When UK bus services were deregulated in 1985 a system of competitive tendering was introduced for the provision of socially necessary services. Payment to the operator can be either the net difference between cost and revenue or the gross (total) cost of the service. While the former is attractive, a comparison of both methods indicates the overall cost to the contracting authority is generally lower under the gross cost method, due to the reduced risk perceived by the operator.

The productive efficiency of the railway systems in 19 OECD countries is analysed. The empirical results show that: (i) railway systems with high dependence on public subsidies are significantly less efficient than similar railways with less dependence on subsidies; (ii) railways with a high degree of managerial autonomy from regulatory authorities tend to achieve higher efficiency.

In determining the level of subsidy, and its use in reducing fares or increasing frequencies, weight should be given to the comparative benefits accruing to different income groups. A local authority will be influenced in its decision by the proportion of the cost that is borne by central government.