Enhanced bus partnerships will require new strategies and difficult maths for both operators and city mayors
For decades, UK bus operators have sought to contain economic regulation, whilst local authorities have consistently argued for increased powers. Like some medieval siege, nobody can quite remember when the fighting broke out, and entire careers have been spent on policy battles, without either side giving up an inch of territory. It is not inaccurate to say that this 100 Years War has its origins in the 1920s, with regulatory victories for the authorities in 1930 and 1968, and the operators in 1986.
The “Buses” bill is now law, and will give English local authorities new powers to control bus services in their areas, whilst the first Metro Mayors have now been elected. The existential threat created by "London" style operating contracts has led most operators to welcome any alternative to the "franchise" model as a success. In my view, partnerships are likely to be challenging for both sides, and will involve some difficult maths.
The first problem will be to build some consensus about scheme objectives
This ought to be straightforward. Both sides would benefit from passenger growth, which would generate the social benefits desired by the public sector, and would swell the coffers of the operators, leading to enhanced financial returns. However, there are several roadblocks.
What is passenger growth intended to deliver ? In the Blarite noughties ‘social inclusion’ was a key priority. Then the agenda moved towards ‘decongestion’, then ‘economic growth’. Now ‘environmental improvement’ is the current policy priority. Objectives will need to be stabilized if any kind of economic model can be constructed that involves risk capital over extended periods.
For many in the public sector, a desire for control is an end in itself. This view is not confined to the Corbynite Left. Anything that gives too much flexibility to the operators will be difficult to accept. In practical terms, this will lead to differences of opinion on a variety of soft and crunchy topics, including fare setting, marketing and the all-important question of economic returns. Operators will need to move the agenda on to measureable outcomes around which a consensus can be built.
The second problem relates to the interventions needed to deliver growth
If passenger growth was easy, it would be happening now. New ideas will be needed, that will generate new costs and risks.
The partners will need imaginative but deliverable plans for growth. This will be difficult. Contrary to the general opinion amongst local authorities, passenger growth is hard won, and operators already have powerful incentives to grow volumes. It is now clear that best-in-class businesses such as Stagecoach, Go Ahead and TfL are struggling with the problems of congestion and unhelpful demographics, even in cities with an otherwise benign operating environment. In recent years, local authorities have tended to evade the kind of tough traffic management measures that are unpopular with motorists and cyclists, and have placed their faith in second order projects such as smart cards and low emission buses that increase costs with minimal revenue benefit.
There is in fact remarkably little doubt about the policy menu that would actually improve bus patronage. The winning policy mix has been fairly clear since the Oxford “Balanced Transport strategy” of the 1970s. Such a strategy would be founded on traffic management, coordinated parking management, and planning policies that favour development in key nodes. The difficulty will be to reach a local political consensus to deliver such a menu. In many regional centres economic growth is anemic, at best. Authorities are prepared to grab whatever developments they can, regardless of the impacts on travel demand. Hence the slow drift towards out of centre office parks, retail strip malls and suburban regional hospitals.
It should now be apparent that the unfavorable demographics of many English urban areas make devising a growth plan a non-trivial issue. Operators in many areas face significant headwinds, including population decline, weak urban centres, and fundamental changes to demographic cohorts (eg heavy bus-using 85 year olds being replaced by low bus-using 63 year olds). None of this will alter as a result of bus regulation, and London is now comprehensively proving that even highly favorable demographics can be negated by traffic management policies that prioritise cycling and walking.
Bus lanes remain politically problematic, often generating vocal public objection, without the association with moral virtue and elite support now associated with cycling priority. The failure of the bus industry to mobilise middle class opinion in its favour remains a significant issue.
The evidence from places like Sheffield, (and now London), demonstrates that partnership schemes without decisive traffic management policies that favour buses, are insufficient to deliver meaningful passenger growth.
The third and largest set of issues is economic
Both sides seem to have a shaky grasp of the financial architecture of a true partnership. Many local politicians (and a good many officials) confuse profits with dividends. This explains the widespread view that any profit-making local bus operation can fund an infinity of “nice things”, such as real fare cuts, increased capital investment and staff pay rises. Some authorities genuinely think that they can have all these things, and extract large dividends for themselves.
They will quickly discover that such wish lists far exceed the ability of the current revenue streams in most local bus markets to bankroll such spending.
Most operators are offended by the idea that they should ever share their revenue streams with the authorities.
This financial problem is made worse by implicit commitments to greater capital expenditure (for improved rolling stock, bus stations and bus priority measures) and for ‘development mileage’. Experienced hands will realise that the latter is the most expensive item of all. A good rule of thumb is that any new route will be unlikely to achieve breakeven without a £1-3m investment in running empty buses until demand catches up with the new supply. Furthermore, many authorities cling to the ancient idea that there is something wrong (“unfair”) about running high levels of service on busy routes, and therefore ‘wasteful’ bus miles can be moved around the map without an impact on demand and revenue. Cutting ‘oversupply’ on busy routes is in fact likely to depress demand and reduce revenues, with a corresponding impact on network finances.
Network economics will need to be modelled in new ways, to isolate these issues, and devise workable cashflows for all parties. Hard maths, and clear thinking, will be needed to resolve these issues, and highlight the trade offs needed to devise a viable plan.
Issue four might be termed ‘dividing the spoils’
The current arrangements, both in London and outside, have avoided the need for formal, utility-style regulation of operator returns, which is achieved by the threat of on-the-road competition (outside London) and competition for contracts, in the capital. For a partnership arrangement to work, there will need to be some kind of formal mechanism to measure, regulate and allocate returns. Moreover, authorities will need to accept that operator profits will need to go up (as in water and airports), if they are being asked to deploy more capital and or take more risk.
A true partnership model will have to address the issue of ‘excess returns’ [if any], and allocate cash-flows between operators and authorities in a fair and transparent manner. In practical terms, this means finding solutions to:
- Remunerating capital expenditure in buses and fixed equipment (including highway measures)
- Sharing profits from bus operation, and dividing them between operators and authorities
- Stablising the basis for subsidies to specific passenger groups – for example concessionary fares
- Determining a means to regulate fare levels, absent on the road competition
- Creating an incentive for operator cost efficiency
- Incentivizing local authorities to deliver their part of any bargain
Britain’s impending exit from the EU could be helpful, as it will allow UK bus policy to be de-coupled from the doctrinaire EU rules concerning public procurement and transport subsidies that limit the scope for creative solutions to this question. Greater flexibility in this area may allow authorities to enter into longer, more flexible franchises or route licenses. But creativity will also intensify the need to codify economic regulation.
Conclusions
True partnerships between bus operators and local authorities creates the opportunity to transform the outlook for urban public transport, and to address the severe economic challenges now facing the UK bus sector. But both sides will need to adopt much more flexible thinking, and climb out of the policy trenches. The issues are both economic, and mathematical. In the absence of competition (or the threat of competition), operators will have to accept some form of economic regulation. Authorities will have to learn hard lessons about the real cost of capital, the cash needed to deliver speculative mileage, and the allocation of risk. Both sides will need to agree a menu of highway and service improvements that is simulataneously tough enough to deliver a decisive improvement in the relative speed and reliability of bus travel, and appealing enough to command the political support necessary for delivery. None of this will be easy, and the winners will require analytical and political skills that may change market shares and operator returns dramatically over the next ten years.