2 Current Reimbursement Arrangements and Background Trends
2.1 Background to the current concessionary reimbursement arrangement
2.1.1 Payments to individual operators are currently calculated by applying a fixed Reimbursement Rate to the adult cash single fare that would have been charged for each concessionary journey. The latter is known as the "shadow fare".
2.1.2 The Reimbursement Rate was initially set at 73.6% in 2006-7, and was revised downward to 67.0% with effect from 2010-11. However, the agreements reached with CPT included provision for the Scottish Government to limit total payments to specific reimbursement "caps" within each financial year, based on forecast changes in the main factors that should influence payments. Reimbursement caps had little impact initially, but have significantly reduced payments in 2011-12 relative to what would otherwise have been paid, and are likely to have a larger impact in 2012-13.
2.1.3 For the vast majority of bus operators in Scotland, concessionary journeys and the associated shadow fares are now recorded using smartcard technology, allowing a reimbursement payment to be calculated for each concessionary journey made. Identical quantities of reimbursement would be calculated by applying the reimbursement rate to aggregate data for an individual operator, e.g. to the total number of concessionary journeys made, and the average shadow fare. Since many reimbursement concepts make little sense when thought of relative to individual concessionary journeys, in this report we generally talk about reimbursement payments, for individual operators or for bus operators as a whole, calculated in aggregate terms, i.e. relative to the total number of concessionary journeys, and an overall average fare.
2.1.4 Appendix A introduces key reimbursement concepts and terminology and shows how the Scottish reimbursement rate is built up from different components. The main elements are as follows:
- Discount: this measures the extent to which the fare that would be paid by concessionary passholders, in the absence of the scheme, would be less than the adult cash single fare recorded as the "shadow" fare for each concessionary journey. The current Reimbursement Rate incorporates an assumption that the average fare that would be paid in the absence of the concession is about 7.3% less than the shadow fare;
- Generation: a measure of how many concessionary journeys have been generated by the availability of free travel, relative to the journeys that would have been made if there was no concession. The current Reimbursement Rate assumes that if there was no concession, 61.5% of current concessionary journeys would continue to be made, and 38.5% of concessionary journeys would no longer be made (i.e. are generated by the concession); and
- Additional costs: additional operating costs incurred as a result of the additional journeys generated by the concession. The current Reimbursement Rate assumes that additional costs are equal to about 10% of the shadow fare.
2.1.5 The single, fixed Scottish Reimbursement Rate provides a simple and transparent mechanism for calculating payments to operators. However, the concepts set out above are quite distinct, and combining them in a single figure obscures much of the underlying logic. In particular, the use of a single reimbursement rate makes it is less obvious how the different components, and hence the overall reimbursement rate, should change over time.
2.2 Recent Trends in Scottish Concessionary Travel
2.2.1 Relevant recent trends in concessionary travel are summarised in Figure 2.1.
Figure 2.1 Scottish trends in concessionary journeys, fares and reimbursement, indexed to 2006-7
Source: Transport Scotland from 2006-, except data supplied by CPT for journeys in 2002-3
2.2.2 Consistent time-series data on older and disabled concessionary journeys is not available before 2006-7, but data from 2002-3, initially collated by the Association of Transport Coordinating Officers (ATCO) and copied to us by CPT, has been used to show in approximate terms the impact on concessionary journeys of local free travel in October 2002. Overall, the change from the previous mixture of flat fare, half fare and two free schemes led to an increase in Scottish concessionary journeys of about 30%. Journey numbers continued to grow, up to and including the introduction of the National concessionary scheme in 2006-7. From 2007-8, overall numbers of concessionary journeys have declined.
2.2.3 Under the national scheme, reimbursement payments are driven by the combination of journey numbers and the average adult cash single fare. The latter has increased very substantially, and is forecast to be 53% higher in current prices in 2012-13 than it was in 2006-7 (27% higher in real terms, after allowing for inflation as measured by the Consumer Price Index (CPI)). As a result, reimbursement payments have also increased substantially over this period, despite the reduction in the reimbursement rate with effect from 2010-11. In 2011-12 and the current year, the reimbursement caps have had a significant impact, and in 2012-13 are likely to reduce expenditure by about £13 million relative to what would have been paid without the cap.
2.2.4 The adult cash single fare which is used to determine concessionary reimbursement has risen substantially more than other measures of the fare charged by operators to non‑concessionary fare-paying passengers. These have generally increased at about half the rate of the fare used to calculate reimbursement. There are a number of reasons why this might be so, but as noted in the final Chapter of this report, the current national reimbursement arrangements, with a fixed rate which is the same for all operators, are likely to have created incentives for bus operators to increase the adult cash single fare more than they would otherwise have done.
2.2.5 The implementation of a systematic updating mechanism for reimbursement calculations will reduce these incentives to some degree, but more radical changes should also be considered, as is discussed in the final Chapter.