Select Committee on Environment, Transport and Regional Affairs Minutes of Evidence

Memorandum from London Transport Buses (EST 98E)

  I refer to your letter of 6 July 1998 and offer the following comments in response.


  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:

    (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 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 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.


  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

LTB Market Share (as at 8 July 1998)

share of
share of

Cowie Group23.5 Arriva London North 8.7
Arriva London South 7.1
Arriva London North East 2.1
Arriva East Herts and Essex 1.3
Arriva Kent Thameside 1.7
Arriva Croydon and North Surrey 2.2
Arriva The Shires 0.4
Stagecoach Group16.4 Stagecoach East London10.1
Stagecoach Selkent 6.3
Go Ahead Group16.3London Central 8.2
London Central 8.1
Firstbus16.0Capital Citybus 4.8
CentreWest 8.6
London Buslines 1.3
Thameway 1.3
Metroline Plc12.7Metroline 6.5
MTL London 6.2
London United7.9 7.9

1.3 1.3

1.3 1.3

Harris Bus
1.2 1.2

1.0 London Sovereign0.5
Sovereign (Harrow) 0.5

Capital Logistics
0.6 0.6

Q Drive
0.5Limbourne Travel 0.5

Tellings Golden Miller
0.4 0.4

0.4Travel London 0.4

Epsom Buses
0.3 0.3

0.1 0.1

F E Thorpe
0.1 0.1

London Traveller
0.0 0.0

0.0 0.0

100.0 100.0

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Prepared 17 August 1998