PSO reimbursement

Where services are required to be provided below their full direct cost of operation, or specific public service obligations are imposed, the simplest form of compensation to operators can be the authorization and charging of higher fares on unaffected passengers and using the surplus for cross-subsidy. This can prove effective in a well-regulated environment, but is susceptible to evasion of the conditions by informal-sector operators.

In the case of public service obligations, the appropriate compensation can be provided by the government function that is responsible for their imposition – though this is rarely the case. However the recognition of the cost of the subsidy on departmental budgets would have the effect of making its ‘opportunity cost’ explicit, and avoid one sector free-riding on another.