On the Buses Part 1: The Financial Elephant in the Room

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With the “Year of the Bus” drawing to an end, it seems an appropriate time for a short series on something that we perhaps don’t always cover on London Reconnections as much as we should – the planning, management and issues facing London’s bus network.

As the Chancellor’s autumn statement imminent, we thus begin with both a roundup of how things work and, perhaps more importantly, take a sober look at what perhaps represents the bus network’s elephant in the room – just how a future funding reduction might be addressed.

Getting back to basics

In December 2012 the TfL Board, looking ahead, asked for an update on the value for money derived from the bus contracts process and how rising demand can be accommodated within a constrained funding scenario from the Finance and Policy Committee. It was a weighty question, and one that took time to answer. Answer it they did, however, and in November 2013 they provided their reply.

For those unfamiliar with the way the network is planned and contracted, the paper represents a good place to start. It explains the procurement framework for TfL bus route contracts. TfL have a detailed cost model which allows them to act as an “intelligent client” in assessing bids and determining any tradeoffs between costs, benefits and disbenefits. The Independent Investment Programme Advisory Group (IIPAG) have benchmarked the tendering process and considered it mature and effective. It’s a process that is well established and understood by the bus companies themselves.

The level of competition between those bus companies for route contracts is, if the report is accurate, adequate – this despite consolidation in the market place over several years. In recent times Tower Transit (owned by the Australian Transit Systems Pty) has taken over part of the old First London business and Arriva owned TGM have won a contract in North West London. Uno Bus has also won their first TfL contracted service thus adding some more competitive pressure. Additional competition in North West London is potentially valuable for TfL given Metroline took over several garages from First London and now have a very strong position in that part of London.

Incentivising good performance

Key to the contract management process is how the contracts incentivise good performance. This is done through payment bonuses, deductions and the possibility of contract extensions. Interestingly, the report makes clear that TfL takes the realistic approach of not expecting bus routes to run at 100% performance levels in the vast majority of cases – the exception being on some school services.

Overall this model has proven relatively successful. There has been a progressive improvement in the network level of excess wait time (the extent to which buses run later than expected against service headway or timetable given the contractual performance level). The level of subsidy on the bus network has also been examined and the report shows that it has fallen from 28p per passenger journey (ppj) in 2008 to 15p ppj in 2012/13. Since the report, the figure for 2013/14 has remained at 15p ppj.

Indeed overall, between 2009 and 2012, the bus contract section of TfL Surface Transport has delivered £303m of efficiencies – a not insignificant contribution to the wider TfL Efficiencies Programme demanded by the Mayor. The level of bus operator profitability is also briefly touched upon and at a network level, weighted by market share, it seems that the operators’ profit margin has declined from 8% in 2007/8 to 4% in 2011/12, suggesting TfL have a reasonable grasp of the appropriate level of contract specification. There is apparently more detail on profits in the full paper but unfortunately this is excluded from the public version of the document.

Making hard decisions

If the above represents both a good guide to the state of play and, apparently, a good indication that TfL’s management of the network is solid, it is perhaps now time to move on to the potentially bad – what happens in the future to cater for growing demand and what might the impact be of a funding reduction for TfL bus services – a reduction that could run as big as 20%?

This is something that this paper also helps us to answer, but before too much hysteria about cuts sets in, we must set a little bit of context.

TfL are facing quite severe reductions to their revenue grant over the next 3 years. It is thus both entirely normal, and entirely appropriate, for TfL to construct a range of budget scenarios involving a spread of funding reductions. This they did last November when this paper was first produced in the run up to the Chancellor’s Autumn Statement 2013, with the 20% reduction seen as the “nightmare” scenario and smaller reductions of say 5% or 10% also being considered.

That its conclusions are still pertinent now is unfortunately due to the fact that the Chancellor of the Exchequer has maintained the downward pressure on revenue grants this year, those that support the provision of services, which means the bus network faces ongoing financial pressure and limited funds for expansion. The 2014 Fares Revision certainly offered little respite for TfL, given the political “gaming” that went on between Whitehall and City Hall in terms of the scale of the increase and the resultant delay which depressed the expected increase in revenue.

Allocating funding

What’s clear from the report, and indeed from Transport Committee meetings and other sources throughout the year, is that TfL remain confident that reallocating resources around the bus network and using spare capacity, where it exists, to accommodate growth are adequate methods of coping with increased patronage levels. There are no demand forecasts beyond 2021 but TfL are assuming that this patronage growth will follow the trend in population growth, with TfL forecasting an increase in capacity of 3% against an increase in demand estimated at 7%.

Beyond reallocating, the prospect of restructuring routes coincident with the introduction of Crossrail is also seen as a future option. The need for extra bus priority to maintain average speeds is also cited as an important aid to ensuring cost efficiency. This is one of the primary reasons why the TfL Budget, approved for 2013/14, has allocated funding, over 10 years, for removal of “pinch points” on the road network that slow buses down and to create new bus priority corridors in development areas – the quicker a bus can run a route, the faster it can be turned at the end.

Exploring the worst case

Turning to a 20% funding cut scenario, TfL explain that the initial approach would be to follow the usual business planning process which routinely looks at service volume, costs and fare revenue. The criteria that are normally used for network changes would be used in assessing a reduced funding scenario and TfL would seek to minimise disbenefits to passengers. However, should cuts reach that extreme level then the possible need to save £65m would likely give rise to the following four outcomes:

  • Reductions of 1 bus per hour during the midday, evening and Sunday operating periods on approximately 200 routes (roundly a third of the network). (For example a bus running every 15 minutes, 4 buses per hour, would reduce to every 20 minutes, 3 buses per hour).
  • The withdrawal of the 15 most lightly used outer suburban bus routes.
  • The withdrawal of the 15 most lightly used night bus routes (largely suburban routes).
  • A wider scale of reduction to some peak services plus withdrawal of some routes at weekends.

The first three elements above save £25m, £5m and £4m respectively. The final element would need to save the balance of £31m.

TfL did not list any bus routes in the paper that might be subject to cuts. However as TfL have now published the patronage numbers for each TfL bus service (except school buses) it only requires a little bit of sorting within a spreadsheet to come up with a potential list of low usage routes. Without listing them it is worth noting that removing those routes would certainly create a fair amount of criticism and concern in some of the outer boroughs which typically have lower levels of bus patronage than boroughs nearer to Central London.

Overall, TfL estimate that if the 20% funding reduction was implemented the end result would see a bus network that was 10% smaller overall with 5% fewer passenger journeys. TfL are required to consult with stakeholders about service reductions. It doesn’t take a great deal of imagination to guess what the likely response would be.

Beyond the paper

Whilst last year’s paper remains relevant, this is not to say that there hasn’t been further analysis of this potentially thorny subject since. Indeed the Finance and Policy Committee, having duly considered this paper, posed a series of further questions about the bus network. In particular, they asked the Head of Surface Transport to do the following:-

Provide further information, to a future meeting, on the options, issues and trade-offs for London’s bus services. The resulting paper would set out the long term demand and subsidy forecast costs, reflecting predicted population growth and present a wider range of options to reduce costs, and the relative value of each element, including:

(a) the costs and benefits of the existing provision of free travel;

(b) vehicle lifetime costs: setting out specification, maintenance and fuel costs over the lifetime of vehicles and comparing the cost of extending vehicle life against the cost of renewing fleets and the impact on reliability and the Mayor’s Air Quality Strategy;

(c) fuel costs; including how the risk was shared between TfL and the operators and the expected impact of the greater use of electric and hybrid vehicles;

(d) labour costs, setting out the savings achieved to date through developments such as I-Bus, and options for further savings; and

(e) the predicted impact on income and routes for the Night Bus service.

The responses to the above questions were expected at the Finance and Policy Committee in June 2014, but ultimately the resulting paper has (so far at least) not been published. Having let the Freedom of Information process grind its way to a conclusion, however, we are able to provide a basic breakdown of what it has added to the future options via a redacted version.

Managing the Fleet

There are no “shock horror” headlines in the paper about service cuts on the network which perhaps confirms the political context of the scenario set out in the November 2013 paper. However the paper does set out a number of thoughts about the items highlighted above. A lot of the key commercial data has been redacted from the paper but there are no radical options set out in respect of fuel cost and vehicle procurement risks.

The conclusions are that the private sector operators are well placed to deal with those risks because almost all of them undertake fuel hedging and vehicle procurement at a group level, thus bringing about cost savings anyway. The ability to cascade vehicles out of London in the event of contract losses is also seen as an advantage. The general endorsement of operators purchasing or leasing their vehicles is in contrast to the approach used for the New Bus for London. No change is proposed to the assumed maximum vehicle life of up to 14 years for buses used in London. Extending the vehicle life is not considered beneficial as older vehicles are less comfortable for passengers and much less likely to comply with the latest environmental standards. TfL does not want the likely time period for adoption of better environmental standards to be extended.

It is not possible to reach any conclusions about the scope for staff cost reductions as the key information has been redacted. This is entirely understandable given the need for due process to be followed in respect of any possible staffing changes as well as the commercial confidentiality surrounding operators’ costs.

Concessionary Travel

On the question of the costs of concessionary travel then TfL have released some very interesting numbers. The numbers relate to the revenue foregone from concessionary travel schemes that TfL fund to comply with Mayoral policies. They do not include the cost of extra services to cater for the demand caused by these concessions (most likely extra school time buses). These are separate from the Freedom Pass scheme that is funded by the London Boroughs and no cost for that scheme is stated in the paper.

In round terms the total cost of Child and Student concessions is currently £180m (£140m share for buses), for low income & employment concessions it’s £28m (£27m buses) and the pre 0930 Freedom Pass “relaxation” and 60+ Pass cost £40m (£28m buses). All figures are from TfL themselves.

These are pretty big numbers and while there are undoubtedly benefits in terms of reducing the scale of the “school run”, transferring trips to public transport, aiding access to employment and education and reducing social exclusion, if funding is reduced then it seems inevitable that a future Mayor might be forced to review these costs and at least consider scaling them back.

Night travel

In terms of the Night Bus network the June paper suggests that the Night Tube will likely lead to a reduction in demand for some of the radial night bus routes. It will likely not simply be case that this translates automatically to savings in all cases, as there may also be a need to provide extra suburban services to link with the Night Tube service. None of this is a surprise and any future changes will be subject to consultation. The one interesting remark is the assumption that adjustments to the night bus network will at least be cost neutral overall. This will mean a careful balancing act to scale back the radial routes to free up resources for the required suburban / feeder routes.

What does it all mean?

As we stated at the beginning of this article, it is important to avoid any kind of hysteria around the possibility of bus cuts. Both the 2013 paper, and its so-far-unpublished 2014 follow up, exist because good transport planning is about planning for the worst case as much, if not more, than you plan for the best. As we know from previous years, intensive lobbying takes place every year to try to secure as good a deal as possible for London’s transport, and in some ways the publication of a “nightmare” scenario for bus funding should always perhaps be seen in a political context to add some weight to what went on behind closed doors.

If funding cuts come to the buses, however, then at least we now have an idea of what impact they might have and where – whether in the worst case or hopefully in the best. Should they be required, it will be interesting to see how both TfL and the Mayor (whoever they may be) rise to the challenge.

Written by The Walthamstow Writer