The report found serious deficiencies in how the state manages its contracts with bus operators, which provide the only public transport within 400 metres of 70 per cent of Melbourne households.

These include an inability to reliably track buses against the timetable, a failure to tackle fare evasion and a decision by state authority Public Transport Victoria not to impose financial penalties when an operator did not meet its contractual obligations.

An attempt to improve bus service standards two years ago by putting many of Melbourne's bus routes out to competitive tender has not delivered value for money either, Victoria's Auditor-General John Doyle found in a report tabled in Parliament on Wednesday.

The contract with operator Transdev saved the state almost $33 million in 2013-14, yet this did not mean it had secured full value for money, Mr Doyle wrote.

Public Transport Victoria has failed to enforce performance measures imposed on Transdev, which won a $1.7 billion, 10-year contract to operate 30 per cent of Melbourne's bus network in 2013, the report found.

An opportunity to withhold almost $400,000 in contract payments to Transdev for its underperformance in key areas was passed up by PTV, which instead extended the company's deadline to meet its contractual obligations.

The report found this decision undermined government attempts to improve bus services through an incentive-based contract with Transdev. The contract milestones Transdev missed but was not penalised for included refurbishing older buses and installing automatic passenger counters.

Long-standing data reliability problems had also held back efforts to electronically track Transdev's buses against the timetable, in order to enforce the reliability and punctuality targets it must meet. The performance regime was meant to be in full effect by April but has been delayed, as has a timetable revamp proposed by Transdev, which was rejected by the Andrews government.

The report also found the Department of Economic Development, Jobs, Transport and Resources has been tardy in laying the groundwork for new contracts for operators who run the other 70 per cent of routes, meaning the state risks again failing to secure a deal that will improve services.

"The state risks having its options in 2018 severely curtailed due to a lack of time to substantively progress these reforms, meaning it may be forced to again renegotiate with incumbent operators," Mr Doyle wrote.

There are more than 300 public bus routes in Melbourne, run by 12 operators under 28 contracts. All of those contracts, with the exception of Transdev's, were renewed in 2008 with long-standing operators without going to competitive tender. This process was the subject of a previous, critical report by the auditor-general.

Public Transport Victoria and the department accepted all of the auditor-general's recommendations to improve tendering for bus contracts.

PTV executive Mark Wild wrote to Mr Doyle to "acknowledge that further improvements are achievable", but also defended aspects of the franchise agreement with Transdev.

The contract would achieve savings of $380 million over its 10-year life, Mr Wild wrote, while PTV "is now accurately tracking over 90 per cent of Transdev bus movements and is confident that Transdev's performance is being monitored effectively".