The Free Capital Fallacy: Some observations on capital and operating costs of various transit technologies in the Minneapolis St. Paul region

Much earlier this year The Transit Camera posted operating cost comparisons among Minnesota transit operators (reproduced below). The UMN Transitway (owned by the University, operated by a contractor, with no payment required (i.e. free to ride), subsidized by the University and student fees) had the lowest cost per ride.

LRT came in at $2.66 / ride, Metro Transit bus came in at $3.55. Of course part of this is that the LRT was operating one good (high demand) route, while buses include a mix of high demand and low demand routes.

For the sake of argument, assume the operating cost difference is in fact $0.90 per ride. Assume the capital costs differences for a service are $713,162,915. (This understates the capital costs of bus, but we undoubtedly overstated their operating costs for comparable routes, since there are always economies of density, in both operating and capital costs). There are always arguments about which capital costs should be attributed to what (e.g. parking ramps, road improvements, etc., so this may overstate the actual capital costs of a minimalist train system. These are however the official LRT numbers for Hiawatha LRT (the Blue Line).

The difference in operating costs would not make up the difference in capital costs until there were 792 million rides, ignoring interest rates. At 10.498 million rides per year, this would take 75 years. The life of the facility is probably less than 75 years.

I call the assumption that lower operating costs outweigh higher capital costs the “free capital fallacy”.
If capital were free, and the lifespan infinite, i.e. interest rates were zero and the capital never deteriorated, and demand patterns never changed, only today’s operating costs would matter. The option with the lower operating costs, all else equal, would be the best. Eventually the difference in operating costs would recover the difference in capital costs.

In fact, capital is not free. (Though some bloggers might think so.) Interest rates, while low, and near zero sometimes for the public sector, are not actually zero, or negative.

Thus, we need to trade-off capital and operating costs, and look at Net Present Value.  Depending on the interest rate, sometimes the lower capital/higher operating cost option is better, and sometimes the higher capital/lower operating cost option is better. (Obviously, the lower capita/lower operating cost option would dominate).

It is time once again for my annual Minnesota Dept. of Transportation Transit Report system cost comparison. As before the overall focus of this bit of information is on comparing fixed-route operations from the various agencies across the state. A comparison of 2011 costs can be seen here. This is only a small part of the information contained in the report. If you have an interest in learning more about these and other transit providers in Minnesota I recommend reading the report in its entirety.

2012 Cost Per Ride Comparison for Minnesota Fixed-Route Transit Providers
Provider Operating Expenditures Ridership Cost/Ride
UNIVERSITY OF MINNESOTA TRANSIT $6,080,021 3,197,701 1.90
WINONA TRANSIT SERVICE* $597,320 255,132 2.34
METRO TRANSIT: LRT $27,886,232 10,498,236 2.66
ST. CLOUD METRO BUS $6,295,883 2,230,106 2.82
GREATER MANKATO TRANSIT SYSTEM $1,556,183 449,930 3.46
ROCHESTER PUBLIC TRANSIT $6,083,428 1,739,071 3.50
METRO TRANSIT: BUS $245,215,781 69,069,539 3.55
DULUTH TRANSIT AUTHORITY $12,390,741 3,155,423 3.93
MAPLE GROVE TRANSIT $4,220,797 826,879 5.10
PLYMOUTH METROLINK $3,589,498 496,964 7.22
EAST GRAND FORKS TRANSIT*** $266,588 36,847 7.23
SOUTHWEST TRANSIT $7,799,059 998,960 7.81
METRO VAN POOL** $1,416,216 179,013 7.91
LAKER LINES $945,816 96,513 9.80
LA CRESCENT APPLE EXPRESS**** $260,690 25,749 10.12
SHAKOPEE TRANSIT $1,276,055 125,557 10.16
RUSH LINE $385,081 37,015 10.40
RAMSEY STAR EXPRESS***** $567,616 42,263 13.43
TRANSIT LINK** $6,658,057 312,639 21.30
METRO TRANSIT: NORTHSTAR $16,419,740 700,276 23.45
Notes: *Winona operates service under contract for WSU and St. Marys  **Not fixed-route service, included due to being part of overall Twin Cities Metro area system structure  ***EGFT service operated under contract by Cities Area Transit  ****Apple Express operated under contract by La Crosse MTU ***** Ramsey service discontinued with opening of Ramsey Northstar station
Source: 2013 Transit Report – A Guide to Minnesota’s Public Transit Systems (MnDot)