Written evidence submitted by East Yorkshire Motor Services Limited (BSB0075)
EXECUTIVE SUMMARY
Need for the Bill
Franchising, partnerships and multi operator data sharing / ticketing are all possible under existing statutes that could be simply updated by ministerial action or secondary legislation.
Bill fails to tackle the current key issues facing the industry
Franchising
Bill fails to tackle major flaws in this model
Enhanced Partnerships
We have concerns as to how this would work
East Yorkshire Motor Services Limited
With a fleet of 295 buses East Yorkshire Motor Services Limited (EYMS) is England’s largest family owned local bus service operator. It operates around half the buses in Hull, most of the buses in the East Riding of Yorkshire, and services in the Scarborough area of North Yorkshire. EYMS carries 17 million passengers a year and employ 700 staff. Its locally based owner and management has placed network retention, maximising employment and community service at the heart of the Company’s business model. In 2015 the company turned over £29,930,000 (compared to £30,800,000 in 2014) and made a £156,000 net profit (0.5 % of turnover). This was down from £694,000 in 2014 and £652,000 in 2013. All profits are retained within the business, and reinvested in renewing the fleet. Despite falling profits EYMS has made a capital spend on buses since January 2014 of £5 million.
EYMS is a member of the Association of Local Bus Company Managers (ALBUM) and the Confederation of Passenger Transport UK (CPT) and supports their submission to the Committee, but we wish to stress the following issues from the perspective of a privately owned medium sized operator.
1 Need for the Bus Services Bill
1.1 The principal purpose of the Bill is in pursuit of government’s devolution agenda. It adds little to the market interventions already available under the Transport Acts 1985 and 2000 and Local Transport Act 2008. To that extent we see little need for it. Quality Contracts under the 2008 Act could provide the framework required for devolved authorities to test the franchise against the deregulated model if they take account of the issues raised in the Tyne and Wear case https://www.gov.uk/government/publications/quality-contract-scheme-qcs-board-report-on-the-proposed-tyne-and-wear-qcs
1.2 We support the concept of partnership, but believe most of the advantages could be delivered through the existing legislation.
1.3 We welcome the provisions in the Bill to provide better services to passengers through the open data. It is however important that data is released from all operators on an equal basis if the customer is to get the full benefit of multi operator information and ticketing systems.
2 Does the Bill address the correct issues?
2.1 The Department for Transport has made great play on the Bill improving services for customers. However recent surveys of passengers have not put any political desire to control networks as a major priority. The 2016 Transport Focus Report “Bus Passengers have their say” http://www.transportfocus.org.uk/research-publications/publications/bus-passengers-have-their-say/ gave value for money as passengers’ highest priority for improvement, followed by reliability and punctuality. The Bill does little if anything to address these issues. Other Transport Focus work has also highlighted customer satisfaction levels in the commercial bus industry well above those in similar service businesses.
2.2 Value for money is driven by both price and product quality. Bus services have to be paid for, either by the Government or by the passenger. Costs are being driven up faster than inflation, largely because of the need to increase wages to attract and retain staff, the cost of compliance with environmental legislation. Plus the slower journey times due to congestion are increasing the running costs of buses. Continuing restraint on public spending and competing demands for local government budgets means the share covered by the public purse must fall, so fares will increase in real terms. The falling profitability of many operators means it is difficult to squeeze this from margins, and this is part of the reason for the number of operators ceasing to trade in recent months.
2.3 Better multi operator ticketing and fare structures that offer value as well as choice are an important part of this mix, but they can (and are) being achieved under the current legislation. EYMS is now participating in two in York and Hull.
2.4 Reliability and punctuality are governed to a significant extent by issues already in the control of local authorities. Rapidly increasing traffic congestion is the main driver, and local authorities have potential tools in terms of active traffic management under the Traffic Management Act 2004]. They can also make congestion management a key part of their land use planning and parking policies.
2.5 By ignoring the key issues highlighted by customers, and focussing on the demands from politicians for greater control, the Government has lost an opportunity to really improve service levels on the road, for customers. Regardless of who controls the network the Bill does nothing to tackle the key issues facing the bus operators and their customers, of traffic congestion and the impact on usage of rising car ownership and land use planning policies.
3 How will AQP/EP contribute to improving services/enabling a successful commercial sector
3.1 We do not believe that AQP and EP add significantly to the range of market interventions already available to local authorities. For many years voluntary quality partnerships have encouraged improvements in the quantity and quality of bus services. So long as operators and authorities enter into the spirit of the partnership, they can continue to bring considerable benefits to passengers and local economies.
3.2 The Bill does little to strengthen the requirement on local authorities to improve aspects of service quality for which they are responsible [see paragraph 2.4]. EPs give power to local authorities to set the routes, times, frequencies, fares, ticketing, vehicle features and branding of commercial services. Despite this, financial risk remains with operators. This is a particular concern for small and medium sized operators trying to retain or develop their market share. No business can survive if retaining all the risk, but losing control of the key means of mitigating that risk such as pricing and network design. As the CMA has pointed out the threat of competitive entry is a key factor in ensuring incumbent operators play proper regard to value for money and quality.
3.3 Local authorities generally lack the skill and experience to plan bus services that meet demand effectively. Their attitude to busy, frequent bus services, which operators only run that way because there is demand, is that they are evidence of ‘over-bussing’. Authorities tend to favour reducing such frequencies so to run more buses in areas of lower demand. Rather than increasing demand, these policies reduce overall patronage. It is for local authorities to do as they wish in franchise areas, but we have real concerns that they will use EPs to disrupt the commercial market in this way.
3.4 We strongly support partnerships but are wary of those which are factually not so, and which pass service planning powers to local authorities, even though operators do have a right of veto. We believe existing powers provide adequate opportunity for authorities to intervene in the market
3.5 There are however key concerns over the balance of control and risk between the private and public sectors, and the potential distortion of operator investment policies if the public sector commitment is not guaranteed for the full life of buses (12 to 15 years)
4 The appropriateness of limiting the automatic right to introduce franchising to combined authorities with elected mayors
4.1 The decision-making process leading to a move from a commercial market to a franchise must be transparent, with consultation on the principle as well as the process. . It is of the gravest concern that in the Bill there is no statutory requirement to consult on the principle, even with those businesses which may be closed as a direct result of the decision
4.2 This procedure of the local transport authority fully consulting on and then proving that franchising is the only effective way of delivering their bus objectives should apply whether there is a directly elected mayor or not.
5 The likely effect of franchising on SMEs
5.1 The impact of franchising on SMEs is no different from businesses of any size except that the consequences can be far greater. Although not technically an SME as it has more than 250 staff, EYMS as an independent local operator will suffer similar consequences. It is unlikely that a multi-regional or multi-national operator will close as a result, but that is a real potential consequence for SMEs. Once the decision to franchise is taken then businesses lose their markets and business closure becomes a real possibility.
5.2 There are two scenarios for an SME. It either wins or does not win a franchise. In either scenario, if its pre-existing route networks falls into two authorities’ areas, with only one franchising (a very likely scenario) then the removal of cross subsidy would impact negatively in the non-franchised area. The resulting inability to adequately cover overheads could lead to the operator ceasing trading with significant costs to the non-franchise authority.
5.3 If an SME wins a franchise, it will benefit for a time-limited period. Likely franchise contract terms will be between 5 and 10 years, yet vehicle write-down is usually 10 to 15 years, therefore reducing the incentive to invest, with consequences for the bus manufacturing industry. This can be mitigated if the franchise authority owns and leases out the necessary fleets.
5.4 If an SME does not win a franchise, dependent upon its size, it will likely be put out of business entirely, no matter how good the quality of its operations and its customer satisfaction. A large, multi-base undertaking will withstand such losses. Once put out of business, an SME will no longer be present to compete in future. Some SMEs in jeopardy of being put out of business are owned by local authorities themselves.
5.5 SMEs know their markets and consistently achieve high quality, winning operator quality awards and scoring highly in Transport Focus Bus Passenger Satisfaction Surveys. There is evidence of willingness to provide social dividends for the communities they serve: higher frequencies, lower fares, a longer service day or week than would be justified on criteria of strict financial viability (Anthony Smith, Chief Executive, Transport Focus: Will the Bus Services Bill make a difference? Transport Times, 15 August 2016).
5.6 In Hessen, Germany, the decision to franchise saw the number of SMEs in the local bus market fall by 60%, supply costs rose due to the creation of 600 additional council jobs, and drivers’ wages fell (Dirk Dannefield, A Lesson from Hessen: The ALBUM Report 2016, Passenger Transport). Evidence is starting to show the dice loading against SMEs in franchising schemes; Transport for Greater Manchester’s Subsidised Services Dynamic Purchasing System Pre-Qualification Questionnaire stipulates procedures that are difficult for SMEs to meet. This is also reflected in the London market which is now dominated by large multi nationals.
5.7 The TAS Bus Industry Performance review suggests a return of around 10% is necessary to provide funds for investment in an on-going business. This was achieved between 1996 and 2003, but the level has since fallen and was only 7.3% in 2014. A review of 114 bus companies in all ownership sectors found 28% earn pre-tax profit margins of over 10% (none of which were independent or municipal companies), 54% earn between zero and 10%, and a significant 17% incur losses (Martin Higginson: Cross subsidy and franchising/contracting, The Album Report 2016, Passenger Transport). Objective analysis, therefore, indicates the industry, including SMEs, is not making excess profits. However, ahead of the introduction of franchising, operators are likely to reduce cross-subsidy which provides the ‘social dividends’, in order to minimise their costs and to position themselves to bid competitively.
5.8 A further serious concern for SME and Independent operator is the transitional arrangement throughout the process from first consideration of a franchise by the LTA to implementation. By its nature this will not be a quick process. A timescale of at least 24 months would be needed and in this time staff could leave a smaller operator leaving it unable to run its current network. This would increase the need for short term emergency contracting by the LTA, and should be budgeted as a contingency in any franchise plan.
5.9 Apart from these impacts on SMEs there are also key public policy concerns relating to franchising. These are
6 Effectiveness of open data measures on improving bus transport
6.1 We support the Open Data provisions in the Bill. We believe that, over time, this will open the industry to comparison websites which will enhance informed consumer choice. EYMS has been a strong supporter oif electronic registration since its introduction, and is one of few smaller operators to embrace it.
6.2 We believe, however, it is important to ensure now that there are established criteria for its provision and application and we trust that any secondary legislation would do so. This covers issues such as who owns the open data depositary and how it is operated, what data is deposited, how it is used, and what is not required to be deposited.
6.3 It is of primary importance that the means of depositing data is not unduly prescriptive, such that it may favour one operator over another simply because of their pre-existing programs and functionality. We must also be minded that in rural areas, government bodies define even upgraded faster broadband as 2 mb, insufficient to move significant data files.
6.4 We are concerned that data may be deemed to be a sub-function of the registration process of bus services, but it should be the other way around. Registration is a legal obligation but is not fully suited to information provision, and we understand that the operator of the national Traveline facility has to clean up or amend some data to fit its output streams. Given that registration is to do with providing data for the Regulator, its needs should be secondary to those of the consumer, and sequenced accordingly. There is thus an opportunity here to rationalise and modernise the registration processes and it should not be missed.
7 Basis for ban on new municipal companies especially in non-franchising areas
7.1 EYMS has no strong view on this, providing such companies operate on a level playing field to commercial companies, in terms of access to capital, staff training conditions and training and procurement procedures.
8 Measures in Bill re ticketing schemes/new technical measures
8.1 The ability to introduce new technologies without being inhibited by legislation, is a welcome outcome of the Bill. Legislation in this area should concentrate on outputs rather than, as hitherto, inputs.
8.2 Local authorities must not have the right to interfere in commercial decisions by operators on the level and structure of fares, unless they themselves specifically take the consequential commercial risk. We believe that operators should be entitled to compensation for inappropriate decisions forced upon them.
8.3 Technical measures, such as requiring the provision of information (Clause 17: new section 141A and 143B to Transport Act 2000 and regarding the variation or cancellation of registrations (Clause 18: new Section 6C to Transport Act 1985) are acceptable provided they are applicable equitably across the industry. It would not be appropriate to require technical solutions that only suited national and multinational businesses, but excluded SMEs.
9 The matter of compensation for business closure
9.1 We recognise the right of government to determine policy and businesses should adapt to such changes. We believe, however, that closing down a market is such an extreme measure that there has to be transparent and objective analysis of any such decision, because it will inevitably lead to business closures.
9.2 The initial decision to move to franchising will put local route networks of private operators at risk. This is effectively the stage at which the public sector sequesters the business and when compensation is required, not the point where an operator fails to win a contract on the new terms.
9.3 The 2000 and 2008 Acts seek to balance public benefits and private losses by the series of public interest tests set out in them. The 2016 Bill sweeps these away and replaces them with a series of tests based on public benefit derived from public funding. Thus the 2016 Bill denies, for the first time, that there is any impact on private business.
9.4 For this reason the only equitable way to implement government policy is by compensating operators for the cost of business closure, assets sold below written down value, lost goodwill, and ongoing liabilities such as pension deficits.. We therefore support the amendment tabled in the House of Lords for local authorities to be statutorily required to include the cost of compensation in their business case for franchising.
26 August 2016