The bus sector in the West Midlands is among those facing a probe by the competition watchdog following concerns that a lack of competition is driving up prices.

The Office of Fair Trading (OFT) yesterday released the results of its five-month investigation into the country’s £3.6 billion local bus market, saying it proposed to refer the sector – except for London which does not have deregulated services – to the Competition Commission.

The OFT found evidence of limited competition that was forcing up prices, with passengers forking out on average nine per cent more for fares in areas where there is only one major national player.

Bus services in the West Midlands are dominated by the troubled Birmingham-based transport group National Express under the National Express West Midlands brand.

The West Midlands’ bus sector was excluded from the OFT’s analysis looking at the relationship between price and the level of market concentration because National Express did not consent for the Department for Transport to release its data in this area.

Taxpayers risk suffering a double hit from a lack of competition in the local bus sector, given that it is subsidised by about £1.2 billion in state funding, according to the OFT.

OFT chief executive John Fingleton said: “Our investigation has unearthed a range of evidence that suggests the market for local bus services is often not working as well as it should and may be resulting in higher prices for bus users.

“In addition, this is a market where an estimated £1.2 billion comes from public subsidy, so restricted or distorted competition can potentially have a significant impact on taxpayers. We believe that the issues we have identified clearly justify a full investigation and we therefore propose to refer this sector to the Competition Commission.”

The adult fare for a journey lasting more than three fare stages is £1.70 on National Express West Midlands buses in Birmingham, compared to a £1 flat fare for people travelling in buses in London who have an Oyster card.

National Express maintained it offered value for money for passengers in the West Midlands despite its dominant position in the market.

It also underlined the fact the OFT’s report singled out the West Midlands as offering “healthy competition” in the Centro area for bus contract tenders.

A spokesperson for National Express West Midlands said: “We contributed to the OFT study and believe competition creates a healthy market where every bus operator strives to deliver the best service.

“We already participate in multi-operator bus tickets and work closely with Centro to deliver a fully accessible bus service throughout the region.

“The OFT report specifically comments that there is ‘healthy competition’ within the West Midlands tendered market.”

David Brown, of the Passenger Transport Executive Group, said the findings of the OFT report were “symptomatic of all that has been wrong about 20 years of bus deregulation”.

“However, this is an area where the Competition Commission’s cure could be worse than the disease – if they seek to promote more on-road competition as a solution,” he said.

The large national bus groups look set to come under particular scrutiny, as they represent about two-thirds of local bus service provision.

The OFT found that, despite their dominance, they do not operate in all areas of the country and there are fears of a “live and let live” attitude where national operators respect each other’s territories to avoid the threat of retaliation.

Industry body the Confederation of Passenger Transport UK said it believed there was a “great deal” of competition in the market.

It said: “We will study the OFT’s report and assist them further in what ever way is appropriate during this consultation process. Bus companies operate in highly-competitive local markets and it is always in our interests to keep prices competitive to attract passengers out of their cars and on to our services.

“There is a great deal of competition between bus operators, large and small, although the biggest competitor for the bus industry is the car.”

The OFT report also revealed a raft of complaints alleging “predatory behaviour” by existing bus operators to quash competition from new entrants. It said it had received about one complaint in every four months since March 2000.

The OFT added that in a quarter of all tenders for supported service contracts there was only one bidder for the work.

But it also found the government’s free bus scheme for the over 60s may be putting additional upward pressure on fares. It said there was some evidence that fares were higher in areas with a high number of passengers eligible for free fares.

The bus sector and other interested parties have until October 15 to give their comments before the OFT will give its final ruling on whether to make a reference to the Competition Commission.

A Department for Transport spokesperson said the OFT report had raised some “very important issues”.

“We agree with the OFT that the bus market should deliver services that work in passengers’ interests.”

Liberal Democrat transport spokesman Norman Baker MP said an inquiry into the local bus market was “long overdue. Far from creating a flourishing and competitive bus market, deregulation in many areas of the country has created high fares and a dwindling number of routes.

“Outside the big cities, buses are often virtually non-existent and where they do run they’re infrequent and expensive.”

The bus sector was de-regulated in 1986 but still receives a third of its £3.6 billion revenues from the taxpayer for certain non-commercially viable routes and services.