In December 2008 the then Secretary of State for Transport, the right honourable Geoff Hoon MP, announced a range of reforms to bus service operators grant (BSOG) to bring this subsidy better into line with government objectives. As promised in that announcement, we have since been developing the detailed arrangements with stakeholders, and continuing to discuss possible longer-term reforms.

In April this year the Government introduced two changes to the current BSOG scheme. First, bus operators who have achieved a 6 per cent improvement in fuel efficiency will receive a 3 per cent uplift in their BSOG rate from April 2010. Secondly, with effect from April 2009 operators have been able to claim an additional payment of 6p for each kilometre operated by a low carbon bus, ie one that is capable of achieving at least a 30 per cent reduction in greenhouse gas emissions compared to a similar size conventional diesel bus.

I can now confirm the details of two further changes that were first announced in last December’s Statement and will come into effect in April 2010. From that date operators will receive an 8 per cent increase in their BSOG rate if they have operational ITSO smartcard systems and, separately, a 2 per cent increase if they have fitted their buses with GPS equipment. To qualify for the higher rate smartcard equipment will need to accept all English concessionary passes and the incentive will also be linked to accepting integrated ticketing products. To receive either the smartcard or GPS incentive, operators will also have to commit to share specific data with local authorities, central government and other relevant bodies. Together these incentives could be worth around £1,000 in additional grant per bus each year.

The smartcard and GPS incentives will not apply to London operators. The contractual arrangements for bus services in London already provide the mechanism for securing the outputs that the Government are seeking, such as installation of GPS equipment and availability of GPS data. There is a separate project to enable the Transport for London Oyster network to read ITSO smart cards, to which the Department for Transport has committed £60 million.

The smartcard incentive is part of a package of measures designed to encourage the introduction of smart and integrated ticketing across the country. These are the subject of a separate announcement today. Encouraging the take-up and use of GPS systems will help realise the potential for passengers to receive real-time information about bus services and bus performance.

I can also announce today our intentions for a more fundamental reform of BSOG, which we aim to introduce in the next two to three years.

As last December’s Statement made clear, we want our buses to be as green and clean as possible. That is why we are reforming BSOG to ensure it contributes to the Government’s strategic objectives, particularly in relation to tackling climate change. Drawing on the results of our consultation in 2008 on options for longer-term reform, and from discussions with stakeholders, the Government wish to move away from paying support on the basis of how much fuel is consumed. We will therefore bring forward new arrangements for support on the basis of passenger numbers. This will act to make public transport more attractive thereby delivering environmental benefits through reduced congestion and improved air quality.

These new arrangements will mean that operators will face the full cost of the fuel they use. This will strengthen the commercial incentives for operators to find ways to reduce their fuel consumption and improve the business case for investment in driver training and low-carbon buses. It also builds on the fuel efficiency target and the distance-based payment for use of low-carbon buses that are now part of the current BSOG system.

The new incentive per passenger arrangements, which build on the work done by the Commission for Integrated Transport, will rely on accurate recording of passenger numbers. This will require audited data of the sort that can be provided through the use of smart ticketing equipment. The move to per passenger payments will therefore be underpinned by the delivery of the Government’s smart and integrated ticketing strategy, which has been announced today, and which is itself supported by the new smart ticketing incentive described above. We recognise that it could take up to 10 years for the national bus fleet to be equipped, and we therefore propose a managed transition from BSOG to the new system.

Introduction of this new form of bus subsidy will also require the approval of the European Commission for reasons of state aid. Given the fundamental nature of the changes that we are proposing, approval is likely to take two to three years. Until the new system has been approved the existing BSOG scheme will continue. Once approval has been given, the per passenger system will be rolled out as quickly as operators can install ITSO smart ticketing systems. The existing fuel-based system will continue in parallel for those operators without smartcard equipment, although the rate of payment may decline over time. Eventually, by around 2020, the BSOG system will end and be replaced entirely by an incentive per passenger.

We will discuss the detailed implementation of these proposals with members of the Bus Subsidy Advisory Group and with other government departments. In particular, we recognise that an incentive per passenger will have different impacts in areas of high and low demand. While the bulk of resources available for bus support will therefore move to an incentive per passenger basis, we will wish to discuss with stakeholders how best to make appropriate arrangements for supporting socially necessary services that become less commercially viable as a result of introducing a per passenger system. This might mean, for example, some of the current BSOG budget being transferred to local authorities.

It remains our intention as part of these reforms to stop providing BSOG direct to London operators, as announced last December. We will seek to agree detailed arrangements with TfL at the appropriate time.

The changes I have announced today set the long-term direction of changes to bus subsidy and introduce important new incentives to the current system. In summary they will:

provide strong incentives for bus operators further to improve their fuel efficiency, building on the changes introduced in April 2009 which have sent decisive signals to the industry about the need to improve their environmental performance;

give operators real incentives to attract more passengers to their services and out of their cars;

underpin the ticketing strategy also announced today and pave the way for widespread smart ticketing; and

support the take-up and use of GPS systems that will increase availability to passengers of real-time information about services and bus performance.