CC myopic obsession with on-street competition risks doing more harm than good for passengers – but will this pave the way for Quality Contracts?

Transport authorities and bus operators have often been at polar opposites when it comes to the Competition Commission’s on-going investigation. However, there is one point on which we all seem to agree – the CC’s recent obsession with on-street competition is dangerous and largely misguided. What’s more, it risks getting in the way of high-end partnerships and could take us back to the Wild West of the late 80s. But is there a chance this could pave the way for Quality Contracts?

Vintage cornflakes box

Buses cannot be treated like a typical consumer product

Buses are not like cornflakes

Despite its earlier recognition that “head-to-head competition tends towards instability, the closer the competition between operators becomes” the CC’s latest position isn’t entirely surprising. In reality, there was always a risk that it might revert back to the safe and comfortable haven of perfectly competitive markets. This is the norm for most typical consumer products, say cornflakes, where there’s a permanent threat of competitors coming along and offering a similar product at a lower price. Retailers will put the competing products on their shelves and consumers will logically buy the cheaper one, placing pressure on the incumbent to review its offer.

The problem is that bus services are a tad more complex than cornflakes. Critically, they’re perishable which means that they can only be purchased at very specific points in time. Many passengers will arrive at a bus stop at the same time everyday and will expect to board the first bus that shows up. The decision to wait around for another bus or to adjust the timing of a journey increases the non-monetary cost incurred by passengers. At the same time, if a bus turns up immediately after a preceding service it will find very few passengers to pick up. We have shown in our response to the CC’s report that for these reasons, new entry into an existing corridor at evenly spaced intervals between the incumbent’s services is very likely to be loss making, even where the incumbent is earning substantial profits.

This means that there is a very strong incentive on a new entrant to run its services immediately ahead of the incumbent’s timetable. In turn, the incumbent will respond by adjusting the departure of its services and this process will continue until one of the operators decides to withdraw from the market. Typically, the operator with the deepest pockets survives. The all too familiar by-products of this process, observed most clearly in the post-deregulation period, are an irreversible loss of demand due to network instability, short term losses to operators (eventually leading to higher fares) and an increasingly concentrated market where the law of the jungle dictates who survives.

In a sense, the CC is right – profits have never been lower than in the post-deregulation period. But paradoxically (and this is something the CC probably struggles to understand) this has not resulted in a better outcome for passengers. In the five years following deregulation, bus patronage in the metropolitan areas declined by a quarter despite a substantial increase in bus-kms. Without some degree of timetable coordination, unfettered on-street competition will lead to operators losing money and passengers getting a less reliable and more expensive service. Regrettably, the CC report has also raised serious doubts over high-end partnerships, the type of measure with the potential to achieve a more efficient and sustainable outcome in the context of on-street competition. Evidence from Oxford and Merseyside suggests that where competition has developed, Qualifying Agreements can indeed be used to offer a better and cheaper product to passengers, albeit requiring a degree of regulatory oversight from local transport authorities.

So will the CC be successful in delivering more on-street competition? And how will local transport authorities respond?

If the CC’s remedies achieve its stated objective, this could well take us back to the bus wars of the late 80s. Ironically, this would put increasing pressure on LTAs to bring in SQPs or Quality Contracts, the types of remedy that the CC has been so keen to avoid. If, on the other hand, the remedies have little or no impact, then this may act to strengthen the case for Quality Contracts and we may well see new proposals coming forward. Following the publication of the CC’s report, we have already seen announcements from Nexus and WYPTE which seem to show a growing resolve. On the other hand, the CC’s ambivalence over partnerships could lead to a growing sense of frustration amongst LTAs as operators become increasingly reluctant to participate in fear of the competition authorities. The recent findings on tacit coordination in the North East and the Wirral are only likely to compound these fears. The effect could be to force some LTAs to move towards Statutory Partnerships and possibly Quality Contracts.

So it seems possible that the CC’s myopic obsession with on-street competition could end up back firing and eventually pave the way for a more regulated market. I only wish they would have worked this out before repeating the same mistakes of the past. In the meantime, expect turbulent times ahead.

Pedro Abrantes

This article first appeared in Coach and Bus Week

The Competition Commission reverts to type

Greater Manchester bus

The Competition Commission is conducting a two year inquiry into the local bus market

I don’t know about you, but I prefer my fudge to come from Devon and contain clotted cream rather than come in the form of thousands of pages from the Competition Commission’s (CC) dithering economists.

Of course no doubt I would say that because the latest version of the Competition Commission report has made a sudden, unsignalled and rather undignified right turn away from high end partnership and franchising and straight back down the on-street competition cul-de-sac. Exactly why and how they justify such a sudden manoeuvre is unclear and the report doesn’t seem to feel it necessary to explain.

Indeed it’s a strange old process whereby, after a painfully long wait, the final draft report seems so disconnected from those that went before it and the remedies it suggests look thrown together with no explanation of how they might fit together as a coherent package. It’s almost like each report from the OFT and the CC starts again. The tone and the narrative are different and as for the bit that matters – the remedies – these always seem like last minute afterthoughts. Indeed, this investigation seems to take on more incarnations than Dr Who – minus a fully operational sonic screwdriver.

Stelios of easyGroup

The CC would like to encourage new entrants into the bus market to stimulate competition at the expense of quality and stability

Dreams of easybus

Now I realise that there are those who would forgive the CC anything for being mean about QCs. However don’t laugh too hard as it’s not just QCs that the CC has a certain distaste for, it’s also high end statutory and non-statutory partnerships. Because in reverting to type, the CC has a problem with any partnership that might exclude the theoretical possibility of low end competition.

However unlikely it is to happen, the CC wants to keep the dream alive that some day, ‘easybus’ will arrive offering a low price, lower quality alternative to partnerships based on quality and relative stability. That consumers will have a wide selectionof service choices which, before setting off, they carefully assess on comparethebusoperator. com delightedly weighing comparative matrixes and logarthyms of quality, price and journey time before finally, and in the bliss of perfect competition, head down to the bus stop to make their twenty minute journey to the GPs.

Now given the merest possibility that this nirvana may be attained in the space of one lifetime, qualifying agreements and higher spec partnerships are a worry to the CC because, by their very nature, such agreements are not primarily designed to encourage competition – and definitely not low quality competition. Passengers may like what such agreements bring them but, in the view of the CC, what they should like is as much on-street competition as they can get – and that’s what the CC wants to give them. Indeed that’s what all the potentially useful stuff in the report on ticketing, information and so on is about. It’s not principally about their obvious benefits to passengers, instead it’s that it keeps the CC’s fantasy alive that if the ticketing and information framework functions in an equitable and perfect way then it should encourage the new entrants the CC would sacrifice just about anything for.

Political realities

Now if they followed this logic to its conclusion they should outlaw QAs and high end partnerships. But this is where the politics kicks in as they know that unwinding successful existing partnerships is not something they can get away with. Instead they satisfy themselves with raising the same old uncertainties about what attitude the competition authorities took in the past to such arrangements.

Franchising gets the same treatment. They strike but they don’t kill. They blight what’s there now but they don’t build anything substantial in its place. So the end result is a clumsy set of remedies where CC ideology collides with political realities in the vague hope that somehow the magic wand of BSOG money will make everything alright.

Bus partnership in the West Midlands

The CC are wrong to cast doubt over partnership solutions that are working right now on the ground.

I suppose to be fair the clue is in the name with the Competition Commission. And, as they say themselves, they lack the social and wider remit that local transport authorities have in making decisions on public transport for their areas. What’s galling however is that, having accepted they only have a narrow perspective, they then go on to cast doubt over solutions that do work right now on the ground. Solutions that have been made to work by people who do have that broader perspective – high end partnerships, SQPs, qualifying agreements and franchising. And the CC does this in favour of a wholly unproven and unsubstantiated claim that their ‘package’ of remedies is superior. There’s still time for them to either prove or withdraw that claim in the final, final, final version. However, the danger is the CC will end up blighting what works right now in favour of the DfT spending years tinkering around in the shadows of the long grass half heartedly trying to stimulate more on-street competition. And what a waste of time that would be.

Jonathan Bray

This is an edited version of an article that originally appears in Coach and Bus Week.

How might franchising change the UK bus industry?

In its recent report, the Competition Commission concludes that local bus markets aren’t quite as competitive as was once envisaged by the architects of deregulation. This is no bad thing in itself – I expect few of us would advocate a return to the bus wars of the 1980s. The problem is that without the discipline of a competitive market larger operators are able to take home a little too much profit, largely at the expense of passengers and, often, smaller operators. So how could we introduce greater competitive pressures in the market without more wasteful competition? The Commission offers franchising as a potential solution. Indeed, this approach is now the norm across the developed world and the evidence shows it can be a powerful tool in delivering both cost savings and patronage growth. But how might franchising change local bus markets? This article tries to draw some lessons from the experience in London, the Netherlands and Scandinavia.

Lessons from London

London hybrid bus near the Houses of ParliamentOne of the most interesting examples of bus franchising is in London, where TfL is fully responsible for designing the network and tenders out around a fifth of all routes every year, with several bidding rounds each year. This steady flow of contracts has helped keep the market alive and avoids peaks of activity. TfL also takes revenue risk, thereby removing the biggest advantage held by the incumbent at re-tendering, a common problem in recently de-registered services elsewhere in the country. There are now seven medium-sized operators and two smaller ones, with an average of three bids per tender. With controls at the tendering stage to prevent any single operator from dominating this is likely to remain fairly stable in years to come. Another key feature in London is the use of quality incentives since 2000, which has reversed the decline in reliability and service quality observed in the 1990s.

Lessons from the Netherlands

Outside the UK, the Netherlands provide a contrasting model to London with large area-based contracts as the norm. The province of Limburg is at one extreme, having awarded a long term multi-modal net cost contract to Veolia in 2006 covering both rail, bus and taxi. Despite some teething problem as a result of deviations from cost and patronage forecasts, this integrated network approach has delivered both huge cost savings and substantial growth in demand. Few other franchising authorities have been quite as bold though, most of which preferring to adopt gross cost contracts subject to minimum service levels and quality incentives. However, some degree of negotiation over network design issues appears to be commonplace at the tendering stage. Overall, the Dutch approach has been effective in the difficult task of moving some large public monopolies into private ownership.

Lessons from Scandanavia

A slightly less conventional model has been developed in Norway, where reasonably efficient incumbents in some parts of the country are allowed to maintain their monopoly position but with all public subsidy awarded through highly incentivised contracts. These are typically a combination of unit payments per bus-km, per passenger and per passenger-km, varying based on local priorities (for example, with more emphasis on bus-kms in rural areas and passengers in urban areas). The objective is to ensure operators’ decisions are well aligned with public sector objectives. Underperforming operators can be replaced through competitive tendering by default, a more credible threat than Quality Contracts at present. In a way, this model is not dissimilar to Statutory Quality Partnerships with the key difference that UK transport authorities directly control little more than 10% of industry revenues, compared to over 50% in Scandinavia. Changes in subsidy flows could certainly make this a more viable model.

What does this mean for the UK?

In general, international experience suggests that there is more than one way to improve the functioning of local transport markets, with all-out deregulation possibly one of the worst models around  both for passengers (as demonstrated by the contrasting faith of London and the metropolitan areas over the past 25 years) and for smaller operators. The precise model that each UK local market ends up with in the future will depend not only on the Competition Commission but, crucially, on the current market structure, LTAs’ funding and attitude to risk. It is conceivable that some areas could end up with a Limburg-style model while others will prefer to develop something closer to current partnership arrangements. On the whole, these are very exciting times which offer the potential to deliver a more sustainable market structure, increasingly attractive bus services but, above all, long term passenger growth.

Pedro Abrantes

This article was first published in Coach and Bus Week.