But the bus union has rubbished the idea, saying on-demand buses are a fanciful notion for the inner city.

In the two years since Mr Constance assumed the Transport Minister's job from Gladys Berejiklian, he has been an enthusiast for using technological change to overhaul transport services.

The minister legalised the use of ride-sharing services such as UberX in 2015. And now that he has embarked on his first major industrial relations battle in the job - a face-off with inner west bus drivers that has already triggered a day's strike - he is keen to open up public transport to new ways of doing things.

"Bus companies themselves can play in the ride-sharing space, start running small mini-buses around, on-demand services," Mr Constance said this week.

A fortnight ago he announced that buses in the inner west, currently run by the government-owned State Transit, would be "franchised" to a private operator.

The minister said the government would talk to the market over the next month or so, and then seek requests from private operators.

"Out of that I want to see innovation come into it," Mr Constance said. "I want to see how we can use technology, particularly in some of those smaller areas and smaller suburbs, where you might be able to run some on-demand services and how they can link into the broader network."

Under the government's model, the state will own buses and depots, and be responsible for timetables and fares. But Mr Constance said the bus fleet could be complemented by smaller vehicles. These would not run down the main corridors in the inner west, such as Parramatta Road, but potentially on smaller suburban streets.

The secretary of the Rail, Tram and Bus Union's bus division, Chris Preston, dismissed Mr Constance's idea.

"He is fanciful if he thinks he's going to be able to create this Uber-style transportation for buses," Mr Preston said.

He said councils in Sydney's north already ran loop buses and these often ran with few passengers.

"Whenever you don't have somebody in your bus and you are driving and your wheels are moving, that is an expense," Mr Preston said.

"If he thinks he can run a network on demand and it is going to make money, and it is not going to be a burden for the taxpayer, he's laughable."

Corinne Mulley, professor of public transport at the Institute of Transport and Logistics Studies at Sydney University, said there was scope for innovation in bus services in Sydney.

Professor Mulley said route changes could work in the inner west if they were complemented by higher frequencies on major routes.

"My view would be that places like Burwood might have small vehicles that take people to Parramatta Road where they would interchange to a core service. This could increase the frequency for people who live in Burwood," she said.

"It could work as an innovation if the network planning was restructured."

This type of change would require bus passengers to interchange between services. The overseas experience, Professor Mulley said, was that passengers accepted interchanging if it was easy and quick.

But she was sceptical about the use of mini-buses. "This was trialled in the UK following deregulation and while it upped the frequency, operators found that minibuses were not as reliable or cost effective."

Meanwhile Infrastructure Australia, the federal advisory body, released a report on Friday arguing that "franchising" more bus and train services could save NSW about $9 billion by 2040.

Mr Constance said a new operator should be in place in the inner west by July 2018.