ROUTE
TENDERING
LT Buses (LTB) commenced tendering for bus services
on a net cost basis in 1996, with the first such contracts commencing
in April 1997. The main tenet underlying the tendered net cost
regime is the transfer of revenue benefit and risk to the bus
operator, whereas under a gross cost regime LT assumes the risk
of benefit of change in passenger volumes and consequently revenue.
Net cost tendering should provide the necessary commercial incentive
to the private sector to deliver good quality services at minimum
cost to LT Buses, and hence the taxpayer.
The introduction of net cost tendering was a
consequence of the previous Government's policy to introduce a
rolling programme of 5-year net cost contracts. This programme
followed the sales of the London bus companies during the autumn
of 1994. Tendering in 1995-96 was at a level of 5 per cent to
allow the companies to bed down under their new owners, and increased
to a level of 10 per cent in 1996-97. LTB now has nearly two years
experience of net cost tendering, following ten years of gross
cost tendering. At present there are no indications that service
quality is better on net tendered routes compared with gross cost
contracts. However, the analysis is masked by the variable effects
of traffic congestion on individual route performance and the
different nature of the sample since the number of net cost tendered
contracts is smaller and they have operated for a shorter period.
As regards tendering pricing, there were indications
of market hardening at the end of 1996 and this was confirmed
in the first half of 1997. Prices increased rapidly at around
the time contracting switched from Gross Cost to Net Cost. The
main reasons for increased prices are considered to be as follows:
(a) Net cost tendering transfers revenue
risk to bus operators and it is apparent that an element of this
is being built into tender prices.
(b) The volume of tendering has doubled since
1995 and quadrupled since 1994, which has put pressure on the
management time of individual bus operators, resulting in less
predatory bidding. Additionally, the increasing volume of tendering
has meant the opportunity to bid on a marginal cost basis is reduced
and operators are bidding on a full (or average) cost basis.
(c) Reduction in the number of operators
bidding for LTB contracts as a result of previous and more recent
merger activity.
(d) Increases in operators' costs, for example,
wage costs brought about by improving employment conditions, against
a background of severe staff recruitment and retention problems,
particularly during 1997.
(e) Uncertainties concerning fuel prices
in 1996-97, including the prospective taxation regime, also played
a part.
LTB has continued to play a proactive role in
developing the market for tendered bus services in London. This
is being done by encouraging existing operators to compete and
also by attracting new operators to enter the London market. Market
testing of different contract types is also taking place in order
to make LTB contracts more attractive to bidders. These include
variations in the length of contracts and the opportunity to tender
on both a Gross and Net Cost basis.
LTB GROSS
MARGIN LOSS
1998-99
LTB is budgeting a Gross Margin Loss of £20
million in the 1998-99 Plan (page 23 of LT Annual Business Plan
1998-99), which accords with the Secretary of State's target set
some three years ago. This compares with a break-even position
achieved in 1997-98. The increase of £20 million in the Gross
Margin Loss can be broadly attributed as follows:
40 per cent due to impact of tender prices (see
reasons above)
40 per cent due to extra resource being put into
service development, making the buses more reliable against worsening
traffic congestion, relieving overcrowding etc.
20 per cent due to increase in Revenue Protection
officials, increased maintenance volumes in respect of Advanced
Vehicle Location system, Countdown etc., and Marketing.
SUMMARY
I trust the foregoing paragraphs satisfactorily
answer your questions. I should emphasise that the additional
funds required for providing better reliability and for implementing
the London Bus Priority Network are doing no more than "holding"
the current performance in terms of service quality. Without more
bus propriety schemes and, more importantly, effective enforcement
against illegal parking by car, van and lorry drivers, there is
little prospect of LTB meeting the ever tightening service delivery
targets set by government. I do hope that this message can be
conveyed to your Committee.
Clive Hodson
Managing Director
15 July 1998
