Appendix 2: Estimating the Benefits & Costs of Integrated Ticketing33

Appendix 2: Estimating the Benefits & Costs of Integrated Ticketing33

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

  • Across two modes of transport – bus and rail34; and
  • Across three smart and integrated ticketing options – ‘smart’, ‘integrated’ and ‘smart and integrated’.

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

Identifying the benefits (and to a lesser extent) the costs of a national smart and integrated ticketing scheme are challenging mainly because of gaps in the evidence base. In particular, there is no consensus as to whether potential journey time savings will materialise. Secondly, 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 evidence shows increases in patronage which suggests such a benefit exists. Most of the remaining benefits extend from these benefits. Thirdly, 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 for smart, integrated and 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.

The benefits shown in Table A2.1 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 A2.1: Summary Table: Economic Benefits35

 

Integrated

Smart

Smart Integrated

Bus

£ 290.4m

£ 295.4m

£ 373.2m

Rail

£ 142.2m

£ 148.9m

£ 198.8m

Total

£ 432.6m

£ 444.3m

£ 571.0m

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. Costs have been estimated as follows:

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.

Benefit-to-cost ratios (BCRs; benefits divided by costs) have been produced and are shown in Table A2.2 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. 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 and thus the existence of significant sunk costs.

Table A2.2: 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

Breakdown of Economic Benefits36

Bus

All benefits are calculated over the 11 year37 appraisal period and discounted at 2002 prices.

Journey Time Savings to Existing Passengers (B1)

This benefit arises because with a smartcard, the boarding time of passengers is quicker in comparison with a boarding action requiring a cash transaction. Research by Newcastle University on the Yorcard pilot on certain Sheffield bus routes found a three second time saving per passenger between adult cash transactions and adult smart-cards following regression-based analysis. This research was spread over peak and non-peak periods but made no attempt to weight these for the higher passenger numbers in the peak hours. It has been pointed out by the Transport Scotland Smart and Integrated Ticketing Steering Group that any time savings are less likely to transpire at peak times when buses are subject to congestion delays. Therefore, it has been assumed for the purposes of this work that a two second time saving per passenger can be achieved, apart from the case of integrated ticketing for which a saving of 3 seconds per boarder using a simple flash card has been assumed.

Transport Scotland Concessionary Fares have conducted their own analysis in 2008 following the adoption of smartcards for concessionary travel. This compared users and non-users and found no difference in boarding times, with even the suggestion that card-holders took slightly longer. It has to be noted that holders were from a particular demographics i.e. they were over 60, and that since the machines were relatively newly installed people may still have been getting used to them. This supports anecdotal evidence that there will be no impact on journey times, which has been applied as a sensitivity to test the impact on the BCR. It has also been suggested that boarding with a smart card will actually take longer than paying by cash due to the time taken for the electronic reader to read the card. As a further sensitivity the impact on the BCR of marginally increasing journey times has been tested.

The key assumptions required in calculating this benefit are:

  • Time savings per (non-concessionary) passenger boarding (in seconds) – upper limit of 2 seconds (‘smart’ and ‘smart integrated’ ticketing) and 3 seconds (‘integrated’ ticketing)38;
  • Average number of people on a bus at any given time – 1039;
  • Average journey time saving for existing passengers – upper limit of 40 seconds and a lower limit of zero seconds;
  • Average bus passenger value of time (per hour) – £7.60 in the assumed opening year of 2014 [from STAG; increases over time];
  • Number of passenger journeys per annum – 515m40;
  • Number of concessionary fare passenger journeys per annum – 157m; and
  • All passengers switch to using the new ticketing product41.

Estimate:

  • Smart – £140.4m;
  • Integrated – £210.6m; and
  • Smart Integrated – £140.4m.

Convenience benefits to Existing Passengers of Smart Tickets (B2)

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. However there is no simple read across from a ticket type effect to time savings or a cash fare equivalent. Ticketing schemes tend to be introduced at the same time as other changes, such as simplified fare structures, so isolating their effect is not easy. There is also a wide range of existing ticket types.

Research for Passenger Transport Executive Group42 assessing the impacts of integrated (not smart) ticketing found a range between 6-20% in terms of increased patronage. Taking the lower bound of this, a 6 per cent increase in patronage following the introduction of new ticketing products has been assumed. This conservative approach has been reinforced by assuming this represents the convenience effect for smart and integrated ticketing, with lower increases assumed for smart only and integrated only (4% for each). To quantify this, the equivalent fare reduction to achieve this increase in patronage using a long-run bus elasticity (-143) has been calculated. This gives a convenience benefit per journey of the equivalent of an 8p reduction in the average bus fare, for smart and integrated ticketing, and is then applied to Scotland bus revenue and passenger numbers (for 2006/07)44.

Estimate:

  • Smart – £67.3m;
  • Integrated – £67.3m; and
  • Smart Integrated – £101.0m.

Operator Cost Savings

The reduction in "dwell time" at bus stops due to the introduction of new ticketing products can potentially reduce operating costs. This benefit is based on the estimated reduction in boarding time and the number of trips within Scotland. The saving is derived from the average bus operating cost per kilometre45 in Scotland. Following discussions with bus companies it is clear that savings can be made only in limited circumstances so the assumption is that operators can realise 10% of the potential cost savings on offer. Of course, with a lower bound journey time saving of zero, no cost savings will be possible.

For Transport Scotland, the key assumption required in calculating this benefit is the time savings per passenger boarding (in seconds) – upper limits of 2 seconds (‘smart’ and ‘smart integrated’ ticketing) and 3 seconds (‘integrated’ ticketing).

Estimate:

  • Smart – £1.9m;
  • Integrated – £2.8m; and
  • Smart Integrated – £1.9m.

CO2 reduction in buses

The reduction in dwell time has an impact of marginally reducing the CO2 emissions from buses. This benefit is calculated from the reduction in fuel consumption for buses (Scottish Transport Appraisal Guidance) and the value of CO2. This calculation does not take account of increase in bus vehicle mileage to cater for additional demand.

Estimate:

  • Smart – £0.4m;
  • Integrated – £0.6m; and
  • Smart Integrated – £0.4m.

New Net Revenue to Bus Operators (B6)

This is calculated from applying the estimated increase in patronage (see convenience benefits) to bus and rail revenues. The net revenue effect is estimated from using a power rule for costs. The power rule allows an adjustment from gross to net revenue by assuming an increase in costs halves revenue accruing to operators.

Estimate:

  • Smart – £44.5m;
  • Integrated – £44.5m; and
  • Smart Integrated – £66.8m.

Benefits to new bus passengers (B7)

This is calculated by applying the convenience and journey time benefit per passenger to the estimated number of new passengers, and applying 50% (the "rule of half", standard in transport appraisals. This avoids double-counting).

Estimate:

  • Smart – £4.2m;
  • Integrated – £5.3m; and
  • Smart Integrated – £7.7m.

Marginal External Car Benefits Modal Shift from car to bus - excluding CO2 (B9)

The introduction of a new ticketing product, which makes travelling easier, is likely to encourage some switch from car to bus use, resulting in less traffic on Scottish roads. The extent of this switch is estimated and the marginal external benefits of the reduction in car use, such as congestion and accident benefits, applied. Greenhouse gas benefits have been calculated separately.

Estimate:

  • Smart – £34.9m;
  • Integrated – £34.9m; and
  • Smart Integrated – £52.3m.

CO2 Savings – Modal Shift from car to bus (B10)

To the extent that there is less car traffic on Scottish roads, the level of carbon emissions will reduce.

Estimate:

  • Smart – £1.8m;
  • Integrated – £1.8m; and
  • Smart Integrated – £2.7m.

Fraud disbenefits

Expanding paper-based flashcards to non-concessionary users of bus would likely see increases in opportunities for fraudulent use. This has been estimated at around 5% of current revenues.

Estimate:

  • Integrated – £77.4m (negative benefit).

Rail

Passenger Time Saved At Kiosks (R2)

This benefit reflects the easier purchasing experience of passengers no longer having to wait for printed paper tickets; instead tickets are uploaded onto a card. Evidence of this benefit was found in the Dutch rail system where around 30 seconds was saved following the switch from paper tickets to smartcards.

Estimate:

  • Smart – £42.6m;
  • Integrated – £42.6m; and
  • Smart Integrated – £42.6m.

Convenience benefits to Existing Passengers of Smart Tickets (R3)

The same calculation is applied here as for bus travel, i.e. working out using the established price elasticity what equivalent ticket price reduction would generate an observed rise in patronage. Assuming a 6 per cent increase in patronage following the introduction of new ticketing products46 (the assumption for ‘smart integrated ticketing only; ‘smart’ and ‘integrated’ ticketing was 4%) and a price elasticity of -0.947 produced an equivalent 13p reduction in the average bus fare, which is then multiplied by the number of (non-season ticket holding) return passenger journeys (for 2006/07).

Estimate:

  • Smart – £22.2m;
  • Integrated – £22.2m; and
  • Smart Integrated – £33.2m.

Savings in Ticket Sales (R4)

This benefit arises from the recognition that there will be reduced 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. Savings accrue to the operator. These figures are not yet available but are likely to be small (for example, the DfT business case quotes total costs of £500,000 so the figure for Scotland is likely to be significantly smaller).

Estimate:

  • Smart – £1.1m;
  • Integrated – £1.1m; and
  • Smart Integrated – £1.1m.

Fraud Prevention (Overriding) (R5)

The benefit is based on the observation that the introduction of smartcards often lowers the likelihood of passengers travelling beyond the point that they have already paid for; but requires the presence of gates. The calculation is based on evidence from Transport for London and elsewhere used in the DfT business case of a 1% uplift in revenues; this is applied to annual ticket revenue per annum.

Annual revenue for Scotland was in £210.1m 2009.

Estimate:

  • Smart – £6.7m; and
  • Smart Integrated – £6.7m.

New Net Revenue to Rail Operators (R6)

This benefit, as for buses, is based on the assumption of the extent to which rail travel will be more attractive, given the extra convenience offered by new ticketing systems; more passengers will use the railways.

Estimate:

  • Smart – £44.1m;
  • Integrated – £44.1m; and
  • Smart Integrated – £66.2m.

Benefits to New Rail Passengers (R7)

This is calculated from the increase in patronage noted above, and applying 50% (the "rule of half", standard in transport appraisals) of the benefit per existing passenger from ticket effects.

Estimate:

  • Smart – £0.8m;
  • Integrated – £0.8m; and
  • Smart Integrated – £1.8m.

Marginal External Car Benefits Modal Shift from Car To Rail - excl CO2 (R9)

The introduction of a new ticketing product, which makes travelling easier, encourages a switch from car to rail use, resulting in less traffic on Scottish roads and connected reductions in external car impacts such as congestion and accidents.

Estimate:

  • Smart – £30.0m;
  • Integrated – £30.0m; and
  • Smart Integrated – £44.9m.

CO2 Savings – Modal Shift from car to rail (R9)

To the extent that there is less car traffic on Scottish roads, the level of carbon emissions will reduce.

Estimate:

  • Smart – £1.5m;
  • Integrated – £1.5m; and
  • Smart Integrated – £2.3m.

Costs

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 and integrated ticketing in Scotland the advantage of lower cost estimates. Most of these costs are based on actual contract information so optimism bias has not been applied. However, it is noted that an allowance for rising costs through the integration of the different systems should be made.

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

Capital Costs

The main capital costs to be incurred to enable the use of smartcards in Scotland are detailed in Table A2.3 below.

Figure A2.3 – Capital Costs

Item

Description

ITSO48 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 cryptographic 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.

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

The main operational49 costs to be incurred to enable the use of smartcards in Scotland are detailed in Table A2.4 below.

Table A2.4 – 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 STRs50 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 – licences and support.

Running the CMSs51, HOPs52 and related systems.

Described as "Per shell and per ISAM costs for HOPs".

Range of benefits across each transport mode

The aim of this simple matrix is to summarise how the different benefits may fall differently between (i) smart only, (ii) integrated only and (iii) smart and integrated ticketing. Some benefits will fall only to one or two of these ticketing types (such as fraud prevention), but in most cases it will be a question of the degree of benefit.

It should be read as follows: the first row shows the assumption that journey time savings are potentially highest for integrated ticketing, then smart ticketing, then finally, smart integrated ticketing, since there is some evidence that ITSO enabled cards take slightly longer to process. For fraud prevention (overriding), there is assumed to be no saving for integrated ticketing.

Table A2.5 – Benefits of Various Transport Modes

Bus benefits

Smart Integrated Smart Integrated

Journey Time Savings to Existing Passengers

X+

X++

X

Convenience Benefits to Existing Passengers

X

X

X++

Operator Cost Savings

X+

X++

X

Fraud Prevention (Overriding)53

X

 

X

CO2 mitigation actions

X+

X++

X

New Net Revenue to Bus Operators (derived from a combination of 1 and 2)

X

X

X

Benefits to new bus passengers (ditto)

X

X

X

Savings due to removal of surveys

X

 

X

Decongestion Benefit (modal shift: car to bus)

 

 

 

CO2 Saving from modal shift of car to rail

 

 

 

Rail benefits

Smart

Integrated

Smart Integrated

Passenger Time Saved At Gates

X+

 

X

Passenger Time Saved At Kiosks

X

X

X

Convenience Benefits to Existing Passengers

X

X

X++

Savings in Ticket Sales

X+

 

X+

Fraud Prevention (Overriding)

X+

 

X+

New Net Revenue to Rail Operators (1+2)

X

X

X

Benefits to new rail passengers

X

X

X

Decongestion Benefit (modal shift: car to rail)

X

X

X++

CO2 Saving from modal shift of car to rail

X

X

X++

Allocation of benefits

This table shows to whom each benefit is likely to fall. It is assumed that there are three categories of beneficiary:

P = Passengers
O = Operators
G = Government
W = Wider Benefits

Table A2.6 – Recipient of Benefits

Bus benefits

Smart

Integrated

Smart Integrated

Journey Time Savings to Existing Passengers

P

P

P

Convenience Benefits to Existing Passengers

P

P

P

Operator Cost Savings

O

O

O

Fraud Prevention (Overriding)54

O

 

O

CO2 mitigation actions

W

W

W

New Net Revenue to Bus Operators (derived from a combination of 1 and 2)

O

O

O

Benefits to new bus passengers (ditto)

P

P

P

Savings due to removal of surveys

O/G

 

O/G

Decongestion Benefit (modal shift: car to bus)

W

W

W

CO2 mitigation action (modal shift: car to bus)

W

W

W

Rail benefits

Smart

Integrated

Smart Integrated

Passenger Time Saved At Gates

P

 

P

Passenger Time Saved At Kiosks

P

P

P

Convenience Benefits to Existing Passengers

P

P

P

Savings in Ticket Sales

O

O

O

Fraud Prevention (Overriding)

O

 

O

New Net Revenue to Rail Operators (1+2)

O

O

O

Benefits to new rail passengers

P

P

P

Decongestion Benefit (modal shift: car to rail)

W

W

W

CO2 Saving from modal shift of car to rail

W

W

W