Victorian Auditor-General's Report 
29 August 2012 

Fare Evasion on Public Transport 
Audit summary
Background
Public transport is important for the efficient movement of people and goods around Victoria and plays a critical role in relieving urban traffic congestion. Services are heavily subsidised and the cost to government has risen as more services are provided. In 2010–11 the cost of operating public transport services was $2.2 billion, with 30 per cent coming from fares and 70 per cent from government subsidy. 
Patronage is expected to grow significantly over the next 20 to 30 years. Expanding services to meet these demands represents a significant funding challenge. It is therefore essential that passengers pay the correct fare to meet their share of costs.
Fare evasion is travelling on public transport without an appropriate, validated ticket. This includes travelling without a ticket, purchasing but not validating a ticket, or using a concession ticket without proof of entitlement.
Effectively protecting revenue and controlling fare evasion requires:
·	a well-designed, understandable, accessible and user-friendly ticketing system
·	education and marketing—to help passengers understand how to use the system correctly and persuade them to do this
·	revenue protection measures—ticket barriers and station staff
·	enforcement—to detect and address passengers travelling without a valid ticket. 
Since 2004 the responsibility for revenue protection has been shared. The Department of Transport (the department) is responsible for providing a sound ticketing system including transitioning from Metcards to myki smartcards.
This audit assessed whether the department’s oversight has been effective in controlling fare evasion, by examining whether it:
·	adequately understood the scale, nature and drivers of fare evasion
·	put in place contractual arrangements and other measures that provide an effective framework for monitoring and controlling fare evasion
·	responded to adverse fare revenue trends in a timely and effective way. 
This report addresses these issues by examining:
·	in Part 2, fare evasion outcomes and the adequacy of the department’s oversight
·	in Part 3, the drivers of these outcomes and the oversight lessons.
From 2 April 2012, Public Transport Victoria (PTV) assumed the department’s responsibilities for public transport. Accordingly, this report’s conclusions are directed at the department and its recommendations to PTV.
Conclusions
The department’s oversight framework was effective in controlling fare evasion between 2005 and 2008, but failed to cope with the transition to myki and the new tram and metro train contracts that commenced in November 2009.
The overall fare evasion rate for Melbourne has come full circle over the past six years. Between 2005 and mid-2008, the percentage of passengers without a valid ticket fell from 13.5 per cent to a low of 7.8 per cent. However, these gains were lost, with a return to an overall evasion rate of 13.5 per cent for the first half of 2011. Since this time overall fare evasion has fallen to 11.6 per cent in the first half of 2012.
In 2010–11 the department estimated that metropolitan fare evasion cost $85 million. Figure A shows estimated revenue impacts of fare evasion by mode of transport.
Figure A
Fare evasion revenue losses (exclusive of GST) 

Source:	Victorian Auditor-General’s Office based on Metlink fare evasion surveys.
The department’s six-monthly surveys found that the amount lost:
·	fell by 31 per cent, from $25.2 million to $17.3 million, between the second half of 2005 and the first half of 2008, when overall evasion was lowest
·	rose by 155 per cent, from $17.3 million to $44.2 million, between the first half of 2008 and the first half of 2011, before falling to $38.9 million in late 2011. 
Two-thirds of this increase, or $18.7 million, happened in an 18-month period between January 2010 and June 2011. This period immediately followed the start of new train and tram contracts in November 2009 and the introduction of myki in December 2009. 
Growing patronage and rising fares have meant that the value of fare evasion has grown rapidly. Between 2004–05 and 2008–09 both patronage and fare revenue grew. Fare increases of 14 per cent meant revenue exceeded patronage growth. 
Since 2008–09 fare revenue growth has declined, despite continued patronage growth and fare rises, because of increased fare evasion and other factors, such as the abolition of zone 3, free travel to the city for early train travellers, and other promotional fares. 
The significant increase in fare evasion between 2009 and 2011 happened because of the decline in effective enforcement. The department viewed the level of visible enforcement as crucial to controlling the level of fare evasion. Infringement notices are the critical lead indicator for assessing the effectiveness of enforcement. 
Figure B shows trends in transport ticketing infringements issued by the department by mode as six month moving averages. 
Figure B 
Infringement notices, mode and month – 6 month moving average 

Source:	Victorian Auditor-General’s Office based on Department of Transport information.
Over this period the number of infringement notices fell as the operators reported fewer passengers for fare evasion for a number of reasons:
·	The government required the operators to be lenient in dealing with people using myki and did not provide them with any financial disincentives for not enforcing fare evasion. The operators interpreted this leniency as extending to Metcard users as well.
·	The department did not address the fall in effective enforcement on trams and metropolitan trains in a timely and purposeful manner.
·	Operational problems with handheld myki readers hampered enforcement. 
This increase in fare evasion has had financial consequences for the state. Under the transition arrangements for myki, the state bears all revenue risk by guaranteeing that the tram and metro train operators receive the revenues forecast in their bids. 
The guarantee started with the new contracts on 30 November 2009 and is likely to run for 49 months until December 2013, one year after the last Metcard tickets have been sold. After this point the state and operators will share the fare revenue risks.
The myki guarantee is likely to result in payments exceeding $350 million to cover the shortfall of actual fare revenue compared to the operators’ forecasts comprising:
·	$98.5 million already paid for the 19 months up to June 2011
·	$108 million as PTV’s provisional estimate for the 12 months from July 2011
·	$162 million between July 2012 and December 2013 applying the 2011–12 provisional payment to the final 18 months of the guarantee on a pro-rata basis.  
Increased fare evasion has contributed to the gap between actual and forecast fare revenue. We estimate that increased fare evasion accounted for 38.6 per cent or $38 million of the $98.5 million gap between actual and forecast fare revenue for the first 19 months of the new train and tram contracts. 
The main lesson from the past six years is that the level and intensity of oversight has to be flexible and tailored to address changing risks. The gradual rise in fare evasion before the end of 2009, the imminent introduction of myki and the suspension of revenue risk sharing, should have triggered greater departmental oversight. Instead of being proactive in mitigating these risks, the department reacted too slowly to the fall in enforcement that was apparent from the first half of 2010. 
PTV needs to exercise strong oversight because the fare evasion risks remain high and are borne solely by the state until the end of 2013. PTV should take the lead in managing these risks and reducing fare evasion to match, or better, the lowest fare evasion rates achieved between 2007 and 2009. 
Recommendations
Number	Recommendation	Page	
	Public Transport Victoria should:		
1.	develop survey-based estimates of fare evasion across regional public transport	15	
2.	review the cost-effectiveness of ticketing enforcement on Melbourne’s trains, trams and buses and on regional public transport	15	
3.	consider the economic case for allocating additional resources to this task	15	
4.	develop and deliver a plan to:
·	complete the full rollout of myki without increasing fare evasion
·	reduce fare evasion to match, or better, the lowest fare evasion rates achieved between 2007 and 2009	24	
5.	publish the fare evasion survey results and provide the detailed data to the public transport operators when the results have been confirmed.	24	
Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report was provided to the Department of Transport, Public Transport Victoria and V/Line with a request for submissions or comments.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments are included in Appendix A.