Bus Services after the Spending Review

Written evidence from TAS Partnership Ltd (BUS 37)

Executive Summary: Bus Services after the Spending Review    

Background

1.1 Public Spending on buses has continued to rise in recent years. Spending on supported services outside London has, however, only reached the same level in cash terms as applied in 1984. Developments including the introduction of the English National Concessionary Travel Scheme (ENCTS) have seen a large rise in concessionary spending and there has been a huge increase in spending on bus support in London since 1997. Bus industry costs, driven by wage-related costs, continue to rise significantly above inflation and are reflected in above-inflation fare increases. Despite this, passenger numbers in both PTE and Shire areas have grown since 2007, reversing years of decline.

1.2 Most ‘subsidy’ is not subsidy to the bus operators. Concessionary fare payments to operators result from a subsidy to the user and subsidised services are a contractual arrangement whereby operators are paid to provide a specified level of service at set fares.

1.3 Since introduction of ENCTS the proportions of typical bus company income vary little between the PTEs and Shires – broadly 55% farebox, 24% concessionary reimbursement, 11% local bus support and 10% Bus Service Operators’ Grant.

Assumptions

1.4 Other than the reduction in BSOG of 20% expected from 2012, precise measures of spending reductions are unknown but we have assumed reduction in concessionary reimbursement of 20% (based on example calculations using the revised DfT guidance) and in supported service budgets of 25%.

Outcomes

1.5 Our calculations using the above assumptions indicate that even with an additional increase in fares above the normal level to yield an extra 3% of income, we expect mileage operated to reduce by around 8%. The effects of this will be unequal, with rural and interurban services suffering disproportionately.

1.6 The rate of loss is particular sensitive to changes in concessionary reimbursement levels. Notwithstanding this, we tested a further scenario where BSOG is abolished and local authority support reduced by 50%. This level of reduced spending suggests the loss of almost one in five services. Against this it seems perverse to protect concessionary free travel at all costs when the offer of free travel could be irrelevant if there is no service available to significant numbers of potential passengers.

1.7 There is a risk that services which are currently marginal commercial services would be lost completely if local authorities fail to prioritise spending in the most logical way. There are limits to how far the Community Transport sector could replace the poorest performing bus services given that this sector is also very dependent on local authority grants and support and will see a reduction in BSOG. There will also be risk transfer as access to employment and health services become more difficult due to the lack of public transport.

1.1 Introduction, Objectives and Structure 

1.1.1 This document constitutes evidence provided by the TAS Partnership Ltd (TAS) to the House of Commons Transport Select Committee in response to its call for evidence for its inquiry into the funding of bus services in England (outside London). The objective of this evidence is to provide illustrations of the effect of spending reductions on the provision of local bus services and the likely consequences.

1.1.2 The main body of this report is a brief summary of public spending and trends in public spending, passenger levels and costs of operation. It is accompanied by a series of appendices examining these areas in greater detail. Except where otherwise quoted, figures are taken from published information from the Department for Transport (DfT), Office for National Statistics (ONS) or published operator accounts lodged at Companies House.

1.2 The TAS Partnership Limited 

1.2.1 TAS has been involved over 21 years in numerous projects advising bus operators and local authorities on ideal and attractive bus services and networks. This advice has covered both commercial and subsidised services and networks and we have made submissions to the Competition Commission as part of its ongoing inquiry. While the majority of our work is in the UK, we have also provided advice in areas from Abu Dhabi and Dubai in the Middle East to the Irish Republic.

1.3 Subsidy and Who Benefits 

1.3.1 There are three main ways in which national or local government contributes to bus services:

· Concessionary fare schemes

· Secured services

· Bus Service Operators’ Grant

Concessionary Fares

1.3.2 It is quite clear here that the recipients of this subsidy are the passholders themselves who get a personal subsidy entitling them to free travel.

- Acknowledged by DfT in ‘Transport Statistics Great Britain’

1.3.3 Legally, payments to operators should leave them with the same level of revenue which would be there if there was no concessionary scheme, irrespective of whether a service is very profitable or not.

Secured Services

1.3.4 There are small profit margins built into contract prices but the main beneficiaries of the subsidy are the users of the service. Without the subsidy and under normal fare conditions the service would not be able to operate. Bus operators are just the same as any other commercial business providing a service to a public body at market rate.

Bus Service Operator’s Grant (previously Fuel Duty Rebate)

1.3.5 BSOG refunds a significant proportion of the duty paid on fuel, keeping fares lower than they would have otherwise been and helps to maintain the viability of some marginally profitable services.

1.4 Changes in Spending 

1.4.1 Figure A below compares public spending levels in 1997 and 2010 adjusted to 2010 prices. There has been a significant increase in all areas of spending, with:

· 78% increase in concessionary fare funding (driven by the move to ENCTS)

· 58% increase in BSOG (driven by rising fuel prices and poorer fuel consumption)

· 31% increase in spending on secured services (driven by increased operator costs and a higher proportion of supported mileage)

Figure  : Comparison of Public Spending 1997 and 2010 (2010 Prices) [1]

1.5 Dependence on Public Spending 

1.5.1 Table 1 illustrates the typical composition of bus operator revenue from the various sources. Since the full introduction of the English National Concessionary Travel Scheme (ENCTS) the revenue streams in shire areas have altered markedly and there is now very little difference between the proportions in shire and PTE areas.

1.5.2 Prior to the introduction of ENCTS around 75% of income in shire areas came directly from passengers. London remains much more dependent on support payments. The percentages shown in Table 1 are obviously influenced by the volume of passengers in each area, thus Table 2 illustrates the average income per passenger by area type and how this income is made up.

1.5.3 If it is accepted that concessionary reimbursement is a direct replacement for revenue forgone as a result of ENTCS, then between 20 and 22% of operator income is from government support. Obviously, supported services will contribute a certain degree of income either through the farebox or from concessionary reimbursement, but this is difficult to quantity. Nonetheless it is a further sum at risk.

1.5.4 The proportion of secured services varies by local authority and can be already zero (for example Southend) up to 100% (for example, Rutland), but is notably high in some significant local authority areas – around 85% of services in Somerset receive some subsidy [1] .

Table  : Make-up of Bus Industry Income 2009/10

Table  : Per Passenger Statistics 2009/10

1.6 Spending Reductions 

1.6.1 Given the economic situation, to have expected the bus industry to be unaffected by the CSR would be grossly unrealistic. We do not set out here to question policy or political decisions but aim to give some pointers toward the likely effect of reduced spending on buses.

1.7 Estimations 

1.7.1 All three main areas of public spending on buses are subject to reduced budgets. As finance committed to supported services is counted as ‘discretionary spending’ these appear particularly vulnerable to reduced budgets as they now make calls on the same blocks of finance which must satisfy statutory requirements or discretionary spending which has a higher political profile, such as day care centres or nurseries.

1.7.2 However, as at the end of December 2010 only one figure for spending reduction was firmly set, that for the definite reduction of BSOG by 20% in 2012. As detailed in Appendix B, we expect concessionary reimbursement rates to fall by around 10% and broadly speaking, reimbursement payments would then reduce by 20% at a 50% current reimbursement rate and we estimate that local bus subsidy budgets will fall by 25% on average, although the actual percentage will vary from authority to authority and may be phased.

1.7.3 We have made estimates of the likely effect of all three changes individually, but in effect we are facing a trichotomy – a combination of deciding the effects of reductions under all three headings.

1.8 Calculations 

1.8.1 Table 3 below summarises the results of our calculations. In the BSOG and Concessionary scenarios, as these are blanket reductions across all services, we have also assumed that operators will impose fare increases to produce 3% additional revenue. This is probably the maximum the recessionary market will bear as higher percentage fare increases would meet such passenger resistance that they could be self-defeating.

1.8.2 What Table 3 shows clearly is that the most major threat is posed by the reduction in concessionary reimbursement. To offset this reduction and maintain current service levels would require increases in support budgets in excess of 26% and this is simply not a realistic proposition. Conversely, the reduction in BSOG can be offset by a fares increase and some small reductions in mileage.

1.8.3 Put together, all three reductions in spending would see a significant reduction in service provision of around 8% [1] . In addition to some negative synergy produced by the combined spending reductions, there can only be one fare increase to offset these as it is unrealistic to expect fare increases to yield 6% net. This would be equivalent to an actual increase of around 11% and would be in addition to the ‘normal’ fare increase needed to offset above-inflation cost increases, making the total fare increase around 15% in real terms. Note that even increases of this magnitude would not offset more than around 50% of the reduction income.

1.8.4 The last period when fares increased by this magnitude was in the mid to late 1970s when inflation peaked. Then it was established that even in such inflationary times large percentage increases were self-defeating and passenger resistance was substantially more than the expected level.

1.8.5 A large fare increase would also be reflected in higher concessionary reimbursement payments, but under the revised reimbursement guidance recently produced by DfT this would not be in direct proportion.

1.8.6 We have tested a further ‘worst case’ scenario where local authority support is reduced by 50% and BSOG is abolished. This predicts losses of service in the order of 18 - 19% of all provision. This level is equivalent to eliminating all current secured services and a significant number of those currently run commercially.

Table  : Estimated Effects of Reductions in Public Spending

1.9 Cyclical Impacts 

1.9.1 Some of the effects of changes will be cyclical yet very difficult to measure, so we have maintained simple calculations in the above, but effects will be that:

· Increased fares increase concessionary payments but lead to declining levels of farepaying passengers

· Reduced service levels imply lower concessionary payments and lower BSOG payments but declining levels of farepaying passengers and a further fall in revenue.

1.10 Outcomes 

1.10.1 Figure B below graphically illustrates the likely movements in service supply in the event of predicted changes to public spending. We also consider that funding to the Community Transport (CT) sector will reduce from a combination of reduction in BSOG and lower contributions from local authorities.

1.10.2 It appears obvious that rural and interurban services will suffer unduly. These services already often have lower than average reimbursement for concessionary travel (at least because the gap between adult fare and reimbursement is so much larger), are more reliant on BSOG and rural services are much more dependent on local authority subsidy.

1.10.3 There are some obvious approaches taken by local authorities to reduce subsidy budgets:

· Blanket removal of evening and Sunday services

u Which can have a major impact on access to employment – some 40% of bus trips after 1830 are made to and from work [1] ;

· Deleting the most expensive contracts

u Which can also be the best used

· Deleting non statutory school services

1.10.4 While Figure B suggests a progressive re-categorisation of services, it is more than likely that some current marginal commercial services will be lost without replacement as there is ‘no more money’ to subsidise a replacement. Thus some worse performing services may be retained at the expense of better-used ones.

1.10.5 We are unconvinced that the CT or third sector will have the ability to expand its role to replace more conventional bus services. It will suffer the loss of BSOG and be subject to cutbacks in local authority contributions too. The CT sector often serves particular niche markets or areas of need and individual schemes are not set-up to enable easy transition to serving other demands.

1.10.6 There will be significant impacts on other sectors, such as employment, with increased numbers of potential staff unable to access jobs and some existing employees having to leave current jobs due to lack of public transport. Access to healthcare facilities will also be affected – particularly patients from more rural areas – with increased demands on non-emergency patient transport.

1.10.7 The three areas of combined spending reduction call for a root and branch review, with the commercial operators redefining their commercial networks and local authorities establishing available budgets to decide what additional services to provide. Notwithstanding this, it is clear there will be significant losses of service in the order of 10% with the effects felt very unevenly across the country.

Figure  : Effects of CSR on the Structure of Bus Service Supply

January 2011

Appendix :  Bus Industry Trends and Public Spending 

1. Introduction

1.1 This appendix looks at current and past levels of public spending, analyses some key trends and includes some London data for comparative purposes.

2. Background

2.1 Bus operators’ income stems from a number of sources, but can be broadly divided into four income streams:

· Farebox – Revenue coming directly from passengers, either on the bus or pre-paid

· Concessionary – Revenue paid by local authorities on behalf of concessionary passholders

· PT Support – Contractual payments made by local authorities to operators to run services which are not commercially viable

· BSOG (Bus Service Operators’ Grant) – Essentially still a rebate of part of the duty paid on fuel.

2.2 Table 4 illustrates the typical composition of bus operator revenue from the various sources. Since the full introduction of the English National Concessionary Travel Scheme (ENCTS) the revenue streams in shire areas have altered markedly and there is now very little difference between the proportions in shire and PTE areas. Prior to the introduction of ENCTS around 75% of income in shire areas came directly from passengers. London remains much more dependent on support payments.

Table  : Make-up of Bus Industry Income 2009/10 [1]  

3. Supporting Statistics

3.1 The percentages shown in Table 4 are obviously influenced by the volume of passengers in each area, Table 5 and Figure C illustrate the average income per passenger by area type and how this income is made up. These figures are repeated in Table 6 and Figure D in terms of kilometres operated to give figures relative to the level of service provision.

3.2 However, it must be remembered that the figures expressed per kilometre are influenced heavily by relative bus speeds, which are much lower in London than in shire areas. Thus average total income per passenger in the shires is almost double the level in London, while the situation per kilometre operated is reversed, with total income per km in London being well over twice the average level in the shires.

Table    : Per Passenger Statistics 2009/10

Table    : Per Kilometre Statistics 2009/10

Figure    : Average Income per Passenger by Area Type

Figure  : Average Income per km Operated by Area Type

4. Declining Market?

4.1 DfT and its predecessors have collected information on passenger numbers since 1950. There has been a significant year-on-year decline in bus passenger numbers since the mid 1950s as a result of demographic changes and, most obviously, the inexorable rise in car ownership.

4.2 The following two charts (Figure E and Figure F) look at trends in bus passenger numbers since 1977 in the shire areas and PTE areas respectively. We have indexed the number of passengers to one at the start of each decade to enable comparisons of trends in each ten year period.

4.3 It is notable that in shire areas the rate of decline was the highest before bus deregulation in 1986, whereas in the PTE areas there was a period of growth in the first half of the 1980s. This was a result of significant investment, revenue support and fare subvention by PTEs in that period, similar to the recent policies in London. It must also be remembered that one of the principal political reasons for bus deregulation was to curb what the Thatcher government considered to be excessive public spending by the metropolitan authorities. In this it was ‘successful’ with revenue support cut by almost 60% in seven years – from the equivalent of £904m in 1984/5 to £364m in 1991/2 [2]

4.4 Post deregulation the decline continued – broadly at the same rate in the shires, but at a more rapid rate in PTE areas. Among the many reasons for sharp decline in PTE areas was the effect of very significant fare increases in many metropolitan areas as operators adjusted to charging commercial fare levels to replace the previous levels held down by significant financial input from PTEs.

4.5 The decade from 1997 showed a significant slowing of the rate of decline, especially in shire areas and since 2007 there has been an upward trend in both area types. This cannot be explained solely by the introduction of free concessions. At a presentation to Passenger Focus in 2010, Stagecoach Manchester claimed growth levels of 25% in adult farepaying passengers and some of the shire operators – for example Western Greyhound in Cornwall and both Norfolk Green and Konectbus in Norfolk have experienced double-digit growth and fleet expansion.

4.6 This is best illustrated by a couple of photographs of typical operations – in Figure G and Figure H. In each case there is a smart modern vehicle, but the most notable aspect in each is the age profile of the intending passengers – in contrast to the popular misconception that buses are primarily for schoolchildren and old people.

Figure  : Trends in Passenger Journeys since 1977 – Shire Areas

Figure  : Trends in Passenger Journeys since 1977 – PTE Areas

Figure    : Stagecoach in Manchester

Figure  : Konectbus in Norwich

5. Demand, Supply and Revenue

5.1 The relationship between demand, supply and revenue in the bus industry is a curious one. The normal economic relationship would establish equilibrium where price, supply and demand balance. But crucially, if the supply increases significantly, demand will not automatically follow unless the price alters accordingly.

5.2 It is beyond doubt that in the bus industry if supply increases, so does demand – independent of changes to fare. This appears to be an unexpected result but is easily explained if we place a monetary value on time. Bus journeys are time-based products – the whole bus journey experience is a function of generalised cost, so improved frequency = less waiting time = lower generalised cost. So the overall journey is ‘cheaper’ even if the cash element of the journey is unchanged.

5.3 Under competitive circumstances, standard economic theory would suggest that some of the market would shift and supply would decrease by a suitable percentage in time, maybe by small increments at a time. Supply in the bus business cannot be that responsive. Because of the need to deliver the product at specific times, it only makes sense to deliver service headways which divide roundly into 60. Outside London these are rarely minor adjustments to headway such as a change from every six minutes to every 7½ minutes, but reducing from every 15 minutes to every 20 minutes or every half hour. These are big step changes.

5.4 No operator would seriously consider operating a service frequency of every 16.7 or every 24.6 minutes. Again there’s a clear reason for this – with services running every 15 or 20 minutes, passengers will time their departures around advertised bus departure times and probably keep their average waiting time down in the order of 5 minutes. Running every 17.6 minutes will result in nobody knowing the scheduled times and passengers effectively turning up at stops at random, thus increasing the average wait time, raising generalised cost and reducing passenger numbers.

5.5 This is all illustrated in Figure I by some simplified calculations (using standard elasticities) based on a current service carrying 10,000 passengers per day, running every ten minutes and an average fare of £1.50. The graph shows what happens as fare changes, demand alters and attempts are made to match supply and demand.

5.6 Note how the ‘seats’ line, effectively supply, changes in steps. Importantly, it is notable that whenever the supply of seats is adjusted to follow declining demand, it forces another decline in patronage and revenue in response to reduced supply. The dark revenue line (a simple calculation of average fare x no. of passengers) shows that even though supply and patronage fall, representing a declining market, revenue continues to increase. This is how most bus companies have managed passenger decline over the years and why they continue to be viable in the face of market decline.

Figure  : Supply, Demand and Fare Levels

6. Change in Profitability – the Influence of Congestion

6.1 The simple relationship between demand and supply described above assumes that there are no other influences on service supply, but increasing traffic congestion continues to have a deleterious effect on service provision. This is an ‘outside’ influence which can lead to demands for local authority support. The key issue for local authorities is whether investment in bus priorities to maintain timekeeping (and thus profitability) is preferable to ongoing needs for financial support to services.

6.2 To use a simplified example:

· A half hourly service uses 4 buses; takes 56 minutes end to end and makes a profit of 10%.

u But Peak Congestion is beginning to ‘bite’, delaying services

6.3 The first action is typically that peak journeys are retimed with extra running time thus:

· more hours’ cost are required to provide the same level of service

· longer journey times, longer gaps in service and loss of clockface headways make the service less attractive

u therefore patronage falls

· increased cost and lower patronage means that profits fall

6.4 Assuming that further adverse effects such as a new traffic scheme and / or all-day congestion slows the off-peak service by seven minutes which now takes 63 minutes end to end, this fundamentally alters the economics of the service:

· The service needs an extra bus to maintain the half hourly service adding at least £100K to costs, but most of its time is unproductive.

· But slower journeys are less attractive to passengers so patronage falls further

· The extra resource coupled to lower patronage means the service now makes a loss and needs local authority support to continue.

The progression of these results is illustrated graphically in Figure J.

Figure  : Changes to Service Performance

6.5 Notably, this principle will work in reverse. If we started with the loss-making supported service using five buses and taking 63 minutes end to end, then put in bus priorities (or removed a section of route) which saved 7 minutes running time, the operator would save one bus in service, gain passengers as buses would be faster and more reliable, make a profit and therefore remove the need for revenue support from the local authority.

7. Public Spending on the Bus Industry

7.1 Since the early 1980s, public spending in the industry has varied significantly. Figure K below shows trends between 1982 and the present day. Spending on concessionary fares has steadily risen over time – notably unaffected by deregulation in 1986 – except for a fall in 1993/94 as the level of concession offered was reduced in many areas. Since the introduction of statutory schemes from 2007 onwards, spending on concessions has almost doubled in five years.

7.2 Net revenue support outside London fell consistently in the years following deregulation but has risen steadily since the mid 1990s. However, the level of support in cash terms in 2010 has only reached 1984 levels again. The change in London is very marked, given that total support was at around £1m per annum in the 1998 – 2000 period. London bus support grew to over £700m per annum in 2009.

7.3 Figure L compares 1997 and 2010 spending under four headings adjusted to 2010 prices. Excluding the extreme change in London, in thirteen years spending in real terms has increased by 78% on concessions; 58% on BSOG and 30% on support outside London.

Figure  : Trends in Public Spending 1982 to 2010 [3] (Current Prices)

Figure  : Comparison of Public Spending 1997 and 2010 (2010 Prices) [4]

8. Subsidy and who Benefits

Concessionary Fares

8.1 It is quite clear that the recipients of this subsidy are the passholders who get a personal subsidy entitling them to free travel as acknowledged by DfT in ‘Transport Statistics Great Britain’. It is the passholders themselves who decide what makes up the market for concessionary travel and associated travel patterns.

8.2 Legally, payments to operators should leave them with the same level of revenue which would be there if there was no concessionary scheme. This is irrespective of whether a service is very profitable or not. Arguments that payments should be low as concessionary fare schemes are simply a way of occupying seats which would otherwise be empty are fatuous and ignore both the basic rules laid down by the 1985 Act and the fact that in many areas concessionary passengers create the peak of demand.

8.3 There are grave concerns that the recently published DfT guidance on concessionary fare reimbursement does not satisfy this basic requirement and these arguments are taken further in Appendix B. While the main concentration lies with the ENCTS scheme for older and disabled passengers it must be remembered that various concessionary schemes for younger people also exist which partly mask the myriad of commercial arrangements for young people.

Secured Services

8.4 Spending on secured services is almost always justified on social grounds or to meet policy objectives. The inference is often made that it is the bus operators who are being subsidised. While it is true that operators will expand their businesses and make a small profit margin within their contract prices, the main beneficiaries of spending on secured services are the users of the services.

8.5 Without the subsidy and under normal fare conditions the service would not be able to operate. This is reflected by the fact that local authorities usually have a ‘subsidy per passenger’ measure, a measure of affordability to the local authority based on the level of usage. Affordability is also a key issue for users – in most urban or semi-urban areas an adequate supply of public transport already exists in the form of taxis and private hire vehicles, but the fare charged is the key issue.

8.6 The operators have often been criticised for making profit from secured services but in effect payments for secured services which include a profit margin are no different to any other profit-making commercial business providing a service to a public body. As a direct comparison, there is seldom any reference to ‘huge subsidies’ to hospital cleaning firms or waste disposal firms, for example, which provide a service to the public sector at a commercial rate.

Bus Service Operators’ Grant (previously Fuel Duty Rebate)

8.7 Despite the renaming, BSOG effectively remains as a rebate. It refunds a significant proportion of the duty paid on fuel, keeping fares lower than they would have otherwise been and helping to maintain the viability of some marginally profitable services. BSOG is not only fairly simple to administer but also applies a degree of fairness in that it reflects service supply in terms of mileage operated, regardless of whether the service is rural or urban.

8.8 Fuel Duty Rebate was first introduced in 1966 in an era when there was comparatively little variation in fuel consumption between different vehicle types and its basic calculation rebates duty in accordance with the amount of fuel consumed. Thus for vehicles running on conventional diesel it effectively rewards poor fuel consumption. Part of the increase in BSOG spending despite the introduction of lower levels of rebate results from significantly worse fuel consumption by modern vehicles.

8.9 Governments have continued to consider the most appropriate way of restructuring or replacing BSOG. One of the main suggestions has been to move from a mileage-based payment to a per-passenger payment, but this would have the perverse effect of transferring the grant away from rural services towards busy urban services which are already highly profitable.

9. Costs and their Impact on Fares

9.1 A key relationship exists between bus industry costs and fare levels. Income derived directly from fares – either paid by the passenger or from concessionary reimbursement – typically accounts for between 75 and 80% of all income.

9.2 Figure M below shows the breakdown of typical large bus company costs. The majority of costs – 61% - are directly related to wages. Wage costs have risen steadily above inflation for some years. There are three principal reasons for this:

· Wages in general are rising ahead of inflation

· Lower productivity – buses suffer the effects of traffic congestion and get slower year by year

· Secondary legislation – for example driver CPCs – have increased the level of non-productive time

Figure  : Breakdown of Bus Industry Costs [5]

9.3 Figure N below compares the percentage of wage-related total costs in a number of service industries. At face value other businesses ought to come close to the bus industry’s high proportion of wage cost, for example the High Street Banks or Royal Mail, but this is not the case. The main reasons are the point of sale and the time critical nature of the bus industry product.

9.4 In the bus industry, each bus acts effectively as its own business which needs to be manned by its own staff member throughout the day and the times at which it provides its service are critical.

Figure  : Wages as %ge of Costs – Service Industry Comparisons [6]

10. Operator Trends

10.1 In preparation of evidence to the Competition Commission in 2010 in its enquiry into local bus services, TAS carried out some analysis of published accounts data for a sample of ten operators in diverse areas over the years 1991 to 2008 to point out some overall trends. Figure O shows that there are two distinct periods with different trend patterns 1991-2000 and after 2000.

10.2 From 1991 to 1999 patterns in all variables were fairly constant, although there was a slow decline in staff numbers and turnover began to increase above other variables towards the end of the period. This would imply improving profit margins overall.

10.3 From 2000 onwards a different pattern emerges with fleet sizes slowly reducing and staff numbers showing only a slight decline, but the other variables diverge markedly with year-on-year increases in wages and total operating cost significantly above RPI. Turnover has increased alongside cost increases but at a lower rate up to 2006. It is also clear that wage costs are the principal driver of operating costs – the lines for both variables mirror each other

10.4 The effects of these trends on profit margins are shown clearly in Figure P – this shows margins over the ten operators growing consistently up to the late ‘90s after which margins declined consistently to 2006. This confirms our work for CfIT in 2007 where we pointed out that continuing decline of margins was not an acceptable scenario for the future of the industry. In the last two years operators have increased turnover to remedy this – reflecting fare increases and some passenger growth.

10.5 Figure Q shows trends in four KPIs – Turnover per Bus, Wages per Staff, Staff per Bus and Wages as a percentage of Operating Cost. This throws up some further conclusions:

· Turnover per bus has grown markedly since 2000 and is now over twice the 1991 level in real terms, but

· Wages per staff have grown at a similar rate

· Wages expressed as a percentage of total operating cost have barely changed in 18 years at between 61 and 64%.

· Efficiency improved throughout the 1990s with around a 12% improvement in staff per bus, but from 2000 onwards these efficiencies have been lost so that by 2008 the number of staff per bus is slightly higher than it was in 1991.

u Although there have been some improvements in staff conditions relating to maximum driving time, breaks etc. these have not been universal and we suggest that the major cause of declining staff per bus efficiency is slower bus speeds, leading automatically to an increase in staff needed to provide the same level of service.

11. Summary

11.1 In conclusion:

· Fleet size has declined on average by over 10% since 2000

u Some fleets illustrated within our analysis have reduced by as much as 40% over 18 years

· Measured in staff per bus, efficiency improvements achieved through the 1990s have been lost over subsequent years, driven mainly by slower operating speeds.

· Wages are still the principal cost driver and continue to rise significantly ahead of RPI – estimated at around 2 - 3% above RPI annually.

· Profit margins shrank year on year from 2000 and only growth in patronage and turnover has partially remedied this since 2007.

· The average profit margin is 6%

Figure  : Overall Trends – Sample Operators

Figure  : Trends in Profit Margins 1991-2008 (All Operators Combined)

Figure  : Aggregated Trends in Key Performance Indicators (Constant Prices)

12. Fares and Operating Costs

12.1 Bus operators have only two potential ways of increasing income streams:

· Passengers,

u From higher fares or higher volumes or

· Increased Subsidy

In response to rising costs and falling demand, the industry has two choices:

· Cut services

· Put fares up

12.2 There have been many drivers of cost increases:

· Labour costs including pensions and other on-costs have increased by 20% in real terms over the last five years

· Significant increases in insurance and property charges – especially driven by an enormous increase in insurance claims on a ‘no win no fee’ basis.

· Significant increases in fuel costs in real terms due to poorer fuel consumption, limits on BSOG and increase in the cost of fuel itself

· Lower speeds lead to a decline in productivity. Slower buses mean more resources to provide the same service or less service from the same resource. Productivity has fallen 15% in 10 years

12.3 In terms of activity to offset these trends it is far easier to increase fares than to adjust service supply. This is partly due to the respective amounts of effort required but also reflects the fact that the market is much less resistant to fare increases than to service reductions. Typically a 10% decrease in service supply would be reflected in a 6 - 7% loss of passengers whereas a 10% increase in fares leads to a 3 - 4% loss of passengers.

12.4 This has led to an increasing imbalance between demand and service supply. Since 1950, demand has gone down by 69% but service levels by only 17%; hence the average bus load has declined significantly. It is a simple equation that in a declining market rising costs have to be recovered from fewer passengers.

· Average bus loads

u In 1955: 26.9

u In 2008: 10.8

· On a journey costing £25 [7] to run, the cost per passenger is

u £25/26.9 = 93p in 1955

u £25/10.8 = £2.32 in 2008

Appendix : Impact of Changes to Concessionary Fares Reimbursement 

1. Locus

1.1 Over 21 years, The TAS Partnership Ltd has amassed extensive knowledge of all aspects of concessionary bus fares, from strategic policy, through scheme design, implementation and review to day-to-day administration. This includes schemes for young people, as well as the more prominent ones for elderly and disabled people.

1.2 We have advised government departments in England, Wales and Northern Ireland on this topic, in addition to bus operators and over 80 local authorities. Our periodic publication ‘Concessionary Fares Monitor’ is the UK’s most comprehensive survey of and commentary on the subject.

2. Overview

2.1 Concessionary fares are a subsidy to individual users – in the case of the English National Concessionary Travel Scheme (ENCTS), this means public funding for the bus travel choices of over eight million older or disabled people throughout England.

2.2 The overriding legislative principle [1] is that bus operators should be reimbursed for delivering the public policy by providing concessionary travel, so that they are ‘no better and no worse off’ than they would have been if the policy did not exist. To achieve this, reimbursement is divided into two main elements:

b) revenue reimbursement – the total value of concessionary trips (‘revenue forgone’), adjusted to remove the value of additional (‘generated’) trips which occur solely because of the reduction in or removal of fares; and

c) additional costs reimbursement – the marginal costs of catering for those generated trips, net of any commercial benefit (e.g. where more fare-paying passengers result from a higher frequency of service).

2.3 Additional costs have historically been very small in relation to revenue reimbursement. However, as the proportion of generated trips has steadily risen over recent years (owing to both the greater discount of free travel and revised estimates of generation), the importance and scale of additional costs reimbursement have grown dramatically since 2008.

2.4 Total concessionary reimbursement is now a major element in the income of all bus operators; in 2009/10, it comprised some 24.1% of local bus revenue in England outside London [2] . For many – especially smaller operators – the proportion of income may be over 30%, but it is unlikely to fall far below 20% for any operator.

2.5 While the principles are clear, a major problem is that there is no ready means of comparing the current situation with that where concessions do not exist. Concessionary fares predated the first legislation [3] , itself some 55 years old, became general during the 1970s and universal from June 2001. We are therefore reliant on estimates of generation, based either on theoretical demand relationships or on increasingly distant historical comparisons.

3. Reimbursement Calculation

3.1 Determination of reimbursement rates remains a local function for each Travel Concession Authority (TCA) and a variety of methods has been used to assess the level of generated travel on which these depend. Unsurprisingly, a wide range of rates results: research by TAS in 2008/09, the first year of ENCTS, revealed rates typically in the range 50-65%, with an average (weighted by population) of around 55% of revenue forgone [4] .

3.2 On 29 November 2010, the Department for Transport (DfT) published more prescriptive guidance on reimbursement, although retaining local discretion in its application. The guidance is based on advice from Leeds University’s Institute of Transport Studies (ITS), but despite ITS leading substantial review and research on the subject, its results lack precision [5] and remain arguable. We concur with the view of many operators that DfT, in its interpretation of the latitude in the ITS recommendations, has consistently adopted assumptions or judgments which have the effect of reducing reimbursement payments.

3.3 The default "calculator" model which accompanies the DfT guidance therefore has the virtually universal effect of reducing the amounts of reimbursement to be paid. Moreover, DfT removed some potential adjustments of the calculator to reflect local circumstances [6] , following an inappropriately compressed period of consultation on the draft new guidance. The new guidance is not wholly unhelpful, justifiably increasing the emphasis on additional costs. Without going into technical detail, however, we believe it embodies some flawed logic and questionable assumptions and will result in reimbursement failing to meet the ‘no better and no worse off’ criterion.

3.4 More pertinently, if TCAs apply the calculator without substantial modification, it is clear that reimbursement payments to operators will fall substantially for carrying the same volume of concessionary passengers. DfT’s own estimates [7] indicate an expected drop of £101 million (outside London, within a range of £68-133M), or about 13% of all concessionary reimbursement.

3.5 Bus operators generally consider this to be a significant underestimate of the financial impact; our estimates for a number of TCA areas suggest that the typical impact will be an effective reduction in total reimbursement payments in the order of 30%. For an average operator, this equates to removal of 8% of total income.

3.6 Note that this amount comes straight off the ‘bottom line’ – there are no offsetting cost savings. The average bus company pre-tax profit margin [8] was 6.2% in 2008, which would turn into a loss were 8% of revenue to disappear.

3.7 If the guidance is followed, it is clear that virtually the whole bus industry will be forced to increase revenue (i.e. raise fares) and / or make substantial cost savings (i.e. reduce services) in order to stay in business. The potential effects are examined below.

4. Anticipated Effects

4.1 To offset the impacts of reduced reimbursement, an obvious option is to raise fares, which would have the joint effects of:

a) raising more revenue from fare-paying passengers and

b) increasing the average fare on which reimbursement is calculated.

4.2 Given its expected size, no operator could realistically recoup the income loss through fare increases alone, but they could make some contribution. However, industry sources suggest that major operators will be most unlikely to adopt this course of action, because:

· they are already nervous about resistance to fare increases in the current economic climate and

· it is [rightly] seen as penalising farepaying passengers for something – fair reimbursement – which is specifically someone else’s responsibility.

4.3 Service cuts will therefore be the primary, if not only, means for operators to address the projected loss of income. These were not considered in the DfT Impact Assessment, which simply notes that:

‘If this were to occur then there would be passenger disbenefits associated with higher fares and lower service levels. It has not been possible to directly model the reaction of operators to this change.’

4.4 Equally disingenuous is the section on ‘rural proofing’, which states:

‘bus passengers in rural areas may be affected more than bus passengers elsewhere in the country and this may raise issues in specific localities. Local authorities already have powers under existing legislation to secure socially necessary services if these are not provided by the commercial market. This provides TCAs with the flexibility to address any specific issues which arise when implementing the new guidance in rural areas.’ [Last paragraph of section VI) Specific Impact Tests]

4.5 In the context of contemporaneous statements about budget cuts and a review of local government funding, it is patently ridiculous to expect that additional resources will simply be found from TCAs’ other budgets to support bus services rendered uneconomic simply by changing methodologies, assumptions and reimbursement rates.

4.6 It is important to realise that in order to save 8% of costs, operators would have to withdraw significantly more than 8% of resources, since further revenue will be lost with each service reduction or withdrawal – and that is before any perceptual effects take hold among existing passengers about reductions in service availability or stability, as they see substantial reductions elsewhere on the network. Such a ‘cycle of decline’ is horribly reminiscent of that in the 1970s, the time of worst decline in the bus industry, albeit with somewhat different drivers.

5. Preservation at All Costs?

5.1 In the face of the need to make significant cuts to public expenditure, it does seem perverse to maintain free travel for pensioners at all costs and it seems disingenuous to attempt to make savings in this area of expenditure by reducing the amount reimbursed for travel and thus transferring the financial pain from user to supplier. The impacts of this will be increased fares for other bus users, often from households in lower income brackets, as well as loss of services and further modal shift.

5.2 Whilst it is undoubtedly true that there are pensioners who are amongst the poorest members of the population, the concept of most pensioners being in that income bracket is false. Figure R uses DWP data to show that the distribution of pensioners by income band is much more variable with a significantly lower proportion in the lowest income quintile than applies to the general population.

Figure  : Proportion of Pensioners by Household Income Quintile [9]

5.3 The perversity is, of course, that the price of a free service for all will be loss of all service to some. Given the characteristics of people in that age group, there will almost certainly be direct cost impacts upon other public sectors – not least the health service with increased demands for home visits by GPs and community nursing staff and in non-emergency Patient Transport Services to and from hospitals.

5.4 There will also certainly be an unequal effect in urban and rural areas, with rural services suffering particularly. As a result there is likely to be a significant issue of increased social isolation in rural areas.

Appendix : Calculations of the Effect of Spending Reductions 

1. Description

1.1 Table 7 to Table 10 below show calculations of the percentage changes in funding required or service supplied as a result of spending reductions. This calculation is based on the assumption that a given percentage of revenue shortfall can be overcome by a combination of fare increase and mileage reduction. Any mileage reduction will be accompanied by reduction in revenue which is difficult to quantify. It is to be hoped that such reduction will be achieved by minimising revenue loss. Therefore these estimates are cautious and may be increased by around 20 to 30% dependent upon the revenue at risk and transfer to other services.

Table  : Effects of 20% BSOG Reduction by Area Type

Table  : Effects of 20% Reduction in Concessionary Reimbursement by Area Type

Table : Effects of 25% Reduction in LA Support for Secured Services by Area Type

Table  : Cumulative Effects of Reductions in Spending by Area Type

Table : Cumulative Effects of More Severe Reductions in Spending by Area Type

Appendix : Impacts on the Bus Market 

Figure : Impacts of CSR on Bus Service Supply

Appendix : Taking Passengers’ Views into Account when Planning Bus Services 

1. Introduction

1.1 This Appendix provides a brief appraisal of how passengers’ views should be taken into account when bus services are planned. Passenger Focus currently has no statutory role in taking account of passengers’ views: we consider and conclude whether this should change. We also review the wide variety of changes to bus services which may be planned by operators or local authorities and the variety of stakeholders involved in planning bus services.

2. A Range of Circumstances for Planning Change to Bus Services

2.1 Planning changes to bus services takes place at a variety of different levels, depending upon the circumstances. These may include:

c) An operator wishing to introduce a new route and requesting that the local authority introduces one or more bus stops;

d) A local authority wishing to move a bus stop;

e) An operator wishing to introduce a new service to compete with an existing operator on a route;

f) An operator wishing to deregister a service which is not commercially viable;

g) A local transport authority concluding not to continue a subsidised bus service;

h) An operator increasing or otherwise changing its fare structure;

i) A local authority increasing or otherwise changing the fare structure it sets for any subsidised services;

j) An operator wishing to change an aspect of its service such as the type of vehicle allocated, the service frequency, journey time or a minor change to the route;

k) Advertisement of statutory schemes (Partnerships or Ticketing Schemes) or

l) A local authority changing its maximum journey time policy on home to school services.

2.2 One feature of this range of examples is that the initiative for change may come from either an operator or a local authority. Another feature is that planned changes may be perceived as either ‘a good thing’ or ‘a bad thing’ for public passenger transport. In other instances the merit of any planned change will depend upon the perspective of the stakeholder. An example of this is location of bus stops: the majority of the population would like the reassurance of a bus stop within a reasonable walking distance provided that it is not immediately outside their own home.

2.3 A further generalisation is that, at least outside Quality Contracts (QCs) and Quality Partnership Schemes (QPSs) [1] , bus operators plan changes to enhance their commercial, private sector results whereas local transport authorities plan changes to achieve a balance between provision of both statutory and socially necessary services and available finance.

2.4 Bus operators can afford to make relatively simple judgements about whether planned changes are likely to achieve their financial and non-financial objectives. Local authorities have a more complex series of judgements to make based upon provision of access to a range of services including health, education, employment, health, retail, affordability and impact on different segments of the population.

1.10.8 QCs differ in that, under the Local Transport Act 2008, consultation is specifically described in the statutory guidance [2] . The statutory guidance on QPSs is illuminating [3] : where an authority wishes to introduce a QPS in order to raise standards the guidance recommends that:

· "A QPS is best developed in partnership with all potentially affected operators to ensure that the standards are set at an appropriate and achievable level that will deliver the proposed benefits – including value for money (for passengers and in terms of policy and commercial objectives), growth in patronage, or improvements in the efficiency and effectiveness of operations".

2.5 This does not suggest that the needs or interests of passengers are put first when a QPS is considered. Rather, a QPS might be described as a compromise between the interests of the operator(s) and the authority(s).

3. A Range of Stakeholders

3.1 Depending upon the identity of the party behind a planned change, there are clearly a range of interested parties: these may include:

b) The operator(s) or local authority(s) – whichever did not initiate the planned change;

c) Passengers using the service(s) where change is planned;

d) Competing operators;

e) Politicians, both local and national, representing people in areas affected by the planned change;

f) Employers, retailers or providers of other services who may be affected by the proposed change.

3.2 Notably, this list does not currently include Passenger Focus or any other passenger representative(s).

3.3 In early 2008 central government consultation took place on options for strengthening bus passenger representation, including the proposal that the new body should be national rather than having a regional dimension. The Passenger Transport Executive Group responded to this by stating that [4] :

· ‘we would not favour the establishment of a large regional structure’; and

· ‘Bus travel is very local in character’;

· The new body should ‘act as a credible voice for passengers in the deregulated regions when major problems / issues arise’

4. The Role of Passenger Focus

4.1 The Local Transport Act 2008 enabled the Secretary of State for Transport to extend the remit of Passenger Focus to include the interests of bus users in England outside London through secondary legislation [5] . Passenger Focus currently carries out its objectives [6] of ‘Putting passengers first’ by:

· Gathering information and research;

· Working with Government and the industry to ensure the passenger’s voice is heard;

· Seeking the views and experiences of passengers to influence journey improvements; and

· Focusing on a number of key areas including:

u Fares and tickets

u Quality and level of service

u Investment

4.2 In legislation Passenger Focus has powers to investigate matters and, if it considers it appropriate, may refer findings to an operator of passenger transport services, a provider of passenger transport facilities, a local traffic or transport authority or the Highways Agency. If, after making representations, Passenger Focus considers that it is unable to achieve a satisfactory outcome, it is able to refer the matter to a Traffic Commissioner.

5. Commercial Objectives

5.1 For operators there are clear requirements to submit local bus service registrations – either for new services, variations or cancellations - to the Traffic Commissioners for approval, 56 days before introducing a change to a service (or 21 days where circumstances warrant a short notice request). At this stage the operator is also obliged to provide a copy of the registration to the relevant local authority(s).

5.2 There are circumstances where the operator will not wish to provide anyone with any greater prior notice of its intention to run a local bus service in order to maintain a competitive advantage. An operator engaging in any form of consultation prior to the 56 day period is providing his competitors with additional information to react in the market place. However, many voluntary partnerships or codes of conduct in place already routinely involve operators submitting proposals with more than the statutory notice period.

5.3 The questions of competitive advantage, fair competition and the benefits, rules and boundaries for partnerships have exercised many minds during the Office of Fair Trading Market Study of Local Bus Services in the UK (excluding London and Northern Ireland) [7] in 2009 and the current Competition Commission Inquiry into the market [8] . In short, no ‘one size fits all’ solution has yet been reached.

5.4 In the ideal world of the virtuous circle (growth in bus use, growth in service provision) then changes made by bus operators are likely to be advantageous for bus users. In these circumstances it can be argued that consultation prior to the 56 day period is unlikely to be necessary.

5.5 In the current times of financial pressure, changes are more likely to be ones which leave gaps in service provision. While it may be ideal for bus users and local authorities if a period of debate takes place before a service is withdrawn or reduced, it has to be asked whether such debate is:

g) Necessary;

h) Likely to change the mind of the operator; or

i) Likely to add to anything which can, in any event, be achieved within the 56 day period.

5.6 From a pure commercial perspective, many operators would argue that the best evidence for passengers’ views is travel patterns, as expressed through cash fares paid on the bus and actual boarding and alighting patterns. On those grounds, they would suggest that further debate is wasteful.

5.7 To supplement their knowledge of passenger travel patterns, progressive operators will also be closely monitoring the opinions of their passengers through a number of media including traditional written or telephoned comments as well as social media such as Facebook and Twitter. This feedback will be used to inform future plans.

6. Value for Money and Accessibility: the Local Authority Perspective

6.1 Local authorities may not apply a pure commercial logic to decisions about the local bus services they support, but they still have value for money considerations. For this reason, although pressure groups and political persuasion may play a part in influencing expenditure recommendations by officers and decisions by members, ultimately most local authorities will use some form of ‘cost per passenger mile’ or ‘cost per passenger carried’ benchmark to assist in determining whether local bus services are sustainable. ‘Use it or lose it’ campaigns allow officers and members to discover whether strength of feeling converts into actual use of a service.

6.2 The Government Code of Practice on Consultation [9] understandably recommends that:

· Consultation should take place at a stage when there is scope to influence the policy outcome; but also adds that

u Consultation should normally last for at least twelve weeks; and

u Consultation should be designed to be accessible to, and clearly targeted at, those people the exercise is intended to reach.

6.3 This type of timescale may be appropriate in conjunction with a ‘Use it or lose it’ campaign. It may also be appropriate in larger, strategic decisions where operators and local authorities work well in partnership. For smaller scale decisions or those which operators feel they are entitled to make on a purely commercial basis, it will be inappropriate. It should be noted that a local authority has a statutory duty to involve representatives of local persons in the exercise of its functions when the Council ‘considers it is appropriate to do so’.

6.4 Even for local authorities, listening to the views of passengers about plans for one particular route or area runs the risk of failing to take account of the remaining population in the authority – and the whole population is equally entitled to be consulted on policies affecting accessibility and levels of subsidy to local bus services. The natural conclusion from this is that local authorities should only enter formal consultation on the planning of local bus services at a strategic level where policy decisions can be influenced.

6.5 The internet age has improved the ability to collect and analyse the results of consultations – several operators undertake such exercises [10] and this principle has expanded to local transport authorities – for example recent consultation by Nexus regarding proposals to amend its secured network [11] .

6.6 The basic difference in approach between operator and local authority is that the operator is commercially focussed and will optimise service delivery to the majority of its passengers whereas local authorities have more complex specified social criteria to satisfy. Local authorities should consult at a strategic level when and where policy decisions can be influenced. Significant reductions in operator income are likely to put stress on operator – local authority relationships and might not lead to the optimum outcome.

7. The Role of Passenger Focus

7.1 Given that planning bus services encompasses a very wide range of possible circumstances our recommendation is that, in the current legislative environment, it would be inappropriate to formalise a role for Passenger Focus in taking passengers’ views into account in service design.

7.2 There is clearly a difference between formal consultation and the ‘good practice’ of listening to customers. Equally, there are circumstances where a number of operators and one or more local authorities might be working in partnership – either formally, through a QPS, or informally – and are sufficiently confident in their partnership to:

· listen to the views of bus passengers on a regular basis;

· plan changes based on the views of passengers;

· implement changes incorporating the views of passengers; and

· tell passengers what changes have resulted from passenger feedback.

7.3 While either a bus operator or a local authority may invite Passenger Focus (or any other appropriate local Passenger Representative body) to facilitate passenger feedback or consultation, any greater role may require Passenger Focus to side either with an operator or a local authority. This would prejudice and undermine Passenger Focus’s independent voice as the passenger representative and limit its ability to influence government and the industry.

January 2011