Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence

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 replacement.


  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 (Brown, 1998)).

  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. (ATCO 2001).

  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 bids:

Service Bus Contracts3.1 2.9
School Bus Contracts4.4 4.3
RBSG Contracts3.42.9
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 competitors.

  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 paid.

  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 tendering process.

  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.

April 2002


  Association of Transport Co-ordinating Officers (2201) Local Bus Contracts: price, expenditure and competition survey 2000, ATCO, Dunblane.

  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.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 12 September 2002