Public subsidy in the bus industry:
CfIT response to Government consultation on the bus industry
- LEK Consulting: Assistance to CfIT in consultation response to the Government policy paper - Putting Passengers First
CfIT report: Reform of the Bus Service Operators Grant (BSOG)
In 2002, CfIT published the most comprehensive look into the economics of the bus industry. This study examined how public subsidy to the bus industry could be used more effectively to deliver patronage growth and modal shift. We recommended a change from the Bus Service Operators Grant (BSOG) to an incentive per passenger (IPP). We believed this reform, alongside increased investment in Park & Ride schemes, bus priority, and changes to the concessionary fare regime, could achieve a 35% increase in passengers over seven years.
In 2007, as part of our response to the Government's consultation on reform of the bus industry, we have revisited our earlier analysis and undertaken a detailed cost-benefit analysis of reform options to BSOG. We have updated the economic analysis to take account of the changes since 2002 - notably the extension of concessionary travel. Picking up the themes of your Putting Passengers First consultation, we looked specifically at BSOG based upon variable rates for cleaner fuels and/or engine types (environmental incentive) and BSOG based upon a per passenger journey system (Incentive Per Passenger).
The analysis considered how BSOG could be reformed to meet Government objectives for the bus industry, including modal shift, congestion relief and sustainability.
Our analysis uses updated operator economics, and considers the direct reaction (e.g. service withdrawals), and indirect reaction (e.g. product and service enhancements) of bus operators in response to proposed reforms to subsidy.
The detailed findings of this analysis are attached in the accompanying reports by LEK. The CfIT recommendations based upon the LEK analysis are outlined below.
The BCR of BSOG/FDR
The LEK analysis reconfirmed that BSOG/FDR offers an attractive Benefit Cost Ration (BCR)
compared to many alternative transport investments.
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Table 1: Results from moving from zero BSOG to a £274m payment to operators - CBA analysis of direct fares reaction
| £m |
| High | Low |
| Consumer Surplus | 931 |
| Public and Private Surplus |
|
| BSOG | (274) |
| Other | 0 |
| Other Government (taxes) | (123) |
| Decongestion | 478 | 469 |
| Environmental |
|
| Carbon | 6 | 2 |
| Other | 80 | 29 |
| Total CBA | 1,098 | 1,034 |
| BCR | 5 | 4.8 |
| Incremental Passenger Journeys (Millions) | 265 |
The benefit of BSOG per incremental passenger journey is between £3.90 - £4.14.
Environmental Incentive
The following table examines the Cost Benefit Analysis (CBA) of converting 20% of the bus fleet to either ethanol powered engines, hybrid (electric / diesel) engines, or standard engines running on a 20% biodiesel mix (B20). These technologies all result in reductions in carbon emissions.
Table 2: Cost / Benefit analysis of three technology options
| B20 Fuel | Hybrid Technology | Ethanol Technology |
| Required change in BSOG funding (£m) | 3 | 10 | 71 |
| Funding Scenarios Net Benefit / (Cost) (£m) |
| Unconstrained funding scenario | (1) | (8) | (64) |
| Constrained funding scenario | (8)-(2) | (29)-(9) | (222)-(72) |
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Based on our analysis, we do not believe there is a case for reforming BSOG on an environmental basis alone, as it has limited benefit and is, particularly in the case of ethanol, costly.
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Of those examined, B20 and hybrid technology appear to be the most viable solutions.
Currently B20 can be used in the bus fleet without the need for engine modification, as many operators already have operations that run with 5% biodiesel. However, a key hurdle in the wider take-up of B20 is the fact the engine manufacturer warranty does not extend to B20 mixes.
We understand another key issue with fuel efficiency is vehicle weight - which has increased substantially to meet regulations (e.g. DDA), and enhancements to safety and required functionality of vehicles. There is an argument that replacing BSOG with a per passenger incentive might lead to bus operators demanding more fuel-efficient buses from manufacturers. Currently, we believe the incentives for bus operators to pursue these improvements with manufacturers are dampened, given that BSOG is allocated on fuel used.
We therefore believe dialogue is necessary between all stakeholders (the Government, bus operators and vehicle manufacturers), on cost-effective ways to reduce emissions through better vehicle design and lower bus weights. This dialogue should include extension of current B5 engine warranty's to B20 biodiesel mixes.
The cost benefit performance of hybrids would be more compelling if capital costs could be reduced. We therefore support and encourage the continued trialing of hybrid bus technology. Similar trials with low floor buses in the early 1990s enabled manufacturers to achieve the scale economies and operational experience necessary to bring financially viable low floor buses to the market. We believe hybrid technology will enter the market increasingly as technology develops, capital and operating costs decline, and the market for such technology grows.
Incentive Per Passenger
Our analysis covering the reform of BSOG to an Incentive Per Passenger examined three scenarios:
- Scenario 1: IPP per passenger (unconstrained funding @ 11.2 pence per passenger);
- Scenario 2: IPP with no rural safety net (unconstrained funding @ 11.2 pence per passenger) and
- Scenario 3: IPP with rural safety net (constrained funding at 2005/06 levels @ 9.7 pence per passenger). We also considered the impact of additional funding in highly congested areas.
In the constrained funding scenarios, funding was limited to the current BSOG budget. In the 'rural safety net' scenarios, funding was top sliced from BSOG and reallocated to local authority tender budgets to allow the public sector to 'buy-back' services that commercial operators would other wise drop.
i) Scenario 1: IPP per passenger (constrained funding at 2005/06 levels)
We do not recommend moving to an IPP system under a constrained funding scenario, as this would not deliver significant mode shift or overall benefit, and the upheaval to passengers, local authorities and the industry would therefore be out of proportion to the likely benefit. While rural routes remain protected, urban routes receive substantially less funding. Under these conditions, passenger uplift of only 0.1% is achieved, with no overall change to fares, frequency, or route types.
ii) Scenario 2: IPP with no rural safety net (unconstrained funding)
We do not recommend moving to IPP under an unconstrained funding scenario, where a rural safety net is not in place. While offering the highest Benefit Cost Ratio (c. > 10), the potential uplift in passengers (0.3%) will occur either through a 2.6% increase in fares or a 1.1% reduction in service frequency overall. This is a result of service increases in urban areas generating passenger growth and/or service withdrawals in rural areas leading to some decline.
iii) Scenario 3: IPP with rural safety net (unconstrained funding)
We recommend moving to an IPP system where funding is unconstrained and in which a rural safety net is provided. As shown in the table below, this scenario creates the most passenger uplift (1.3%) for the additional payment of c. £30m. The passenger uplift results from either 2.3% fare reduction or 1.6% increase in service frequency.
Table 3: Unconstrained Funding IPP with Rural Safety Net with a direct fares reaction by operators
| BSOG change (£m) | Fares change % | Passenger change % |
| Radial routes (settlement size bands '000s) |
| > 250 | 13.9 | (2.3) | 0.7 |
| 100-250 | 7.6 | (6.0) | 3.6 |
| 25-100 | 9.8 | (4.9) | 2.7 |
| Rural <25 | 0 | 0 | 0 |
| Inter-urban | 0 | 0 | 0 |
| Orbital | (0.0) | 0.1 | (0.0) |
| Park and Ride | (0.6) | 6.9 | (4.1) |
| Total | 30.6 | (2.3) | 1.3 |
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This scenario delivers a BCR of 2 - 4: a "High" level of value for money in DfT's own terms. The fare reaction would generate a benefit of £2.78 to £2.96 per incremental passenger journey.
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Table 4: Unconstrained Funding with Rural Safety Net - CBA Total (modal shift and generation) - fares reaction (direct operator reaction)
| IPP Per Passenger Subsidy (£m) |
| High | Low |
| Consumer Surplus | 84.2 |
| Public and Private Surplus |
|
| BSOG | (30.6) |
| Other | 0 |
| Other Government (taxes) | (11.2) |
| Decongestion | 43.5 | 42.7 |
| Environmental |
|
| Carbon | 0.6 | 0.2 |
| Other | 7.2 | 2.6 |
| Total CBA | 93.7 | 87.9 |
| BCR | 4.1 | 3.9 |
| Incremental Passenger Journeys (Millions) | 31.6 |
Under an IPP regime, bus operators would be under intensified pressure to carry out service improvements and other investments that would generate incremental passenger journeys. Our 2001/02 research generated elasticities for potential operator reactions. If we include these secondary effects, the BCR rises to c.10 with the assumed introduction of additional product and service initiatives (CCTV and driver training are used as proxy measures for operator enhancements within our analysis).
Table 5: Unconstrained Funding with Rural Safety Net - Total CBA (£m) (Modal shift and generation): Direct Fares Reaction
| Direct Fares Reaction | IPP per passenger with Rural Safety Net
(unconstrained funding) |
| Fare Change | 88-94 |
| Product Initiatives | 220-240 |
| Total CBA | 308-334 |
| BSOG | (36) |
| BCR | 10 |
In addition to the above analysis on Scenario 3, we also considered the increase in IPP that would be required to generate the same level of modal shift on the large urban routes (>250k in population: 0.7% passenger uplift) as was being achieved on the medium urban radial routes (100-250k of 3.6 passenger uplift). This was calculated to be an additional 3 pence per passenger with incremental BSOG increasing by £63m-£30m. Total BSOG spending would increase to £94m-£58m.
The BCR for this additional subsidy spend would fall from 4 to almost 2 for all passengers. This reflects the high cost of additional services and the elasticities generated in our 2002 study.
Table 6: Fare and Service Elasticities from Accent Research (2001/02)
| Park and Ride | Radial (>250k) | Radial (100-250k) | Radial (25-100k) | Radial (3-25k) | Orbital | Inter Urban Short | Inter Urban Long | Rural | Rural <25k |
| Fare Elasticity |
| Car | Peak | (0.141) | (0.073) | (0.144) | (0.188) | (0.188) | (0.241) | (0.061) | (0.061) | (0.118) | (0.118) |
| Off Peak | (0.355) | (0.123) | (0.319) | (0.273) | (0.273) | (0.111) | (0.120) | (0.120) | (0.273) | (0.273) |
| Bus | Peak | (0.300) | (0.155) | (0.305) | (0.252) | (0.252) | (0.153) | (0.217) | (0.217) | (0.252) | (0.252) |
| Off Peak | (0.754) | (0.262) | (0.677) | (0.581) | (0.581) | (0.235) | (0.424) | (0.424) | (0.581) | (0.581) |
| Frequency Values of Time |
| Car | Peak | 10.5 | 15.5 | 7.3 | 6.9 | 6.9 | 5.4 | 11.1 | 11.1 | 6.9 | 6.9 |
| Off Peak | 7.3 | 10.4 | 4.9 | 4.3 | 4.3 | 3.6 | 7.6 | 7.6 | 4.3 | 4.3 |
| Bus | Peak | 1.1 | 1.9 | 3.0 | 1.0 | 0.9 | 2.3 | 1.6 | 4.6 | 0.9 | 0.9 |
| Off Peak | 2.2 | 1.0 | 1.2 | 1.0 | 0.4 | 1.2 | 0.9 | 2.7 | 0.4 | 0.4 |
Note: Values shown are taken from 2001/02 study. Frequency values were updated with growth indices to produce 2005/06 values which were then used in this project.
Based upon our analysis, we would not recommend increasing the IPP rate from 11.2 pence. While we appreciate there are specific benefits to be gained from variable rates in certain areas (e.g. to reduce congestion), the overall effect is to dilute the cost-effectiveness of the scheme.
While we have estimated the additional annual spending required in BSOG funding, there will be other costs associated with implementing an IPP scheme. These have not yet been quantified and are subject to a CfIT follow-on study on the reporting, monitoring and auditing requirements of an IPP scheme. We hope to complete this advice by March 2008.
