Are Smart Card Ticketing Systems Profitable? Evidence from the City of Trondheim

Electronic ticketing in public transportation based on smart cards is gaining momentum worldwide. It is widely recognized that a smart card system can deliver benefits to both passengers and operators, but due to its complexity, implementation can come at a considerable cost. Therefore, it is likely that a commercial appraisal from the perspective of the public transportation operator alone would reveal that costs are higher than benefits and, hence, economic non-viability. This paper presents the experiences of the Norwegian city of Trondheim, which recently implemented a fully-interoperable electronic smart card system. A social cost-benefit analysis of the scheme is presented, focusing on net overall benefits for the passengers, the bus company, the local transportation authority, and the rest of society. The main conclusion of the paper is that the smart card ticketing system in Trondheim delivers a positive net present value. The paper demonstrates that economic evaluation of smart card ticketing schemes using the principles of social cost-benefit analysis is desirable and possible. Because commercial non-viability may represent constraints to the implementation of such schemes, the findings presented in this paper provide valuable information to those currently working on smart card ticketing strategies. Journal of Public Transportation, Vol. 15, No. 1, 2012 134 Background Electronic ticketing in public transportation based on smart cards is gaining momentum worldwide. It is widely recognized that smart cards can deliver benefits to passengers and public transportation operators through time savings, increased travel convenience, more flexible ticketing, lower administrative costs, and better marketing information. The implementation of smart card systems is, however, a complex process that includes legal, economic, and technological issues. Implementation can thus come at a considerable cost. Therefore, it is likely that a commercial appraisal from the perspective of the public transportation operator alone would reveal costs higher than benefits and, hence, economic non-viability. Authorities and public transportation operators, therefore, often are reluctant to sanction large investments in such systems. A striking example of transportation investments that may not generate sufficient revenues to justify private investment alone is public transportation investments. Public transportation often is subsidized to ensure that important services are provided even if they do not generate sufficient ticket revenues to justify their operations. Even in countries where the public transportation industry is completely deregulated, there is usually some kind of operator reimbursement for services such as certain rural routes, school travel, or free travel for older adults. Other arguments for subsidizing public transportation include the positive externalities generated by the service, the potential for user-scale economics (often referred to as the Mohring effect), and alleged public or merit good characteristics. This implies that, in reality, very few, if any, investments in public transportation are profitable from a purely commercial perspective. When deciding whether to implement smart card ticketing systems, the investment should be evaluated from a social perspective, following the principles of social cost-benefit analysis. Cost-benefit analysis (CBA) is a methodology based on the valuation of all relevant effects accruing from an investment or policy. Harberger (1971; cited in Winston 2006) described the principles of applied welfare economics through CBA as follows: benefits and costs to consumers should be calculated using consumer surplus; benefits and costs to producers should be calculated using producer surplus; and benefits and costs to each group should be added without regard to the individual(s) to whom they accrue. Thus, it is the change in consumer and/or producer surplus that determines the change in social surplus in a CBA. (For a comprehensive review of cost-benefit theory and methodology, see Boardman et al. 2006.) In other words, CBA is concerned with the welfare of society as a whole and not just a smaller part of it. That will be illustrated in this paper.