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 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.
There are two basic contract types under which
London bus services are secured:
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
2. EVIDENCE OF
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
(b) The purchase of two contiguous subsidiaries.
(c) The purchase of a subsidiary contiguous
with an operation outside Greater London already owned by the
(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 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)
|Operator/Group||Market share at 6 Jan 1995 (%)
||Group||Market Share at 4 Jan 1999 (%)
||76.0||13 Other Operators
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
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
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
3. COMPETITION FOR
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
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.
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
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.
4. TRENDS IN
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
5. IMPACT OF
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
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
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.