The cost of running bus and local rail services in the West Midlands is set to soar by £15 million next year after the passenger transport authority found itself on the wrong side of a landmark Government ruling.

A projected 11.3 per cent increase in the Centro-PTA budget for 2008/09 reflects the cost of a failed attempt to resist paying the region's bus companies more to run concessionary fares for pensioners and children.

The DfT rejected the mechanism used by the West Midlands Passenger Transport Authority to work out reimbursement paid to operators for carrying concessionary passengers

The decision could eventually cost council tax payers £10 million a year, according to figures produced by the region's two largest bus companies Travel West Midlands and Go Ahead.

WMPTA officials have requested a judicial review of the DfT decision, face a wait of at least six months before discovering whether a full hearing of the case is to take place.

A report to WMPTA's transport strategy committee describes the DfT decision as "fundamentally flawed" and suggests the Government has misunderstood the reimbursement scheme. However, Centro-PTA chief executive Geoff Inskip has accepted that next year's budget will have to increase by a minimum of £10.1 million to take account of the concessionary fares ruling.

The report concludes that the amount of money WMPTA should ask the region's seven metropolitan councils for must go up from £131 million in 2007/08 to £146 million in 2008/09. The 11.3 per cent increase consists of 3.6 per cent for inflation and 7.6 per cent to reflect the bus concessions adjudication.

The document adds: "Centro buys-in many of its services from private sector operators, whose costs are labour intensive and are rising well above inflation. Typically, the transport costs indices have averaged six per cent per annum compared to RPI of 2.5 per cent."

The financial difficulties are likely to result in difficult discussions between WMPTA and West Midlands council leaders, who are keen to keep any increase in the transport levy portion of council tax bills as low as possible.

Len Clark, Birmingham City Council's lead representative on WMPTA, promised the £10 million cost would not be passed directly to council tax payers next year.

WMPTA will seek to absorb the bill, either by borrowing more or by taking cash from the capital programme.

However, there would be little alternative in the long term but to increase council tax bills if the appeal against the DfT decision is unsuccessful, he admitted.

He said the DfT ruling on the concessionary fares mechanism had come as a surprise to Centro-PTA officials.

Coun Clark (Con Quinton) said: "We have appealed against it and we are waiting for an outcome. But we do need to make financial provision for this in the budget.

He added: "We are talking about big bucks here. We want to devise a new formula for working out reimbursement but the bus operators will not take part in discussions until after the outcome of the appeal.

"As it stands they can legitimately charge us extra money."