Select Committee on Transport, Local Government and the Regions Minutes of Evidence

Examination of Witnesses (Questions 60-79)



  60. How many of those 16 per cent are cross-subsidised?
  (Mr Lockhead) A lot of them. Journeys, not just the routes. There are journeys within a corridor—it is cross-subsidised through journeys, it is cross-subsidised across the network, there is a whole series. And the reason we have to do that and we want to do that is because we sell a ticket for people to travel the whole network.

  61. What I am trying to get at is some idea of how much of the non commercial operation, which is the minority, is cross-subsidised because that will impact, one way or the other, the public subsidy required.
  (Mr Lockhead) The whole of the network, at various times of the day and week, has cross-subsidisation. It has to be because we do not know that we are going to carry the same number of people on every journey every day on that route, do we? It varies.

  62. I am told in my area that each route stands or falls on its own merit, and if it falls, it goes; if it stands, it stands, and that means public subsidy. It is important. Is there any way in which we can get a bit more clarity on how much cross-subsidisation goes on in your companies, where it goes on, and what effect that has on public subsidy requirements?
  (Mr Lockhead) I just find that it is almost an impossible task to include every route and every journey.
  (Mr Cochrane) Clearly, there is a proportion of our business that I think you are getting at which is subject to competitive tendering on a three year basis, which is where the local authority determine that there is a social requirement for that service. I think what Mr Lockhead is saying is that the core commercial network is run without subsidy, but within that core commercial network, there will be elements that we will cross-subsidise because it is in our interests to provide a complete network of services.


  63. But what Mr Stevenson was putting to you was that members who raise questions of bus services that have been removed are always told precisely this: "If this particular route is not viable, it is not viable." Now you are telling us that as a routine matter of economic maintenance you cross-subsidise those services—
  (Mr Lockhead) There is a point at which the number of people on a particular route just do not justify having the resource—

  64. We are not arguing with you, Mr Lockhead, we are trying to make sense of what it is you are telling us.
  (Mr Lockhead) We are telling you that there is massive cross-subsidisation both within the commercial network and the non commercial network, but there comes a point, in looking at the root structure, when you can see demand has fallen, maybe because there has been jobs lost in certain areas, or maybe because there is a demographic change. We therefore change the timetabling.

Mr Stevenson

  65. Is it possible to identify what cross-subsidy takes place in the non commercial 16 per cent?
  (Mr Lockhead) The non commercial is routes that are brought in for all sorts of different reasons. They are open book. They are tendered routes.

  66. Is it possible to identify—
  (Mr Lockhead) Every local authority has a list of them.

  67. So we can do that?
  (Mr Lockhead) They have it, yes.

  68. Could I ask two more quick questions to all three companies. What are the rates of return on your operations that you require, or is that commercially confidential?
  (Mr Lockhead) You mean a margin on sales?

  69. Profit, yes. Rate of return.
  (Mr Lockhead) In the past, the operating profit, as a margin of revenues, has been around 12-13 per cent. We need that to sustain the investment, and that margin is coming down. It is coming down as a result of higher costs for insurance, fuel, pensions, NI, and all the other things that you are well aware of.

  70. That is consistent with your—
  (Mr Lockhead) Yes.

  Mr Stevenson: I see.

Andrew Bennett

  71. When can we start crying about the rate coming down too far?
  (Mr Cochrane) The point at which we do not have sufficient funds to support further investment in new vehicles, because, clearly, profits fund that investment in new vehicles.

  72. You could still do that at 10 per cent.
  (Mr Cochrane) That is a moot point, I think. Our assessment is that you require around 12-13 per cent to support the significant investment that the entire industry has made. In fact, I think only in three out of the last nine years has the industry earned more in profits than it has invested in new vehicles, so our commitment is there in terms of investment, but we do need to earn an adequate return to support that ongoing investment.
  (Mr Lockhead) I think it is a key point that we invest more than we earn, year on year, and if you look at our investment record against the other levels of investment in the infrastructure for bus travel, you will see that we are much further ahead.

Mr Stevenson

  73. Is that rate of return required based on your operations as a whole, or does every subsidiary company have to achieve it?
  (Mr Clayton) Speaking for my business, we have a portfolio of businesses. The rates of returns in some of them will vary as a result of external factors. I can quote but one to you: the effects of Foot and Mouth last year had a fairly disastrous effect on the profitability of our North Wales operation. It would not come as a surprise to anyone. We have not closed down North Wales as a consequence. Equally, there have been occasions, to be absolutely blunt, where we have made a complete fist of things, and we need to put that right, and that has had an impact on margins.

  74. I do not wish to take you into great detail, I am simply interested in whether or not your rate of return your companies require, as has been indicated, is that for your operations as a whole, or do you require each of your subsidiary companies to achieve it?
  (Mr Clayton) Speaking for us, we are looking at the return as a whole. We have to balance up the good and the bad.

  75. Is that the case?
  (Mr Cochrane) Yes.
  (Mr Lockhead) There is no doubt we could not get the returns in Cornwall and some parts of the Lowlands of Scotland. It just would not be practical. There is no sufficient patronage base, and we do have a low return.

  Chairman: I have three Members trying to get in and I want brief questions, please. Mrs Ellman and Mr Campbell.

Mrs Ellman

  76. You do not like the Traffic Commissioner's national targets for reliability. Are you against targets, or do you have a new suggestion for us on how it should be done?
  (Mr Clayton) I think targets are welcome in the sense that it gives everyone something to aim for, but unrealistic targets clearly have little value. I think there has been a dialogue with the Traffic Commissioners which is still ongoing. Our view would be that a national target is very laudable, but it must be coloured by local experience. What can be achieved will vary from area to area.

  77. Are you saying, then, that you are in the process of agreeing local targets?
  (Mr Clayton) We are not at the moment. I think that is what we should be doing. There is some tension, and some tension is probably no bad thing between the industry and one of its principal regulators.

  78. If you had a Statutory Quality Partnership, there could be enforceable agreements where, let us say, the operators were committed to having a standard of buses or vehicles, and the local authority was committed to a certain infrastructure, both legally enforceable. Would you welcome that?
  (Mr Lockhead) If we have a Statutory Quality Partnership we have the same. We have partnerships where the local authorities—


  79. Let us not exchange too much time on this.
  (Mr Lockhead) Just what you have described.

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