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

Memorandum by London Transport Buses (TBS 23)



  Greater London is a major bus market. It represents about 30 per cent of bus journeys in Great Britain, but unlike the rest of the country bus services are not deregulated. There are 813 bus routes (including mobility and night routes) serving a population of over 7 million with 4 million bus journeys being made on a typical week day. A fleet of over 5,500 vehicles operates 346 million scheduled bus kilometres per annum.

  Nearly all bus services in Greater London are planned and tendered by London Transport Buses (LTB), a division of London Transport (LT). Bus journeys in London continue to grow in contrast to the decline experienced in the rest of Great Britain.

  The London Regional Transport Act 1984, requires LT to provide or secure the provision of public passenger transport services for Greater London. In carrying out its duties. LT must have regard to the transport needs of Greater London and the efficiency, economy and safety of its operations. The Act empowers LT to invite private operators to submit tenders to carry out those activities for such periods and on such basis as may be specified in the invitation to tender. LTB secures the provision of public bus services for Greater London through a competitive tendering process, which aims to encourage fair and sustainable competition for the provision of bus services.

  LT is responsible for determining the general structure of routes and frequencies and it consults with local authorities and others as appropriate. LT also determines the general level and structure of fares. LTB works with bus operators to develop opportunities for service initiatives. Bus services are tendered on a rolling programme, with about 20 per cent of the network tendered each year.

The Tendering Process

  The tendering processes are in accordance with the requirements of the EC Utilities Directive 93/38/EEC using the "Negotiated Procedure." An annual notice is published in the Official Journal of the European Community (OJEC) stating that LTB operates a qualification system for companies who may wish to bid for bus service business. Periodic Indicative Notices are also published detailing the scope of bus service tenders.

  Tenders are evaluated on the basis of "value for money", with particular emphasis on quality.

Type of Contract

  There are two basic contract types under which London bus services are secured:

    —  Gross Cost, where the revenue risk/gain is retained by LTB;

    —  Net Cost, these transfer revenue risk/gain to operators, in that a net sum (the difference between cost and projected revenue) is paid to/received from operators.

      LTB policy is to use the type of contract that will deliver best value for money and provide incentives to operators to deliver a higher quality of service. A flexible approach has been adopted to allow market testing of some arrangements, including variable contract length, revenue growth sharing and contract type. LTB is continually looking at how to create greater incentives to encourage contractors to provide a consistently higher quality of service.


    What evidence is there of the operation of local bus monopolies or cartels?

      When LT decided to sell its bus companies to the private sector in 1993, one of the objectives of the Government at the time was that LT should manage the privatisation so as to promote sustained and fair competition in the provision of bus services in London. To that end LT took advice from the Office for Fair Trading (OFT) as to the nature of the sales and degree of common ownership of contiguous companies. The sales took place on the basis that the OFT would be concerned by the four circumstances outlined below and that bidders would have to obtain the necessary clearance from the OFT before their bid would be allowed to proceed:

      (a)  The purchase of two subsidiaries by a single buyer.

      (b)  The purchase of two contiguous subsidiaries.

      (c)  The purchase of a subsidiary contiguous with an operation outside Greater London already owned by the purchaser.

      (d)  A purchase by an operator already providing a substantial number of LT contracts within the subsidiary's area.

      For the purposes of the privatisation process a market share test of 25 per cent was established.

      London is treated as a single market, distinct from the rest of the UK. Very few services operate totally within the central area, but suburban areas can be identified as providing separate markets for local bus services within London.

    Market Share

      Market share data is analysed regularly on a London wide basis and shows a steady market consolidation from 12 large groups and 13 smaller companies in 1995 to six groups (with 91.5 per cent of the market) and 13 smaller companies in March 1999, see Table 1.

    Table 1: LT Buses Market Share by Group

     (Market share based on LTB contracted mileage, excluding Commercial Section 3.2 routes)

    Market share at 6 Jan 1995 (%)
    Cumulative (%)
    Market Share at 4 Jan 1999 (%)
    Cumulative (%)

    First Group
    London General
    British Bus
    Go Ahead
    Metroline Travel
    London United
    London United
    13 Other Operators
    MTL Group
    Capital Citybus
    London Buslines
    13 Groups/Companies

    Note: Arriva (as Cowie) bought Leaside (now Arriva London North) in October 1994 and South London in January 1995, as part of the initial privatisation. It bought County Bus in February 1996 and British Bus in July 1996.

    Go-Ahead bought London General in May 1996 (having bought London Central in November 1994).

    London United was sold to Transdev (French Transport Co) in August 1997.

    First Group (when it was Badgerline) bought Thamesway as part of Eastern National in April 1990. It bought Centrewest, including London Buslines, in February 1997 and Capital Citybus in July 1998.

    Metroline bought MTL London Northern in July 1998.

      The merging of operating companies into large groups over recent years has significantly reduced the number of owners of bus companies operating in the London area. Arriva is the largest group operating in London, followed by First Group, Stagecoach and Go-Ahead. Mergers and acquisitions which have occurred since privatisation have all been cleared by the OFT.

      The MMC inquiry report into the takeover of British Bus by Cowie in 1996 concluded that LTB should give greater emphasis to long-term considerations such as competition in the capital, the tendering and allocations of blocks of routes and the encouragement and promotion of a more diverse range of operators in London.

      There is a need for a robust market of several medium to large sized firms capable of maintaining competition. To this end LTB encourages new operators to enter the market and will continue to sustain and enhance competition to improve both the quality and delivery of bus services to the public. The introduction of several new operators over a period of time has had mixed results. Capital Citybus and Metrobus have grown their operations signficantly over this period. On the other hand there have been occasions when new operators have struggled to either sustain quality operations or expand into the London market.

      Initially small operators have neither the resources nor the facilities to undertake the operation of large routes, consequently they start by only competing for small to medium routes.

      Market shares within five distinct local suburban areas are presented in Annex A. It is apparent that within the local markets there are dominant companies. It is also evident that not all the large UK bus companies have a dominant share of the London market.


    What competition is there for tenders, what has been the impact of rural bus grants on the cost of tenders, and what is the effect of cross-subsidy?

      We are aware that the DETR and others will be responding on the issue of rural bus grants and cross-subsidy. However we wish to comment on competition issues in London.

    Tender Bids

      Competition for tenders has declined from an average of over six bids per tender in the first half of 1995 to 3.3 in the second half of 1998, see Figure 3. There was a slight rise in the last half year, from a low of under three bids per tender between July 1996 and June 1998.

      The level of competition traditionally varies across London, there is strong competition in the North West, the North East and in the South East. Competition is much weaker in the South and South West of London. There is little or no competition for crew operated routes and other large routes operating within the central area.

      The average number of tender bids also varies by vehicle type. The smaller companies appear to find it easier to enter the single deck market and hence there is more competition for single deck routes than for double deck routes.

      There appears to be a relationship between the number of tender bids and average cost per peak vehicle, see Annex B.

    Factors affecting bidding

      Availability of suitable garage premises is often seen as a barrier to entry to the London market, however since July 1994, a number of small, new garages have opened to service LTB routes. It is recognised that it is more difficult to open large garages and this may have an impact on the scale of entry into the London market or expansion within it. Entry to the London market tends to be on a gradual basis over time and the nature of the tender programme, with approximately 20 per cent of the network, which represents a peak vehicle requirement of about 1,200 buses, being tendered each year, facilitates incremental growth.

      A number of London operators face a shortage of drivers for their existing routes, and some have put this forward as a reason for not bidding for new work. Some companies experience a higher turnover of staff than others and much of this can be attributed to differences in wages and conditions. Significant factors influencing the availability of drivers, include driving conditions in the operating area, employment terms, shift patterns and working practices. It is our belief that high staff turnover is as much a matter of management style as economic factors.


    What are the recent trends in the cost of, and the premature termination of, contracts for tendered bus services (including educational services) provided by local authorities and London Transport, and what reasons can be identified for these trends?

      Following years of keen competition and attractive prices, which resulted in a significant reduction in Government subsidy, tender prices started to increase significantly faster than inflation at the end of 1996. Following the switch from Gross to Net cost contracts in 1997, further increases became apparent. The main reasons for the increases in unit prices are considered the following:

      —  Net cost tendering transfers revenue risk to bus operators and it is apparent that an element of this is being built into tender prices.

      —  The volume of tendering has doubled since 1995 and quadrupled since 1994, in line with the programme set out during the privatisation process. 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.

      —  Reduction in the number of operators bidding as a result of merger activity.

      —  Knock-on effect of increased operators' costs (for example labour costs have risen to attract more drivers and overcome staff shortage problems).

      —  Uncertainties concerning fuel prices in 1996-97, including prospective taxation changes.

      —  The introduction of a higher number of new, more accessible vehicles, incorporating new features.

      —  A general reflection of the increasing pressure on bus contractors to improve overhead recovery and profit.

      Although some operators have sought to improve operational effectiveness by assigning contracts to other operators, only one operator has invoked an early termination clause for economic reasons. LTB has recently terminated two contracts due to poor quality performance.


    How will the cost of providing tendered bus services affect the ability of local authorities and London Transport to achieve the objectives of the Integrated Transport White Paper?

      Better integration of transport is a key aim of the Transport White Paper and London Transport is firmly committed to playing its part. In recent years LTB has sought to improve bus services in London by:

      —  Improving market penetration into previously unserved areas.

      —  Enhancing the infrastructure by providing more bus stations, shelters and stops.

      —  Improving passenger information systems.

      —  Promotion of inter-modal ticketing and the travelcard.

      —  Working with other modes including LUL and the Train Operating Companies in providing modal interchanges.

      Higher bus service costs will have a significant impact on the bus network and London Transport's ability to meet the objectives of the White Paper. Increased bus service costs will require additional funding to support bus services. If additional funding is not available then LTB will have reduced scope to expand services, improve reliability, make environmental improvements and enhance the quality of service experienced by passengers through introduction of new vehicles, better information etc, without significant increases in fares.


      The London tendering system has delivered improvements in service provision and achieved significant reductions in costs and subsidy since 1985. It has also increased ridership in sharp contrast to the rest of Great Britain.

      Since 1995 there has been consolidation within the London (and British) market, to which LTB has responded by encouraging competition and entry of new operators to the market. A variety of factors has caused a hardening in tender prices since 1996 and LTB has responded flexibly by testing alternative contract arrangements and developing incentives to encourage operators to provide consistently higher quality of service. LTB will continue to respond flexibly to market conditions and promote good competition in order to secure bus services offering the best value for money.

    March 1999

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