Financial Case
Key assumptions
Funding
The project results in a change in revenue to ScotRail and thus a change in the level of subsidy required to operate the rail system, equivalent to the costs estimated in sections 5.2 to 5.6 below.
Capital Requirement
There is no capital requirement.
Value Added Tax
There is a change in VAT through changes in the demand for non-public transport. This is picked up by the TMfS modelling of Value for Money.
Estimation of Steady-State Costs
The initial cost estimates are for the first year of implementation based on the experience of the pilot and are calculated in 2 ways as detailed in Section 2.1 and 4.1. There remains significant uncertainty over the level of costs associated with the project and there is no direct mechanism by which the true level will ever be clear. This is because the impact is a change in revenue received of which the intervention is only one determining component. As such the approach is to present a range of potential costs but the uncertainty means that it is possible that the actual impact may still fall outside this range. However, the analysis is able to draw on the experience and evidence collected during the pilot in order to make the range of estimates as robust as possible. Longer term estimates are made using a methodology derived from the Passenger Demand Forecasting Handbook (PDFH).
The basic approach is to estimate the impact of simply removing peak fares and leaving the rest of the current rail fare system in place as a starting point. The costs of the additional options that seek to address the wider outcomes of the project are then calculated and added in where appropriate.
Transport Scotland Approach
The Transport Scotland approach to cost estimation is to use the 2 scenarios from the demand analysis above, run them through the TMfS based model developed for the pilot evaluation and convert to current prices and values, and then adjust to account for demand changes that have taken place since the pilot ended.
The demand changes associated with the two scenarios are 2.67% and 5.59% and when run though the model and adjusted give the following results.
| Categories | Reference values | Revenue Loss (TMFS) £ million - Alternative Scenario | Revenue Loss (TMFS) £ million - Core Scenario |
|---|---|---|---|
| Total Revenue (pilot) (£m) | 326.7 | Not applicable | Not applicable |
| Revenue loss from pilot | Not applicable | 35.5 | 17.9 |
| No Pilot Revenue | Not applicable | 362.2 | 344.7 |
| Percentage Loss | Not applicable | 9.8% | 5.2% |
| Post Pilot Period Daily revenue (£m) | 0.99 | 0.097 | 0.052 |
| Annualised (£m) | Not applicable | 35.5 | 18.9 |
| Natural Growth Continues at Post-Pilot rate | 3.2% | 36.6 | 19.5 |
| Natural Growth at pre-pilot rate | 8.7% | 38.6 | 20.6 |
The estimates do not explicitly account for the fare changes in April 2025. However, the Natural Growth adjustment is judged to contain an element of revenue growth that reflects the increased fares.
As such a prudent initial range of costs are between £19.5 million and £38.6 million per annum for the first full year of the project. This does not include any additional operating costs (or marketing budget) incurred by ScotRail.
ScotRail Approach
The ScotRail approach uses the estimates of demand impacts from the pilot from their commissioned work undertaken by Steer consultants and standard PDFH methodology and provides a useful triangulation/check against the main results.
The results are an initial estimate of £28.3 million.
| Summary | Revenue (£m) | % revenue | Journeys (m) | % journeys |
|---|---|---|---|---|
| Peak Fares Pilot impact | -24.3 | -6.8% | 3.7 | 4.7% |
| 25-26 revenue/journeys | 416.2 | Not applicable | 91.3 | Not applicable |
| Impact with 25/26 demand (exc. season/flexi) | -28.3 | -6.8% | 4.3 | 4.7% |
Analysis of additional costs of options
The costs above represent the estimated costs of option 1 – Simple removal of Peak fares – New Core Fares.
The additional costs of Option 2 – adjust Season Flexi/Prices to 5% below main fares are estimated to be £1.5 million per year. Without the adjustment seasons/flexis would be more expensive than the core fares and the calculation of the core cost assumes that demand for seasons/flexis would fall away. In addition, it is assumed that demand for seasons/flexis would fall from current levels with this option as the discount is significantly lower (albeit on a much lower base).
The calculation of the impact of Option 5 – raising core fares to reduce the overall cost of removing peak fares is more complicated to analyse. Given the time restrictions a simple percentage rise in all Core (previously off-peak) fares is modelled for a range of percentages (as discussed above this would not be optimal but is all that is possible before the projected implementation date).
The analysis is relatively simplistic but uses the core PDFH assumptions which indicate that Peak time demand is more inelastic (less responsive to price) as Off-peak demand. Elasticities are -0.5 and -0.9 respectively (an elasticity of -1 implies that revenue is unaffected by price changes).
Thus impact is asymmetric to the core analysis as the increase in the cost of what was previously off-peak travel (which accounts for more than half total demand) has a greater impact than the reduction in peak time travel.
The results are shown in the table below.
| Price increase | Journeys impact (millions) (m, %) | Journey impact (%) | Revenue change from Option 1 (£100k) |
|---|---|---|---|
| 0.0% (Baseline) | 0 | 0.0% | Not applicable |
| 2.0% | -1,316 | -1.4% | 1,812 |
| 3.00% | -1,958 | -2.1% | 2,710 |
| 4.00% | -2,588 | -2.8% | 3,603 |
| 5.00% | -3,207 | -3.4% | 4,492 |
| 6.00% | -3,817 | -4.1% | 5,375 |
| 7.00% | -4,416 | -4.7% | 6,254 |
| 8.00% | -5,005 | -5.3% | 7,128 |
| 9.00% | -5,585 | -6.0% | 7,997 |
| 10.00% | -6,156 | -6.6% | 8,862 |
| 15.00% | -8,876 | -9.5% | 13,120 |
| 20.00% | -11,395 | -12.2% | 17,273 |
| 25.00% | -13,735 | -14.7% | 21,328 |
| 30.00% | -15,916 | -17.0% | 25,292 |
| 40.0% | -19,864 | -21.2% | 32,967 |
| 50.0% | -23,344 | -24.9% | 40,336 |
Each 1% increase in the Core fare reduces overall journeys by 650,000 and increases revenue by around £0.9 million. These estimates are subject to significant uncertainty but are broadly consistent with the higher end of the range of core costs (around £40 million). Note that the changes in demand are mainly down to existing travellers at off-peak times, who are more sensitive to price, using alternative modes and these changes are on top of the core scenario where peak travellers have significant savings.
Affordability
| Options and Related Activities | 2025-26 | 2026-27 |
| Do Nothing | Not applicable | Not applicable |
| Option 1 - Revenue Loss | 22.5 | 38.6 |
| Implementation Costs - Service Changes | 1.8 | 3.0 |
| Marketing | 1.0 | Not applicable |
| Evaluation | 0.3 | 0.8 |
| Cost Of Option 1 | 25.5 | 42.4 |
| Option 2 - Flexi And Season Tickets | 0.9 | 1.5 |
| Cost Of Option 2 | 26.2 | 43.9 |
While costs are highly uncertain and dependent on demand, a prudent estimate of costs for Option 2 is around £38.6 million for the first full year of the project (see section 5.2 above), plus implementation costs of £3 million per annum, evaluation costs of £1 million, and marketing costs of £1 million in year one. The implementation, marketing and to a less extent the evaluation costs are likely to occur largely in the first few months of implementation and thus the estimated loss of revenue and costs of implementation in 2025-26 (7 months from start September 25 to end March 26) are estimated to be £26.2 million. This has been accommodated in Scottish Government’s financial planning, and appropriate budget cover will be transferred at the in-year budget revisions.
Budgets for 2026-27 and beyond have not yet been set, however the cost of peak fares removal is reflected in the medium-term spending outlook published in the Medium-Term Financial Strategy (MTFS) in June 2025. The MTFS is accompanied by the Fiscal Sustainability Delivery Plan which sets out the key actions the Scottish Government is taking to constrain the rate of growth in public spending and maximise the impact of economic and tax performance over the next five years. Funding, spending and investment decisions will be taken in the 2026-27 Scottish Budget and the Scottish Spending Review, which are due to be published in December 2025.
Long term impact on costs
Within a financial case it would be usual to include a long term impact on costs ie the impact over multiple years. This is not included here but is discussed in section 8. This is because whilst there is considerable uncertainty over the 1 year costs estimates, the subsequent position is even less clear. Academic evidence suggests that the impact of changes in price take a number of years to fully realise and this will tend to reduce the costs over time. This could be as quick as one or two years. However, once the removal of peak fares is established and becomes part of the usual ScotRail financial budgeting process it will become increasingly difficult to assess what would otherwise have happened. The significant evaluation work discussed below is the only practical solution to this issue.
Summary
The total cost of the 4 options is shown below. Note that there is also the inclusion of around £5 million to include a significant marketing budget (£1 million), ongoing evaluation (£1 million) and a small sum (£3 million) based on the pilot for the costs of running additional services.
| Options | Low demand Impact | Estimated demand impact | Scot Rail Estimate |
|---|---|---|---|
| Option 1 | £38.6m+£5m = £43.6m | £19.5m +£5m = £24.5m | £28.3m +£5m = £33.3 |
| Option 2 | +£1.5m = £45.1m | +£1.5m = £26.0m | +£1.5m = £34.8m |
| Option 5 | See table above | See table above | See table above |
| Option 6 | No additional cost | No additional cost | No additional cost |