Scrap the Bus Service Operators Grant

The public transport industry are out in force today telling the Telegraph that the world will end if the Bus Service Operators Grant (BSOG) is abolished.  The Telegraph report quotes two groups.  The Campaign for Better Transport, radical anti-car campaigners who are partly funded by public transport companies and have also received huge amounts of taxpayer funding over the years.  And Stagecoach, who are one of the operators that do quite well out of the grant.  So this is yet another case of an industry and their stooges trying to look after their slice of taxpayers' cash.

We recommended that the BSOG should be scrapped in our report with the Institute of Directors and How to Cut Public Spending.  Scrapping it would save £451 million in 2010-11.

As we noted in our research, the BSOG has come under attack from a number of groups.  The Local Government Association have said that "BSOG is not well focused on the achievement of public policy objectives [...] it does not encourage efficient use of fuel or cleaner, greener vehicles, nor is it related to tackling congestion, driving up patronage, improved performance, better quality services or improved accessibility".  Oxera, an economics consultancy, reflected that the abolition of BSOG was central to improving the value of taxpayer support for bus services.

Stagecoach cite research that found BSOG delivers £5 worth of benefits for every pound spent.  It isn't clear, but I think that refers to this research from the Commission for Integrated Transport, and particularly Table 1.

That research compares £270 million of spending on BSOG (and the reduced tax take as bus passengers aren't huge net contributors to the Exchequer as motorists are) with a range of estimated benefits.  The carbon and other environmental benefits are pretty tiny so the two items that account for the lions share of the total estimated benefits are:

1.  Consumer surplus.  I think this basically means the utility to passengers from the greater number of cheaper bus journeys they are able to take.  The consumer surplus dominates the estimated benefits as it is worth £931 million according to the research, more than twice the total costs.

It is a bit odd to say that consumers are better off because their money is taken from them in taxes and then given back in lower bus prices, so presumably this is down to increased consumer choice.  That means the economic case that they are making for the BSOG is that because our money is pooled and given to bus operators in a bigger lump of cash it opens up transport options we otherwise wouldn't have, or perhaps that it redistributes to rural customers who aren't sufficiently numerous to justify bus services on the routes they want to travel.

This is what's known in economics as a network effect; a classic case is that telephones become more valuable the more people own them - more people to talk to.  But network effects can also take place in private spending, if more people are able to drive places then they will encourage the development of a range of services from motorway services to mechanics for example.  Has this research produced its results by taking account of network effects in public spending but not in the private spending that can't take place because consumers lose the money to taxation?

This sentence is also a bit odd:

"The benefit of BSOG per incremental passenger journey is between £3.90 - £4.14."

A bus journey is worth £4.14?  I've taken plenty of bus journeys and can't think of many worth £4, far more than most people pay in fares.  All in all, I would take that crucial "consumer surplus" component of their calculation with a pinch of salt.

2.  Decongestion.  I think that the assumptions here would need to be looked at very carefully.  Some buses, in some places, can create congestion rather than reducing it.  A big bus (particularly if its bends and therefore can't stay in a lane) with only a few people on it that regularly stops and blocks traffic isn't helping to unblock the roads.  And congestion is much less of a problem in rural areas compared to the cities.  So to some extent the report is trying to have its cake and eat it by suggesting that the BSOG provides services to areas without the traffic to justify them and also eases congestion in areas that have too much traffic.

Transport Minister Norman Baker responded to the story in the Telegraph basically by saying that the Government
don't really know what they're doing with bus subsidies yet.  Hopefully they'll scrap the grant.  Instead of subsidising bus operators, it would be much fairer to work to cut Fuel Duty and ease the burden on all road users.

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