Underutilised bus services in Perth are costing the WA Government more than $410 million a year, a new report has found, as fewer people catch buses and services become less efficient.

The cost is set to rise nearly $40 million over the next three years unless fares are increased, more people start catching buses or operating costs are slashed, the report by auditor-general Colin Murphy has found.

Mr Murphy said just 17 per cent of the cost of running the service in the past financial year — $85 million — was recouped in passenger fares.

"Despite increased capacity, higher frequency services and coverage of new residential areas, fewer people are using buses now than four years ago," the report found.

"As a result, revenue from fares dropped 7.7 per cent between 2012-13 and 2016-17.

"Bus services are 28 per cent less efficient than 10 years ago. It now costs $1.18 per passenger kilometre compared with $0.92 (in real terms) in 2006-07."

It recommended the best way to reduce costs would be to for the Public Transport Authority (PTA) to cut routes, especially those that duplicate train routes.

Cutting the six services that run non-stop along Kwinana Freeway between Canning Bridge and Elizabeth Quay, for example, would save an estimated $4 million and 100,000 bus trips a year.

"PTA has good information about bus routes and how passengers use the network, but it is not using it effectively to identify which service changes will produce the greatest efficiencies," Mr Murphy found.

Fewer people are catching buses in Perth, the report found. ( ABC News: Natasha Harradine )

Replacement buses set to cost $680 million

Bus services were contracted out to private companies in 1998, a move that was expected to save $40 million per year.

Instead, costs are rising to an "unsustainable" level, and there are significant further outlays on the horizon, Mr Murphy found.

Replacement of ageing buses and expansion of the current fleet is set to cost the PTA almost $680 million over a 10-year period, including the replacement of its entire fleet 512 compressed natural gas buses.

The PTA has tried to get more bus priority lanes installed in a bid to boost passenger numbers.

"But PTA does not own the roads and there is no specific enabling legislation to establish bus priority measures. This often results in substantial delays," the report found.

In response to the report, the PTA said its contracting arrangements followed world's best practice and bus operators from around the world had copied its model.

However, it said Perth's low density "brings with it the very difficult challenge of balancing … obligations to provide a reasonable level of service to the more vulnerable people in our community, who often have no alternative transport options, and making the most efficient use of our available resources."

About 15 per cent of homes in Perth do not have easy access to bus services.

The PTA said it was looking at "new and innovative" ways to boost passenger numbers, but it was confident this would happen as the economy improved.