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April 14, 2021

COVID-19 has fundamentally changed lives across Canada. This change may be most pronounced in Canada’s major cities. Many of the things that make life in our cities so vibrant—great restaurants, entertainment, or going to the office to learn from great colleagues—have vanished. Post-pandemic, as more Canadians work from home, transit operators will face the challenge of bringing us back together to enjoy urban life while facing a gloomy financial outlook.

There are many benefits of urban living, such as tapping a large job and employee market, having access to a wide range of services and infrastructure, and learning from others face-to-face. Public transit is the essential component that enables the benefits of people coming together. These wider economic benefits—what economists call agglomeration—are a key element of why cities exist in the first place. As more people can connect in person, the higher their incomes.

Canadian governments are systematically undervaluing transportation investments—both in annual operating value, and on the returns on new investments—if they ignore how transit is a key ingredient of what makes cities vibrant.

One way to think about the economic value that transit provides is to take a simple thought experiment: what would happen to the value of the wider economic benefits of living in a city if everyone who took transit stopped taking it? How much less would we learn in person? How many unique and innovative restaurants would fail by not having people come from across town and only catering to people who can walk, drive or bike?

Using this thought experiment, a C.D. Howe Institute paper that will be released on April 15 estimates the annual economic value of the Toronto Transit Commission (TTC). This single transit system enables $1.8-billion in wider economic benefits, even if we assume that some travel on the TTC would still happen, but on other modes.

Sadly, something remarkably close to this thought experiment has happened during the COVID-19 outbreak.

We estimate an economic loss of $1.7-billion for the Toronto region of reduced agglomeration benefits due to low travel levels mid-pandemic from reduced TTC ridership. These economic costs are more likely in the range of $1.2- to $1.4-billion based on reasonable assumptions about how much people still travelled but switched to using cars during the pandemic.

Future service enhancements—ranging from simple investments like dedicated lanes for buses to new train lines—might enable broader urban agglomeration economies. A faster train service that replaces a bus stuck in traffic enables faster travel. Faster bus travel enables a transit rider to have access to a wider set of job opportunities. They can access more services, such as restaurants or other businesses. We estimate the agglomeration wider economic benefits of the TTC’s five-year service plan improvements to be $377-million per year, which would add on to the agglomeration benefits of the existing system.

Transit authorities in Canada rely on farebox revenues from paying passengers as their largest source of revenue. As costs rise, such as the need to increase staff wages, transit operators must decide between increasing fares, finding efficiencies, or seeking a greater subsidy from governments. Fare increases have the effect of discouraging some users from travelling and create a wider economic cost. The economic costs of people choosing not to travel because of higher fares—not going to a new restaurant, or not taking on a new and better job—can be substantial. However, governments should weigh the alternative of the economic harm of raising taxes to pay for subsidies. Depending on the kind of tax a government relies on, the economic harm of higher taxes may be worse than the economic cost of fewer fare-price-sensitive travellers.

How does incorporating wider economic benefits into the economics of transit affect all public transit operators looking beyond the pandemic to a new normal of work and commuting? A return to a partial (one or two days a week) work-from-home model for many workers once the pandemic subsides is a likely outcome. The ability to partially work from home will likely recapture most of the lost agglomeration benefits we have seen over the last year.

However, such reduced travel leaves a fare revenue gap that transit operators will need to fill to maintain service levels. Senior governments that collect income tax revenues—and see a bottom-line income tax benefit from wider economic benefits—can temporarily provide operating subsidies to transit operators. Such operating subsidies should only last until transit networks can reorient their services to permanent post-pandemic demand trends.

By taking away many of the things so many Canadians love about cities, the pandemic has shown us the value of urban life that many of us take for granted. There is a wider economic value of preserving travel options and public transit service that all Canadian governments should recognize.

 

Benjamin Dachis is director of public affairs at the C.D. Howe Institute.

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