Memorandum by Dr R J Langridge (Bus 24)
1. This is a submission by Dr R J Langridge,
a transport economist at Oxford Brookes University. I have a particular
interest in competition and market structure in the bus industry
both within a UK and wider EU context.
2. It is now 15 years since the British
bus industry underwent a major shake-up in the way it was owned,
regulated and structured. At the time, it was hoped that injecting
competitive elements into the industry would achieve efficiency
gains that benefited the general public both directly, as the
user of more responsive services, and, indirectly, as a taxpayer
through reduced subsidy levels.
3. Initially, as one might expect, the industry
experienced a period of destabilisation. Significantly, general
operating costs fell from 176p/km in 1985-86 to 112p/km in 1992-93
(DETR 2000, Table 30). Meanwhile, the non-commercial sector was
subjected to a much more transparent form of competitive tendering
process than the over-arching and opaque blanket-subsidy system
that had appertained hitherto. Hence, public transport revenue
support outside London, excluding concessionary fares, fell by
approximately 35 per cent initially between 1985-86 and 1987-88,
and by approximately 40 per cent subsequently between 1985-86
and 1990-91 (DETR 2000, Table 20).
4. Most tender initiatives by local authorities
to fill gaps in the commercial network were met with bids from
more than one operator. While not a textbook model of competition,
it did provide an opportunity for a level of competition hitherto
unseen. Nevertheless, de minimis provisions allowed many
contracts to be awarded without undergoing market testing and
allegations have been made of informal cartels of operators carving
up tenders between themselves. Notwithstanding this, the costs
of tendered services fell from 28.27p/km in 1985-86 to 10.85p/km
in 1992-93. (Department of Transport 1993).
5. More recently though, there has been
evidence of a reversal in the decline in the level of support
required in order to maintain non-commercial services. In 1985-86,
the sum had been £352m but this fell quite sharply to a low
of £210m in 1990-91. Although there has been a slight rise
in the amount required in order to support local services since
then, a sudden sharp rise took place to £258m in 1998-99
just prior to the introduction of the Rural Bus Grant. This rise
cannot be explained in terms of operating costs. The costs of
local bus services outside London during the period 1985-86 and
1999-2000 had fallen from 183p/km to 92p/km and 64p/passenger
journey to 56p/passenger journey adjusted for inflation (DETR
2000 Table 30). In addition to this, fares have risen by nearly
33 per cent above the rate of inflation from 1985/86 to 1999/2000.
(DETR 2000 Table 9).
6. This apparent rising gap between, on
the one hand, rising fares revenue and grant subsidy, and on the
other, falling operating costs, cannot be explained entirely in
terms of wage costs. One factor that might explain the rising
costs is the reduction in competition that has resulted from the
re-oligopolisation of the bus industry since the fragmentation
that took place in the mid-1980s. With this low-cost competition
eliminated, operators could concentrate on better quality fleet
7. As stated above, in the early days of
regulation, the level of public expenditure given to non-commercial
bus services dropped dramatically. In some measure, this was the
result of a move away from the blanket subsidy scheme operated
by National Bus Company and the Passenger Transport Executives;
then, local authorities were just presented with largely existing
overall service levels and the subsidy prices required to maintain
them. In the absence of any significant competition from within
the market, or any independent watchdog to investigate price levels,
councils really had little option but to pay that which was asked
or negotiate a reduced level of service which met their target
budget level. This should be borne in mind when assessing the
strengths and weaknesses of the current system.
8. Extricating commercial services from
the overall subsidy package at least gave a better indication
of the true costs of providing services. It did, nevertheless,
depend on some level of competition, or, at least, threat of competition.
If a service could be run commercially and an operator claimed
it could not, that claim could soon be challenged. Equally, if
an operator tried to make a profit from a subsidised service,
another operator could be waiting in the wings to undercut the
incumbent and take over the service. In other words, the market
may not have been characterised by more than one or two players
on the road, but it was, nevertheless, contestable.
9. There was some anecdotal evidence, particularly
of new entrants, undercutting price too much but such operators
would eventually come to grief, not only losing the contract through
non-compliance, and/or their operators' licence through lack of
vehicle safety, but also rendering their business insolvent. Some
operators left the business, while the remaining operators, often
suffering from a shortage of new capital, underwent a series of
mergers; meanwhile, price competition became less critical. Of
course, while the degree of stability was good from an investment
point of view, it raised questions regarding the degree to which
the market remained contestable, had it been so in the first instance.
Allegations were beginning to be made regarding price cartels
operating between operators during the tendering for local authority
contracts. (See, for instance, Financial Times Report on the Office
of Fair Trading Investigation into alleged price fixing in Hull
10. Despite this, subsidy levels failed
to rise significantly throughout the 1990s although subsidy levels
never returned to the real price levels of the late 1980s. It
is only recently that a sharp upturn in price levels has been
experienced. One commentary places the sharp upturn on driver
shortages and rising drivers' wage costs, albeit, adding that
there have been wide variations within different local authority
areas (ATCO, 2001). It continues, "it appears that whilst
there is considerable upward pressure on contract prices because
of cost increases in the bus industry it is the actual level of
competition in each authority's area which determines the extent
to which bus operators are able to obtain higher contract prices"
(ibid para 3.3).
11. The present Government's commitment
to reducing the dependence on the car, and concerns about the
level and quality of public services in rural areas, led to the
introduction of the Rural Bus Subsidy Grant (RBSG) in 1998. The
grant amounts to £32.5m per annum currently, rising to £48.5m
in 2003-04 (provisional allocation). Originally, it could only
be used to subsidise new or improved services, to/from settlements
less than 10,000. So far, the RBSG has provided 1800 new or enhanced
services with additional passenger numbers rising from 10 million
in 1998-99 to 16 million in 1999-2000.
12. The Government recently has relaxed
the eligibility criteria to include new services in and around
market towns and continued support to existing bus services. The
first relaxation is generally welcome in the sense that the 10,000
maximum population figure was always going to result in absurd
decisions. However, the second is more worrying as it opens the
scheme to exploitation by bus operators who estimate that they
face little competition for particular services and, consequently,
inflate tender prices. It is also a temptation to operators to
de-register rural services in the knowledge that there is a sum
of money available from public funds that could not only pick
up the costs of these services but also boost operators' profits.
13. Laudable though the Government's attempts
to underwrite the costs of expanding further rural bus services
were, there was a danger that it was simply adding to the supply
of services in a market characterised by rising costs, falling
competition and staff shortages. Moreover, unless operators were
likely to have surplus staff and vehicles available to meet the
upsurge in demand for services resulting from the inception of
the RBSG, there was likely to be heavy start-up costs involved,
eg the cost of additional buses. One might expect this to be inevitably
reflected in higher tender prices for RBSG routes.
14. There is evidence at aggregate level
of substantial real rises in subsidy levels over time. A recent
survey into price, expenditure and competition in local authority
bus contracts suggests substantial average price increases for
contracts renewed on a like-for-like basis of 11.8 per cent in
1998-99, 17.0 per cent in 1999-2000 and 16.7 per cent in 2000-01
among participating local authorities throughout Great Britain.
15. While these figures represent increases
well above price inflation, they might be dismissed as the inevitable
consequence of a response to the uncompetitiveness of wage rates.
However this picture is not reflected to the same extent in school
bus contract prices where one might expect many of the cost pressures
to be similar if not identical. While not providing a totally
adequate proxy for subsidised bus services' cost functions, they
do suggest the need for further investigation. Comparable figures
for average price increases for contracts over the three years
are as follows: 11.0 per cent in 1998-99, 13.1 per cent in 1999-2000
and 11.1 per cent in 2000-01.
16. Undoubtedly, there are differences in
cost structures between subsidised service buses and school contract
vehicles. Some school contracts may be coupled to excursion traffic,
use staff on a part-time basis or use vehicles no longer considered
acceptable for service bus routes; this situation may change if
the US School Bus pilots of First Bus should become the norm.
In addition, conscious of the need to cater for the elderly, infirm
and disabled, local authorities are offering a premium to tenderers
in return for using DiPTAC and/or low-floor vehicles. For instance,
50 per cent of all first year RBSG-funded contracts specified
the use of vehicles containing some DiPTAC features (DETR Appendix
2 par 6). All these factors should have some impact on differences
between tender prices.
17. Nevertheless, the factor so far not
discussed is the level of tender competition proxied, in this
instance, by the number of bids per tender. Again drawing on information
provided by ATCO, the following was discovered regarding tender
AVERAGE NUMBER OF BIDS PER TENDER FOR THE
PERIODS 1 OCTOBER 1999-2000 AND 1 OCTOBER 2000-01
|Service Bus Contracts||3.1
|School Bus Contracts||4.4
|Note: Adapted from ATCO (2001) Table 8.
It is clear that, while school bus contract bids have remained
above an average of four per contract, both service bus contracts
and rural bus contracts have fallen to less than an average of
three per tender. While there is not sufficient evidence to assert
that rising tender prices are a direct result of the fall in competition,
it does suggest that such a hypothesis is worthy of further investigation.
18. There is evidence to suggest that RBSG tender bids
also vary between regions. A DETR survey of local authorities
appears to be in broad agreement with the ATCO findings of an
average of three bids per tender across most regions. However,
in Yorkshire and Humberside there was only an average of 2.3 bids
per tender and, in the South-West, an average of 1.9 (DTLR (2001a),
Appendix 1 par 19). It is also worrying that 30 per cent of all
first-year RBGS-funded contracts were awarded outside of the competitive
tendering process by way of de minimis provisions (DTLR
(2001b) Appendix 2, para 11).
19. A further consideration is the degree to which service
bus contracts have been entered into in order to replace withdrawn
commercial services. This has risen by 32 per cent in 2000-01
compared to 1999-2000 incurring additional costs to local authorities
of £5.343m. (ATCO, 2001 para 8.2). What is hard to determine
is the extent to which this 32 per cent represents real cost increases,
a lessening of general competition and/or the seeing of the RBSG
as a milch-cow.
20. However, over the same period, there has been a reduction
of costs of having to replace early terminations of service bus
and school contracts of 25 per cent and 20 per cent respectively.
(ATCO, 2001 para 8.3). This finding does not accord with the hypothesis
that cost increases and levels of competition are inversely related.
This might be explained in terms of a learning curve with a growing
reluctance by operators to tender right at the margins and then
discover, as the contract proceeds, a deepening loss.
21. It is never going to be easy to delve deeper into
the behaviour of bus operators in relation to bidding for local
authority contracts. It does, after all, beg questions about a
potential misuse of public funds. Nevertheless, pilot interviews
were carried out with public transport officers responsible for
the provision and monitoring of contracts for non-commercial bus
services. Their observations are contained in the next section.
22. The notion of competitive tendering provides good
safeguards against the waste of public money even though the system
is not failsafe. On the other hand, the decline in bids per tenders
for non-commercial service bus contracts does weaken the potential
for safeguarding public funds. A major criticism of the situation
prior to deregulation in 1986 was that the local bus monopoly
could employ a take-it-or-leave-it attitude and use surplus profits
to cross-subsidise uncommercial services. With the effective re-oligopolisation
of the industry, there was a fear that this attitude and practice
was beginning to return.
23. One reason for the decline in bids might be to do
with the more mature market for tendered services after the post
deregulation free-for-all. After the early years of bidding for
everything at bargain-basement prices and the high number of financial
failures among operators, things have settled down somewhat. Operators
still have different strategies for tendering. One might bid for
everything, building in a high profit margin to the price and
win just those contracts where more localised operators did not
exist or simply were not interested in running those services.
Others, worried about protecting their network, might bid in a
highly localised way often at marginal costs simply to avoid allowing
others a foothold in "their" territory.
24. The situation with school contracts seemed to be
more stable. There had been little change to the number of operators
bidding for services and this might also explain, in part, the
differences between the rates of increase in contract prices.
However, the number of tender bids varied by area; this was explained
in terms of the number of local operators in any given area. Operators
employed different strategies. The small localised operators were
found to just bid for their existing services because it reduced
elements of risk; operating conditions, costs and even knowledge
of the customers gave these operators elements of certainty. As
a result, these operators tended to be more competitive with respect
to their existing services.
25. Other operators, as with subsidised service bus contracts,
would bid for everything, invariably at a high price, in the hope
that they would catch a few high-cost contracts where competition
was weak. The larger operators were considered to be better at
milking the system tendering at low prices and then re-negotiating
the price upwards once in possession of the contract. While there
were attempts by local authorities to resist this strategy, if
it were done incrementally, each increment was cheaper to concede
than starting the tendering round again.
26. Finally, it was hard to find any evidence of the
existence of cartels. Despite the amount of merger and takeover
activity and the decline in the number of bids for non-commercial
service bus contracts, it was felt that most of the suspicion
of price-fixing rested upon the small local operators carving
up school contracts between them. Nevertheless, there was little
evidence of price fixing even in school contracts with just odd
cases of a contractor being discovered trying to collude with
27. Moving to the Rural Bus Subsidy Grant, there was
a strong reluctance to bid first time around due to the high degree
of financial uncertainty. This has been especially true on net-cost
services where operators retain the revenue and estimate this
element in calculating the overall level of grant required. There
is also some anecdotal evidence to suggest that RBSG tenders cost
more as they contain a higher margin for risk. It is not known
to what extent this situation will prevail when the RBSG contracts
come around for renewal.
28. There existed a feeling that the milch-cow attitude
to RBSG did exist. However, it was felt that it existed primarily
in terms of high tender prices. It is too early to say whether
or not commercial services are being withdrawn in order to benefit
from RBSG money as, until recently, RBSG was specifically forbidden
for use on existing services. Nevertheless, RBSG is a factor that
needs further investigation once the system and the revisions
to the original scheme have had time to bed in.
29. The evidence suggests that competition has been found
to decline on subsidised service bus contracts but not on school
contracts. This may be explained by differences in motivations
by many operators of school contract operators, their vehicle
investment policy and their labour market conditions. On the other
hand, even with the bespoke school contract operators, drivers'
wage rates have had to rise and that cost has been passed on,
partly by way of fares, but principally through the level of subsidy
30. The actual market for subsidised bus services was
found to be far from competitive in the general sense of the term.
Bus operators were not an homogeneous group and even the larger
companies varied in terms of their motivations for tendering for
contracts and the tactics they employed both ante and post the
31. Finally, the Rural Bus Subsidy Grant appears to attract
higher tender prices than the traditional contract prices. This
might be explained in terms of the higher start-up costs of many
services and the risk element of providing services that are neither
commercial nor a lifeline operation virtually guaranteed by the
local authority over the longer term. There is also the suspicion
the Scheme is being used as a way to make money out of the system
by transferring services that were once commercial into the subsidised
network. While this is very difficult to prove, the recent changes
to RBSG does make the temptation more, rather than less, likely.
Association of Transport Co-ordinating Officers (2201) Local
Bus Contracts: price, expenditure and competition survey 2000,
Brown K (1998) "Stagecoach One of 13 Operators in Alleged
School Bus Cartel Exposed by OFT after Complaints from Council".
Financial Times 20 November p11.
Department of Environment Transport and Regions (2000) Transport
Statistics Bulletin: A bulletin of Public Transport Statistics,
GB 2000 Edition, National Statistics.
Department of Transport Local Government and Regions (2001a)
Rural Bus Subsidy Grant 1999/00, DTLR Integrated &
Local Transport Directorate.
Department of Transport Local Government and Regions (2001b)
The First Year of Rural Bus Subsidy Grant, DTLR Integrated
& Local Transport Directorate.
Langridge Bob (1995) "Price Competition and Competitive
Tendering: the bus industry since deregulation" in Report,
November pp20-22, Report, Stourbridge.
Langridge R and Sealey R (2000) "Contestability in the
UK Bus Industry? The National Bus Company and the `Tilling Mark
II' effect" in Transport Policy, Vol 7, pp105-115.