Examination of Witnesses (Questions 240
WEDNESDAY 30 JANUARY 2002
240. When do you expect this report to be ready?
(Mr Leeder) The work is coming to a close at the moment,
it is going through the validation period. Professor Begg can
give you more details, but I think the current proposal will be
to publish probably in March or April.
241. Now a lot of county councils have complained,
a lot of local authorities have complained, that the emphasis
on quality corridors with higher profits has led to a withdrawal
of services on other routes, often at short notice; to what extent
do bus operators see their obligation to provide a network of
(Mr Leeder) The network is terribly important to the
bus operators. There has been a lot of network change going on
at the moment, and that is reflected
242. But you would not deny that there have
been quite a lot of instances, in fact, growing numbers of instances,
where it did look as if the operators were withdrawing the service
which had previously been regarded as being viable and then going
to the local authorities to ask for subsidy?
(Mr Leeder) I think there is limited evidence that
that has been going on; but what is going on, on quite a large
scale, is, a number of the operators are carrying out comprehensive
market assessments of their networks, and there is a general trend
at the moment away from a dense network of infrequent services
to a coarser network of much more frequent services.
243. But is that an assessment that you carry
out and carry into operation within a very short period of time?
(Mr Leeder) No. The ones I have been associated with,
generally there is months of research. But I think what we have
got to say is that we have always got to build our relationships
with the local authorities, and we are very keen, at CPT, about
having more consultation, we need to work more closely with local
authorities, and I think that the best practice operators are
doing that. We ought to operate a "no surprises" policy
on both sides; and these market research exercises are valuable,
and network change does occur and we need to talk to local authorities
and discuss the results with them.
244. What are the factors that bus companies
consider when they are reviewing their networks, Mr Leeder?
(Mr Leeder) One of the key things, it may be paradoxical,
in Light Rail, I just said, but generally we look to minimise
change, because an awful lot of the use of these networks is habitual,
so whenever we make a change we have to be very sure that we have
done our research properly. Having said that, what we are really
looking for is to understand the key drivers of demand, and generally
there are certain key factors that we look to, and a simpler network
is generally more easily understood by the public.
245. What about profitability?
(Mr Leeder) Sure; we look to increase profitability,
and essentially we do that by attracting more passengers. So these
network reviews really are all about trying to understand what
the shape of the network and the fares offers would be that would
encourage us to attract more passengers.
246. Social responsibility?
(Mr Leeder) Absolutely; because, if you look at the
profile of bus users, current bus usage is disproportionately
weighted towards low income groups, and journeys with a social
inclusion dimension are very important to our businesses.
247. Yes, indeed. I was not thinking specifically
in terms of the make-up of the majority of passengers, which is
a fair comment for you to make, I was thinking more in terms of
the geographical spread of those services. Because what is happening,
I think every Member around here would testify to it, is that
the Quality Partnerships, whereby local authorities invest money
in the infrastructure, and your companies invest money, as they
have, in new rolling-stock, are your priorities, and we are seeing
those routes becoming increasingly popular and more profitable,
that is a fact; but the feeder routes, the routes that are not
on the Quality Partnership routes, they are the ones that are
being cut back. How do you square that with the provision of a
(Mr Leeder) The issue for us, going forward to produce
growth, the bus industry, like all service sector businesses,
retail sector businesses, has got to be driven by passenger growth,
profit growth driven by passenger growth; the challenge for us
is to change the balance. We have moved away from a situation
where more or less the total network was in decline for a long
period to a position where we have now got some routes in strong
growth and some routes in exogenous decline; and what we have
now got to try to do is move the anaemic routes into the growth
248. Do you then cross-subsidise?
(Mr Leeder) We do.
249. Is it possible to let us have some information
about your member companies, in terms of their cross-subsidisation
policy and effect; is that possible?
(Mr Leeder) We can certainly give you information
about network effects, and, if you want to come back for clarification,
we can certainly do that.
250. Thank you. Could I ask about the cost of
tendered bus services, which we are advised rose 21 per cent last
year; what are the main reasons for this, and, I suppose, more
importantly, is it likely to continue?
(Mr Nimick) I think it is worth bearing in mind that
the figure of 21 per cent is over the life of a contract, so although
they rose 21 per cent that is over the life of a three-year contract.
So you are actually seeing growth, in terms of annual growth,
that is broadly in line with inflation, it is not an excessive
251. There is some interesting arithmetic there,
Mr Nimick; broadly in line? Which line is that?
(Mr Nimick) I think we need to talk about the factors
which actually affect the cost of . . . Over the last year, if
I can give an example, if I might, the average cost of secured
bus services per kilometre, excluding London, increased by 11
per cent to the operator. The average fuel prices, even allowing
for FDR, have increased by 10 per cent per annum, and the average
bus and coach driver's earnings per hour have increased, last
year, by 7 per cent per annum. So there has been a fundamental
increase year on year in the costs of actually running the business
of buses. The rise in tender prices over a three-year period matches
almost exactly that general level of inflation, in terms of cost
of provision of the service, increases in fuel and increase in
252. One observation and two further questions,
if I might, very quickly. The increase in labour costs, which
are drivers, basically, would that have anything to do with the
fact that when privatisation and deregulation came about we saw
a dramatic decrease in the costs and the income of drivers, and
so on? You are now having to react to the market, where you need
to recruit drivers. And, if so, is that likely to be a problem?
My two questions are, are you saying that the companies have had
to absorb something like 7 per cent per annum increase in costs,
and you are quite willing to do that, because you are there in
the pretty certain knowledge that you will be able to recoup it
when it comes to renegotiating the contract?
(Mr Leeder) Can I take the question in two parts.
On the labour costs, I think you are exactly right, and the situation
that the operators inherited from the public sector owners was
effectively that labour prices were above market rates. Now that
they are at market rates, exactly as you say, they move with inflation,
and in many parts of the country we are seeing labour prices moving
at much higher than 7 per cent, in London and the South East some
companies have been paying 10 or 12 per cent increases in recent
months. And I would expect, given the health of the economy, and
certainly we are budgeting for, our staff costs to rise way above
the rate of inflation for the foreseeable future. The second question
really is about can we expect these costs to be recouped. Well,
we are in competitive bidding for these routes, and we are in
competition on the commercial routes, with the private car and
with other operators, but all the other operators are as well.
So although there is obviously a competition to minimise one's
costs all operators in the area have got to pay the market rate
for labour, you cannot buck the markets, people demand a certain
rate of pay, and that affects all the bidders.
253. What I do not understand is, you absorb
the 7 per cent increase per year, in the hope that you will get
it back when you rebid for the tender. Now I would have thought
a more commercially sensible way of approaching it would be to
build in those increases every year; that implies that you are
pretty certain of getting the contract, at the end of the day?
(Mr Leeder) We take a risk, when we bid on a fixed-cost
basis for labour costs over a period. And one of the reasons why
local authorities effectively contract this out is that they are
transferring that risk to us; and, obviously, at the end of that
period, that is the point at which that economic equation is revisited.
(Mr Nimick) It is probably worth bearing in mind there
is one other factor, which is perhaps unique to this year, but
which is going to make itself felt in coming years. There has
been an enormous increase in the rate of insurance premiums. We
know they have been increasing by about 10 per cent per annum
over the last five years; this year, we are seeing operators reporting
increases of up to 20-30 per cent. There are fewer companies now
in the insurance market who are insuring coaches and buses, and
the response of that has been an enormous increase in premiums,
and that is having a fundamental effect.
254. So, as a group of trade organisations,
you would naturally be drawing that to the attention of the Government,
and pointing out that insurance companies are benefiting from
a difficult set of circumstances, you would expect that view to
be made clear?
(Mr Nimick) We cannot say the insurance companies
are benefiting from a peculiar set of circumstances; the insurance
companies themselves, certainly this year, as you well know, have
taken an enormous knock. Their prices will broadly follow the
risks that are taken. There is no doubt at all that, in terms
of public transport, we are seeing more personal injury claims
from people, very much as a result of advertisements that you
see on television, "Have you suffered an injury? Then no
win, no fee," and that has had an impact, there is no doubt
about that, on the industry.
255. Gentlemen, you have been very, very kind
and very patient. Could I just ask you, finally, Mr Leeder, are
you going to meet Lord Birt?
(Mr Leeder) I have been invited to see Lord Birt,
yes, I have.
Chairman: You have been invited; how nice. I
have enjoyed talking to you, and doubtless we shall talk to you
again. Thank you both very much.