STAGECOACH Response to Tyne & Wear Integrated Transport Authority Quality Contract Proposal NON-CONFIDENTIAL (REDACTED) VERSION
This is a redacted version of Stagecoach's response submitted to Nexus on 22 November 2013 CONTENTS
1 INTRODUCTION 2 EXECUTIVE SUMMARY 3 BACKGROUND 3.1 Stagecoach 3.2 Tyne and Wear 3.3 Metro 3.4 Passenger Satisfaction 3.5 London & Europe 3.6 Regulation & Cross Subsidy 4 AFFORDABILITY 4.1 Nexus Budget 4.2 Network 4.3 Do Minimum Scenario 4.4 QCS Revenue 4.4.1 Fares increase by RPI 4.4.2 Fares simplification 4.4.3 Fares reduction 4.4.4 Metro fares 4.4.5 Customer Charter 4.5 QCS Costs 4.5.1 Operating Costs 4.5.2 Vehicles 4.5.3 Depots 4.5.4 Other Costs 4.6 Operating Profits 5 TWITA BUS STRATEGY 2012 5.1 Patronage 5.2 Accessibility 5.3 Value for Money 6 EMPLOYEES 6.1 TUPE 6.2 Pay & Conditions 6.3 Pensions 6.4 Other 7 QCS 5 STATUTORY TESTS 7.1 Patronage 7.2 Quality 7.3 Local Transport Policy 7.4 Economic, Efficient, Effective 7.5 Proportionality 8 VOLUNTARY PARTNERSHIP AGREEMENT
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9 APPENDIX 1 – Department for Transport Statistics 10 APPENDIX 2 – Tyne & Wear ITA Statistics
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1 INTRODUCTION
This is the response by Stagecoach to the formal consultation on a proposed Quality Contracts Scheme for the Tyne & Wear region, prepared and published by Tyne & Wear Passenger Transport Executive (Nexus) on behalf of Tyne & Wear Integrated Transport Authority (TWITA). Stagecoach responded to informal consultation by Nexus on its previous QCS Proposal, but many of its concerns have not been satisfied in the formal QCS Proposal. Stagecoach has engaged independent economic experts Oxera Consulting Ltd (Oxera) and legal experts Herbert Smith Freehills (HSF) to review the economic and legal aspects of the QCS Proposal respectively. This document is the summary response of Stagecoach and does not seek to replicate the analyses of its expert advisors. Their reports are attached to and form part of this response. The QCS Proposal effectively seeks to extinguish the current rights of operators including Stagecoach to provide local bus services within the Tyne & Wear region, including cross boundary services into Northumberland, Durham and Hartlepool, and to replace the current deregulated market with a contracted market under which local bus routes, timetables, fares, vehicles and quality measures would be determined by Nexus and operated by any licensed operator through competitive tendering for contracts for a period of 7 to 10 years. It is unclear what will happen at the end of the contract period. Busways Travel Services Ltd is the bus company formed to own and operate the TWPTE/TWITA bus business until its privatisation under the Transport Act 1985, sold in 1989 to its management and employees with the proceeds applied to fund the Metro extension to Newcastle airport, and which was subsequently purchased in 1994 for valuable consideration by Stagecoach Group plc. TWITA has already enjoyed the financial consideration of the proceeds from the sale of Busways Travel Services Ltd. The QCS Proposal seeks to remove Stagecoach’s right to operate with commercial freedom which was an inherent and fundamental aspect of the acquisition by Stagecoach. TWITA offers no compensation for the effective confiscation of this valuable asset. The QCS Proposal consultation acknowledges that it has material adverse effects on and implications for the Human Rights of operators but fails to properly quantify or address this issue. Stagecoach notes that the QCS Proposal is made under the provisions of the Transport Act 2000, which is silent on the issue of compensation, but there is established case law to support a compensation claim in such circumstances, as explained in more detail in the HSF report. The QCS Proposal has a disproportionately adverse effect on Stagecoach. It is evident from published statutory accounts that Stagecoach is the most profitable of the 3 major operators in Tyne & Wear, and therefore that Stagecoach risks the greatest reduction in its profitability, which has been earned through its careful management of and its continued investment in its business. The scheme takes no account of the material
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financial effects on company pension schemes or employee pension benefits, and creates an unfair bidding advantage to non incumbent operators with no current pension liabilities. The QCS Proposal is driven by Nexus’ stated need to reduce public expenditure and constraints on its projected budget. These projections are speculative and have not been endorsed by the 5 District Councils who fund Nexus through an annual levy. There is no meaningful discussion of Nexus’ budget projections, its efficiency or value for money, or its preference to confiscate the rights of commercial operators without compensation in preference to improved efficiency or reduced non statutory public expenditure. Every local authority in the UK is subject to cuts in public spending as a result of the worst economic recession in 80 years and Government policy to reduce the national debt. Many local authorities have chosen to reduce discretionary expenditure on bus services. The QCS Proposal is a device to maintain discretionary public expenditure by applying widespread internal cross subsidy between commercial and social services including concession fares. If the QCS were allowed to proceed it would set a precedent for every local authority to confiscate the commercial business of local bus operators in a similar way allowing local authorities to design bus services and fares to generate a financial surplus to support their discretionary expenditure on transport services, in effect to restore the failed system of regulated monopoly which the Transport Act 1985 was designed to change. This is not a purpose ever intended or envisaged by Parliament and should not be permitted. The QCS Proposal, Appendices and supporting documents run to over 2,000 pages, and include complex financial models. Nexus has misunderstood, misinterpreted or misrepresented much of the supporting evidence on which it relies, in particular in support of its projected patronage growth through simplified ticketing and a customer charter. Its financial Affordability Model fails to comply with Department for Transport and National Audit Office best practice and is often opaque; its Fares Model is not transparent, is inadequate to demonstrate its fare revenue assumptions, and fails to accurately reflect the adverse effect of its fares proposals on Stagecoach passengers. The economic analysis of the QCS Proposal carried out by Oxera for Stagecoach which forms part of this response is inevitably complex and technical. Stagecoach is concerned that the TWITA elected members must rely on Nexus and its advisors to make an informed decision on a major and serious issue for which they become liable. We have no confidence that Nexus will accurately portray Stagecoach’s many concerns with the QCS Proposal, and we seek an opportunity to present our response directly to the elected members.
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2 EXECUTIVE SUMMARY
The QCS proposal is unaffordable, in particular . The Do Minimum costs are understated; fares, revenues, profits and patronage declines are overstated . The QCS costs are understated; revenues and patronage growth are overstated. There is no evidence to support Nexus’ projected patronage and revenue growth from fares simplification and customer charter. Significant costs in respect of vehicles, depots, scheme management and transition costs are omitted . When these errors and assumptions are corrected, Oxera for Stagecoach has estimated a shortfall in scheme funding of £157m over 10 years even after use of the risk contingency, requiring fares to increase by RPI + 5.3% pa and resulting in greater patronage loss than in the Do Minimum scenario . Nexus has failed to correctly identify the level of financial and delivery risk transferred from the private to the public sector The QCS Proposal must comply with the public interest criteria test set out at section 124 of the Transport Act 2000; this is not optional and legal precedent is clear that compliance is mandatory. The Transport Act sets out 5 tests each of which must be met at the consultation stage of the proposals and, following such consultation, before a decision is made to proceed with a QCS. The Proposal fails to satisfy any of the 5 tests . Statutory Test 1 requires the QCS to achieve an increase in bus patronage, which may include arresting a decline. The QCS Proposal will fail to achieve this because . Nexus has overstated the likely scale of fare increases and patronage loss in the absence of the scheme. . The evidence relied on by Nexus in support of its proposed measures for simplified ticketing and customer charter to increase patronage has been misunderstood, misinterpreted or misrepresented and does not support its case. . The scheme revenues have been overstated, the scheme costs have been understated; the scheme is unaffordable and would require either higher fare increases or lower service levels than Nexus claims are achievable resulting in fewer passengers than in the absence of the scheme. . Statutory Test 2 requires an improvement in the quality of service which would be achieved in the short term by the scheme proposal to introduce a new fleet of buses, although the average fleet age would increase to exceed the national average before the end of the scheme. However, Nexus has failed to include the costs of that fleet and it is unaffordable. Nexus’ other Customer Charter improvements can be achieved through a Voluntary Partnership Agreement without the need for a QCS.
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. Statutory Test 3 requires that the scheme supports the aims and objectives of the local transport authority policies and plans. In this case the TWITA Bus Strategy 2012 has been written to support the case for the QCS Proposal, rather than the scheme being designed to achieve the policy. The three key policy objectives to increase patronage, maintain accessibility, and improve value for public money cannot be achieved within Nexus’ budget constraints and can only be achieved in theory through the QCS Proposal. However, because the scheme is unaffordable the projected quality improvements cannot be delivered in practice, thus it fails to meet the ITA policy objectives. The alternative VPA proposal satisfies all the Bus Strategy objectives. . Statutory Test 4 sets out clearly how the tests for economy, efficiency and effectiveness of the Proposal should be carried out. Nexus has chosen to ignore the Guidance and has substituted its own definitions and measures which are inappropriate, fail to provide a proper basis for consultation, and fail to satisfy the test. At no point in its commentary does Nexus mention that it has ignored the Guidance, and it is unclear whether this was brought to the attention of the ITA or its advisors. It is therefore surprising that the Proposal has been endorsed by the Chief Financial Officer, legal counsel, expert advisors and the elected members of the ITA, who are ultimately liable for compliance with the Regulations. . Statutory Test 4 requires that the scheme be assessed for economy, efficiency and effectiveness. The Oxera analysis demonstrates that the test is not satisfied when applied correctly. The scheme costs are understated (economy), the Benefit Cost Ratio (BCR) is less than 1.0 with 99% probability (efficiency), and the probability of the objectives being achieved is less than 50% (effectiveness) . Statutory Test 5 requires a clear assessment of the proportionality of the Proposals of the public benefits compared with the disbenefits to current operators. Nexus accepts that there will be significant adverse effects on operators but has not attempted any level of quantification of these effects including the loss of future profits which is evident from its own financial modelling, loss on disposal of assets rendered surplus by the scheme, and dismisses serious concerns about significant pension scheme issues in two pages. The consultation acknowledges implications for the Human Rights of operators but fails to consider these The Voluntary Partnership Agreement proposed by the North East Bus Operators Association would achieve the majority of QCS Proposal objectives and aspirations more quickly at less cost and risk to the ITA and operators. The BCR of the VPA proposal is much higher than that of the QCS Proposal, and is a more proportionate scheme The QCS proposed fares simplification has an adverse effect on the majority of Stagecoach adult fare paying passengers in South Tyneside and Sunderland who will be
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required to pay higher fares. The QCS proposed fares structure will result in less passenger revenue on the Metro, which implies an unfunded increase in operating deficit and increased public sector support
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3 BACKGROUND
3.1 Stagecoach
Stagecoach Group plc is a successful international provider of public passenger transport services. Stagecoach was formed in 1980 as a small business with 2 buses in Perth, Scotland, and has grown through acquisition and organic expansion to a current turnover of £2.8 billion pa. The Group is formed of 3 Divisions – UK Bus, UK Rail and North America.
In the USA and Canada Stagecoach operates some 2,900 buses and coaches on a mixture of commercial and contracted local, express, contract and tour services, and is currently enjoying rapid expansion of its innovative megabus.com internet booked express coach service network throughout North America.
Stagecoach UK Rail incorporates the South West Trains and East Midland Trains franchises, 49% shareholding of the Virgin West Coast trains franchise, and the Sheffield Supertram franchise.
Stagecoach UK Bus Division is the largest operator of bus and coach services in the UK, with some 110 depots, 8,000 vehicles and over 20,000 employees throughout the UK (including 1,000 buses in London) carrying some 2.5m passengers daily. Stagecoach has the highest investment record in its fleet of any major UK operator (and has continued to invest at the same level throughout the current economic recession), and is recognised as a leading innovator in local bus services in the UK, including
National application of its simple and affordable unlimited travel ticket range – Dayrider, Megarider and Unirider. Stagecoach has been found twice in recent years by independent industry experts TAS to offer the lowest fares of all large operators with fares up to 20% cheaper than its competitors The first large operator to introduce nationwide smartcard ticketing to ITSO compliant standards, now used to record all UK national concession travel cards, and offering discounted period tickets through its e-shop. Stagecoach and Go Ahead have pioneered smartcard multi operator ticketing in Oxford Redesign of its local bus networks to provide simple high frequency core services supplemented by commercial and contracted services to provide easy to understand accessible networks with patronage growth annually Holder of the Carbon Trust Standard, with the largest fleet of hybrid diesel- electric buses outside London, gas buses, increasing use of bio-diesel manufactured sustainably from waste products and national use of eco-driver
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technology with financial rewards for drivers meeting safe and effective driving standards Innovative marketing including in-house telemarketing and sales department which offers one week’s free travel to non users contacted by telephone, direct mail and email Design and operation of megabus.com, a growing national express coach network using internet sales with fares from £1 + 50p booking fee, now expanding into northern Europe. Numerous awards for innovation, marketing and environmental initiatives
Stagecoach operating companies are grouped into regional units each with a team of local Directors, management and employees with autonomy to design and deliver local bus networks, supported by a small UK Divisional Head Office comprising UK Bus Directors, finance, HR, training, health & safety, insurance and other expertise, and a shared service centre providing accountancy and payroll functions. This structure allows local management to concentrate on service design and delivery, and to call on other expertise as required.
Stagecoach North East is the regional unit serving Tyne & Wear and Teesside, formed of Busways Travel Services Ltd (Tyne & Wear) and Cleveland Transit Ltd (Teesside), with a regional head office and management team based in Sunderland. The region currently operates 4 depots with 357 buses and 1,096 employees in Tyne & Wear and 2 depots with 112 buses and 296 employees in Teesside. In Tyne & Wear Stagecoach acquired what were originally (pre 1974) the municipal operations of Newcastle, South Shields and Sunderland Councils, and continues to be the major operator in these 3 Districts, with only limited operations in Gateshead and North Tyneside. The local Directors and management are responsible for all aspects of service design, pricing and delivery, including reliability, punctuality, presentation, marketing and customer service. In the 5 years to 2011/12 Stagecoach has invested £27m in 200 new buses in Tyne & Wear replacing 56% of its fleet, including new low carbon hybrid and gas buses, with a further 60 new buses on current order. Service levels have been exceptionally stable in recent years since its core Superoute network was introduced in partnership with Nexus. Stagecoach is also a partner with Nexus in the South Tyneside Voluntary Partnership Agreement.
3.2 Tyne & Wear DfT Statistics
The table of statistics attached at Appendix A is extracted from Department for Transport Bus statistical tables and demonstrates that the Tyne & Wear bus network operates successfully by comparison with national and North East regional trends. In
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particular, the region has the highest level of bus passengers per head of population outside London.
Tyne & Wear Local Statistics
Nexus Annual Accounts for 2012/13 show that compared to 2011/12:
Bus patronage increased by 3m to 139m (+2.2%) Metro patronage declined by 0.5m to 37m (-1.3%) Ferry patronage declined by 68k to 432k (-13.6%)
The table attached at Appendix B is extracted from Nexus 2011/12 Annual Report for District Leaders. It demonstrates that the three Districts in which Stagecoach mainly operates (Newcastle, Sunderland and South Shields) have outperformed the other two Districts, and that the bus network has outperformed the Metro network.
3.3 Metro Tyne & Wear Metro opened in stages between 1980 and 1984, funded mainly by Government grants, with extensions in 1991 to Newcastle airport and in 2002 to Sunderland. It is owned by Nexus which sets the timetables and fares, and is managed under contract by DB Regio. In 1982 the PTA/PTE adopted the unpopular policy to terminate many bus services at Metro stations outside central Newcastle and force many passengers to interchange between bus and Metro for journeys to and from central Newcastle. As a result of this policy passenger numbers on Metro grew to a peak of 59.1m in 1985/86. Following the deregulation of buses in 1986 and in response to public petitions operators were able to restore direct bus services; Metro patronage declined to 32.5m (-45%) in 2000/01 With the opening of the Sunderland extension in 2002 the network increased from 59km to 78km (+32%) and patronage increased year on year to a peak of 40.8m (+26%) in 2009/10. In part the increased patronage was abstracted from local bus services, and Stagecoach was forced to reduce its commercial Sunderland-South Hylton service as a result In the following 3 years to 2012/13 patronage has declined to 37.0m (-9.3%). Over the same 3 years concession patronage has declined from 6.1m to 5.0m (- 18%). This is in contrast to national and local growth on conventional heavy rail services, and reflects the recession also affecting local bus services. Passenger revenue for the 3 years 2012/13 to 2014/15 is projected by Nexus to cover around 50% of total costs, the remainder being financed by Government grants and Nexus support
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3.4 Passenger Satisfaction Nexus relies on four separate market research passenger satisfaction surveys in support of its QCS Proposal: 2010 Nexus Customer Service Strategy (Survey & Marketing Services Ltd) 2011 Evaluating Performance (MVA for Nexus) 2012 What the Public Want (MVA for Nexus) 2012 Bus Passenger Survey autumn 2011 (Passenger Focus national survey) All show high levels of satisfaction in Tyne & Wear, although Nexus persists in interpreting the results as unsatisfactory and in need of improvement. In each of the surveys it is evident that the highest priorities for passengers are reliability and punctuality, and these are also the highest priorities for improvement. It is also evident from the survey results that Tyne & Wear operators already provide a high standard of reliability and punctuality; the majority of delays are the result of highway conditions including traffic congestion, accidents and other incidents, and are outside the operators’ control. Bus priority and car restraint measures are limited, patchy and largely unenforced; car parking is relatively cheap and available. The QCS contains no new proposals or funds to improve highway conditions The most recent 2012 independent Passenger Focus satisfaction survey shows Percentage of Passengers 1 2 3 4 5 Overall satisfaction with bus journey
Stagecoach North East 50 40 7 3 0
Go North East 48 44 4 3 1
Tyne & Wear 50 40 5 3 1
PTEs 41 44 9 4 2
Value for Money of the bus journey
Tyne & Wear 26 37 20 12 6 PTEs 22 35 17 15 11 Notes: Arriva results not recorded separately 1=Very satisfied, 2=Satisfied, 3=Neither/Nor, 4=Dissatisfied, 5=Very dissatisfied 3.5 London & Europe The opening statement of the QCS Proposal sets out its aspiration to deliver local bus services “in a way that will be familiar to users of buses in London and numerous European cities”. This is a commonly expressed aspiration by those who seek to re-regulate bus services under local authority control of routes,
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timetables, fares and quality with no passenger choice. It is, however, a totally unaffordable and un-realistic aspiration. London The main characteristics of the London economy are high population density; a growing population of younger working age adults and students with greater propensity to travel; low and declining car ownership; high car parking charges, low parking availability and central London congestion charge; high levels of rail and underground peak time commuting with interchange to bus in the central area; a strong 24 hour economy and below average unemployment. None of the above conditions apply within Tyne & Wear DfT Bus Statistics show that London bus patronage declined from1970 to 1982, increased to 1988/89, declined to 1993/94, then increased every year until 2011/12, but declined in 2012/13. However, net public transport support for London buses has increased (at 2012/13 prices) from £1m in 1999/2000 to a peak of £792m in 2008/09, declining annually to £526m in 2011/12. In comparison, net public transport support for all Metropolitan bus services increased from £135m in 1999/2000 to £152m in 2008/09, declining annually to £131m in 2011/12. Nexus’ current net service support expenditure is £13m (2.5% of London). It is evident that patronage growth in London is the result of its unique demographic and economic conditions and high level of public financial support. Despite London’s unique attributes Tyne & Wear bus operators achieve higher levels of passenger satisfaction than London at lower cost and fares. This is not to understate or denigrate the achievements of Transport for London, but to demonstrate that TWITA’s and Nexus’ aspirations are unaffordable and unachievable. Europe The QCS Proposal also aspires to the standards of other European cities. As with London, this aspiration ignores the high level of public support provided in many European cities. The most appropriate comparator is Northern Ireland where the Transport Act 1985 privatisation and deregulation of local bus services did not apply, and which continues to operate under public sector control comparable to the QCS regime which TWITA and Nexus seek to achieve. In Northern Ireland bus use has fallen by 4.9% in the five years to 2011/12 and by 17.7% since 1997. In the same five years services have been cut by 10.1%, the bus fleet cut by 12.2% and employee numbers cut by 11.3%. This decline in bus use has been driven mainly by increased car ownership and use similar to that in Tyne & Wear, and which the QCS Proposal fails to address. 3.6 Regulation & Cross Subsidy UK Bus patronage reached its peak in the mid 1950s and has seen a trend of constant decline outside London since then. The response of the mainly (90%)
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public sector owned operators was to increase the level of both external subsidy and internal network cross subsidy. Fares were increased and frequencies were reduced on profitable services to produce a financial surplus to support unprofitable services. The effect of this was to create a spiral of decline with ever increasing fares, reducing service levels, under investment and declining patronage. The Transport Act 1985 had 3 key objectives all of which were achieved: . To benefit from the sale proceeds of public sector operators . To introduce commercial competitive discipline to improve efficiency and productivity, reduce unit costs, and to become more responsive to passenger demand . To reduce public sector subsidy by making support for unprofitable socially desirable services transparent and subject to competitive tendering Nexus QCS Proposal seeks to revert to opaque internal network cross subsidy which was a fundamental weakness of the failed public sector regulated monopoly regime, and which contributed to the spiral of decline.
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4 AFFORDABILITY
Above all else Nexus must demonstrate that its QCS Proposal is affordable. Nexus has produced its spreadsheet based Affordability Model, which fails to comply with Department for Transport and National Audit Office best practice for design, traceability and transparency, and which is in part difficult to follow, in particular in the transition from its base year 2011/12 to QCS year 1 in 2014/15. The Affordability Model seeks to compare the Do Minimum projections (i.e. no change to the current deregulated environment) with its Do Something projections (i.e. Quality Contract Scheme) and with Do VPA projections (i.e. Voluntary Partnership Agreement) as an alternative to the Quality Contract Scheme
Oxera’s analysis of Nexus’ Affordability Model is that Nexus has understated the Do Minimum costs, overstated the Do Minimum fares, revenue, profits and consequent patronage decline projections; understated the QCS costs, overstated the QCS patronage and revenue growth projections; and that the QCS is unaffordable
4.1 Nexus Budget
Nexus’ starting point as justification for its QCS Proposal is that it has a constrained budget and cannot afford to continue in the long term to provide all the non statutory services which it currently provides. Stagecoach does not accept that Nexus’ budget is as constrained as Nexus implies within its QCS forecast. The costs of concession and supported services are exaggerated by the excessive RPI + 3% projection of commercial fare increases, resulting in premature withdrawal of non statutory support. From 2009/10 to 2012/13 Stagecoach’s total cash payments for both statutory and non statutory concession travel by Nexus have reduced each year from £[redacted] to £[redacted] and its payments per passenger have increased in cash terms by only [redacted]% in total over 4 years (less than [redacted]% pa and well below RPI). Stagecoach would welcome even an RPI increase. The largest cost increases in the ITA Medium Term Financial Strategy from 2012/13 to 2014/15 are £2m additional Metro support and £2m additional support for District Council highway measures, neither of which are relevant to local bus service support. The budget for these years also includes significant non-recurring expenditure on the QCS Proposal. Nexus’ long term QCS projections have not been approved by the 5 District Councils or the ITA and do not include any analysis of the underlying revenues and costs to allow a value for money support per passenger appraisal of its activities. Nexus persists in referring to its expenditure on local bus services as “subsidy”, implying “handouts” to bus operators, but does not for example refer
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to payments to its Metro contractor as a subsidy. There are 3 types of payment to operators, none of which represent a subsidy to the operator: . Concession Travel: payment to operators for statutory and non statutory free and discounted travel plus the additional capacity costs; payments are controlled through a complex DfT calculator to ensure that operators are no better and no worse off than in the absence of the scheme. . Supported Services: payment to operators to provide services specified by Nexus through competitive tendering. These services include statutory school transport for eligible scholars, and cannot be withdrawn by Nexus as proposed, although it is unclear why they form part of Nexus’ budget rather than that of the local education authority as is more normal. . BSOG: national Government rebate of a proportion of the normal fuel duty paid by operators, at no cost to Nexus (a perverse consequence of the QCS Proposal to increase bus mileage by 2% would be to increase Government expenditure). To assist Nexus NEBOA has offered to ‘commercialise’ some marginal services to reduce the cost to Nexus by £0.4m pa, and to conduct a joint review with Nexus of the supported services with an objective to achieve further cost savings The Metro Gold Card offers non statutory unlimited travel to ENCTS card holders for £25 pa. At an average of 2 return Metro journeys per week this equates to a charge of around 25p per journey, an 85% discount on the minimum Metro single fare of £1.70. The Shields Ferry has an annual cost of about £1.5m, passenger revenue of about £0.5m and Nexus’ support per passenger of some 200%. Nexus Annual report 2012/13 shows that it achieved a surplus after grants and taxation of £27.2m compared with £13.2m in 2011/12 and usable reserves increased by £1.9m. The report also shows . 601 employees of whom 288 worked on Metro and Ferry (an increase of 5 over 2011/12) and 315 (the same as 2011/12) on bus and other activities . Average salaries of £30,300 +7.6% NI +44.0% pension costs = average employment costs of £45,948 pa (an increase of 3.75% over 2011/12) . 26 employees earning over £50,000 pa (an increase of 2 over 2011/12); by comparison Stagecoach North East has 4 employees earning over £50,000 pa to manage a £60m pa turnover business Nexus does not appear at face value to be an organisation suffering from public expenditure constraints or a budget problem
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4.2 Network The original QCS Proposal on which Nexus consulted informally included a redesign of the bus network to improve accessibility. However, Stagecoach and other operators demonstrated that many existing bus passengers would be inconvenienced by the changes to routes and locations served. As a result the formal QCS Proposal includes no change to the existing network. Stagecoach is pleased to note that Nexus has recognised that the current network is fit for purpose, and notes that this recognition means there are no network or accessibility grounds to support the QCS Proposal, other than restoration of the supported services which Nexus claims would otherwise be unaffordable. The QCS proposal includes an additional 18 buses (2%) to enhance the existing network; the costs of these are included in the Affordability Model but no revenues. This is presumably because there is no identified un-served demand for the additional buses, and their deployment will be a matter of political negotiation rather than economic necessity. However, for the reasons explained in detail by Oxera, the QCS is unaffordable, and we do not expect that the 18 additional buses would in fact be affordable. 4.3 Do Minimum Scenario In the QCS Do Minimum scenario Nexus has assumed that operating costs will increase by less than RPI inflation annually, based on 3 recent and atypical years of the CPT cost index. The long run CPT cost index shows that bus costs have increased by on average RPI + 2% pa over 9 years from 2004 to 2012. The DfT Bus Statistics table 408b shows that bus operating costs per vehicle mile nationally have increased by 20.3% from 2004/05 to 2012/13 in real terms at 2012/13 prices, compared with increased revenue per passenger mile of 17.7%. In the Do Minimum scenario Nexus has assumed that commercial bus fares will increase annually by RPI + 3%. This is validated by the CPT North East long run cost index from 2004 to 2011, but must be seen in context with costs rising by RPI + 2% pa, meaning that fares have increased by costs +1% pa. Stagecoach North East fares have increased by only cost + [redacted]% pa from 2007 to 2011, which is a normal expectation with typical price elasticity. The effect of Nexus’ Do Minimum cost and revenue assumptions is to grossly overstate operating profit margins, which increase in the model from 14% in the base year 2011/12 to 18% in 2014/15 and to 25% by 2024/25. This is a totally implausible scenario on which to base the QCS Affordability Model, resulting in an excessive so-called “usable reserve” and an excessive decline in patronage. 4.4 QCS Revenue To calculate total revenues and operating costs Nexus has employed industry experts TAS. In the absence of commercially confidential management accounts, TAS has relied on the published statutory accounts of the 3 major Tyne & Wear
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operators for the years 2008/09, 2009/10 and 2010/11, with subjective adjustments to allow for non Tyne & Wear operations, price and cost inflation from 2010/11 to date, and suitable caveats to Nexus on the accuracy of this method. In calculating revenues within its Affordability Model Nexus makes 4 key assumptions, each of which is wrong, is not supported by the evidence on which it relies, and is either misunderstood, misinterpreted or misrepresented. The assumptions are that . in the QCS scenario fares will increase annually by RPI . fares simplification will increase patronage by 2.7% . fares simplification will reduce the average fare by 2.5% . the customer charter will increase patronage by 1.7%
4.4.1 Fares increase by RPI
The QCS Proposal is modelled and publicly advertised as guaranteeing that fares will initially reduce by an average 2.5% and will not increase by more than RPI over the 10 year life of the QCS (in small print – except to cover unforeseen events). In the first instance it is not possible for Nexus or TWITA to offer such guarantees, as the life of the QCS proposal to 2024/25 is too long term for any reliable forecast of revenues, costs and unforeseen events and TWITA (and ultimately the local taxpayer) bears the entire revenue risk More importantly, the QCS RPI fare increase is only possible if the projected commercial financial surplus holds good, and the operating costs only increase by the amount assumed by Nexus. The projected Do Minimum commercial financial surplus based on fares increasing by RPI + 3% pa, costs increasing by less than RPI and escalating profit margins does not hold good for the reasons explained above. Similarly, QCS costs are understated and QCS fares must rise to generate revenue at least in line with cost increases The QCS Proposal ticketing structure and pricing eliminate all passenger choice in favour of fares determined annually by TWITA, who may choose to increase fares unnecessarily on profitable services to generate a surplus to support unprofitable bus or other transport mode services 4.4.2 Fares Simplification Nexus has proposed that a single network wide zonal fare structure and fare scale be applied with a range of single, day, week, month and annual tickets providing inter operable bus to bus and multi modal travel. This would be a major change from the current fares and ticketing system and presents a major revenue risk if Nexus’ modelling is inaccurate by even a small percentage; TWITA would bear the entire risk
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The 2.5% reduction in average fares is projected to result in a 1% increase in patronage and net 1.5% decrease in fare revenue. In addition to this Nexus has assumed a further 2.7% increase in passengers and fare revenue as a direct result of its fares simplification plan, resulting in a combined total of 3.7% increase in patronage and 1.2% increase in net fare revenue from the two proposals. To support its assertion of 2.7% patronage and revenue growth from fares simplification Nexus relies on the 2009 Department for Transport study report on “The Role of Soft Measures in Influencing Patronage Growth and Modal Split in the Bus Market in England”. Nexus has misunderstood, misinterpreted or misrepresented the conclusions of this study, and has ignored its many warnings against reliance on conclusions from a small sample Stated Preference survey, referred to as ‘strategic response bias.’ The study states expressly at section 6.6.1 that . “The estimated utility for the zonal structure is also positive but, in the model built on data from all three areas, at 12 pence (or 1.29 minutes); it is only significantly different from zero at the 61% utility level. Comparison of results from the three areas reveals that, in Manchester and Leeds, the utility for zonal fares is actually negative. Although this result may indicate that zonal fares are not viewed positively in conurbations (where zone boundaries may be hard to define), it would be unwise to read too much into results which are not statistically significant” and . “If zonal fares were introduced as specified the overall impact on trip numbers would be negative (a reduction of 24 trips per year, which is about 11% of the current average of 228 trips per year recorded by the respondents). People with driving licenses would expect to increase their bus trips by an average of 5 trips per year (=2%). People without a driving license would expect to reduce their bus trips by an average of 54 trips per year (=-24%)” In the light of these clear statements Nexus cannot rely on any patronage growth from fares simplification and it is surprising that Nexus does not appear to have made the significant risk of a negative effect on patronage and revenues clear to TWITA elected members or in its public information statements. 4.4.3 Fares reduce by 2.5% Stagecoach’s fare structure is based on a distance based scale of single adult fares, with discounted day, week, month and annual unlimited travel tickets and discounted fares for children, young adults up to age 18 and full time students. Prices vary slightly in each of the 3 Districts served by Stagecoach reflecting the differences in average journey lengths and consequent costs of service supply. Stagecoach does not have data to examine the effect of Nexus’ proposed fare structure and fare scale on the Tyne & Wear network, but has examined the
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effect in detail on its own adult fare paying patronage below, using Nexus’ price elasticity of -0.42.
Stagecoach NC SS SU TW
Revenue change -3.7% -2.9% -4.2% -3.7%
Passenger trips change +1.8% -1.4% +0.9% +1.2% Average revenue per trip change -5.4% -1.6% -5.1% -4.8%
Percentage of trips fares reduced 60% 45% 48% 55%
Percentage of trips fares unchanged 39% 0% 1% 25%
Percentage of trips fares increased 1% 55% 51% 20%
Percentage of winners minus losers 58% -10% -3% 36%
(NC=Newcastle, SS=South Shields, SU=Sunderland, TW=Tyne &Wear)
It is clear from the table above that in Newcastle the majority of Stagecoach adult passengers would enjoy a fare reduction or no change, whereas in South Shields and Sunderland a majority of adult passengers would suffer a fare increase. Assuming that Stagecoach fares are typically the same as or lower than its competitors and the same effects apply across the network, the calculated 3.7% reduction in fare revenue is greater than the QCS estimate of 2.5% reduction. Even applying the Nexus long run price elasticity of -0.57 produces a 3.0% reduction in adult revenue. Additionally the QCS proposes significant discounts for young adults which Stagecoach is unable to model due to insufficient data, but which will further reduce total revenue. 1% of fare revenue over 10 years = £117m; the QCS revenue is therefore overstated.
4.4.4 Metro Fares
Stagecoach notes that Nexus has been historically opposed to multi operator bus- bus ticketing in favour of multi modal bus-tram-ferry-rail ticketing (including in Nexus’ evidence to the Competition Commission), but appears to have changed its view with the QCS Proposal. The QCS proposed fares simplification also includes a reduction in Metro fares to bring these in line with bus single mode and reduced bus/rail/Metro/Ferry multi mode prices. Metro single fares are reduced by about 20% with lower percentage reductions on period and multi mode tickets. This is not explicitly mentioned or modelled in the QCS Proposal, and it is unclear how Nexus has modelled the consequent Metro revenue
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reduction, if at all. The implication is that bus fares will cross subsidise Metro fares.
4.4.5 Customer Charter
The QCS Proposal includes a single Customer Charter with Nexus as the sole point of contact with passengers, defined customer service standards and service delivery performance targets and monitoring. Nexus claims that this will achieve a 1.7% increase in patronage and fare revenues. The DfT study on which Nexus relies states “No figures have been provided for the introduction of a customer charter [...] because user valuations of [this factor] are not statistically significant from zero”. Nexus has clearly misunderstood, misinterpreted or misrepresented the evidence, which does not support its claim, and there is no evidence that a customer charter will increase patronage. Stagecoach already has a published customer charter which complies with the CPT bus industry Code of Conduct. Whilst we agree that this is good practice and provides re-assurance to passengers, we do not consider it has resulted in any patronage growth. Furthermore, the North East Bus Operators Association (NEBOA) has volunteered to adopt a uniform customer charter by all operators under a VPA which would match or exceed the QCS proposed standards, and the QCS Proposal is a disproportionate means of achieving this Nexus claims a range of passenger benefits arising from the introduction of a customer charter, the main benefits of which are discussed below: The proposed customer charter would make Nexus the sole point of contact with passengers. Based on current performance Stagecoach has no confidence in Nexus’ ability to forward customer comments to operators for investigation in a timely manner or to respond promptly; by inserting itself between the passenger and the operator it simply delays any investigation, response and action. Costs would increase as Nexus would require more staff but operators would need to retain their current staff to investigate and respond to Nexus instead of direct to customers. The proposed reliability and punctuality targets are those already applied by the industry regulator, the Traffic Commissioners, with penalties for failure. Stagecoach already monitors its services, meets the Traffic Commissioner’s standards and publishes its results annually. The only way in which operators can improve performance is to increase journey time by either increasing resource to maintain the same frequency or reducing the frequency, both of which would make services less attractive and would reduce patronage. Given that Nexus will define the timetables neither option is available under the QCS Proposal, and once contracts have been awarded operators will be unwilling to increase
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resources without additional payment. The proposed incentive scheme of penalties and bonuses (with neutral net cost effect) is therefore meaningless. Stagecoach cleans all its buses internally and externally daily, with an interior deep clean every 3 weeks. This already exceeds the proposed scheme target and the QCS Proposal would actually introduce a lower standard. NEBOA has volunteered to adopt a uniform standard by all operators under a VPA which would match or exceed the QCS standard. As noted above, bus operators in Tyne & Wear already achieve some of the highest passenger satisfaction ratings in the UK. This demonstrates that all operators are strongly motivated to deliver high quality customer service. Under a QCS regime operators would have no interest in the number of passengers carried, their sole interest being to deliver the service specified at the minimum cost. This results in a perverse outcome that passenger satisfaction is no longer a priority for operators, and is likely to worsen rather than improve. In a commercial regime the opposite applies, and operators have a strong incentive to improve satisfaction. NEBOA has volunteered to adopt a uniform standard by all operators under a VPA which would match the QCS standard. The QCS Proposal includes a new scheme of governance of 9 new Committees, comprising a new ITA Bus Board, 5 new District Council Local Bus Committees and 3 new Cross Boundary Consultation Committees. Assuming each Committee comprises at least 5 elected members, 2 local authority officers and 1 committee clerk, together with 5 staff days to collate information, produce and circulate agendas and minutes, each meeting at least twice annually, this would result in an additional 234 person days per year with associated costs of salaries, expenses, accommodation, etc. This seems to be a curious response to the current drive to improve efficiency and reduce local government expenditure, and there appear to be no costs included within the QCS financial projections. The bureaucratic process under the QCS Proposal is that any proposed change to services made in one year must be considered by the relevant Local Bus Committee, adopted by the ITA Bus Board into its annual plan, and implemented in the following financial year. This is highly unresponsive to changes in passenger demand, traffic conditions, changes in retail or industrial activity, etc. It seems probable to Stagecoach that most service changes would occur under delegated powers rendering the bureaucratic structure less effective. Notwithstanding the above, Stagecoach recognises that passengers and local authorities increasingly expect greater consultation on proposed changes to services and fares, and has already taken steps to improve this. NEBOA has volunteered to adopt a uniform standard of public and local authority consultation on service changes applicable to all operators under a VPA, and the QCS Proposal is a disproportionate means of achieving this
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In summary, the proposed Customer Charter and its purported benefits will not achieve any patronage growth; the associated revenue growth in the QCS Affordability Model is illusory and will not be achieved. The same standards can be achieved more proportionately under a VPA.
4.5 QCS Costs As described above, in order to estimate the affordability of the QCS Proposal, Nexus engaged bus industry experts TAS who carried out an analysis of the major incumbent operators’ statutory accounts with adjustments for excluded services and inflation, and compared the results with their own knowledge of industry average costs. In the case of Stagecoach TAS appears to have understated its current operating costs, although actual costs will of course depend on the contract tender bids. However, there a several key areas where Nexus has materially underestimated the costs of delivering the QCS proposal – vehicles, depots, operating costs, operating profits, set-up and transition costs In modelling bus operating costs TAS makes it clear that its analysis is based on historic costs of provincial operations and provides a clear warning in section 1.41 which it appears that Nexus has ignored “The ‘Quality Contract Effect’ “These costing figures assume the status quo in relation to drivers’ pay and conditions and fleet composition. A Quality Contract regime might alter these in a material fashion. Nexus may decide to raise vehicle standards and/or impose age limits...” 4.5.1 Operating Costs Nexus has made a fundamental mistake in its representation of operating costs in its Affordability Model by assuming that 10 year actual operating costs equate to year 1 costs plus its Contract Price Index (CPI) mechanism. The proposed CPI is a blended index of average earnings, fuel prices and general cost inflation. It is similar to the annual Contract Price Adjustment (CPA) applied by TfL in London, although not quite the same, and Stagecoach and other large operators are acutely aware of its shortcomings. DfT Bus Statistics table 408b demonstrates that local bus operating costs per vehicle mile in Metropolitan areas have increased by 20.3% in real terms between 2005 and 2013 for many reasons which have been well documented. No operator willingly increases costs beyond that which is necessary, and there is no good reason to suppose that for the next 12 years to 2024/25 bus operating cost inflation will reduce in Tyne & Wear just because Nexus decided to cap its contract prices. As noted above, Stagecoach and other operators in London are well aware of the effects of
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TfL’s CPA mechanism, and its disparity between contract prices and actual costs. The circumstances surrounding London bus contracts are very different to those proposed by Nexus. In London on average about 20% of an operator’s contracts are retendered annually, giving an operator the opportunity to adjust its contract price at least every 5 years on each contract. In Tyne & Wear an operator must bid to earn an average margin over its entire contract for up to 10 years without any opportunity to change this. Each operator will have its own bidding strategy to manage this material risk, but Nexus should note that London operator margins are after actual (not theoretical) cost increases. The average earnings index relates to the whole national economy and does not reflect regional labour markets, the difference between private and public sector earnings, the change from full time to part time working, or the expectations of employees in a profitable company to at least keep pace with cost of living increases. Since 2008 the AEI has been suppressed by national economic recession resulting in public sector and some private sector pay freezes and has been lower than RPI. By effectively capping employee pay rises to a pessimistic forecast of average earnings Nexus implies that bus operative wages will decline in real terms over the life of the QCS and invites a serious risk of industrial action. Historically long run average earnings have risen by more than retail price inflation as measured by various cost of living indices such as RPI, CPI, etc. It can be reasonably assumed that post economic recession there will be considerable pressure to raise average earnings by more than average costs of living to restore some of the reduction sustained by workers during the recession. No one can predict with any confidence when the recession might end and what the effect will be on pay bargaining and average earnings, but it seems reasonable to expect significant changes during the lifetime of the proposed QCS. The British Chamber of Commerce expects average earnings to rise by inflation +0.5% in 2014 and 1.0+ in 2015. If earnings rise faster than RPI Nexus will bear the entire risk of costs rising faster than revenue, making the QCS unaffordable (or breaking its promise to cap fares to RPI). Additionally an average earnings index measures the increase in earnings, but this is not the same as the increase in employment costs. In recent years the bus industry has experienced an increase in employers’ National Insurance contributions, increased pension cost contributions, increased statutory holiday entitlements, increased statutory driver CPC training costs, and increased employee industrial tribunal litigation costs. As these are not included in the average earnings component of Nexus’ proposed
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CPI mechanism and operators will be expected to carry these risks, prudent operators will build an added risk factor into their tender prices. Nexus appears to have adopted a gross fuel price index as part of its CPI, taking no account of BSOG. The effect of BSOG being frozen is that bus operator fuel costs rise annually by a much higher percentage than gross fuel pump prices. As a simple example BSOG £0.35 rebate fixed Gross price £1.40 increases to £1.456 = 4.0% Net of BSOG £1.05 increases to £1.106 = 5.3% All operators are acutely aware of this effect, and will incorporate this into their tender pricing models. Similarly Nexus’ proposed CPI mechanism incorporates RPI increases on all other operating costs. This seems a reasonable assumption except that depot utility costs (electricity, gas and water) are all expected to continue to rise well in excess of inflation; it would be reasonable to include these in the fuel cost element of the index. Each operator would be expected to form its own view of this and any risk factor it may add to its tender price. In summary, Nexus has underestimated the annual increase in bus operating costs by wrongly substituting its Contract Price Index in place of actual costs, as indicated by the CPT and DfT long run indices of bus operating costs 4.5.2 Vehicles The key QCS Proposal to satisfy the DfT Statutory Guidance Test 2 to improve the quality of service is a requirement that all buses from the start of the QCS meet Euro V engine emission standards, and are of a higher specification than other standard UK buses. This presents both practical and financial issues which are examined in more detail by Oxera. Under EC Regulations Euro VI engine emission standards have now superseded Euro V which can no longer be manufactured. Euro VI buses cost between £[redacted] and £[redacted] more than Euro V due to more complex technology, will cost more to maintain and may have worse fuel consumption for the same reason. The demand for a large number of new buses in a short timescale is likely to exceed UK manufacturing capacity, requiring a high proportion of imported buses at higher prices estimated at an additional [redacted]% per bus. The higher Nexus vehicle specification is estimated to add a further [redacted]% per bus. Stagecoach estimates that the average capital cost of a compliant new bus to QCS specification will be £[redacted] at current prices, compared with a current average of £[redacted].
24 STAGECOACH Response to Tyne & Wear Integrated Transport Authority Quality Contract Proposal NON-CONFIDENTIAL (REDACTED) VERSION
NEBOA has estimated that by March 2014 in the absence of a QCS the 3 major Tyne & Wear operators will operate 487 Euro V or better buses, of which Stagecoach expects to operate 157 such buses out of its fleet of 357 (44%), assuming these can be made compliant with Nexus specification at additional cost. As a minimum the 3 large QCS contracts require 870 buses including spare vehicles. If each large incumbent operator wins one contract, 383 new buses would be required. In addition the QCS specification appears to require all secondary contracts (at least 165 buses including spares) to meet Euro V or better specification; the number of such buses currently available in the incumbent small operator fleets is not known but is likely to be few if any. Assuming at best that only 500 new buses (each large incumbent operator wins one contract each) and at worst 1035 new buses (all contracts won by new operators) are required the estimated additional capital cost would be in the range £85m to £176m. It also seems highly unlikely, given available manufacturing capacity and lead times for orders, that a sufficient number of new buses could be acquired in less than 12 months. Nexus has not considered how this would affect the timing of the introduction of a QCS. Assuming that Stagecoach was a successful bidder, and assuming its Euro V and low emission buses can be made compliant with Nexus’ specification at a reasonable cost, Nexus would in every potential contract outcome render 200 older Stagecoach buses surplus to requirements. Nexus dismisses the effect of this summarily by stating that Stagecoach can use the buses elsewhere in the UK. However, to do so would imply that other Stagecoach UK regions would have to accept mid life buses instead of the new buses they would normally expect, and the premature disposal of other buses. Apart from the distorting effect on Stagecoach’s national fleet age, fleet replacement programme and the additional maintenance costs this would impose on other areas, we would anticipate significant discontent from our other partner local authorities and passengers, who would perceive themselves to suffer as a result of Nexus’ actions. The effect of TfL reducing the maximum fleet age in London some years ago to 12 years exacerbated by the political decision to prematurely withdraw London’s large fleet of articulated buses was a surplus of second hand buses in the market and a severe drop in second hand bus prices, and the same effect is a likely outcome of the QCS Proposal. Stagecoach mainly purchases and owns its provincial buses in preference to leasing, and depreciates its assets using the straight line method over the expected economic life of the asset, which in the case of its buses is an
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average 15 years. In consequence the written down asset value of mid life buses is higher than the second hand market value. Stagecoach estimates that it would incur an average loss on disposal of £[redacted] per bus, totalling £[redacted] for the 200 buses rendered surplus by the QCS Proposal. This in itself is not a cost to the scheme, but it is a cost to Stagecoach which must be included in the DfT Statutory Guidance Test 5 of proportionality. Stagecoach has considerable experience of the London contracted bus market (as do Arriva and Go Ahead). In London contracts are much smaller route based (typically less than 50 buses) on a rolling cycle for 5 years extendable by mutual agreement for a further 2 years, with a maximum vehicle age of 12 years, allowing buses from expired contracts to be used on new contracts. In contrast to its policy of purchasing new provincial buses and depreciating them over an average 15 years (resulting in a lower accounting charge per bus per annum), in London Stagecoach leases its contract buses over a 12 year life taking the risk of sufficient contract wins to deploy the buses. Stagecoach believes that other large operators take a similar approach to vehicle purchase and depreciation. In contrast to London, the Tyne & Wear contracts will all run concurrently for 7 years extendable at the sole discretion of Nexus by up to 3 years. It is unclear what would happen thereafter, but it is unlikely that operators would take the risk of a further extension of a contract with buses 10 or more years old. In consequence Stagecoach considers that existing operators and new bidders would limit their risk of loss on disposal at the end of the contracts by leasing new buses for 7 to 10 years, depending on the level of risk they are prepared to take. From their experience in the London market we would expect leasing companies to take a cautious approach, especially to potential new entrants to the market and bidders will have to factor this in to their bids. The effect of reducing the asset life of new buses and of leasing instead of purchase is to materially increase the accounting charge and the QCS operating costs. In addition the QCS Proposal includes a requirement that all buses be repainted into a new livery within 12 months of the contract start, at an estimated cost of £[redacted] per bus, costing between £[redacted] (500 new buses) and £[redacted] (1035 new buses). All buses must then be repainted at 4 year intervals; the cost of this is already reflected in current operating costs, but at present operators repaint a proportion of their fleets annually; the logistics of repainting over 1,000 buses every 4th year have not been considered by Nexus. Similarly the QCS requires that all
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buses undergo a mid life refurbishment by their 8th year of operation, which will apply to the entire fleet if the contracts extend beyond year 7. Currently operators refurbish their buses on an ongoing basis including repaints, seat re-trims, floor coverings, etc to spread the costs and avoid peaks and troughs. We estimate the cost of a refurbishment at around £[redacted] per bus, costing £[redacted], with a major logistical problem of taking at least half and possibly the entire fleet out of service for at least one week per bus in year 7 which has not been considered by Nexus. The effects of higher vehicle specification, depreciation and higher leasing costs are analysed in more detail by Oxera (report attached), and are expected to add £85m-£127m to the Affordability costs of delivering the QCS Proposal. 4.5.3 Depots Nexus has failed to incorporate any additional depot costs into the QCS Affordability Model, presumably on the misconceived assumption that existing depots will continue to be used, or that alternative depots will not incur additional costs. Stagecoach operates from 4 depots in Tyne & Wear – Newcastle (2 depots), South Shields and Sunderland. Assuming that Stagecoach was a successful bidder for one or more large contracts, because of the way in which services have been ‘bundled’ in every potential large contract win outcome Stagecoach would need to acquire one or more new depots to accommodate between 50 and 200 buses, and to dispose of its surplus depots. Any additional buses from the smaller contracts would increase the above requirements proportionately. It cannot be assumed that incumbent operators will be willing to sell their existing depots to new operators, unless they are prepared to pay the commercial value of the property, and in any case an incumbent or new operator may simply prefer to acquire new purpose built depot. Nexus cannot simply assume that the effects of these necessary changes are a matter for the bidders and cost neutral. In Stagecoach’s experience the cost of a new depot (excluding land purchase) will be at least £[redacted] more than the disposal cost of an old depot. A new depot will incur a higher depreciation or lease cost than an existing depot and this must be included in the Affordability Model Nor can Nexus simply ignore the potential loss on disposal for an incumbent operator selling a surplus depot as ‘tough luck’, and must include the loss to operators in its proportionality test and potential compensation claim costs in its risk model.
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It is likely to take considerably longer than the QCS Proposal timetable allows to acquire land, obtain planning consent, construct, and commission a new depot; Stagecoach estimates at least 1 year. Oxera has endeavoured to quantify the depot and transition costs for Tyne & Wear as a whole based on reasonable assumptions of the range of possible outcomes, and Nexus must incorporate these into its Affordability Model 4.5.4 Other Costs In addition to all of the above, Nexus has understated other costs within its Affordability Model Nexus has not allowed for any bidding costs in its Affordability Model. Every bidder will incur such costs for expert advice from consultants and the costs of successful bidders will be incorporated in their tender prices amortised over the life of the contracts. It is acknowledged that unsuccessful bidders will bear such costs themselves, but that leaves Nexus open to a claim for compensation from incumbent operators Nexus has assumed that some staff from incumbent operators will transition directly to Nexus on a cost neutral basis, and has only allowed for 14 additional employees at a cost of £500k pa to manage the contracts. Stagecoach’s and other operators’ experience in the London contract market is that operators need to actually increase their support staff to manage their contract compliance requirements, in particular to record in detail every instance of and reason for reliability and punctuality failures to satisfy the prescriptive compliance and penalty/bonus regime. Operators will still require schedulers to compile driver duties and rosters for holiday periods and service changes, but Nexus will require additional schedulers for network and timetable planning. Operators will still require ticket inspectors as they will be responsible for fare collection, but Nexus proposes to employ its own inspectors to audit compliance. Nexus also proposes to employ additional auditors to monitor vehicle and service delivery compliance. It cannot be assumed that any such staff will transition to Nexus, nor can Nexus assume the continued employment of its staff currently engaged on developing the QCS Proposal is cost neutral. Nexus should include an additional increase in its own and the successful bidders’ support staff. In its Bus Industry Market Study the Competition Commission recognised this additional cost of a Quality Contract which it estimated at £1m pa per contract. Nexus does not appear to have given any consideration to the practical aspects and associated costs of an overnight transition with an extensive relocation of a large number of buses, employees, plant and equipment
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between depots resulting from its decision to re-allocate services in contract ‘bundles’ which do not reflect current operations. In the most extreme scenario this could involve every contract being allocated to new operators with new depots and every employee relocating; in even the least extreme scenario the relocation will inevitably be extensive. Some examples of the advance training issues to be considered are . All staff - new depots, offices, administration and reporting systems . Drivers - route learning, ticket equipment, fare structure, depot procedures. Every current driver would be required to drive routes they are unfamiliar with due to the way in which services have been ‘bundled’ into contracts. If each driver requires typically 5 days route learning, that would entail 12,500 days release from duty for training at an estimated cost of £1.25m . Mechanics - new workshops, equipment, vehicle types Unsuccessful incumbent bidders cannot be expected to bear any costs associated with the transition and will have no incentive to assist. Incumbent operators who are forced to exit the market will each take their own view on how long they can reasonably maintain their existing services, but are unlikely to replace any of their current buses and may become reluctant to recruit and train employees from whom they will derive no future benefit. Incumbent operators, whether or not they are successful bidders, will be fully occupied in running their businesses and will not have the staff, the time or the inclination to assist other successful bidders. Nexus must give serious consideration to how it proposes to manage this extended period of limbo preceding and followed by extensive complex overnight transition of three large businesses, and budget accordingly. 4.6 Operating Profits Nexus has incorporated an average 7.6% operator profit margin on turnover in its Affordability Model, which is considerably less than the average 14% currently achieved by the major incumbent operators. Nexus does not provide any explanation for this percentage, but Stagecoach suspects it is based on current London contract margins. If that is the case, it should first be noted that London margins have been depressed in recent years by the low margins earned by East London Bus Group and First which have resulted in disposal of both businesses. When these are restored to average profitability the total London operator margin would increase to around 10%. Adopting a profit margin based on London would also represent a fundamental failure to recognise that 8% margin on the turnover of an average London bus of
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around £250k pa produces £20k per bus profit per year, whereas 8% margin on an average Tyne & Wear bus turnover of around £150k pa produces £12k per bus profit per year, a difference of £8k (40%) per bus per year. To earn the same rate of return per bus in Tyne & Wear, all other things being equal, would require a profit margin of 13.3% pa. In projecting the QCS profit margin Nexus also appears to fundamentally misunderstand the difference between operating profit and return on capital as a measure of profitability. Operating profit is a satisfactory measure to monitor trends for a single operator, but an inadequate measure to compare operators. An operator with an owned fleet (showing only historic cost depreciation in its accounts but with a high level of capital investment) will require a significantly higher profit margin than an operator with a leased fleet (showing both depreciation and lease interest in its accounts) to earn the same rate of return on capital. Stagecoach estimates that the difference between its mainly leased London fleet and its mainly owned provincial fleet requires a 4%-5% increase in provincial profit margin to earn the same return on capital (as recognised by the Competition Commission study). Stagecoach’s conclusion from this brief and simplistic comparison of the London and provincial regimes demonstrates that we believe a 7.6% profit margin is unrealistic and materially understated. A more realistic assumption would be 10% margin based on a leased fleet (with higher operating costs) or at least 15% margin based on an owned fleet (with current operating costs).
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5. TWITA BUS STRATEGY 2012
Tyne & Wear local transport policy in respect of buses is contained in the Tyne & Wear Integrated Transport Authority Bus Strategy 2012. TWITA first informed operators that it was considering a QCS Proposal in November 2011. The Bus Strategy was subsequently amended and adopted by the Authority in 2012. It is evident that the Strategy was written with the intention of applying for a QCS and that the Strategy is unaffordable and could not be achieved by any other means. The Transport Act 2000 includes 5 statutory tests, test 3 being that “the proposed scheme will contribute to the implementation of the local transport policies of the ITA”. By adopting policies which can only be achieved through a QCS, TWITA has ensured that the QCS Proposal supports the policy. This is a circular argument which fails to meet the statutory test and should not be permitted. The Bus Strategy contains three key aspirations . To arrest the decline in bus patronage . Maintain (and preferably grow) Accessibility . Deliver better value for public money
However, it was obvious to TWITA at that time that their budgets were constrained by public spending cuts, and they could not afford to continue existing discretionary expenditure on concession travel, supported bus services, Metro and Ferry services. Within its projected budgets Nexus would require additional income to achieve objectives 1 and 2, and the only source of funds would be to confiscate the commercial businesses of incumbent operators, which they describe in objective 3 as “better value for public money”.
5.1 Objective 1 – Patronage At paragraph 2.1 of the Bus Strategy Nexus notes “[2.1.1] There are a number of factors affecting patronage decline, including . The economic situation and therefore the number of jobs . Car ownership and fuel prices . The relative attractiveness of bus as a mode of transport, including frequency, fares and punctuality” “[2.1.2] Although there has been continued and significant investment into Tyne and Wear buses and infrastructure, patronage still continues to decline...” “[2.1.7] It is almost certain that the more recent patronage decline has also been affected by external economic conditions, such as rising rates of unemployment and increased living costs, factors which are evident in the decline of the Gross value Added (GVA) of the local economy”
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“[2.1.8 + Figure 3] The unemployment rate in Tyne and Wear has increased rapidly since 2009, which has inevitably resulted in fewer adults travelling by bus...” “[2.1.10] Another factor which is likely to have contributed to the decline in patronage is the rise in car ownership in Tyne and Wear, which has increased steadily in recent years. Travel by car accounts for around 70% of travel among potential bus users and is the greatest threat to reversing the downward trend in bus patronage” “[2.1.11] Car ownership in Tyne and Wear has increased by 16% between 2001 and 2011” “[2.1.13 + Figure 4] Additionally although the cost of fuel has increased significantly in recent years, the overall cost of motoring fell by 13% between 1997/8 to 2007/8 once the impact of inflation had been removed. .. The graph shows bus patronage declining at the same rate as the greatest increase in fuel costs” It seems evident from the many comments above that Nexus recognises that bus patronage has fallen due to external factors which will not change with a QCS. Under the circumstances it seems evident that commercial operators have done well to stabilise the rate of patronage decline since 2007/8 despite the effects of the worst economic recession in 80 years. The Bus Policy aspires to arrest this decline but offers nothing to stem the increase in car ownership and decline in the cost of motoring. Other progressive local authorities have introduced and enforced extensive bus priority and car restraint measures and have succeeded in achieving bus patronage growth and modal shift from car in partnership with bus operators. TWITA has no such strategies to achieve its policy aspirations. The Bus Strategy then goes on to list the measures it seeks to take including fares simplification and a customer charter as precursors to its QCS Proposal. However, as noted above Stagecoach’s and Oxera’s analysis of the QCS Affordability Model is that the QCS will in fact result in less, not more, bus patronage, and fails to satisfy the statutory tests 1 and 3 It is difficult not to conclude that the primary motive for the QCS Proposal is to confiscate the commercial bus network to allow Nexus to cross subsidise concessionary travel and supported services, and the primary motive for the Bus Strategy is to support the QCS Proposal
5.2 Objective 2 – Accessibility
Nexus’ Accessibility Model is a matrix of households, key destinations and proximity to frequent bus services. In its informal consultation on its first iteration of the QCS Nexus proposed to change the route network to improve
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accessibility. As a result of operators demonstrating the adverse effects of these plans on passengers Nexus now proposes no change to the current bus network, which is welcome In consequence, the only potential adverse effect on accessibility would be the result of Nexus’ own actions to curtail or withdraw supported services. Nexus cannot be allowed to use the adverse effects of its own actions to support its QCS Proposals The commercial operators through NEBOA have offered to maintain a number of marginally viable supported services commercially to reduce Nexus’ expenditure, and to carry out a joint network review with Nexus to reconfigure the supported services to maintain accessibility at less cost to Nexus
5.3 Objective 3 – Value for Money
There are 3 streams of public expenditure on local bus services which are paid to operators. These are described in more detail under ‘revenues’ above: they comprise concession travel payments based on the operator being ‘no better and no worse off’ than in the absence of the scheme; support for services which would not otherwise operate commercially through competitive tendering; and Government funded BSOG rebates on a proportion of fuel duty paid by operators, paid at a flat rate determined by Government, and at no cost to Nexus. It is self evident that Nexus already obtains value for money on its payments to operators; if it did not it would challenge the payments. TWITA and Nexus have full control and choice of the supported service network and of non statutory concession travel; BSOG is not a cost to Nexus. They have frequently expressed the view that they should be allowed to ‘control’ the commercial bus network and fares because they make payments on behalf of a minority of passengers, but this use of the expression ‘value for money’ does not stand up to scrutiny.
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6 EMPLOYEES 6.1 TUPE Whatever the outcome of the QCS Proposal contract awards, a large number of employees will be required to transfer from one employer to another and from one depot location to another. The extent of this will not be known until the end of the tendering process when contracts have been awarded to operators. This will continue to be a source of ongoing concern to all employees and their current employers. Employees are also concerned about their futures and pensions at the end of the 7-10 year contract period. The process to transfer employees is governed by The Quality Contracts Schemes (Application of TUPE) Regulations 2009, and is supplemented by the QCS Proposal Allocation Arrangements, but these taken together still leave issues of concern. Nexus has sought to minimise the likelihood of compulsory redundancy of any surplus employees, but has not offered a guarantee of no compulsory redundancy, which both Stagecoach and its employees would wish to see. In the event of any compulsory or voluntary redundancy Stagecoach will expect full indemnity from Nexus for any costs it incurs. Nexus has explained how it proposes to allocate employees to the 3 large contracts, and in the case of most Stagecoach depot based employees it seems clear which contract they would be allocated to. Stagecoach employees are not allocated to specific bus services, but are generally required to work on any service within a depot. This includes a number of miscellaneous works and school services, which might be awarded to any operator, new or incumbent, large or small, at any location. This may give rise to a surplus or a shortage of drivers and will require further consideration after the contracts have been awarded. Stagecoach North East head office is in Sunderland and services both its Tyne & Wear and its Teesside businesses; its head office staff perform the same duties in respect of each area and are indivisible. In the event that Stagecoach is forced to exit the market a selection process would be required to determine which staff should be allocated to Tyne & Wear and which to Teesside. However, with no base in Tyne & Wear it is unlikely that local staff would wish to relocate or travel daily to a new base in Teesside, creating a compulsory redundancy situation, in addition to potential employee claims of unfair selection. Stagecoach will expect full indemnity from Nexus for any costs incurred. Additionally, it is unclear whether Nexus expects head office staff of the 3 incumbent major operators to remain with the contracts in the areas they currently serve, or to remain with their incumbent employers. For example, if Stagecoach lost its current South Tyneside/Sunderland operations and won one of the other contracts it would need to close its Sunderland depot and relocate its
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head office. It is unclear whether it would be expected to retain and relocate its current head office staff or to inherit another operator’s head office staff. Stagecoach (and Arriva and Go Ahead) has experience of the application of TUPE transfers when London bus contracts change from one operator and depot to another, and is aware that this is not as simple as it appears. A transferred employee may have good reasons why it is inconvenient to move to another location, even if the new location is within reasonable travelling distance of the original. This can and does give rise to claims of unfair dismissal against the transferor and the transferee, and some claims have been upheld by Employment Tribunal. Stagecoach will expect full indemnity from Nexus for any costs it incurs. Nexus has proposed to employ a facilitator to assist statutory consultation with employees and their representatives. It is not clear what terms of reference or level of authority the facilitator may have; he or she cannot intervene to make any offer to resolve a possible dispute between employer and employee. The proposed allocation arrangements involve consultation between employee representatives, the facilitator and Nexus. Nexus must recognise that Stagecoach Trades Union representatives are working employees and cannot always be allowed time off; service delivery takes priority. Stagecoach will expect reasonable advance notice of any requests for time off work and full payment by Nexus of any pay or other costs incurred. Unlike a more typical TUPE transfer there would be no commercial or contractual relationship between an operator who is forced to exit the market and an incoming operator (whether incumbent or new to the market). The outgoing operator has no obligation or incentive to assist the incoming operator in any way, and could make changes to employee terms and conditions which the incoming operator has not provided for. The incoming operator would be liable for any outstanding holidays or bonus payments without recourse to the outgoing operator. 6.2 Pay and Conditions Stagecoach recognises and affords facilities to Unite the Union and the GMB Trade Union for the purposes of consultation, representation and negotiation on behalf of its employees. Some employees choose not to be members of a Trade Union. Stagecoach has a range of comprehensive, documented agreements on pay, terms and conditions of employment which will be made available to a transferee employer. However, it should be recognised that in each depot there may be different local working practices, some documented and some not, many of which are termed ‘custom and practice’. Stagecoach cannot guarantee to provide every local practice and nuance to a transferee employer, which may give rise to claims of breach of contract.
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It is clear that on transfer to a new employer existing terms and conditions of employment must continue unless renegotiated, and that additional protection is incorporated in the special TUPE Regulations covering a QCS. Nexus has stated that it will ensure no future change to terms and conditions of employment for transferred employees and for future new recruits. It is unclear how Nexus proposes to enforce this, especially if a new employer finds itself in financial difficulty and invokes a change on Economic, Technical or Organisational (ETO) grounds. It is relevant here to refer to Stagecoach’s comments on the QCS Affordability Model above, specifically the disparity between its Contract Price Index and actual operating costs. Where a similar issue arises in London it is common practice for London operators (with the full knowledge of TfL) to offer new employees inferior pay and conditions than long serving employees, to bridge the gap between actual cost and indexed contract price increases. If Nexus seeks to prevent this practice it has a greater imperative to reconsider its CPI. The effect of the QCS Proposal will be inevitably to merge employees on different pay and conditions within each depot. There is also some likelihood of more than one Trade Union being represented within some depots. This is a recipe for inter union rivalry, industrial unrest and pressure to harmonise pay and conditions to the best of each workgroup. We note that Unite the Union has already made its expectation clear in return for support of the QCS Proposal. Stagecoach has estimated that to simply harmonise its existing employee terms and conditions to the best within Busways would increase payroll costs by [redacted]%. Nexus should recognise this as a major cost risk. 6.3 Pensions In its response to Nexus’ informal consultation on its original QCS Proposal, Stagecoach made strong representations that Nexus had failed to recognise significant issues concerning pensions. In the current QCS Proposal Nexus is equally dismissive of this issue, affording it only 2 pages in a 1,000 pages of documents. Stagecoach has provided a detailed analysis of pension issues by its legal experts Herbert Smith Freehills which is attached to and forms part of this response. Accordingly, only a summary is provided here
Pension Summary of Impact of QCS Proposals The introduction of the QCS Proposal is likely to have a material detrimental effect both on employees and employers; Members with defined benefit pensions can expect to lose between [redacted]% and [redacted]% of the value of their current pension benefits, and for an
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average member of the T&W LGPS for example his/her pension benefits would [redacted] under the QCS proposal. Employees transferring to smaller employers are likely to lose their entitlement to ongoing defined benefit pensions, being replaced with lower value higher risk defined contribution arrangements. The annual contribution cost of providing defined benefit pension arrangements will materially increase as employers will be required to fund such benefits over the term of the QCS contracts, rather than on the current long term ongoing basis. For the current Busways employees we would estimate that the increased annual contributions would be in the region of £[redacted] p.a. Following the transfer of routes under the QCS proposals, Trustees and Administering Authorities of pension schemes would be required to or may be inclined to seek immediate payment under the very expensive buy-out like level of funding for past service pension commitments. Stagecoach estimates that this could trigger payment obligations of its subsidiaries to the pension schemes of up to £[redacted]. Points we would like to see in the Proposal We believe that the QCS pension protection provisions are materially deficient and inequitable and that any Proposal should seek to remedy those deficiencies. Therefore, the Proposal should include requirements that any tender document should require all bidders to price their bids on the basis that they will; offer a pension arrangement which is identical to current arrangements (including defined benefit arrangements) and accept a transfer on a share of fund basis from existing defined benefit pension arrangements in respect of active, deferred and pensioner members who have previously been employed on the route which is being tendered.
This goes beyond the statutory requirement but it is the only way to ensure;
a. a level playing field between bidders;
b. there is not a “levelling down” of pension provision for employees, and that employees do not lose value from current accrued benefits;
c. and that the pension commitments continue to be linked to the business which supports them, thus preventing any undue escalation in the cost of those benefits and making it more likely that the members will receive their benefits in full. This is the system which operates, for instance, in rail
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franchising where, as a franchise is re-let, the pension liabilities which relate to it are transferred to the new franchisee. 6.4 Other Teesside Nexus is well aware that Stagecoach North East incorporates operations in Teesside (Hartlepool and Stockton on Tees) in addition to Tyne & Wear, but has failed to consult with Stagecoach, to consider or even to mention this. The Stagecoach North East head office in Sunderland provides management, commercial, operational and engineering support to Teesside. The head office staff perform their duties on Tyne & Wear and Teesside as a single entity and cannot be separately identified or allocated between the two areas. In the event that Stagecoach is forced to exit the Tyne & Wear market, its Teesside business would have no local management and is too distant from other Stagecoach regions to combine with them. The result would be a requirement for a disproportionate number of staff to manage the smaller Teesside operation and an increase in its overhead costs, which would have to be met through higher fares for Teesside residents. It is unlikely that current head office staff based in Sunderland would wish to relocate to Teesside but would become surplus to requirements resulting in a redundancy selection process and associated costs Paint-shop Stagecoach has an in house paint-shop within its Sunderland depot including 5 employees engaged on the routine repainting of its fleet over a 3 year cycle. The QCS specification is that all buses must be repainted in Nexus livery within the first year, and then repainted every 4 years (a lower standard than Stagecoach). This would render the paint-shop employees redundant at the end of year 1 with associated costs. Stagecoach also has doubts over the local market capacity and the logistics of repainting the entire Nexus fleet of over 1,000 buses in years 4 and 8 of the contracts Print-shop Stagecoach has an in house print-shop within its Walkergate depot including 3 employees serving the requirements of its entire UK Bus Division. In the event that Stagecoach is forced to exit the Tyne & Wear market, or even its Walkergate depot, it would have to relocate the print-shop elsewhere within the UK (wherever it could find sufficient surplus space within an existing property), rendering the employees redundant with associated costs. Contractors Stagecoach employs a number of contract staff within its depots including canteen staff and tyre mechanics. Nexus is silent on the future of these staff
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7 DEPARTMENT FOR TRANSPORT – Quality Contract Schemes: Public Interest Criteria
A proposal to introduce a Quality Contract Scheme under the Transport Act 2008 must comply with the DfT QCS Statutory Guidance 2009 including consultation requirements and meet the 5 “Public Interest Criteria”. Nexus has failed to comply with the consultation requirements, in that it has failed to carry out the correct analysis in Test 4 of the economic, efficient and effective measures of its QCS Proposal, and therefore consultees are unable to respond to a correct assessment of the Proposal. Stagecoach finds it a matter of considerable concern that Nexus has not drawn its decision to ignore the Statutory Guidance to the attention of TWITA members. A full analysis of the extent to which Nexus’ QCS Proposal fails to satisfy the Statutory Guidance has been provided for Stagecoach by its advisors Herbert Smith Freehills (HSF) and Oxera which are attached to and form part of this response. Below is a summary of the key issues with reference to and explained in more detail by the expert analyses - 7.1 Test 1 – Passenger numbers That “the proposed scheme will result in an increase in the use of bus services in the area to which the proposed scheme relates” The QCS Proposal fails to meet this test because . Nexus has overstated the projected patronage decline in the Do Minimum scenario by overstating future commercial fare increases . The main reason for Nexus’ projected patronage decline in the Do Minimum scenario is its assumption that it will cut discretionary expenditure on concession travel and supported services, and has overstated the extent of such cuts. Nexus cannot argue that its own actions to reduce patronage support its QCS Proposal; this would create a significant perverse incentive and precedent for every local authority in England to cut bus service support in order to apply for a QCS, and effectively negate the deregulation of local bus services . Nexus’ projected 2.7% increase in patronage as a result of simplified ticketing is illusionary and unsupported by the evidence on which Nexus relies . Nexus’ projected 1.7% increase in patronage as a result of a Customer Charter is illusionary and unsupported by the evidence on which Nexus seeks to rely.
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7.2 Test 2 – Passenger benefits That “the proposed scheme will bring benefits to persons using local services in the area to which the proposed scheme relates, by improving the quality of those services”
The QCS Proposal fails to meet this test because . The main improvement in service quality arises from the proposed contract specification to require buses to Euro V or VI engine emission standards. Stagecoach agrees that this would be a benefit but limited to the first years of the scheme, after which the average age of the fleet would become higher than the current local and national average and would exceed 10 years by the end of the scheme. However, as the scheme is unaffordable, the benefit does not transpire. . Nexus claims several benefits arising from its proposed Customer Charter, none of which hold good under analysis a) Making Nexus the single point of contact will divorce passengers from any direct contact with operators. Operators will be solely concerned with contract compliance at minimum cost and will have no incentive to take an interest in passenger satisfaction b) The proposed Performance Management regime will not improve reliability and punctuality, which is a function of good scheduling, service management and variable traffic conditions. The QCS contains no proposals to improve bus priority and general traffic conditions c) The uniform drab livery and branding has no intrinsic value to passengers; the QCS eliminates passenger choice. Passenger information can be improved through a Voluntary Partnership Agreement without the need for a QCS d) The QCS Proposal will create 9 additional local government committees for consultation and decision making at additional cost, resulting in a cumbersome, slow and unresponsive bureaucratic process. Consultation can be improved through a Voluntary Partnership Agreement without the need for a QCS 7.3 Test 3 – Local Transport Policies That “the proposed scheme will contribute to the implementation of the local transport policies of the LTA” The QCS Proposal fails to meet this test because . The local transport policies of the ITA are contained in The ITA Bus Strategy for Tyne and Wear 2012. This document was adopted by the ITA
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after it first announced its intention to seek a QCS in November 2011. The Bus Strategy incorporates aspirations which are unaffordable and unachievable except through a QCS, and has been written support a QCS; this is a circular and self-fulfilling argument. The Bus Strategy has 3 key objectives . To arrest the decline in bus patronage. This objective is not achieved because QCS fares would have to increase annually by more than Do Minimum fares resulting in less passengers than in the Do Minimum scenario . To maintain (and preferably grow) Accessibility. The only potential loss of accessibility would be a result of Nexus’ own actions to curtail supported services. The objective is only achieved if the QCS Proposal is affordable, which it is not. The major operators have offered to conduct a joint network review with Nexus to reduce the cost of supported services without significant loss of accessibility under a VPA . Deliver better value for public money. Nexus already receives value for public money: its expenditure on concessionary travel is governed by regulations which leave operators in a no better and no worse position than in the absence of the scheme; its expenditure on supported bus services achieves best value through competitive tendering; Bus Service Operators Grant is fully funded by central government at no cost to Nexus 7.4 Test 4 – Economic, Efficient and Effective That “the proposed scheme will contribute to the implementation of those policies in a way which is economic, efficient and effective” The QCS Proposal fails to meet this test because . The Statutory Guidance includes specific definitions to be used in assessing these values which collectively result in a measure of value for money. Nexus has chosen to ignore the Statutory Guidance definitions and to substitute its own definitions and measures . The correct application of the 3 measures is examined in detail in the Oxera report attached to and forming part of this response, and is not repeated here. In summary: Nexus has substituted its own measure of ‘Economic’ and has failed to demonstrate the cost of resources used or required; Nexus has substituted its own measure of ‘Efficient’ and has failed to demonstrate the relationship between the output and the resources; Nexus has incorrectly applied the definition and measure of ‘Effective’, and failed to demonstrate that its objectives are affordable and achievable . Nexus’ failure to comply with the Statutory Guidance is not admitted or recorded in any of the documents which Stagecoach has seen, and did not
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become apparent until Oxera began its analysis of the QCS Proposal financial models. Stagecoach has requested that Nexus provide correct analyses of the 3 measures in accordance with the Statutory Guidance to allow Stagecoach to respond properly to the consultation. Nexus has refused this request. . Failure to correctly and fully follow the Statutory Guidance means that the QCS Proposal is incomplete and the consultation requirements have not been met. These are prima facie grounds for the statutory QC Board to reject the QCS application
7.5 Test 5 – Proportionality That “any adverse effects of the proposed scheme on operators will be proportionate to the improvement in the well-being of persons living or working in the area to which the scheme relates” The QCS Proposal fails to meet this test because . Although Nexus recognises that the QCS proposal will have material adverse effects on incumbent operators and engages the legal issue of the Human Rights of operators, it has failed to attempt any quantification of the effects of the proposed scheme on operators, and does not therefore satisfy the statutory consultation requirements . The most significant effect on operators is loss of future profits which are easily quantified based on Nexus Affordability Model, which shows the (undiscounted) difference over the 10 years of the scheme between the Do Minimum operating profits (described as Usable Reserves) of £352m and the QCS operating profits of £128m, a total loss of £224m. It is not relevant here that Nexus has overstated the Do Minimum profits and understated the Do Something profits. What is relevant is that Nexus seeks to confiscate a much larger sum than its own projected and exaggerated shortfall in its public expenditure budget, and that is totally disproportionate. . In its response to informal consultation by Nexus on its original QCS Proposal, Stagecoach noted its significant concerns that the QCS proposal could trigger material pension scheme deficits on the incumbent business, but leaving it with no means to fund these in the future; in particular that if it were forced to exit the local market its LGPS deficit would crystallise for immediate payment in full. Nexus dismisses these concerns in two bland pages with its view that they can be funded from future profits earned outside Tyne & Wear, without offering any reason why passengers in other parts of the UK
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should pay to fund Tyne & Wear pensions. Nexus also suggests this result is commonplace when operators acquire or sell businesses, failing to recognise that business acquisitions and sales include consideration of pension scheme funding, and in the case of the QCS Proposal the business is effectively confiscated with no prospect of a sale. Nexus’ response is not a serious consideration of a serious issue. . It is also obvious to TWITA and Nexus that the vast majority of these losses relate solely to Stagecoach as it has been historically the most profitable of the 3 major incumbent operators, and the scheme has a disproportionate effect. TWITA members and Nexus officers have in the past commented that they consider Stagecoach profits are “too high” showing subjective bias against Stagecoach. Stagecoach considers that TWITA and Nexus are seeking to set themselves up as economic regulators for which they have no powers and are acting maliciously against Stagecoach. In summary, Nexus has failed to comply with the statutory consultation requirements, has failed to apply statutory test 4 correctly, and has failed to demonstrate that the QCS Proposal satisfies the statutory tests.
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8 VOLUNTARY PARTNERSHIP AGREEMENT
Local bus operators in Tyne & Wear have formed the North East Bus Operators Association (NEBOA) to offer an alternative Voluntary Partnership Agreement (VPA) with TWITA and Nexus as an alternative to a QCS. There are already three VPA agreements in place with Nexus and the relevant District Councils, in Gateshead involving Go Ahead and in South Shields separate agreements involving Stagecoach and Go Ahead. Nexus has expressed a willingness to consider a VPA as an alternative to a QCS, but has been reluctant to engage in constructive discussions and has placed its unreasonable expectations on the commercial operators; in particular that TWITA should exercise a right of veto over commercial service and pricing decisions. Notwithstanding this difficulty, NEBOA has proposed a VPA containing the key elements summarised below. These are discussed in more detail within Stagecoach’s Oxera and HSF reports attached to and forming part of this response . An additional 50 all day buses to be provided commercially to be deployed where they will maximise the increase in patronage . A new range of affordable NTL bus to bus multi operator tickets to supplement the current multi modal ticket range and new discounted tickets for 16-18 year olds . Smart card ticketing, delivered at lower cost to Nexus based on the successful Oxford Smartzone scheme . An accelerated rate of fleet replacement to comply with PSV Accessibility Regulations in advance of the statutory date, and an increase in the number of low emission buses . Commercialisation of some marginal supported services with a saving to Nexus of £0.4m pa, and a joint review with Nexus of the commercial and supported network with a view to further reducing the cost of supported services to Nexus by up to £0.5m pa . No change to any individual service or fare more than once each year, no change to any service in the first year (other than for exceptional reasons), and fixed change dates once each year in each District . Agreed targets for service delivery, self reporting of actual results against targets, and agreed action plans for improvement, supported by penalty payments into a bus improvement fund . Automatic Vehicle Location systems to support Real Time Information on street and on smart and web based applications . A common brand logo with operators providing a uniform branded suite of paper and electronic passenger information . A common customer charter with agreed standards, fare refunds and mutual support in the event of operational failure
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. A formal governance structure involving TWITA, Nexus and the District Council to consult on and endorse any changes to services or fares The VPA Proposals meet all 3 TWITA Bus Strategy 2012 objectives by increasing patronage, maintaining accessibility and reducing public expenditure at no risk to Nexus, leaving the entire revenue and cost risk with the operators, and can be implemented much more quickly than the QCS Proposal. The VPA satisfies each of the 5 statutory QC tests, even though this is not a legal requirement . Patronage will increase as a result of an additional 50 buses to be provided commercially . Quality will improve as a result of accelerated fleet replacement, and customer charter standards will be achieved . The ITA Bus Service Strategy 2012 objectives of increased patronage, reduced loss of accessibility than under the Do Minimum scenario, and reduced public sector costs will be achieved . The correct measures of economy, effectiveness and efficiency will be achieved with a higher BCR than the QCS Proposal, and significantly less risk to public sector finances. . The VPA achieves similar public benefits to the QCS proposal in a significantly more proportionate way then the QCS Proposal and must therefore be preferred.
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9 APPENDIX A - DfT Statistics
The following are extracted from Department for Transport Bus statistical tables and demonstrate that the Tyne & Wear bus network operates successfully by comparison with national trends– BUS 0108 North East bus patronage by region remained relatively constant between 2004/05 and 2010/11 at 206m trips. In 2011/12 this declined by 3.4% to 199m and in 2012/13 by 4.0% to 191m. This reflects the effects of economic recession, rising unemployment and rising cost of living with less disposable income. Nexus’ annual report 2012/13 shows that Tyne & Wear bus patronage increased by 2m to 139m over 2011/12, outperforming the region and outperforming Metro. BUS 0108 North East ENCT bus patronage increased between 2007/08 and 2011/12 by 15.6% from 64m to 74m, due to a growing elderly population, increased take up of ENCTS entitlement and some transfer from fare paying to free travel. In 2012/13 this declined by 5.4% from 74m to 70m. As all travel is free, this must reflect the effects of economic recession and the rising cost of living with less disposable income. BUS 0108 North East bus patronage per head of population has been consistently the highest in the UK outside London since 1991/92. In 2012/13 at 73 trips pa it is 12.3% higher than the next highest region (North West at 65 trips). London at 279 trips per head of population is distorted by the large number of visitors and tourists; TAS has estimated from NTS data that a like for like comparison of trips per head of the local population in London is around 140, reflecting the higher population density. BUS 0109a Total North East bus patronage by local authority declined between 2009/10 and 2012/13 by 8.0% from 207.3m to 190.8m. Tyne & Wear declined by 5.0% from 129.9m to 123.4. Other English PTE patronage declines over the same period were: Greater Manchester -5.4%, Merseyside -3.3%, South Yorkshire -8.3%, West Yorkshire -8.4%, West Midlands -11.9%. Tyne & Wear has outperformed all other North East Authorities and all PTEs except Merseyside. BUS 0205a Total vehicle miles in English metropolitan areas declined between 1987/88 and 2012/13 by 7.5% from 318m to 294m. Commercial vehicle miles declined by 3.6% from 253m to 244m. Local authority supported miles declined by 23.1% from 65m to 50m. BUS 0302a Total passenger miles in English metropolitan areas remained constant between 2004/05 and 2012/13 at 3,600m due to falling passenger trip numbers being offset by rising passenger trip lengths. BUS 0406b Total operating cost per passenger journey at 2012/13 prices increased between 2004/05 and 2012/13 by 17.7%, less than the increase in operating cost per vehicle mile.
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BUS 0408b Total operating cost per vehicle mile at 2012/13 prices increased between 2004/05 and 2012/13 by 20.3%. BUS 0502b In 2010/11 English metropolitan areas received 18.5% of total national public subsidy (supported services + BSOG); London received 48.6% BUS 0503a In 2010/11 English metropolitan areas received 23.3p public subsidy (supported services + BSOG) per passenger trip; London received 27.7p on a much higher number of passenger trips BUS 0902 In 2012/13 82.8% of all non frequent bus services in England ran on time (within the Traffic Commissioners’ window of tolerance); In London 83.0%; in North East 83.8%; in Tyne & Wear 87.0% Bus 0903 In 2012/13 average excess waiting time for frequent services was 0.8 minutes in Tyne & Wear compared with 1.0 minutes in London National Travel Survey Data Tyne & Wear has the highest rate of growth in car ownership in England. This largely accounts for the decline in bus patronage Bus boardings per person per year 2002-2012 (11 year average) in metropolitan areas . No car/van 261 . One car/van 81 . Two or more cars/vans 42 . All people 111
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10 APPENDIX B - Extract from Nexus 2011/12 Annual Report for District Leaders
Tyne & NEXUS Sunderland Gateshead Newcastle North South Wear 2011/12 Tyneside Tyneside Total
ENCT Population -1% -2% -2% -2% -2% -2% Passengers '000 12% -17% 0% -3% 10% 1% Pass take up (pp) 1.5 2.5 5.0 2.3 2.3 2.7
Under 16 Concession Population -1% -1% 0% 0% -2% -1% Passengers '000 10% 25% 0% 14% 25% 13% Pass take up (pp) -7.7 -5.2 -22.1 -2.3 -5.2 -8.5
Secured Bus Services Passengers '000 2% 4% 36% -16% 7% 9% Mileage -12% -13% -4% 6% -1% -6%
Commercial Services Passengers '000 7% -16% -3% -2% 6% -2% Mileage 3% 10% 2% 24% -12% 6%
All Bus Patronage Passengers '000 7% -14% -1% -5% 6% -2% Mileage 0% 7% 4% 16% -7% 4%
Metro Passengers -10% -6% -5% -5% -7% -6% Track Mileage 0% 0% 0% 0% 0% 0%
Metro Gold Card Population -1% -2% -2% -2% -2% -2% Passengers '000 -9% 0% -6% -15% -7% -7% Pass take up (pp) -8.4 -6.7 -11.6 -18.8 -10.8 -11.2
Metro U16 Concession Population -1% -1% 0% 0% -2% -1% Passengers '000 24% 8% -5% 12% 10% 4% Pass take up (pp) 7.7 5.2 22.1 2.3 5.2 8.5
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