Financial case
This financial case primarily considers the estimation of the potential costs of the scheme. Given the nature of the Ministerial commitment, it does not consider affordability in the usual way as it is deemed unnecessary.
Value for money of the preferred option is considered in Chapter 8, bringing together all 5 cases in the usual manner.
Key assumptions
Funding
The project results in a loss of revenue to bus operators which the SG/TS will reimburse. The nature of this reimbursement along with the impact on demand (and how that is dealt with) alongside the running costs of the scheme form the basis of the financial cost.
Capital Requirement
There is no capital requirement. Assumed.
Value Added Tax
There is a change in VAT through changes in the demand for non-public transport. This is likely to be minimal and will have no impact on Scotland
Estimation of Steady-State Costs
The initial cost estimates are implementation in the current year and vary with the decisions made around both the form and parameterisation of the reimbursement process. The costs are subject to significant uncertainty around the demand response and, at this point, the reimbursement process and crucially the parameters of that process agreed with operators.
The model produces a base cost before demand effects are considered (this varies with non demand based parameters). The ideal scheme design would leave operators no better or worse off than this core estimate but given the extreme uncertainty, the approach for each demand reaction scenario is to consider:
- The core (before demand changes) costs
- The impact of reimbursement rates of 90% (in line with the Highlands and Islands scheme), 95% (based on discussions with operators) and 100% (to illustrate the potential impact).
- The reimbursement rate for each modelled demand reaction that leaves operators no better or worse off.
Based on the analysis is the socio-economic case, 3 scenarios are initially considered for costs based on the demand response to the core scenario around current (2026) bus prices. These are based on the “Lower”, “Low” and “High” scenarios as discussed above. Cost values are rounded to nearest £1m.
| Core Elasticity Scenario | Lower | Low | High |
|---|---|---|---|
| Increase in demand | 9.5% | 19.1% | 38.2% |
| Core cost (no demand change) | £85 m | £85 m | £85 m |
| 90% reimbursement | £84 m | £91 m | £106 m |
| 95% reimbursement | £89 m | £96 m | £112 m |
| 100% reimbursement | £93 m | £102 m | £118 m |
| Neutral reimbursement rate | 91% | 84% | 72.5% |
Under this core scenario a reimbursement rate of 90% (which replicates that in the existing pilot) is seen to leave operators broadly no better or worse off under the lower scenario. The low scenario shows that there would be some gains to operators (around £6m from the core cost) at 90% whilst the high scenario (which previous analysis suggests is unlikely) shows additional gains totalling £21m. The revenue neutral reimbursement rate falls across the scenarios.
In terms of considering the impact on operators there is a strong possibility (as noted previously) that smaller operators may face lower demand responses.
An initial sensitivity analysis looks at an increase in fares of 20% on 2025 levels.
| Higher fares Elasticity Scenario | Lower | Low | High |
|---|---|---|---|
| Increase in demand | 10.4% | 20.8% | 41.5% |
| Core cost (before demand change) | £101 m | £101 m | £101 m |
| 90% reimbursement | £101 m | £110 m | £129 m |
| 95% reimbursement | £106 m | £116 m | £136 m |
| 100% reimbursement | £112 m | ||
| £123 m | £144 m | ||
| Neutral reimbursement rate | 90% | 83% | 71% |
The first point to note is the sensitivity of the estimates to an increase in fares – if fares have risen by 20% rather than 10%, the impact on costs (core) is around 18% - this is because the costs are based on the increase in fares above the cap rather than in totality.
For example, if fares were £2.50 and increased by 10% to £2.75, then the full reimbursement at 100% per journey would increase from 50p to 75p, an increase of 50 percent.
Secondly, again the lower demand scenario results in a broadly neutral impact on operators, with again increasing gains if demand reacts more.
A further scenario is to uplift the cost estimates for a higher than expected impact on long distance journey demand (as emerging evidence from the existing pilot suggests).
Making appropriate adjustments for the nature of the SPT area, for longer distance travel increasing in a similar manner to that seen to date in HITRANS, increases the estimated cost to £125 million to £160 million at 95% reimbursement or £120 million to £150 million at 90% (amounts to nearest £5 million to reflect significantly greater uncertainty).
| Higher LD demand Elasticity Scenario | Lower | Low | High |
|---|---|---|---|
| Core Cost | £110 m | £110 m | £110 m |
| 90% reimbursement | £110 m | £120 m | £150 m |
| 95% reimbursement | £115 m | £125 m | £160 m |
| 100% reimbursement | £120 m | ||
| £130 m | £170 m | ||
| Neutral reimbursement rate | 91% | 84% | 72.5% |
Summary
The cost of the scheme is subject to significant uncertainty and to the reimbursement level chosen to operators. This is discussed further in section 8 below