Performance-based quality contracts for the bus sector: delivering social and commercial value for money

Reform of the bus sector has been occurring in many countries. One matter central to these reform initiatives is the establishment of a value for money (VM) regime to ensure that operators deliver to the market the best possible service levels consistent with stakeholder needs, and especially with the objectives of government. A key underlying feature of VM is identifying the benefit to society associated with each dollar of subsidy support from government. This paper reviews the elements of a VM regime within the setting of an incentive-based performance contract, and develops a formal framework for establishing optimum subsidy based on system-wide maximisation of social surplus. The maximisation of social surplus is subject to a number of constraints, including the commercial imperative of the operator, minimum service levels under community service obligations (CSO), and a fare and subsidy budget cap. An important feature of the performance-based contract (PBC) regime is a passenger trip-based incentive payment scheme linked to user and externality benefits that incorporates a subsidy per additional passenger trip above the patronage delivered under service and fare levels compliant with CSO. In this way, rewards to operators are revealed through the fare box, through increased consumer surplus and through reductions in negative externalities such as those associated with the use of the car. PBCs can be designed to accommodate both the transition from an existing regime and post-transition growth strategies. The implementation of PBCs is illustrated using data from private operators in the Sydney Metropolitan Area.