By

ABSTRACT: Reform of the bus sector has been occurring in many countries. One matter central to these reform initiatives is the establishment of a value for money (VM) regime to ensure that operators deliver to the market the best possible service levels consistent with stakeholder needs and especially the objectives of government. A key underlying feature of ‘value for money’ (VM) is identifying the benefit to society associated with each dollar of subsidy support from government. This paper reviews the elements of a VM regime within the setting of an incentive-based performance contract and develops a formal framework for establishing optimum subsidy based on system-wide maximisation of social surplus. The maximisation of social surplus is subject to a number of constraints including the commercial imperative of the operator, minimum service levels under community service obligations and a fare and subsid