A new report suggests that the government is short-changing bus operators for carrying pensioners and disabled people for free. It claims that the methodology for calculating what compensation bus operators are due is flawed.

Britain's biggest bus operators have grown increasingly frustrated by the Department for Transport's handling of the introduction of free travel for pensioners and disabled people. Two major groups have considered applying for a judicial review of concessionary travel arrangements (Transit February 15).

The new report, Reimbursing bus operators: Analysis of the DfT's guidance has been produced by Oxera for the Confederation of Passenger Transport with funding from the large groups.

It provides the intellectual case for challenging the current arrangements, and gives a glimpse of the arguments that could be used in a court case. A copy has been passed to the DfT.

The report finds that DfT's assumptions about the nature of demand for bus travel are "fairly arbitrary" and "cannot be justified by empirical evidence". Other, equally valid, assumptions would give more favourable results for operators, it says.

Britain's biggest bus operator, First Group, is believed to be one of the companies that has considered taking the government to court over reimbursement. It has been embroiled in a number of disputes across the country. As he presented the group's financial results in London last week First chief executive Moir Lockhead revealed that his company had not ruled out a legal challenge. "The process isnÕt working properly," he said.

However, Lockhead said that both the bus industry and the DfT were keen to find a solution to the problem. He pointed to Scotland where the centrally administered concessionary travel scheme has run smoothly.

The Oxera report presents an analysis of the DfT guidance and the RAT, the 'reimbursement analysis tool' used to quantify the level of compensation to operators. Oxera has reviewed the economic literature quoted by the DfT, and conducted simulated exercises to determine the impact that a change in the assumptions could have in the reimbursement due to bus operators. It found that the DfT's assumptions are not based on robust evidence.

Key findings of the report are: * There is limited evidence for the assumptions about passenger reaction to real-terms fares increases. * The assumptions about long run versus short run elasticity are also open to question. * On the cost side, there is no evidence that the range of additional costs is between 1p and 15p per generated trip. * The RAT should allow for the entry of overall patronage trends after the first year, along with changes to substitutes (such as car parking) and changes to quality. It does not. CPT members can download the report, Reimbursing bus operators: Analysis of the DfTÕs guidance, at www.cptmembers-uk.org