2 Investment Case

2 Investment Case

2.1 Introduction

2.1.1 This chapter is taken from the Strategic Business Case (SBC) which was prepared by the Transport Economics, Environment, Appraisal and Research team (TEAR) in Transport Scotland. A more detailed discussion of anticipated benefits is included at Appendix 2.

2.2 The Existing Evidence Base

2.2.1 A starting point for the development of the strategic business case was a review of the existing evidence base for smart and integrated ticketing. This evidence base is limited although two key documents are the business case that the DfT produced for smart ticketing and a report for the Passenger Transport Executive Group (PTEG) by Booz & Co. A summary of both reports is outlined below.

2.2.2 The conclusion of the DfT business case is that: "On the basis of the figures presented in the table below it would appear that taking in all the benefits that accrue to passengers, operators and road users, the introduction of smart ticketing would more than cover the up-front costs. And so long as the benefits continue for a number of years this result holds even with a low demand and high optimism bias uplift on the capital costs. However, these results are dependent on a number of important assumptions:

  • Smart ticketing can achieve savings in dwell times, journey times and ticket buying times;
  • Full take-up of smart ticketing by passengers and operators;
  • The time gap between spending on equipment and achievement of full benefits is short;
  • The risks of the project are successfully managed;
  • Smart ticketing can work in a variety of market situations (or that market situations change to accommodate smart ticketing); and
  • Operators and Authorities can work together to produce integrated IT and back office functions."

2.2.3 A report for the Passenger Transport Executive Group (PTEG) by Booz&Co.8 presents the results of a desk-top review of integrated ticketing (it did not specifically address smart ticketing) in major urban areas in the last 40 years or so. Various impacts were assessed: patronage; revenue; modal shift; passenger satisfaction; boarding times; fraud reduction; and transaction and administration costs.

2.2.4 The following findings emerged:

  • Substantial increases in patronage, in the range of 6% to 20%, with some transport modes experiencing increases to the order of 40%;
  • Limited evidence to support increased revenues, with the reported increase varying widely from a 1% to a 12.6% increase in total revenue;
  • Limited quantitative evidence to support a link between modal shift and fare integration, with some case studies suggesting an overall increase in public transport usage;
  • Some evidence to suggest improved satisfaction from fare integration primary due to increased convenience and fare savings;
  • Limited evidence of faster boarding times as a result of integrating ticketing, with some transport modes experiencing in order of a 10% reduction in passenger in-vehicle time; and
  • Limited evidence to suggest that integrating ticketing in isolation has reduced fare evasion. Rather the reduction in fraud has usually been associated with integrated fares as well as a change in fare medium;

2.2.5 There is only anecdotal evidence to support a reduction in transaction and administration costs from simplified and integrated ticketing.

Table 2.1: DfT Business Case: Summary of Benefits and Costs of Smart Card (£m)

 

High demand/
low optimism bias

Low demand/
high optimism bias.

Bus annual benefits: Brackets indicate the inclusion of an uplift for consultancy and contingency

Journey time savings to existing passengers

309

77

Ticket type benefits to existing passengers

55

55

Operating cost savings to operators

57

21

Carbon savings

2

1

Concessionary reimbursement

39

39

Fraud reduction

42

42

Saving in surveys

5

5

New net revenue to bus operators

101

34

Benefits to new bus users

13

2

Total

621

275

Bus annual costs

66

66

Net bus annual

555

210

Car to bus pa

De-congestion

75

28

Carbon savings

4

2

Total

80

30

Rail benefits pa

Time saved at gates by existing passengers

32

21

Time saved at kiosks by existing passengers

147

65

Ticket type benefits to existing passengers

86

86

Saving in ticket sales costs

250

165

Fraud reduction

56

56

New net revenue to rail operators

85

56

Benefits to new rail users

2

1

Total

658

450

Rail annual costs

191

191

Net rail annual

467

259

Car to rail

De-congestion

53

21

Carbon

4

1

Total

56

22

Total net annual

1159

520

Bus capital costs

314

343 (521)

Rail capital costs

741

853 (1231)

Total capital

1055

1197 (1752)

2.3 Option Appraisal

2.3.1 An early, informal option appraisal process in the form of a SWOT9 analysis was undertaken by Transport Scotland to consider the following options:

  • Paper based system;
  • Smartcard based system – non ITSO compliant; and
  • Smartcard based system – ITSO compliant.

2.3.2 The results are shown below.

Results of Initial Option Appraisal

2.3.3 Please note this was an early, high-level assessment and it is important to note that there have been significant positive developments around ITSO since it was produced.

Table 2.2: Initial Option Appraisal

 

Paper Based System

Smartcard non-ITSO compliant

Smartcard ITSO compliant

Strengths

Not reliant on technology. Deliverable subject to participating parties agreeing business and operating rules.

Technology opens up new opportunities, Oyster is proven in London, EMV is a global standard, new technology will appeal to passengers

Interoperable, secure, technology already rolled out across much of Scottish bus fleet and pilot on rail. ITSO already used by Transport Scotland for concessionary travel scheme, ITSO currently supported by DfT for both bus and rail.

Weaknesses

Difficult to administer effectively. Difficult to distribute revenue fairly or quickly. Increased risks of fraud/revenue protection. Does not realise benefits of sunk costs e.g. TS AMS/HOPS. Unlikely to have passenger appeal and so will have a limited impact on modal shift from the car to public transport.

Oyster may not be ready or appropriate for operation outside of London, EMV is not yet widespread as it is a payment system rather than a platform for integration, and does not address needs of unbanked. Both systems would require considerable investment for introduction in Scotland.

Still a fledgling standard. Concerns over whether ITSO is geared up to support a large commercial ticketing system protection. Does not realise benefits of sunk costs e.g. TS AMS/HOPS. Unlikely to have passenger appeal and so will have a limited impact on modal shift from the car to public transport.

Opportunities

Could be operational very quickly.

Enables some synergy in future with some large ticketing systems globally.

Probably the best opportunity of delivering a secure smartcard based ticketing system by 2014

Threats

Previous and current paper based schemes have not achieved appreciable market share. Due to the weaknesses outlined above, this option is not a basis to galvanise partners to co-operate and work together.

Would leave Transport Scotland and other Scottish partners dependent on a single third party supplier, which could be both expensive and constraining, would possibly help to stunt the organisational growth of ITSO.

Scotland continues to take excessive risks around unproven technology. ITSO fails to become established as a robust basis for integrated ticketing. Longer term – Oyster, EMV.

2.4 Rationale for Government Intervention – The Presence of Market Failures

2.4.1 The key market failure rationale underpinning the case for public sector intervention is the existence of externalities; that is, wider social and environmental benefits, which would not solely accrue to private operators so that the incentives for the market to deliver a socially optimal level of provision may not be sufficient. These include the presence of convenience benefits to passengers in enjoying seamless, cashless ticketing across different transport modes. Stated preference work by IPSOS-MORI for the DfT which covered daily integrated tickets only, suggests that there might be some willingness to pay extra for such a ticket but that this depends on personal and other circumstances. Moreover, qualitative results suggest that people like the idea of smart and integrated tickets, would travel more if they were available, but saw them as an entitlement and were not prepared to pay more for them.

2.4.2 Despite the perceived advantages of integrated ticketing it is apparent that the market is not delivering integrated ticketing in the quantity and speed which would make the full benefits realisable for passengers. For example, bus operators see a number of barriers to participation in integrated ticketing schemes resulting in their reluctance to co-operate together to deliver such products. The DfT Smart and Integrated Ticketing Consultation Paper10 listed the principal bus operator concerns as:

  • Losing market share as passengers are not locked into one operator when buying a ticket;
  • Not receiving a fair proportion of revenue from integrated tickets;
  • Concerns about Office of Fair Trading fines for anti-competitive practices; and
  • The lack of freedom to set all ticket prices.

2.4.3 Bus operators are likely to be best placed to assess the balance of advantages and disadvantages to their involvement in smart, integrated ticketing. But it is possible that a further market failure exists through asymmetric information where information is not available, in this case, to ‘sellers’, preventing profitable opportunities taking place and results in a ‘co-ordination’ failure, where sellers are unable to group together to ‘bring a product to market’ which is in their own collective interest. The DfT consultation document11 states that "the UK Government believes that the right integrated ticket products, at the right price, are what the travelling public want. As a consequence transport operators have the ability to grow the overall public transport market and benefit all participating operators". The role of Government could be to provide the information which the market is unable to make available by itself, to take a coordinating role, or to provide funding to incentivise operators’ involvement.

2.5 Estimating the Benefits & Costs of Integrated Ticketing

2.5.1 The economic analysis undertaken so far has been primarily to estimate the economic and social benefits from integrated and smart ticketing for Scotland across the following dimensions:

  • Across two modes of transport – bus and rail12; and
  • Across three integrated smart ticketing options – ‘smart’, ‘integrated’ and ‘smart and integrated’.

2.5.2 This has been combined with estimates of the costs, both capital and operational, to extending existing smartcard infrastructure across the bus and rail sector in Scotland.

2.5.3 Identifying the benefits (and to a lesser extent) the costs of a national smart and integrated ticketing scheme is challenging mainly because of gaps in the evidence base. In particular, there is no consensus as to whether potential journey time savings will materialise. Second, there is no evidence isolating the "convenience" benefit to passengers. The latter seem unwilling to pay for this extra benefit, yet a review of international experience finds evidence of increases in patronage which suggests such a benefit exists. Most of the remaining benefits extend from these benefits. Third, it is difficult to judge the extent to which cost savings can be realised by operators. Even where evidence is available, it does not typically exist separately for 1) smart, 2) integrated and 3) smart integrated ticketing. Therefore the benefits are subject to a large element of uncertainty, and judgement has had to be employed in calibrating benefits across the different ticket types.

2.5.4 The benefits shown in Table 2.3 reflect an appraisal period set to 11 years to reflect the technology lifespan. A standard 60 year transport appraisal period would clearly be inappropriate in this instance.

Table 2.3: Summary Table: Economic Benefits13

 

Integrated

Smart

Smart Integrated

Bus

£ 290.4m

£ 295.4m

£ 373.2m

Rail

£ 142.2m

£ 148.9m

£ 198.8m

Total

£ 432.6m

£ 444.3m

£ 572.0m

2.5.5 The likely costs are uncertain but the best available estimates are shown below. Capital costs are lower for integrated ticketing though the difference is primarily with respect to rail since significant investment in smart card technology for buses has already been made as part of the concessionary fares programme. A key operational cost is the transaction cost charged by retailers etc for topping up cards.

Integrated ticketing

  • Capital Costs – £2.0m for combined bus and rail; and
  • Operational Costs – £27.4m for combined bus and rail.

Smart ticketing

  • Capital Costs – £2.0m for bus; £5.5m for rail; and
  • Operational Costs – £18.5m for bus; £4.4m for rail.

Smart and integrated ticketing

  • Capital Costs – £2.0m combined costs; £0.5m for bus; £4.6m for rail; and
  • Operational Costs – £4.0m combined costs; £15.5m for bus; £2.4m for rail.

2.5.6 Benefit-to-cost ratios (BCRs; benefits divided by costs) have been produced and are shown in Table 2.4 below. Because of a lack of concrete evidence, certain assumptions have been made, for example about take-up. These BCRs are highly sensitive to changes in assumptions, both in benefits and costs. In light of this a range of sensitivities has been modelled and the results are shown in Appendix 3. However, these provisional benefit cost ratios suggest that even with more restrictive assumptions about the extent of the benefits, there is a good case for proceeding with new ticketing arrangements in Scotland. Net present values (benefits minus costs, discounted to give lower weight to costs and benefits further in the future) are significant, reflecting in part the fact the existing availability of smart readers on buses.

Table 2.4: Benefit-to-Cost Ratios and Net Present Values

Ticketing Option

Benefit Cost Ratio (BCR)

Net Present Value (NPV)

Integrated

14.7

£ 403.2m

Smart

14.6

£ 413.8m

Smart Integrated

19.7

£ 543.0m

Bus

Convenience Benefits to Existing and New Passengers

2.5.7 Potential benefits include ease of use (less need to carry cash, more certain budgeting), more flexible journey choice of mode, route, timing, and easier interchange within and between modes.

Journey Time Savings to Existing Passengers

2.5.8 There is some evidence that passengers using a smartcard will board more quickly than those buying a ticket with cash. This benefits both the boarder and all passengers already on the bus.

Operator Cost Savings

2.5.9 The resulting reduction in "dwell time" at bus stops due to the introduction of new ticketing products can potentially reduce operating costs. This is possible only under certain limited circumstances, for example, if services can be reconfigured to allow the removal of a bus from service.

New Net Revenue to Bus Operators

2.5.10 Any new patronage will generate higher revenues for operators.

Marginal External Car Benefits – Modal Shift from car to bus (excl. CO2 impact)

2.5.11 Any encouragement of switching from car to bus use will result in less traffic on Scottish roads which will result in a range of benefits, including lowering congestion and accident rates at the margin.

CO2 Savings – Modal Shift from car to bus

2.5.12 Lower car use will tend to see carbon emissions reduce at the margin.

CO2 reduction in buses

2.5.13 Any reduction in dwell time will have an impact of marginally reducing the CO2 emissions from buses.

Fraud disbenefit

2.5.14 Widespread take-up of (non-smart) integrated flashcards could offer increased opportunity for fraudulent travel.

Rail

2.5.15 Similar benefits as described in the section above may apply to rail: extra convenience to new and existing passengers; fraud prevention (overriding); new net revenue to rail operators; and decongestion and CO2 benefits of modal shift. In addition, the following benefits are thought to apply in the rail context.

Passenger Time Saved At Kiosks

2.5.16 Passengers holding smart cards will no longer have to wait to purchase printed paper tickets.

Savings in Ticket Sales

2.5.17 There will be savings to the operator in terms of costs of procuring and distributing paper tickets. For example, the topping up of Stored Value Rights products on smartcards could all but eliminate the cost of ticket sales agents and commission.

Subway and Ferries

2.5.18 Similar types of benefit are potentially available on the subway (in Scotland, the Subway, run in Glasgow by Strathclyde Partnership for Transport, who are currently considering roll-out of smart ticketing). Quantification of benefits for ferry travel has not been undertaken at this stage, due to uncertainties over how smart, integrated ticketing would be applied to the ferry sector.

2.6 Costs

2.6.1 The key point about costs is that much of the technology has already been deployed as part of concessionary fares policy. This gives the business case for smart, integrated ticketing in Scotland the advantage of lower cost estimates. Most of these costs are based on actual contract information and so only minimal optimism bias has been applied. However, it is noted that an allowance for rising costs through the integration of the different systems should be made.

2.6.2 To encourage high take-up in some other systems (notably Oyster in London) a policy stance of reducing fares for card-holders has been adopted. No account of these potential costs has been taken in this exercise.

Capital Costs

2.6.3 The main capital costs to be incurred to enable the use of smartcards for integrated ticket products in Scotland are detailed below.

Table 2.5: Capital Costs

Item

Description

ITSO14 compliance/membership

Includes the cost of ITSO Secure Access Module: A smart-card-like chip that is needed inside ITSO readers to store secret keys which are used for cryptograghic operations with ITSO customer media (cards)

Consultancy

A significant cost indicating the immaturity of ITSO and the effort needed to achieve end-to-end integration of already-certified products. In addition to this cost, there is also the uncosted staff time of the overrun projects.

Card Issuance

Concessionary and commercial cards. Significant cost for buses scheme (Local Authorities)

Card acceptance

Installing ITSO readers

Distance charging

Installing exit readers

Upgrading sites for ITSO messaging

Central back office e-systems; Card Management Systems

Settlement systems

Needs to resolve the fares settlement. Not an ITSO cost, but essential.

Operational Costs

2.6.4 The main operational15 costs to be incurred to enable the use of smartcards in Scotland are detailed below.

Table 2.6: Operational Costs

Item

Description

ITSO Compliance & Membership

Scheme and operators. Used ITSO website calculator to calculate. Rail has much higher turnover and hence higher fees.

Systems Management

Assume all systems are a managed service

Card Replacement

Significant cost for bus schemes (Local Authorities)

Agency Costs

This is incremental costs of covering cash to STRs16 over the commission cost of selling regular tickets in less convenient places. By moving to STR, cost of sales goes up due to the retailer receiving a percentage of 5-7% making the total cost 10% or more instead of 5%. Also includes ETM costs – licenses and support.

Running the CMSs17, HOPS18 and related systems.

Described as "Per shell and per ISAM costs for HOPS"

2.7 Sensitivity Analysis

2.7.1 Sensitivity analysis has been undertaken, which has involved recalibrating the assumed values of the key drivers that affect the benefit-to-cost ratios (BCRs). The full analysis is shown in Appendix 2. Given that the BCRs are high (partly because many of the costs are sunk), the aim of the sensitivity analysis was to investigate under what conditions the various ticketing options would no longer represent value for money, to allow a better understanding of the risks involved with integrated smart ticketing.

2.7.2 A set of base case assumptions has been established for the three ticketing options, with a range of variations relating to the scale of capital and operating costs as well as the magnitude of economic benefits anticipated. A range of sensitivities has also been established, which focuses on the key drivers affecting the benefit cost ratios (BCRs).

Benefit Sensitivity Analysis:

2.7.3 The following sensitivities were assessed for each ticketing option:

  • Lowering boarding time savings per bus passenger (from 2 seconds for smart and smart integrated ticketing and 3 seconds for integrated ticketing to zero and -2 seconds);
  • Lowering the percentage of passenger take up (from 100% to 75%, 50%, 25% and 10%). The model assumes 100% take-up, in line with the DfT business case, though actual take up would undoubtedly be lower. Note that this also lowers costs;
  • Lowering the percentage increase in patronage (to 2%, 1% and 0% for smart ticketing and integrated ticketing, and 3%, 2% and 0% for smart integrated ticketing); and
  • Reducing the average number of people on a bus from 10 to 5. This affects the overall time saving for the boarders and people already on the bus.

Cost Sensitivity Analysis:

2.7.4 The following variations were also assessed for each ticketing option, in conjunction with the benefit sensitivities:

  • Capital costs increase by 50%;
  • Capital costs increase by 100%;
  • Operating costs increase by 50%; and
  • Operating costs increase by 100%.

2.7.5 The full results of the sensitivity analysis can be seen in Appendix 2. Each of the individual variations is still associated with healthy BCRs and even applying different combinations does not yield a BCR below 1. This provides comfort, given the uncertainties around some of the key assumptions, that the business case for smart and integrated ticketing in Scotland stands up even under significantly more restrictive assumptions.

2.8 Conclusions

2.8.1 A range of evidence has been reviewed relating to the benefits and costs of smart and integrated ticketing. Much of this has been produced for the Department for Transport (DfT) as part of the development of a strategy for England. This assessment has adopted the same categories of benefits though has not always adopted the same assumptions and methods used to calculate benefits. Some of the evidence derives from existing integrated ticketing schemes in the UK and abroad. The evidence suggests that there is a range of benefits associated with the provision of integrated smart ticketing, including the convenience to passengers of seamless and cashless travel, increased patronage, potentially faster journey times, potential cost savings to operators, some modal shift from cars to public transport, reduced fraud, and better planning using the rich management information generated. With widespread take-up, these benefits can significantly outweigh the costs incurred. It is important to note that the available evidence is relatively weak and the magnitude of some of the key benefits contested. The high benefit-cost ratios (BCRs) reported here are partly a function of the large element of sunk costs through delivery of an ITSO/ Smartcard platform for buses by Transport Scotland, but still they provide some reassurance that even with more restrictive assumptions the BCRs would remain above 1, meaning that benefits exceed costs.

2.8.2 However, only some of the benefits of smart integrated ticketing fall to the operators. This, combined with risk aversion as they seek to avoid operating in more open markets, means that the private incentives may, in general, not be sufficiently large for operators to invest in smart integrated ticketing of their own accord. The evident lack of a purely market-based solution and the existence of wider economic and social benefits thus justify more detailed investigation of the case for public sector intervention.

2.8.3 It should also be noted, though, that while greater benefits can be derived from the combination of smart and integrated ticketing many of the benefits can be attributed to smart ticketing alone. There is evidence that bus operators are becoming more convinced about the benefits that smart ticketing alone can bring them and there is less clear evidence of market failure for this ticketing product.

2.8.4 The strategic business case establishes the rationale for intervention to derive benefits from smart, integrated ticketing and provides enough evidence of the various benefits to justify proceeding to the next stage.

2.8.5 It is important to recognise that there are a number of challenges to the delivery of smart, integrated ticketing. Adoption by private sector operators in a deregulated bus market and achieving interoperability through ITSO technology are particular challenges which must be faced. These are assumed to be achievable in the modelling undertaken for the investment case (challenges to delivery are assessed in subsequent chapters).