Bus services after the Spending Review

Written evidence from the Department for Transport (BUS 15)

Impact of the reduction in Bus Service Operators Grant

1. We have previously said that the Bus Service Operators Grant (BSOG) helps ensure that, on average, bus fares are around 7% lower than they otherwise would be and bus service levels around 7% higher than they otherwise would be outside London. On the same basis, this would suggest a 20% reduction in BSOG might be expected to lead to around a 1% increase in fares and a 1% reduction in bus services outside London.

2. Using this analysis and the Department’s new National Bus Model (NBM) to estimate sub-national impacts, we have also estimated the following impacts outside of London following a 20% reduction to bus subsidy (note however that this reduction is less than the overall reduction in local transport revenue funding of 28%):

Table 1: Estimated approximate average impact of a 20% reduction in BSOG outside London

Source: DfT analysis and modelling

* Impact assumes all else being equal e.g. no change in the cost of travelling by other modes of transport.

3. Although the above table provides estimates of the potential impact of the reduction in BSOG, as the bus market is deregulated outside London, it is up to commercial operators to decide what fares they set. In reaching their judgement on fare changes, bus operators will take account of a range of factors, not least the costs involved from increasing fares. The Confederation of Passenger Transport (CPT), who represents the bus industry, has suggested the reduction in bus subsidy could be absorbed without fares having to rise.

4. Bus subsidy payments are one element in a firm’s pricing decisions but are likely to be fairly marginal when considered in the context of an operator's overall outgoings. A table showing the proportion of industry costs in 2007 and 2010 is given below.

Table 2: Estimated share of bus costs

Source: Confederation of Passenger Transport cost index

5. The table illustrates that the most significant costs include labour and other staffing costs. In contrast fuel represents 9-15% of total costs.

6. Passengers in all areas may be affected by a reduction in bus subsidy. Given the relatively lower level of demand in rural areas, it may mean that, at the margin, it may no longer be profitable to run as many services in such areas following a reduction in bus subsidy. However, reduced subsidy will also affect those routes where running costs (in particular bus fuel costs) are relatively high. This could be in areas where bus routes are relatively long or where congestion is higher which will reduce a bus’s fuel efficiency. Congestion tends to be higher in urban areas.

7. Impacts on service levels can be offset by action from local authorities who may choose to increase expenditure on tendered services. Local authorities should work in partnership with operators and local communities to decide how best to provide access to services for residents where commercial services are not viable – this may mean tendered bus services, or it may be other more flexible services provided by the council or the voluntary sector e.g. dial-a-ride.

8. The Department has carried out an Equalities Impact Assessment on the planned reductions to bus subsidy. This analysis suggests that the following people tend to make relatively more bus trips – women relative to men, people aged 17-20 relative to people aged 30-59, ethnic minorities compared to White British people, people with mobility difficulties compared to people without mobility difficulties. They are therefore potentially more negatively affected by the reduction in bus subsidy. However, older and disabled people will be protected from changes in bus fares through the national concessionary travel scheme, which the Government has protected in the Spending Review.

9. The Department estimates BSOG to be on average high value for money with around £2 worth of benefits per £1 of BSOG spent, as well as additional non-monetised benefits such as greater accessibility, which is why the Government has reduced it by less than some other grants. The majority of the benefits of BSOG are from quicker and cheaper journeys for bus users (representing around 58% of the benefits of BSOG) and external benefits (representing around 27% including lower congestion and better environmental outcomes). The remaining benefits are estimated to fall to transport providers. However, to the extent that the reduction in bus subsidy can be "absorbed" by industry , this will help ensure that any wider costs resulting from the reduction in bus subsidy are minimised .

10. The Department’s assessment of the benefits of BSOG and the modelling of the impacts of the 20% reduction rely on assumptions about the competitiveness of the bus market. The Committee will be aware that the Competition Commission is currently undertaking an inquiry into the market for local bus services in the UK (excluding Northern Ireland and London). The Commission is due to complete the inquiry in autumn 2011.

Impact on community transport

11. There are at least 1,700 community transport organisations in England (CTA State of the Sector Report 2010) who offer transport services for those unable to access conventional public transport, whether this is because of location, personal circumstance or a lack of suitable (available) transport provided by commercial operators.

12. In 2009/10 £8.3million was claimed in BSOG payments from 850 organisations operating services under a community transport permit. However, in a recent State of the Sector report, produced and published by the Community Transport Association, they suggest that of this total £3.7million was claimed by 622 community transport groups (just over a third of the total number of community transport groups in England); the remaining was claimed by local authorities operating their own community transport services.

13. Whilst most payments to community transport groups are small in size (average claim per operator £4,200 – CTA State of the Sector Report 2010), we do understand that they are an important and reliable source of funding and play a role in supporting socially necessary and rural transport services.

14. The planned reduction in BSOG from 2012/13 by 20% would see the average claim reduce by £840 to £3360.

Impact of the reduction in local authority grant support to bus services and other changes to the funding of local authority bus schemes and services

Local Transport Funding

Grant Simplification & Formula Grant

15. To support the localism agenda, as part of the Spending Review DfT has carried out a radical simplification and reform of local transport funding, moving from 26 grant streams to 4 from 2011-12:

i. a local sustainable transport fund (capital and revenue);

ii. major schemes (capital);

iii. block funding for highways maintenance (capital); and

iv. block funding for small transport improvement schemes (capital).

16. All other specific grants are ending [1] , with the funding transferred and included in the main Local Government Formula Grant administered by the Department for Communities and Local Government. This approach will give local authorities greater flexibility in how they spend their funding, enabling solutions tailored for the specific needs and circumstances of individual communities. This is crucial if they are to deliver effective and efficient transport for their communities at a time of limited resources.

17. DfT has established a £560 million Local Sustainable Transport Fund to invite local authorities outside London to bid for funding to support packages of transport interventions that support economic growth and reduce carbon emissions in their communities as well as delivering cleaner environments and improved air quality, enhanced safety and reduced congestion. The Fund will include a mix of £350m revenue and £210m capital funding over the next four years.

18. In addition, over the SR period DfT is providing over £3 billion for highways maintenance, over £1.5 billion for local authority major schemes, and contributing around a third of the funding for the £1.4 billion Regional Growth Fund.

19. DfT intends to provide over £1.3 billion over four years for small transport improvements. Integrated transport block funding is crucial to help local authorities improve road safety, stimulate local economies by reducing congestion, and deliver social justice to their local communities. Local authorities are free to use this funding to meet local priorities, for instance through investment in capital bus measures.

Concessionary Travel Reimbursement – new guidance

20. The Department has issued new guidance for Travel Concession Authorities (TCAs) to use in deciding the level of reimbursement that bus operators should receive for carrying concessionary passengers together with an impact assessment.

21. The new guidance is designed to help TCAs estimate a level of reimbursement that leaves bus operators no better or no worse off than they would have been in the absence of a scheme.

22. The new guidance provides TCAs with a detailed methodology for calculating reimbursement in their area. The guidance and methodology cover the main issues in reimbursement – the number of trips that would have been made in the absence of the concessionary fares scheme; the average fare that would have been paid in the absence of the concessionary fares scheme; and the additional costs that operators incur due to carrying generated concessionary passengers. The guidance is based on extensive research.

23. The new guidance is designed to be simpler to use than the existing guidance because it reduces the scope for argument about factors that are not easily observable. It also addresses some of the specific problems of the existing guidance, for example definition and calculation of additional costs.

24. The guidance is not statutory. If TCAs think that a different method achieves a more accurate no better no worse level of reimbursement for their area, they are free to use it.

What effect does the new guidance have?

25. It was assumed that the new guidance would be applied by all TCAs in England outside London. Annual costs associated with the administration of concessionary fares schemes that are incurred by TCAs and operators were estimated to decrease once experience of the new guidance was gained. This amounts to £1.8m pa. The number of appeals and the costs associated with appeals is estimated to rise initially and then fall back to current levels.

26. The effect on the overall level of reimbursement was estimated from an analysis of returns from 35 TCAs to a Department for Transport survey of reimbursement. These TCAs were reasonably representative of the geography and area type of all TCAs, but estimates based on this data should be treated as results from a sample rather than a complete census of TCAs.

27. The extent to which the new guidance will lead to a reduction in total reimbursement paid to bus operators depends on whether and how it will be applied by Travel Concession Authorities. The estimates of reimbursement also depend on assumptions about various aspects of the guidance and in particular the level of marginal capacity costs and the incidence of additional peak vehicle requirement costs. A range of costs were used in the calculations.

28. The average change in reimbursement compared with the existing level of reimbursement in the 35 sampled TCAs ranges from a saving of 9% to 16%. To estimate a time profile of the absolute amount of saving requires an estimate of the total amount of reimbursement that would be likely in future years. This has been done using data on actual reimbursement from the survey of TCAs, and projecting this forward using population projections of different age groups, bus trips rates of different age groups and the effect of aligning eligibility for concessionary bus passes with the pensionable age for women.

Table 3 Forecast of total real spend on concessionary travel for older and disabled people: England excluding London (£m 2008/09 prices)

Source: DfT analysis

29. Applying the % savings noted above to the forecasts in Table 4 gives an average annual change in reimbursement over the period 2011/12 to 2020/21 in the range £54m to £100m pa, with a best estimate of £77m pa.

Range of Impacts

30. The percentage impacts noted above are calculated from the 35 TCAs surveyed. Within that sample there is a wide range in the saving from that actually paid in 2008/09. And it is likely that across all TCAs there will be a range in the change in reimbursement. In TCAs with high reimbursement factors the change in reimbursement using the guidance could be large. In TCAs that have lower reimbursement factors and allowance for additional costs in their existing methods the change could be much smaller.

Second round effects

31. The change in reimbursement could have second round effects through the reaction of operators. We have not carried out detailed modelling of these reactions but in principle they could comprise all or some of the following:-

§ Change in bus operator profit;

§ Change in fares;

§ Change in service levels;

32. In turn changes in fares and changes in service level could have an effect on passengers. Taking the changes in reimbursement calculated above, and pro rating those changes to a previous analysis of the impacts of changes in BSOG, it is estimated that changes in fares and service levels could lead to a reduction in trips in the range of 1 to 2%. If operators made changes in fares and service levels then the financial impact of a change in reimbursement would be reduced from a range of £54m to £100m pa to a range of £10m to £21m pa.

Rural areas

33. During the consultation on the reimbursement guidance concern was expressed about the impact on rural bus services. The revised guidance will affect the calculated reimbursement for rural bus services, by making special provision for infrequent services, by emphasising the criteria that allows small operators to be treated separately, by calculating the reimbursement factor by reference to the operators own fare, and by allowing the payment of marginal capacity costs on all routes.

The Implementation and financial implications of free off-peak travel for elderly and disabled people under the Concessionary Bus Travel Act 2007

The Scheme

34. The introduction of free off-peak concessionary bus travel throughout England from 1 April 2008 gave the opportunity for greater freedom and independence to around 11 million older and disabled people in England. The concession guarantees free local bus travel for those eligible from 9.30am until 11pm on weekdays, and all day weekends and bank holidays.

35. The Coalition Government is committed to protecting the concessionary bus travel scheme – we made this clear in the Coalition Agreement and the Chancellor reconfirmed this commitment in the recent Spending Review. This is why we are focusing our efforts on assisting local authorities to find efficiencies through reforms to the administrative and reimbursement arrangements for the scheme rather than cutting back on the entitlement.

The Pass

36. The move to England-wide travel required the introduction of a single national bus pass. With help and funding from the Department for Transport, local authorities throughout England have issued over 10 million ITSO smartcard passes for concessionary travel. ITSO is a national smartcard specification which has been developed by industry and the Department for Transport. 95% of passes were produced and over 80% of passes were sent out to concessionaires by the start of the concession on 1 April 2008.

Administration

37. Responsibility for administering concessionary travel lies with Travel Concession Authorities (TCAs) – currently district councils, unitary authorities, PTEs and London Boroughs. From April 2011 responsibility for administering the scheme will move from lower tier local authorities (such as district councils) to upper tier local authorities (such as county councils).

38. This reform will assist in overcoming a number of problems that have been identified by local authorities, stakeholder groups and operators. As well as providing economies of scale, it will for example enable the number of negotiations with bus operators to be reduced and align responsibility for concessionary travel with Transport Authority responsibilities.

39. Local authorities are responsible for determining reimbursement that leaves bus operators ‘no better, no worse off’ as a result of the concession. Operators can appeal to the Secretary of State if they feel they are being inappropriately reimbursed.

Funding

40. Around £1 billion is spent on concessionary travel each year. Before April 2008, funding for the statutory minimum bus concession was provided exclusively through DCLG’s Formula Grant system. In the three years since April 2008 local authorities have also received additional Special Grant funding administered by DfT for the England-wide extension to the concession. Additional funding of £212m, £217m and £223m has been provided to local authorities.

41. The special grant mechanism was the clear preference of local government stakeholders. The DfT consulted widely to develop a distribution mechanism that would target funding to those areas that were likely to experience the greatest increase in costs. However it is worth pointing out that the precise distribution of actual costs was simply not knowable in advance.

42. The preferred formula used distributed funding based on the eligible local population, visitor numbers, retail floor space and bus patronage. As such it was expected to take account of likely demand in areas such as coastal towns, urban centres and other places likely to experience an increase in bus journeys as a result of the improved concession.

43. Following the first full year of the England-wide concession, the Department for Transport carried out a review of the additional costs incurred by TCAs. This suggested that the £212 million of funding was more than sufficient in total and that, in the main, the formula distribution had been largely successful. However a minority of authorities - around 30 out of over 260 - were experiencing significant shortfalls. This had potentially severe implications for their ability to deliver local services and the Department took the view that we could not persist with the original distribution.

44. In 2009, the Department for Transport consulted on a revised distribution of special grant funding for 2010/11. The majority of the respondents to the consultation were either in favour or had no opinion on the proposed revised distribution. 22% of TCAs opposed the revised distribution.

45. The new distribution was developed in the light of hard evidence on where the costs of the new concession have actually fallen. This is evidence that was not available to us in 2008, and which we could only anticipate, in developing the original special grant distribution.

Future Funding

46. The special grant funding previously provided by the DfT was only intended to cover the period from 2008/09 through to 2010/11, while the England-wide extension to the concession bedded in. In line with the reduction in separate funding streams to local authorities, from April 2011 all funding for the scheme will be provided through formula grant.

47. CLG recently consulted on how the transfer of responsibility for concessionary travel (from lower to upper-tier local authorities) will be taken into account in authorities' funding allocations from 2011/12. This was an opportunity for local authorities to influence decisions on the final distribution method.

48. The overall amount of funding available for local government was set out in the Spending Review. CLG will publish details shortly on the outcome of their formula grant consultation and on how the overall funding pot will be distributed among authorities. Formula Grant is allocated on the basis that the level provided overall is sufficient to enable local authorities to deliver effective local services, whilst ensuring that authorities do not set excessive council tax increases.

Pass Take-up and Usage

49. The proportion of older people with a concessionary bus pass increased following the introduction of a statutory minimum bus concession in 2001.

50. From 1998/00 to 2002 take-up rates among men 65+ and women 60+ increased from 49% to 58%. The equalisation of the eligible age in 2003 led to an increase in the average take-up among those aged 60+, from 52% in 2002 to 56% in 2003. It remained at this level up to 2005. There was a further increase in take-up in 2006, to 63%, associated with the introduction of free local concessionary bus travel in England and this increased again in 2007 to 68%, in 2008 to 73% and in 2009 to 76%.

51. There was considerable variation between area types in 2009 with take-up ranging from 63% in rural areas to 88% in London. However, this gap is narrowing as, over time, take-up has increased more among rural residents than in other areas.

52. Although the National Travel Survey is not explicitly designed to measure short term trends in travel patterns, data on the frequency of local bus use by people aged 60+ strongly suggests there may have been an increase in bus use among this group, corresponding to the increase in concessionary pass take-up.

53. The proportion of people aged 60+ who said they use a local bus at least once a week increased from 28% in 2005 to 39% in 2009. Over the same period the proportion of people in this age group who said they use a bus less than once a year or never fell from 46% to 31%.

Role of Passenger Focus in Route Planning

54. Around 80% of bus services outside London are operated on a commercial basis and route planning is principally a matter for the operator concerned, based on its assessment of passenger demand. An operator must give 56 days notice to the Traffic Commissioner of any changes to a route. Outside London, an operator must register a local bus service with a Traffic Commissioner, normally providing 56 days’ notice. [2] This application must be copied to the relevant local transport authority. The Traffic Commissioner must accept all properly completed applications to register services from licensed operators, although traffic regulation conditions can be attached to the operator’s licence under certain circumstances (e.g. on grounds of safety or to prevent local congestion or pollution), which may restrict routes, stopping places and timings and frequencies. Services must be run exactly as registered. Each Traffic Area office publishes details of local bus registrations that have been registered, varied or cancelled in a booklet called ‘Notices and Proceedings’, which comes out every fortnight.

55. There is no formal method by which a local bus service registration can be objected to. However, VOSA guidance strongly suggests consulting with the police and the local transport authority before registering a service in order to avoid restrictions being applied by the authority or the Traffic Commissioner.

56. Passenger Focus' role is to build a strong evidence base about existing and potential passengers’ priorities and perceptions. It uses robust research evidence and the views of passengers to advise decision makers about issues affecting passengers and seek improvements. We would not expect Passenger Focus to become formally involved in decisions on individual bus routes.

57. On a more general note, the Committee will be aware that the role of Passenger Focus is currently being reviewed as part of the wider public bodies reform process. In October we announced that Passenger Focus will be retained, but substantially reformed to focus on the core role of protecting passengers while reducing costs to taxpayers .

December 2010

ANNEX

SUPPLEMENTARY INFORMATION

This annex contains supplementary statistical information that the Committee may find useful.

· The following tables show operating costs, operating revenues, fares and support for the bus industry in Great Britain.

· London buses operate under a different model to the rest of the country, therefore comparisons between London and other areas require caution.

· The final table (showing revenue by source) takes data from multiple sources and reflects complex funding flows. These figures are estimates and should be treated as such.

· All cost and revenue figures for years prior to 2009/10 are adjusted for inflation in the wider economy, using the GDP deflator, and are expressed in 2009/10 prices.

· All of these tables are published on the DfT website alongside a range of other statistics:

http://www.dft.gov.uk/pgr/statistics/datatablespublications/public/bus/