Economic Incentives to Increase Public Transport Patronage – The Theory and the Practice

This paper reports on an innovative policy for central government funding to local passengertransport services in New Zealand, that ties funding directly to performance.The new policy, known as Patronage Funding, was developed and implemented by TransfundNew Zealand, with assistance from consultants. Under the policy, government funding to theregions for public transport services is based directly on the patronage generated. This leavesresponsibility for service planning with regional government, but encourages them to improveservices in such a way as to generate additional patronage. The payment rates are based onestimates of both the user benefits and externality benefits of improving services and henceattracting additional passengers. The externality component comprises benefits associated withreduced road congestion, safety and environmental benefits. Hence, the payment rates vary bycity, time period (peak/off-peak) and distance travelled.The paper describes the economic theory and the analyses underlying the new policy, key aspectsof its implementation, and experience in the first six months since its introduction in November2000.