Written evidence submitted by Tower Transit Group (BSB0087)

About Tower Transit

Tower Transit Group is a UK-based public transport company, transporting approximately 200 million passengers each year.  Our workforce of almost 3,000 employees operates over 1,000 buses across London, Cambridge and Singapore.  Established only three years ago, in 2013, Tower Transit is a ‘textbook’ demonstration of how new competitors can successfully enter and grow sustainably in franchised markets.  Following initial acquisitions, Tower Transit has successfully competed for and subsequently won high profile operating contracts, delivering wide ranging benefits to passengers, taxpayers and communities.

The Group is a privately owned, family run business with its founders very actively involved in day-to-day operations. Tower Transit’s founders came from and are affiliated with the leading Australian public transport operator, Transit Systems Group.  With over 20 years’ of operating experience, Transit Systems successfully manages franchise contracts for State Governments in Western Australia, South Australia, New South Wales and the Northern Territory.  Their unrivalled franchising experience involves successfully transitioning over 20 newly franchised operations from incumbent private and Government operators in multiple jurisdictions and with various contracting frameworks.

This experience, combined with Tower Transit’s operations in the London TfL bus sector, secured Tower Transit the first Singapore bus franchise under the new ‘Government Contracting Model’ in 2014 – arguably the most sought after global bus contract in the world at the time. 

Tower Transit executives also actively participate in the international transport procurement academic community that reviews global contracting trends and have presented at leading industry conferences including the International Union of Public Transport (UITP), Tourism and Transport Forum (TTF) and Thredbo.  Tower Transit’s founders and senior management therefore have considerable practical experience and understanding of what models work well and how to deliver exceptional public transport.

With many of the world’s most aspirational public transport cities, such as London, Perth and Singapore, having extensively examined international evidence and best practice, they have all chosen the franchising model[1].  Tower Transit believes that franchising, as defined in the Bus Services Bill, provides the optimal solution for the UK metropolitan bus market.

“London knows what it wants and buys it through a franchising system. If now we [Merseytravel] put £1m into the bus market in Liverpool we can’t guarantee we will get £1m of value. With franchising we could.”

– CEO Of Merseytravel (2015)[2]

Introduction

This paper has been produced by Tower Transit Group to inform the Transport Select Committee on the pressing need for a robust, yet locally-adaptable franchising system, as facilitated through the Bus Services Bill, to introduce increased levels of competition and more appropriate service provision within the UK metropolitan bus industry.

As the committee are obviously aware, the Buses Bill follows on from the Cities and Local Government Devolution Act which has recently received Royal Asset and is intended to enable Local Transport Authorities in England to franchise networks of bus services in their area, should they wish to do so. This will allow bus services outside London to be provided in a similar way as they are inside London – where Transport for London determines routes, fares and a unified ticketing system and contracts bus operators, including Tower Transit and most of the major bus companies, to operate their routes under a competitive tendering process. In this paper we argue that transport authorities, regardless of size or urban character, should use the forthcoming Buses Bill to move towards a franchised contracting model in their area because that has been demonstrated in many parts of the world, including London, to produce the best services and value for money for the passenger and taxpayer.

This document is divided into three main chapters:

1. The need for the Bus Services Bill and whether it addresses the correct issues
2. The likely impact of Advanced Quality Partnerships and Enhanced Partnerships
3. The likely effect of franchising on small and medium operators
   

Executive Summary

1.              The need for the Bus Services Bill and whether it addresses the correct issues

• Deregulation within the UK bus industry has widely failed
• The widespread competition envisaged in the original bus privatisation did not result in the forecast benefits as the market consolidated into a number of large operators, often with significant geographic “dominance”[3]
• There are some examples of inappropriately high “double digit” operating profits, with average bus operator margins (in UK metropolitan areas) at 8.5% (compared to average margins of 4.1% for TfL bus franchises and around 3% for UK rail franchises)[4]
• Continued declining patronage (in contrast to widespread patronage growth in TfL franchises and UK rail franchises)
• Extremely difficult to develop operating contracts under current model[5]
• Franchising reduces barriers to market entry, empowers local authorities, encourages competition within the market, reduces costs and improves the passenger experience
• In terms of network design and fare structures, private companies obviously must put their shareholders first, whereas a public transport system should also be driven by social needs. A new franchised model where the public sector had control of key fundamentals such as routes, fares and modal integration, while still allowing the private sector to bring its commercial knowledge and flair and operating skill to the service through competitive tendering would seem to be the ideal solution for these areas
• Plans for franchising, within the Bill, are essential and timely in improving service provision to the public and increasing levels of competition and value for money for the public funds

2.              The likely impact of Advanced Quality Partnerships and Enhanced Partnerships

• In practice, a partnership approach would only strengthen the current position without tackling the fundamental structural issues – franchising would provide a much greater level of benefits than partnerships alone

3.              The likely effect of franchising on small and medium operators

• Unlike partnerships, well designed franchising will provide a more level playing field for competition and innovation to exist and compete
• The recent example of bus franchising in Singapore demonstrates the positive impact franchising has on boosting levels of service provision and competition to the benefit of passengers and the tendering authority[6]. Singaporean Government representatives, in addition to their consultants and experts, toured the world to view different market structures – and finally chose a franchising system as being the most appropriate for delivering a modern bus service in the best way for the public

– David A. Hensher, Institute of Transport and Logistics Studies, University of Sydney (2011)

Gabriel Wong, LTA Academy, Singapore (2011)[7]

1.              The Need for The Bus Services Bill and whether iT addresses the correct issues

“As things stand, bus companies outside London compete ‘on the street’ for passengers – this is a bad way to run a network: it doesn’t make for healthy private sector competition, and tends to be wasteful, expensive and difficult to navigate for passengers“

– IPPR North[8]

1.1              In 1985 the UK government ‘de-regulated’ the bus market in England which at that time was largely delivered by municipal bus operators. The intention was to improve the provision of services for bus passengers through promoting competition, while increasing value for money for the taxpayer. However, since de-regulation in the mid-1980s, the bus market in the UK has consolidated so that five large operators now dominate the market with numerous small companies operating the ‘undesirable’ routes not wanted by the large companies[9]. This has resulted in a lack of true competition, with a steady decline in bus routes and passenger numbers in all but a few areas (notably London where TfL regulates and lets contracts) – a trend that is inevitable where there is no government management of the market[10].

"The reality is that in too many areas of the country, competition has stagnated and the incumbent providers know that they face little in the way of serious challenge.  “As such, the incentive to increase services, innovate and even lower fares is absent."

– Chairman of the Competition Commission’s Local Bus Market Investigation Group[11]

1.2              Public transportation is a public good, that by its very definition requires the provision of adequate transport services to members of the public.  Similar to utilities, it requires government policy intervention to ensure that private companies operating in a free market provide for society’s needs.  De-regulation is not allowing this to be optimally achieved – it has not created fair, genuine competition or growth in services but instead led to a de-facto oligopoly of large operators that have crowded out smaller players.

“The news this week that First Bus has cut services is a real blow to service users, but at the same time not a shock at all.  Simply, this all comes down to money.  If a private firm feels they can make money by operating a service, they’ll keep it running.  If there’s no money, then the service disappears.”

– The Bath Chronicle[12]

1.3              True competition does not exist under the current operating model in metropolitan areas of England.  The ‘Big 5’ are continuously striving after higher levels of margin, with some operators achieving abnormally high double-digit margins in the city regions.[13]

Research undertaken by the Urban Transport Group highlights that over the last decade, average profit margins of bus operators in the UK metropolitan areas were 8.5% (more than double the average TfL-franchised operations), with large operators continuing to grow their margins.  For example, FirstGroup has recently identified to financial markets that there readily exists potential in the existing UK metropolitan bus market to further grow profitability, with the aim of increasing profit margins across its entire UK Bus division (no franchised operations) to sustainable double-digit levels.[14]

The Bus Services Bill, through its franchising proposition, seeks to tackle a number of the current deregulated market issues.  The need therefore for the Bus Services Bill is essential, in order to stimulate and promote new competition in the market, to the benefits of passengers.

1.4              In Tower Transit’s experience the best value for money public transport systems are found where there is a symbiotic relationship between the governing authority and operator, with clearly defined roles where each party brings their strengths to the relationship for the benefit of the passenger and taxpayer.  When this balance is skewed in either direction the passenger and the taxpayer interest is harmed. Currently in the UK, the powers and responsibilities are out of balance outside of London, as shown in the following diagram:

1.5              The private sector’s strengths lie in bringing investment, innovative thinking and an ability to operate services efficiently.  The transport authority’s role and strengths are in encouraging efficient, cost effective and thriving cities that ensure the social, economic and environmental benefits of public transport are met. In our view the government body should enforce private sector accountability and ensure profit levels are not excessive by facilitating fair competition. They should manage strategic infrastructure, ticketing and revenue collection, intelligent network planning and the integration of entire networks and modes.  A far more balanced and effective model[15] would therefore look like the following diagram:

1.6              This is the position in London where the Mayor of London was awarded regulatory powers over buses through Transport for London (TfL). In London, TfL has been able to manage the bus market, ensuring that routes exist where they are needed as well as where they are commercially successful. Passenger numbers have since grown significantly and helped TfL to move millions of passengers around the city every day. The regulatory powers and model TfL has, is, as a consequence, viewed as a great success internationally.[16]

1.7              In our experience, the most effective transport systems are where the governing authority holds responsibility for the following:

1. Macro and city transport planning and policy;
2. Control of integrated ticketing across the city network;
3. Ticket pricing and revenue collection;
4. Management of contract performance regimes and accountability of operators to deliver specified performance standards under their contract; and
5. City infrastructure investment and integration with operations.

If a governing authority does not have control of the above key areas, this will invariably result in a transport network that serves the passenger poorly.  It is better for passengers and the taxpayer to have private sector involvement in order to create healthy competition, continual innovation and to ensure the best value for money services are provided.  It is a myth that a de-regulated ‘commercial’ or ‘open’ market ensures this. The evidence shows that competition ‘in service’ does not deliver good results whereas competition ‘for service’ delivers superior outcomes for passengers and the taxpayer[17].

[Franchising] “allows competition ‘for the market’, in markets where competition ‘in the market’ is limited”

–International Business Development Director Of Large UK Owning Group[18]

Promoting The Benefits of Rail Franchising In North America

1.8              There are many instances of unbalanced public transport delivery models around the world that result in passengers not being served as well as they could be.  However, as we have witnessed, where these systems move to the more balanced and symbiotic relationship we describe, the passenger is much better served.  This applies in transitions from both municipal-run and privately-run operations (where limited or no competition existed) to where contracts have been competitively tendered or franchised[19]. The vast majority of these transport model changes have resulted in significant benefits to the taxpayer and passenger, both in financial savings and better quality, more reliable services.

“In a statement, the LTA said the new model, used in cities such as London and Perth, will allow it to respond more swiftly to changes in travel demand, promote greater efficiency among operators and lead to better bus services over time. The Government will continue to ensure fares remain affordable for commuters, it added.”

– Straits Times[20]

2.              The likely impact of Advanced Quality Partnerships and Enhanced Partnerships

2.1              Many incumbents will, understandably, prefer a ‘partnership’ model, should they be unsuccessful in avoiding franchising.  In our opinion this structure will always retain structural flaws by its very nature, particularly given the size and power of incumbent operators.  It also has an effect of lessening competition even further from new operators, resulting in greater barriers to entry, and over the long term, pricing trends will not be in the customer’s interest.  We would strongly recommend this is not promoted as a compromise solution to franchising as it will likely continue to be exploited.

“…the case for a competitive environment between private operators – multiple bidders for a local bus network provides better value for taxpayers”

– Monica Ryu, Transport and Infrastructure Partner, L.E.K Consulting[21]

2.2              It is to be expected that incumbent operators in the UK will not welcome their current arrangements being ‘disrupted’. Any change to an established marketplace is always unwelcome to incumbent businesses – but even more so when competition is increased and margins and market share are threatened (through the process of franchising)[22]. The recent Nexus Quality Contract process demonstrated that, notwithstanding a strong and legitimate will from a transport authority to move to the new Quality Contract model, that excessive regulatory hurdles give more opportunity for the path to change to be blocked by well-resourced challenge.

“[Stagecoach] shot down Nexus’ proposal which, according to the operator, would force taxpayers to assume the risk of the local bus network while replacing a currently ‘successful system’.”

– Public Sector Executive (2015)[23]

2.3              In light of this we would strongly recommend that the path to franchising be made as simple as possible, and that the legislation gives sufficient powers to transport authorities to overcome this strong incumbent industry resistance.  In particular, we would strongly recommend that additional third parties should not be required in the process in a sign-off capacity.  Newly elected Mayor’s under the recent Act should have the democratic legitimacy to make the decision themselves if they wish to use this globally recognised, proven model, without further regulation that can be exploited by highly motivated and well-resourced incumbents.

3.              Likely Effect of franchising on small and medium operators

“There are 1,245 bus companies operating in England, Scotland and Wales, but just five of them: Arriva, FirstGroup, Go-Ahead, National Express and Stagecoach, carry 70% of all passengers.”

– BBC[24]

3.1              Unlike partnerships, well designed franchising will provide a level playing field for all competition, from existing incumbents through to new market entrants, in competing ‘for service’ (as opposed to ‘in service’ which is an inferior model).  Through the provision of a level playing field, medium and small operators are able to compete in franchise tender processes, bringing greater diversity to the bid propositions.

“Franchising’s diversity of operators has yielded the innovation that has led to growth which a single state operator would never aspire”

– CEO of Large UK Owning Group and Chairman of Rail Delivery Group[25]

3.2              The recent example of bus franchising in Singapore demonstrated the impact franchising has on levels of competition, with an unprecedented 11 bidders (ranging from family-owned businesses to multinational Plc organisations) competing in the first (won by Tower Transit Group) and 10 in the second second (won by Go Ahead Group) tenders[26].

“The Singapore bus industry is going through an exciting period of transformation. The award of the Loyang bus package to Go-Ahead Group, the largest bus operator in London, shows that our bus contracting model is attracting competitive bids. The bus contracting model allows us to be more responsive to the needs of commuters.”

– Chew Men Leong, LTA’s Chief Executive[27]

3.3              Even in cases where franchises might be too large or complex for small operators, there still exists increased subcontracting potential, providing smaller companies with an opportunity to participate alongside larger operators, if tenders are structured with this in mind.

August 2016