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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 1 STAGECOACH Response to Tyne & Wear Integrated Transport Authority Quality Contract Proposal NON-CONFIDENTIAL (REDACTED) VERSION 9 APPENDIX 1 – Department for Transport Statistics 10 APPENDIX 2 – Tyne & Wear ITA Statistics 2 STAGECOACH Response to Tyne & Wear Integrated Transport Authority Quality Contract Proposal NON-CONFIDENTIAL (REDACTED) VERSION 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 3 STAGECOACH Response to Tyne & Wear Integrated Transport Authority Quality Contract Proposal NON-CONFIDENTIAL (REDACTED) VERSION 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. 4 STAGECOACH Response to Tyne & Wear Integrated Transport Authority Quality Contract Proposal NON-CONFIDENTIAL (REDACTED) VERSION 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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