Economic Perspective 2

BUS REGULATIOH Dl SOOTLAHD - A REVIEW OF THE FIRST SIX MOUTHS by John Farrington, Transport Research Group, University of Aberdeen and Tony Mackay, Mackay Consultants, Inverness

Local bus services in were in particular on the balance between deregulated in 1986. Since then there has operating losses on some routes and been a substantial increase in the supply operating profits on others, with of bus services and strong competition in sufficient surplus for capital investments the four main cities, particularly in and overhead costs. Bus operators were . This article reviews the able to sustain this situation against experience of deregulation over the first railway competition between the two world six months. wars, and both bus and rail transport experienced a boom in the 1940s and early 1950s, as wartime-suppressed demand for travel was fulfilled. However, car Introduction ownership, which began to increase rapidly in the 1950s and surged ahead in the 1960s, began to undermine the framework of supply based on cross-subsidy which was an The 1985 Transport Act introduced the intrinsic feature of bus operations. doctrines of market forces, competition and privatisation into the previously regulated system of the supply of local bus services. Since the 1930s control had been exercised through route licenses In 1961 the Jack Committee (HMSO) granted by regional Traffic Commissioners, identified a need for the injection of a quasi-judicial office whose function as funds to sustain the level of bus services defined in successive pieces of in rural areas and in the 1968 Transport legislation was to secure a public Act this proposal was implemented, local transport service in accordance with the authorities (counties) being given needs of the area. Integral to this discretionary powers to subsidise bus system was cross-subsidy within large operators. The thrust of this new operators between profitable and direction was emphasised in the 1972 and unprofitable routes. Indeed, this was an 1973 Local Government Acts, the Scottish explicit aim of the regulatory system and regions being required to secure the as a consequence of the need to protect provision of public transport adequate for operators' territories, market entry was the needs of their areas. Annual made difficult. Traansport Policies and Programmes (TPPs) produced by the regional councils were in effect a bid for finance to be used in transport spending, including revenue In this way unprofitable, mostly rural and support payments to bus operators. off-peak, services could be provided at no cost to the public purse. Additionally the Traffic Commissioners had responsibilities for operator safety, thus encompassing both quantity and quality However, through the 1970s the funds being control. provided through the Rate Support Grant came under increasing pressure both internally, as other council budgets competed for resources, and externally, as Clearly the continued stability of the central government exercised controls on regulated supply of bus services depended public spending. Increasing use of cars,

64 encouraged by road improvements, reduced Hereford and Worcester. These short term bus revenues and the spiralling results were adduced in support of implications of revenue support were deregulation since fares and revenue becoming a high cost item in regional suport payments 'decreased. Despite the council expenditure. absence of any other experimental deregulation, including urban or Scottish experience, the 1984 White Paper 'Buses' (HMSO) proposed deregulation of local bus services (Mackay 1984) and this was In the early 1980s the large operators carried through in the 1985 Transport Act. (the state-owned and the municipal undertakings) carried out market analysis (SCOTMAP) and produced increased efficiencies by tailoring supply more closely to demand. The rural The 1985 Transport Act networks in Scotland survived SCOTMAP largely intact. Only a few routes were totally lost, though frequencies were reduced (Farrington & Harrison, 1985) on The aims of this legislation, as promoted many rural routes, with a corresponding in the preceding White Paper, can be supply increase in areas of high demand summarised as: and market potential, which were mainly urban. Despite these improvements in efficiency, however, revenue support payments continued to increase. 1. To introduce competition into the supply of local bus services.

2. To increase consumer choice, and Towards deregulation supply levels.

3. To reduce fares. The 1980 Transport Act introduced deregulation of long distance bus 4. To eliminate cross-subsidy within services, resulting in a rapid expansion operators' networks. of a pre-existing competitive trend among bus operators and between bus and rail services. Fares were reduced, supply 5. To produce subsidy transparency, increased and vehicle quality improved. allowing the clear identification of The market expanded, partly at the expense 'value for money1 in revenue support of rail traffic (eg British Rail admitted payments. to a loss of £15 million revenue per year after the 1980 Act) and partly through genertion of new traffic. This experience 6. To reduce the total amount of revenue appeared to encourage the view that support. deregulation could be applied successfully to local bus services, though opponents pointed out that demand elasticity would 7. To maintain safety levels by undoubtedly be lower in the local context. reinforcing quality control.

8. To encourage innovation. Probably even more encouraging for advocates of deregulation was the 9. To maintain a supply of bus services experience of the 'Trial Areas'. These in areas of social need. were enabled under the 1980 Transport Act but only three authorities applied for Trial Area status - Norfolk (part), Devon (part) and Hereford and Worcester. None of these included urban areas and The mechanisms incorporated in the Act, by deregulation of the type embodied in the which these aims were to be accomplished, 1985 Transport Act was applied only in are lengthy but the main provision can be

65 summarised as: 26 October 1986:

Operators are free to enter the market Deregulation takes force. This was subject to registration of new or followed by a standstill period during changed services at six weeks notice, which operators were not allowed to the registration authority being the vary their registration. (In some Traffic Commissioner. areas deregulation effectively began in stages from June 1986.) The Traffic Commissioner has responsibility for ensuring that quality control standards are 26 January 1987: maintained. He also has the power to call public enquiries into situations alleged to be causing severe traffic Full deregulation in force, with free congestion. The Office of Fair market entry and exit for commercial, Trading (OFT) has the power to registered services subject to 42 investigate allegations of unfair days' notice. competition.

Regional Councils are notified of Monitoring of deregulation registrations and their roads departments, together with the police, consult with their public transport units on traffic and safety implications of registered services. Monitoring the effects and implications of deregulation is being carried out by a variety of bodies and interest groups. Regional Councils are empowered to 'Buswatch' is a mainly voluntary system of secure the provision of 'social' bus monitoring local effects on services, and services where it is felt that is co-ordinated from Lancaster University. registered 'commercial' services do The Scottish Office has commissioned work not provide the necessary supply from Newcastle University, based on case level, or are absent altogether. This study areas distributed throughout is achieved by inviting operators to Scotland and a review of regional council tender for specified routes, the policies. The transport and Road Research lowest tender normally being accepted. Laboratory includes Scottish regional councils in its review of policy in the deregulated environment and a survey of Concessionary fare arrangements (paid deregulation's effects in Passenger for by regional councils) are to Transport Executive (PTE) areas being continue. carried out by the Transport Studies Unit at Oxford, funded by the Association of Metropolitan Authorities and the PTEs, Municipal and PTE operators in includes the PTE in its remit. Aberdeen, Dundee, Edinburgh and Glasgow were to become separate companies.

In addition to these studies, the Scottish Consumer Council (SCC) commissioned a Deregulation was to proceed to a monitoring programme to cover the effects prescribed timetable, the main features of of deregulation throughout mainland which were: Scotland, to be carried out jointly by Mackay Consultants of Inverness and the Transport Research Group of Aberdeen by 28 February 1986: University. The review of deregulation impacts in Scotland presented in this article is based on the findings of this Notification by operators of intention work, conducted between October 1986 and to operate registered services, giving April 1987, and represents the views of time for the regions to secure tenders the authors. A full report was published before; recently by the SCC. The objectives of the work were to report Findings to April 1987 on the effects of deregulation, specifically the following topics: service characteristics including fares, frequencies, reliability and quality; unfair competition, if any; the effects The following summary of the authors' on revenue support levels; any problems findings is presented as a series of with access to bus stations; facilities conclusions and recommendations, together for the disabled; schools transport. The with speculation as to possible future information required was obtained by trends. interviews with regional council officers, bus operators, the Traffic Commissioner and OFT, and SCC's Consumer Network provided feedback from consumers on passengers' views of service changes etc. It should be made clear that it is as yet too early to make definitive judgements about the effects of deregulation in Scotland. Stability in terms of supply and market has not yet been achieved and The structure of the Scottish bus industry the implications for regional councils' revenue support payments have not yet worked through the system. It will probably be 1988 at least before firm assessments on the situation can be made. Local bus services in Scotland have been It should also be noted that changes dominated by the Scottish Bus Group and through Scotland have been far from the four municipal authorities in uniform and generalisation is often Aberdeen, Dundee, Edinburgh and difficult. Nevertheless some trends can Glasgow/Strathclyde. The latter had a be picked out and certainly the nature of near monopoly of services in the four changes to date can be reported. cities, while the SBG through its various subsidiaries provided most of the services elsewhere. There were a number of small independents throughout Scotland, with Competition particular strength in Ayrshire.

The Act clearly had the effect of bringing competition into local bus operations, to varying degrees in different areas but According to Scottish Office statistics generally focussing on the large urban (Scottish Office) the number of buses markets. Glasgow quickly emerged as the (vehicle stock) in Scotland in 1984 was area of fiercest competition, which 8,389, of which the SBG accounted for occurred mainly between SBG subsidiaries 36.6$, the local authorities (including on the one hand, and the Strathclyde PTE) 21.7% and the independent (the former PTE undertaking) on the other. or private operators 41.8%. Vehicle This resulted in a sharp increase in kilometres in 1984 totalled 431.8 million, supply in the central area and much- with the SBG providing 46.5%, the local publicised congestion. Peripheral housing authorities 32.1% and the independents estates also received increased service 21.3%. Of the total vehicle kilometres, levels with an independent operator, the stage (or local) services accounted Magicbus, competing in these areas too. for 66.1%, express services 7.5%, Minibuses have been used to provide high excursion/tours 1.5% and contract/private frequency services and to penetrate deeper hire 24.9%. into public housing areas.

One notable feature of deregulation was Strong competition also quickly emerged in that the four municipal operations became Edinburgh, again between the SBG and the limited companies. Unlike in , the former municipal undertaking (Lothian), Scottish Bus Group was not privatised and though this was less intense than in its operating subsidiaries are still in Glasgow. Dundee and Aberdeen were slower public ownership. to show strong competition but from

67 February 1987 this appeared, particularly in July. Nevertheless, the authors are in Aberdeen, again between the SBG strongly of the opinion that there will be (Northern Scottish) and the former substantial reductions in services, municipal operator (Grampian). particularly in the cities, in the near future.

There appear to be two sets of problems arising from the situation so far. There has been little expansion by Firstly, in order to achieve competition independent operators so far, with the it is necessary to have two or more large notable exception of the Perth-based operators in a territory. In Fife Region, which also expanded there is no large operator to challenge rapidly when express coach services were the dominance of the SBG subsidiary (Fife deregulated. There appear to be two main Scottish) and this has implications for reasons for the lack of change in the the tendering process, as noted below. independent sector. Firstly, some of them Secondly, it has been alleged that the SBG appear to be waiting until the market subsidiaries are competing unfairly settles down - probably in 1988- and the because they are drawing on reserves to excess supply has been reduced before finance a level of service which deciding on long term strategies. represents an oversupply for the market, Secondly, the entry or expansion costs of in an effort to drive competitors out of establishing a fleet of buses (say 30) the scenario altogether. This is the main capable of competing with the SBG form taken by competition so far, though subsidiaries can be very large and some fares competition can also be seen. therefore a significant deterrent. A formal complaint along these lines has been made to the OFT by Strathclyde Buses and the outcome is awaited with interest. Fares

There has been an increase in the supply of bus services. The Scottish Office Although competition has mainly been estimates that following deregulation the expressed in terms of level-of-service, total bus mileage in Scotland has there is also competition on fares. This increased from 177 million miles to 182 has not taken the form of a general million miles, a 2.8% rise. They estimate reduction but rather reductions designed that in Glasgow vehicle miles have to exploit the greater demand elasticities increased by 25%. In Lothian the increase of optional travel in specific market is given as 9%, with 3% in Edinburgh segments (shoppers, OAPs, young people) or itself and 24% in the surrounding season tickets offering discounts. The districts. In the rural areas covered by latter may cover no more than 10-15% of an the Scottish Office/Newcastle University operator's market but the benefits in study (Dumfries and Galloway Region), product loyalty are felt to be worthwhile. North East Fife, Badenoch and Strathspey, Such season tickets typically offer a wide and Inverness and Lochaber districts) a 3% range of discounts, up to about 25% off increase in vehicle mileage is estimated. full fare. On the negative side, some passengers have been faced with higher costs of travel, two trip types being affected in particular: school pupils These figures suggest that overall local acustomed to half-fare travel at lunch bus mileage in Scotland has increased by times have lost this concession in about 14%. In contrast the authors Strathclyde, for example; and through estimate that the number of journeys has journeys involving competing operators are increased by only 1.3%. more expensive since through-ticketing is not available.

This increased level of suply does not appear to be tenable in the long run. Cross-subsidy Already there are indications that the bus companies are desperately trying to reduce costs in order to maintain services at the present level. The SBG efforts to reduce This remains an important element in their wage bills led to widespread strikes operators' commercial (registered)

68 networks. It has not been 'squeezed out' while others have had to increase their by competition and is indeed the mechanism subsidy expenditure. However, given the being used to support competition as current instability in the industry it is operators move resources round to confront impossible at the present time to make any competitors or retain a 'territory'. It firm judgements on the overall outcome. is also the basis of many off peak operations, particularly evening and Sunday services. An increase in competition which reduces an operators' Office of Fair Trading revenue will therefore tend to reduce the cross-subsidy available to these types of services, and cutbacks will follow as has already occurred. One disappointing feature of deregulation to date has been the role of the OFT. There had been various complaints about unfair competition and anti-competitive The alternative of fares increases to practices. The sizes of the Scottish Bus maintain revenue is being avoided as much Group and the four ex-municipal operators as possible but inflation alone is are such that it is very difficult for the providing some pressure in this smaller independents to compete with them, direction. Another alternative, that of and there is therefore a very important increased efficiency and reduced costs, is role for the OFT to ensure that there is being applied but may not yield much fair competition in the industry. further saving. A consequence is the tendency for wage levels to fall as premium day and overtime payments are avoided as far as possible. Unfortunately, the OFT has shown great reluctance to deal with the complaints made to it and where is has become involved its procedures are very slow. Tendering There is a real danger that some independents will be forced out of business while the OFT is still considering the cases in question. A The policy of all regional councils has particular problem has arisen where been to seek reinstatement of non- companies have lost tendered services to registered routes through the tendering other operators but have subsequently process, but frequencies have been allowed decided to run commercial services in to fall in off-peak services and in some direct competition with the subsidised rural areas. Also some routes have been services. In some cases the companies truncated and diverted, leaving consumers involved have run free bus services, with reduced frequencies or greater presumably in an effort to force their walking distances. Network package competitors out of business. tendering in Fife appears to have had disappointing results from the local authority viewpoint. The large packages offered for tender prevented small independent operators from competing and The inability or slowness in dealing with allowed (SBG) to offer these problems, is, in the opinion of the discounting on whole packages to secure authors, one of the major deficiencies of tenders. the present system. The "policing" of the 1985 Act needs to be improved substantially.

In general competition for tendering has been less forthcoming than anticipated by the 'Buses' White Paper. This is partly Conclusions due to the small independents' limited fleet size and partly to their preference for waiting upon the outcome of the early stages of deregulation. The costs/savings There has been an increase in the supply to local authority revenue support budgets of bus services in Scotland since show a varied pattern on which it is too deregulation in October 1986. It is early to make definitive judgements. Some estimated that vehicle mileage has risen appear to have made financial savings, by about 14%. In contrast, the number of

69 passengers has increased by only 1.3$ so in the subsidy required. However, there far. are a few examples, notably in the Highlands, where competitive tendering has generated savings. Much of the increase in services is attributable to a duplication of services, particularly in Glasgow and Edinburgh, so The system of "policing" the 1985 the benefits to consumers may not be as Transport Act appears to be causing great as might be inferred. Another point difficulties, apart from the safety to stress is that there has been a net aspects of bus operation. The Traffic increase in peak (daytime) services but a Commissioner/Office of Fair Trading net decrease in offpeak (evening and functions have been criticised as weekend) services. As far as rural partially ineffective or too slow. There services are concerned there appears to appear to be particular problems because have been little change. The main reason of the inability or reluctance of the OFT for this has been the policies of most to investigate cases in Scotland. regional atuhorities to try to maintain such services at their pre-deregulation level and therefore "buy-back" those services which were not registered It is very unlikely that the oversupply of commercially. bus services at the present time will be reduced by a substantial increase in demand. It is much more likely that there will be cuts in services in the near future, particularly in the four main Continuity of services has been adversely cities. Until services have settled down affected in two main respects. Firstly, to a reasonably stable level, it would be there have been a lot of changes and a premature to reach firm conclusions on the lack of information about them. This was effects of deregulation. probably an inevitable problem of deregulation, the purpose of which was radical change, and should reduce over time as the new system of services settles References down.

Farrington, J H & Harrison, R J 1985 Overall, the authors would summarise the •SCOTMAP', Rural Bus Services and effects of deregulation on supply and fare Deregulation*, Scot.Geog. Mag., 101, 2 levels as being to increase overall 111-122. supply, though with decreases in offpeak and low patronage routes, and to reduce HMSO, 1961, Rural Bus Services : Report fare levels for those travelling ('Jack Committee1) frequently in the peak or in specific market segments in the offpeak. The HMSO, 1964, 'Buses' (W.P.), Cmnd. 9300 supply increases, however, may be temporary as operators move their Mackay, G A, 1984 'The Likely Impact of resources around an area to maintain Deregulating Local Bus Services', competition. Supply levels may also Report to the Scottish Consumer decrease if, as has been alleged, some Council. operators are financing their competitive effort from reserves in an "unfair" Scottish Office, 1986, Scottish Abstract manner. of Statistics Scottish Office, 1987, Bus Deregulation : An Interim Report on Registered Most local authorities have adopted Services and Operators. policies of trying to maintain services at their pre-deregulation levels and have not therefore sought to "buy-back" services which were not commercially registered. The financial implications of these policies are not yet clear, but there seems to be increasing evidence of a rise

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