Ideas@TheCentre
New report, old story
When it comes to controlling ferry costs, monopolies (private or public) cannot hold a candle to the cost pressure created by a competitive market.
Earlier this week, IPART released a report examining the cost structure of Sydney Ferries and highlighting several areas of possible improvement.
The report included findings from consulting company L.E.K., which estimated that despite some cost savings, yearly costs could be further reduced by 24% from $125 million to $95 million.
These findings are refreshing to hear; however, the story is not new. My report last year about the disappointing performance of Sydney Ferries found that the aged vessels were amplifying maintenance costs, while above-market remuneration and poor workplace culture were straining labour costs.
Interestingly, IPART’s report raised an important but often overlooked question: Over 25% of ferry users earn salaries exceeding $75,000 compared to 11% of bus users and 14% of train users. Given the relatively high proportion of well-to-do individuals using the ferries, the IPART report questioned the basis for subsidising ferries.
I think that to ask this question is to answer it. Throwing large subsidies at an industry that disproportionately services Sydney’s wealthier regions is neither an effective nor responsible use of tax funds. Most of these commuters could and should foot the full cost of their journey rather than be subsidised by the majority of Sydneysiders who do not use the ferries. The government can still use concession fares to subsidise those on low incomes.
But to provide a quality service at the lowest possible cost, government needs to open up the market to competition. A simple analysis of private companies on the Manly route shows costs can be reduced and the industry profitable without subsidising the entire sector.
Two private ferry operators run completely unsubsidised services on the Manly route in competition with the government’s ferry service. The price of a regular adult ticket stands at between $8 and $9.
Contrast this to the government’s service which, after accounting for subsidy (to the tune of 50%–60%), costs as much as $14.
Without the pressure of losing business, Sydney Ferries lacks sufficient incentive to reduce costs and maintain quality service. This is why ferry reform must introduce competition.
Alexander Philipatos is a Policy Analyst at The Centre for Independent Studies, and author of Free-Trade Ferries: A Case for Competition.
