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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 10-i
House of COMMONS
TAKEN BEFORE the
Competition in the local bus market
Wednesday 16 May 2012
Peter Hendy CBE
Jeremy Peat, Douglas Cooper and Adam Land
Norman Baker MP
Evidence heard in Public Questions 291 - 419
USE OF THE TRANSCRIPT
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Taken before the Transport Committee
on Wednesday 16 May 2012
Mrs Louise Ellman (Chair)
Mr John Leech
Examination of Witness
Witness: Peter Hendy CBE, Commissioner of Transport, Transport for London, gave evidence.
Q291 Chair: Good afternoon and welcome to the Transport Select Committee. Could you tell us who you are, Mr Hendy, for our records?
Peter Hendy: My name is Peter Hendy. I am the Commissioner of Transport for Transport for London.
Q292 Chair: Many parts of the country look with some envy on London. It does not have a deregulated transport service and a lot more people use buses in London than they do elsewhere. It has a much more comprehensive service. Are you satisfied with the way bus services are running in London?
Peter Hendy: Yes. The system that we operate as an authority was established first in 1985. It has evolved over time to changing political and economic conditions. I came back to Transport for London in 2000 to be the managing director of Surface Transport. I ran that system for six years, and in the process I changed the parameters of what had originally been established in competitive tendering terms reasonably substantially. The view of both the previous Mayor and now the present one is that the London bus service is satisfactory and the system that provides it is satisfactory. If it helps you, in terms of competition, we still have an average number of bids per tender of just under three. We have all the major players except National Express, who used to be in the market, and they are actively competing with each other.
Q293 Chair: Are you satisfied that you are getting value for money and that there is enough competition in the bids?
Peter Hendy: There are 700 bus routes in London of various sizes, ranging from ones with one bus to ones with 70 or 80 buses. An average number of bids, as I say, of just under three is a demonstration of adequate competition. The operators never fail to tell me that their margins could be higher, but it is their competitive bids that reduce them, which is entirely satisfactory from the point of view of a public authority spending public money. Generally, of course, they combine their complaint about the relative lack of margin with a request for more work, so it is hard to see that actually they are not doing reasonably well out of it. We do obviously have a duty to make sure that changes in the market-acquisitions and changes of ownership-do not reduce market competitiveness, but I do not think there is any evidence that the market is insufficiently competitive.
Q294 Chair: What is the amount of financial support to bus services in London at the moment?
Peter Hendy: I could write and tell you exactly what the sums are. In my recollection we got up to about £500 million a year. It is now declining, as you would expect, in a position where we had a substantial cut in grant from Government due to the public spending review. The Mayor has been pursuing, at least until now, a policy of fares that are recently RPI+2. The amount of public support is declining in line with his policy.
Q295 Chair: The degree of bus use in London has gone up by a lot, while in other parts of the country it has either declined or more recently has remained stable. What do you think is the reason for that difference?
Peter Hendy: One of the reasons for the subsidy in London is the purpose of the bus service. People do not travel as an end in itself. They travel in order particularly to gain employment and create economic activity and, hopefully, growth. One of the characteristics of the London bus service and one of the reasons it needs support is that in the peaks we plan to carry everybody who presents themselves. We are not trying to limit peak capacity on the grounds of the good economics of the bus service; we are trying to create circumstances in which people who live and work in London can get to work.
Those peak buses are very expensive, but they also create the circumstances where the bus service is catering for demand for it at the fares that are charged. Having got that peak service, we are able to offer off-peak services relatively cheaply. The consequence of that is that most London bus services now run at a frequency where you do not need a timetable. You only need to know that they are more frequent than five buses an hour and so you just turn up and go. All of those characteristics-together with reliability and security, because we pay a significant sum to the Metropolitan Police for policing on buses, and good information-contribute, as does the growing population, to increasing bus usage.
Q296 Chair: You are saying that you have set out to maximise the usage of buses at peak hour times.
Peter Hendy: We have set out to carry everybody who presents themselves at peak hours. Under the GLA Act it is the Mayor who sets the fares. The previous Mayor, for example, decided to give free travel to kids under 18 in full-time education. The current Mayor has continued that policy. We have had to expand the peak bus service to carry those people, even though in those circumstances there are no fares at all. But that is the right thing to do in circumstances where we and the Mayor judge that provision of the bus service is a really important ingredient in the economic growth of London.
Q297 Chair: You are looking at buses as part of economic growth.
Peter Hendy: I think that is entirely right. I have learned, certainly in my recent career working for the Mayor, that you do not make a case for good transport on transport grounds; you make it particularly on economic growth and social grounds. That is, I believe, why both Mayors have consistently supported the development and high quality of the bus service; they believe that it contributes to London’s economic success.
Q298 Mr Leech: Hypothetically, if bus services in London were deregulated, what would be the impact on services?
Peter Hendy: The first thing to say is that I have absolutely no evidence that anybody intends that, whatever their politics in London’s government, and we are responsible to the Mayor. I suppose I could best answer that question from the point of view of having been a bus operator. I would certainly not seek to cater for the maximum peak demand at affordable fares because it would give me a cost profile where the last peak bus would be extremely expensive and I would never recover it from the fare income. In effect, every peak bus that we put on costs money, so we are trying to do our best to restrain the number of peak buses that we put on by managing the service to absolutely suit the demand at the peak level.
What I would do is what you can see people doing in the rest of the country, which is trying to flatten out peak demand through fares and service provision, and then run an adequate all-day service with those sorts of resources. If we tried to do that here, we would simply leave thousands and thousands of people behind, and that would be entirely unsatisfactory, certainly if you adjudge the purpose of the bus service to be the one that I have set out.
Q299 Mr Leech: Would we see an increase in attempts for bus services to compete with light rail and heavy rail services?
Peter Hendy: In London you probably would not. The average journey length on the railway network in London is very substantially more because of the size of Greater London and the pattern of commuting. So I think it would be less likely. I still think the biggest thing that you would see would be a sharp change in peak fares and peak provision, simply because it is entirely uneconomic on a rational basis for the provider alone to provide the last peak bus.
Q300 Mr Leech: In places like Manchester, for instance, arterial routes have tons of buses and other areas have very few and services have been massively restricted. Would we see that sort of model in London?
Peter Hendy: I guess you might. It would depend on the fare levels. Clearly whoever wrote the GLA Act decided that setting fares in London was a political act because it was reserved to the Mayor as the Mayor, and not the Mayor either as the Chair of the Transport Authority or the Authority itself. There would have to be a sea change in the level of fares if it were to replicate anything like the rest of the country. It would be quite hard to see. I do not know what excessive provision is. The ideal bus service is so frequent that you do not need a timetable and so reliable that you can turn up and catch one. Yes, you might see a preponderance of buses on major corridors rather than in lower density suburban areas.
Q301 Mr Leech: We would potentially see more competition in some areas, but would we actually see the bus companies making any more money?
Peter Hendy: It would be radically different because of the level of subsidy. I have to calibrate my financial years, but from memory the subsidy going into the bus service is about £400 million. If that is not there, which is one of the features of deregulation-the original intention in 1985 was to reduce substantially the public contribution to support of bus services-then the whole picture would look radically different. Fares would be much higher and the general provision of service in any event would be much lower. Yes, there might be overprovision on some corridors. I suspect that in some parts of suburban London the housing densities are so low that there probably would not be any service.
Q302 Graham Stringer: You said nobody had withdrawn from the system. I seem to remember that Stagecoach or FirstGroup withdrew at one stage from the London market, didn’t they?
Peter Hendy: We have had various people come in and out. National Express sold their interest to Abellio, who are otherwise the Dutch National Railways. Stagecoach sold their operations to Macquarie but more recently reacquired them. FirstGroup have just recently sold one depot to Go-Ahead.
Q303 Graham Stringer: Both Stagecoach and FirstGroup have withdrawn as well as National Express. Can you explain to the Committee why you think they withdrew?
Peter Hendy: I have heard it said that FirstGroup sold the depot because of low margins, but I am not sure that that holds up because another major commercial player bought it. I think it is on the public record that Stagecoach sold their bus companies to Macquarie for a very high price and bought them back at a very modest price.
Q304 Graham Stringer: That is good business.
Peter Hendy: It seems to me to be good business but it is not evidence that you cannot make any money in this market, because evidently they would not have returned at any price were that the case.
Q305 Graham Stringer: Who should not be in the bus industry? You made a statement recently that, "There are some people in the bus industry that should not be there." Who are they?
Peter Hendy: That was a reference for others’ benefit. I participated in what was rather gloriously called "The Great Bus Debate". I referred specifically to the traffic commissioners, their regulatory functions and the amount of resource and support that they had. Yes, I did say that I thought there were some people who should not be there. That was a reference to the fact that I think the resource that goes into the regulation of the bus industry outside London is frankly insufficient, and you can get into and remain in the bus industry for rather too long in circumstances where, if there were more regulatory activity and more inspection, you would be found out quicker.
As more of an anecdote, when I took over Surface Transport in 2001 I found people on our list of approved tenderers whose vehicles I would not travel in as a citizen in the places where they operated. I took the view that there were people there who had been properly issued with a licence by the traffic commissioners, bearing in mind the criteria they had to adopt, but who were frankly unsuitable to run a high-quality service in a city like this. We took them off the tender list. Running urban bus services in developed first-world cities is a serious activity, and you need to show more than the basic conditions under which you can gain an O-licence to do it. We apply more stringent criteria for people to provide bus services in London, and indeed award tenders to some extent on people’s ability to do what we are currently asking them to do.
Q306 Graham Stringer: So your remedy would be more traffic commissioners, more officials working for VOSA and probably tougher regulations as well.
Peter Hendy: I think all three of those things are justified. I would say, as I have said before, that the commissioners are one of the few regulatory authorities in both the bus and haulage industries who are greatly supported by those industries. They deserve more support than they get in their own activities. The policing activity of VOSA, as it were, could also be better supported than it is.
Q307 Graham Stringer: That is very interesting. The Competition Commission’s report does not apply to London, but have you read it?
Peter Hendy: I have read the summary and I have read some parts of it. It is a substantial document.
Q308 Graham Stringer: What do you think of what you have read? Can you tell the Committee what you think of the recommendations they have made?
Peter Hendy: I share some of the industry’s views that it seems to be a very weighty tome and a pretty major distraction without a great deal of outcome. It seemed to me not to directly answer the questions about whether the current system served the passengers well and what the reason for the provision of a bus service actually is. In my opening remarks I deliberately referred to the economic development and social purpose of it because I think the reason why the Mayor places such emphasis on the transport system in London is in order to support London’s economic growth. That is the reason why you seek to move people about on public transport. There are clearly other issues like congestion. In those terms it seems to me that, whether or not they feel they were asked that question, it is not a question that was answered. It seems to me to be at the heart of why it is that you might want to run certainly a good bus service in urban areas. If you can answer that question and if you can then determine what level of public support you would be prepared to put into that system, then defining how the system would actually work seems to me to be much easier to do.
Graham Stringer: That is very helpful; thank you.
Q309 Jim Dobbin: My area is Greater Manchester. A number of the members of the Committee are interested in comparing their bus service provision and how they are run with areas outside London rather than being part of London. In that area we have two large companies: Stagecoach and First Bus. Do you think these companies are too powerful? The reason I am asking that is because, yes, you are advocating more control and more regulatory powers for the traffic commissioners, but we have passenger transport authorities as well, who have certain inroads into controlling or at least some control over those companies. Why do you think they get away with what they get away with?
Peter Hendy: The best way I can answer that is that in my position it would be much less satisfactory to have both the amount of control and the amount of responsibility we have if we had insufficient resource to buy what is needed. The real difficulty in a place like Manchester is that, for the former PTE, or now the ITA, to have real influence over bus operation, frankly you need to be able to buy it. You need to be able to buy the services you want or have such an accord with the people who run them that what they are running on a commercial basis accords so closely with your view about what is needed for the economic development benefit of the city that it is exactly the same. What I don’t think you want as a public authority is a lot of responsibility for something that you can barely influence because you have no cash to do it.
That seems to me to be why you keep coming back to this question about what the point of the bus service is, who wants it to do what and who should then be responsible for its provision. Frankly, if public authorities have very little money to spend, or could spend money on it and do not, then you might be better to leave it to these people, however unsatisfactory or satisfactory you feel their provision is, because you have no public money to influence it. Again that goes back to the point I made about peak services. If one of your overwhelming priorities is to get people to work, school or whatever, then that provision itself beyond the normal flow of traffic all day is an expensive thing to do, and probably needs to be paid for at reasonable fares.
Q310 Jim Dobbin: So I have to tell my constituents that we have no way of influencing this whole process.
Peter Hendy: I am not sure I am saying that. It is a whole other question about the degree of devolution of finance in major urban areas and the extent to which the politicians in those areas can control it. All I am saying is that if I was running one of those ITAs and faced with the sort of money that they seem to have available, you would not be able to do much.
Q311 Chair: What lessons can transport authorities outside London learn from the London experience?
Peter Hendy: There is one obvious lesson, even though it might not have been picked up electorally in the recent decisions about Mayors. I am sure that the authority that I run, which also provides, as you know, the tube and other things, has been much better provided for financially by having somebody in a strategic political position in London as a region who can argue for the financial resource in order to develop the city’s economy. In the course of that it has provided us with the money. We could always spend more if there was some, and the policy is to make it decline in accordance with the public spending review. That has given us the resource to have this huge influence over the provision of the bus service, the way it is provided and the sort of services that are provided.
As I said in the Great Bus Debate, that is at least a sort of choice. If you believe the provision of transport services is really important in urban areas for those reasons, then actually having a politician in charge who can argue with Government for the financial resource you need to do it is extremely important. If the politician is not there, if there is no strategic authority and if there is no money, you are most unlikely to see the sort of result that we have produced here.
Q312 Chair: Do you think the nature of the system is relevant as well? Do you think there should be more joint working, whether it is through partnerships or contracts, between the transport authority and the bus operators?
Peter Hendy: That is important for a number of reasons, one of which is that the two pieces of our system that mean the most to passengers who go round London are consistent information provision and common ticketing. There is no doubt at all that those two features of all the public transport in London are really the backbone of the provision. The fact that the Oyster Card is used on every mode of transport and the fact that the information provision is consistent, complete and can be accessed without reference to who runs the services is really important. I cannot believe anybody would not support those developments in the rest of Britain. As you know, there have been some strides towards it. It is much easier for us to do it in London because of our control over the whole system, but those are good things to do anyway. The Competition Commission is trying to say that at the same time as trying to sort out how you do it in a market that they would otherwise rather see as competitive. That is a bit of a curious animal to devise.
Chair: Thank you very much, Mr Hendy.
Examination of Witnesses
Witnesses: Jeremy Peat, Chairman, Douglas Cooper, Inquiry Director, and Adam Land, Director of Remedies, Competition Commission, gave evidence.
Q313 Chair: Good afternoon, gentlemen. Welcome to the Transport Select Committee. Could I ask you to give us your name and position for the record?
Jeremy Peat: I am Jeremy Peat. I am Chairman of this particular Commission inquiry. On my right is Adam Land, who is the Director of Remedies at the Commission. On my left is Douglas Cooper, who is Director of this particular inquiry.
Q314 Chair: Thank you very much. You have just heard Mr Hendy tell us that he thinks that the Competition Commission is trying to say that joint working between the transport authorities and the bus operators is a good idea as well as promoting competition. Is he right or are those two incompatible things?
Jeremy Peat: We do not believe they are incompatible. As one of our recommendations has suggested, the Department for Transport and the OFT should convene regular forums at which bus operators get together with local transport authorities, PTEs and the Department for Transport to discuss how partnerships are working in different parts of GB and how lessons of good practice can be learned, and how one can avoid going too far along the route of working together-where one can get to unsatisfactory endings, if you like. We certainly believe that partnerships have been very successful and there are lessons that can be learned. We would encourage more examination of where their actions could be added to.
Q315 Chair: In your report you say that you support "sustained head-to-head competition", but you also find that that is very rare, at least at street level. Why do you think that is the situation?
Jeremy Peat: We have a situation where, in urban areas, something like, on average, 79% of the services are provided by the major operator in that area. There is quite substantial aggregation of the service. We do have examples of sustained head-to-head competition in both urban and rural areas, which we refer to in the report, but we believe that there are barriers to entry. There are inhibitions on entry and competition, and we believe that if these are reduced or removed, there can be more scope for both actual competition and the threat of competition, which will encourage operators to behave more in the interests of passengers, which after all is what the inquiry should be all about.
Q316 Chair: Is it realistic to have sustained head-to-head competition at a route level on a very wide basis, because that does not seem to be happening?
Jeremy Peat: We have seen examples where it does happen. Oxford is one area; Sheffield and Nottingham are other areas. There are examples where it does happen. There are examples where there are other types of competition. There may be competition between buses that are coming into the area and buses that operate within the area. There may be competition by the type of product that is offered. A different quality of product may be offered by one provider as compared to another. There are various ways in which competition can and does take place. We believe there could and should be more. We believe also that the threat and scope for potential competition will also bring benefits.
Q317 Chair: Is it consistent to say that there should be more of this particular type of competition and at the same time support partnership working?
Jeremy Peat: Yes. There are examples where the partnerships involve two or more operators who work together with the local authorities to make sure that bus use generally is encouraged, that there are higher parking fees and that there is more access for buses so that one has general encouragement to the bus product, and at the same time there is competition between operators on particular routes. That does and can happen.
Q318 Mr Leech: Can I ask the three of you when was the last time you went on a bus?
Jeremy Peat: Monday.
Douglas Cooper: Last week.
Adam Land: Last week as well.
Q319 Mr Leech: So you are all regular users of the bus.
Jeremy Peat: Yes.
Q320 Mr Leech: Is that in London or outside London?
Jeremy Peat: I live in Edinburgh, so I regularly use the bus in Edinburgh and the Lothians. My colleagues are London-based.
Adam Land: I live in London.
Douglas Cooper: I live in Sussex.
Q321 Mr Leech: I live in Manchester. I sometimes get the bus in Manchester; I sometimes get the bus in London. I would certainly argue that the bus services in London are significantly better than any other place that I have used bus services in Britain. Would you agree?
Jeremy Peat: I am not a regular user in London. I tend to use the tube more than the bus but I certainly hear good things. We looked at the bus service in London as part of our inquiry even though it was not within our remit. We looked to see what we could learn from it. Certainly there are very positive messages that come out. But I would remind you that the subsidy per passenger for bus from the public purse is something like three times or upwards in London compared to other metropolitan areas in England.
Q322 Mr Leech: But, by general consensus, most people would argue that bus services in London, however much more expensive they might be, are better than in other parts of the UK.
Jeremy Peat: I think some people would argue that bus services in Edinburgh are pretty good as well. I do not think it would be a matter that was agreed across the UK, but I am sure there are a number of metropolitan areas that are jealous of the service that exists in London.
Q323 Mr Leech: Do Mr Land and Mr Cooper agree with that, as users of London transport?
Douglas Cooper: My personal experience is that the service is better in London in terms of the quality of the vehicles and the frequency of service.
Adam Land: I have not used the bus outside London a great deal. I think the key point that makes it difficult to make strong comparisons is this funding point.
Q324 Mr Leech: I am anxious to get to the bottom of why the inquiry came to the conclusion, with which you appear to agree, that increasing competition is difficult on the whole, and strong competition between bus services is pretty rare, yet you think that is better than the system of franchised bus services we have in London, which, by general consent, is better than where we have deregulated services where they may or may not be in competition.
Jeremy Peat: The first point I would make, as I tried to explain to Mrs Ellman, is that we believe it is feasible to enhance the extent of competition across GB in bus services, and that the measures we have proposed as remedies will work to that end and will lead to further competition that will be to the benefit of passengers. We looked at the option of franchising as an alternative for other parts of GB. We noted the costs in London. We also noted that London went straight from a publicly owned bus service to a franchised service. Many would argue that that is somewhat easier than going from a deregulated privately owned service to a franchised service. We noted that and we genuinely believe that in terms of practicality and proportionality the measures that we have proposed are more appropriate and more likely to bring benefits for passengers.
Q325 Chair: But you do contradict yourselves, because you did start off by reaffirming that you did not see more partnership working as an alternative to a competitive system. Now you are suggesting that more competition is the solution to get better services.
Jeremy Peat: Apologies if I have not been totally clear. We certainly believe that more partnership working in certain instances can be beneficial as part of this process. That is one of the areas where we have encouraged this coming together of operators with local transport authorities, agreed with the DfT, working together to see how they can learn from experience and how partnerships can be increased in number and made of more value to passengers. That, we believe, can work alongside the other remedies we propose for encouraging more competition.
Q326 Graham Stringer: We had FirstGroup before us a few weeks ago. They told us that they spent £3 million making representations to the Competition Commission during this inquiry. Can you tell us how you saw their expenditure of that £3 million? What did they do to present to and influence you?
Jeremy Peat: I have no idea what they spent and we have not asked them.
Q327 Graham Stringer: I am telling you that they spent £3 million.
Jeremy Peat: We certainly saw a great many responses from them to the papers we put out. We held several hearings with them. They employed lawyers, economists and other advisers to look at the proposals and the analysis that we have undertaken. They were very diligent in their co-operation with us and in their responses to papers and propositions.
Adam Land: We ran quite a hefty process. I do not think we would deny that we asked companies for a lot of information and data, and to do a lot of analysis. We put out a lot of working papers on which we seek views. Companies who are main parties to our investigations put in a lot of time to respond. They have choices as to how and in what depth they respond to each paper. I do not think we would deny that we place demands on the people who are parties to our inquiries.
Q328 Graham Stringer: Did they just provide you with economic analysis and legal responses or did they cross the line? Were they lobbying you?
Jeremy Peat: They were arguing their case very strongly. When we had economic analysis that we had undertaken, we showed it to them and we would have a workshop with them, and others, where their economists and the economists we had employed within the Competition Commission debated and discussed at some length and some complexity. I am not sure if the word is "lobbying", but they were certainly arguing their case very strongly to us throughout the whole process, as were the other companies.
Q329 Graham Stringer: Were there private meetings that were not technical? Were there meals or anything that I would consider to be lobbying as opposed to just an exchange of technical information?
Jeremy Peat: No. Our hearings were on the record. There would have been discussions between members of the teams and members of the companies about some questions of detail and fact, but we certainly did not get together behind closed doors or in smoke-filled rooms to discuss issues.
Q330 Graham Stringer: That is categorical. Why did you change the recommendations from the draft report to the final report?
Jeremy Peat: We undertook more work. We listened further to the representations and the comments we received, and we worked towards our final conclusion. It was taking account of more evidence, more information and thinking harder. This was a long process.
Q331 Graham Stringer: Can you be slightly more specific than that?
Adam Land: I will take you through the process, particularly on how we worked. After about 15 months of our investigation we published what we called our provisional findings, which set out our views broadly on the competition questions we had been asked. Then we entered into a phase where we considered remedies. At the start of that we published what we called a remedies notice, which set out a range of options that we were going to consider during the final nine months of our investigation. There were a range of options with a view to having a consultation on those options. Franchising was one of the options that was being considered alongside partnerships, multi-operator ticketing and so on.
We then collected evidence from a range of parties about those options; we came to a view as to which was our preferred package of options, which we published in a provisional decision on remedies with probably about three months of the investigation to go. Then we published a final report.
There was not a great deal of change between our provisional decisions and our final report. Where our position developed was moving from our initial list of the options that we were considering to our provisional decision and to our final decision. I would not categorise it as there having been a big shift from having been minded to do one set of remedies and then switching over to something else. It was a process whereby we narrowed down the options until we had come up with the package that we thought was the right solution in this market.
Q332 Graham Stringer: You were talking about on-road competition in response to Louise’s questioning; your report explicitly accepts that this is likely to lead to lower standards. In your words, "There is a risk that partnerships have potential to restrict competition if they specify unnecessarily high quality standards." Why shouldn’t people in Sheffield, Manchester and Liverpool have high standards? Why should it be a race to the bottom?
Jeremy Peat: We are not suggesting it is a race to the bottom. If one takes the question of quality away from the companies and imposes quality standards, then that may impose costs upon them, which will lead them to a different outcome than would have been the case if they had been able to determine their own quality. I think that is what one is saying. Certainly the local authority has every right to express interest in the service for reasons wider than just pure competition. They may wish to impose certain standards and certain other conditions on operators as part of partnerships, but that is for them to determine. We are just stating that it can have other consequences.
Q333 Chair: What are those other consequences?
Jeremy Peat: If you are paying more for the quality of the product, then your fares go up and/or you reduce expenditure elsewhere, which may mean fewer services. It is not a matter of just putting a higher quality bus on, taking that extra cost and making no other changes in your model.
Q334 Graham Stringer: What you actually say is that it will restrict competition. Where is your evidence for that?
Jeremy Peat: I am not aware of that particular-
Q335 Graham Stringer: It says, "There is a risk that partnerships have the potential to restrict competition if they specify unnecessarily high quality standards." What is the evidence for the restriction of competition by having a slightly higher standard?
Jeremy Peat: Douglas, do you want to respond to that?
Douglas Cooper: It is merely that, in principle, if you tie an operator’s hands-
Q336 Graham Stringer: So there is no evidence.
Chair: Mr Stringer is asking you where the evidence is.
Graham Stringer: I understand the competition point.
Douglas Cooper: I do not believe that that is based on analysis.
Q337 Graham Stringer: What I am looking for is evidence. This report suggests that the bus services of Louise, Jim and me-most of the people around this table-should be lower quality than London. You say that it will restrict competition. I am asking for the evidence of that.
Jeremy Peat: We are certainly not saying that you should have a lower quality service than London. We are just pointing out to you that the cost of the service in London in terms of subsidy is substantially higher.
Q338 Graham Stringer: That is a different point.
Jeremy Peat: If other local authorities wish to move to a substantially higher quality, then there will be costs involved.
Q339 Graham Stringer: I understand that; I understand the point of subsidy. What I am asking for is the evidence that there would be a restriction on competition.
Jeremy Peat: I think what we are saying is that we are not aware of any particular analytical evidence. We will take that away, look at it and see if we can come back to you with a better answer.
Q340 Graham Stringer: In a sense, that is one of the pillars where you are resting your argument for on-road competition as opposed to franchising.
Jeremy Peat: I do not think so. I think we are encouraging partnerships. We are very supportive of partnerships, but we are also very supportive of a range of remedies, which we have yet to discuss, that we believe can encourage competition.
Q341 Graham Stringer: But if that is not what you are resting your argument on, where is the evidence that on-road competition is better than off-road franchising competition in terms of delivering quality bus services?
Jeremy Peat: There are a number of good examples where there is on-road competition which leads to good services. I have mentioned three particular urban areas. There are also examples in Cornwall and parts of Devon, where there is good on-road competition that leads to a service which is seen as very satisfactory so far as passengers are concerned.
Q342 Graham Stringer: Again, that was not the question I asked; it was where it is better. There are clearly some areas where competition works and there are a lot of areas where it does not work. Where is the evidence that on-road competition is better than off-road competition? You are the Competition Commission. Where is the evidence between those two different kinds of commercial competition?
Chair: Is there any evidence?
Jeremy Peat: I really am not trying to avoid the question, but the difficulty is finding the actual comparisons that can be made. We have one example of a franchised system in the UK, which is London. We have other examples of attempts at on-the-road competition in the rest of the UK. One cannot directly compare one with the other in terms of the quality of service or the benefits that apply, because they are different in so many other ways.
Q343 Chair: Yes, but Mr Stringer is asking you for evidence behind your assertion. If you can look at your own report again and find some, please tell us what it is because that is why we are asking you. We are trying to get underneath what you have concluded to find the basis for those conclusions.
Jeremy Peat: We certainly have evidence that if competition increases, it does lead to more frequent and better quality services and a tendency for lower prices for passengers. That is evidence that we do have.
Chair: You do in part, but you also talk about geographic market segregation and non-aggression pacts, which is the other part. Mr Stringer, have you finished your questions?
Q344 Graham Stringer: Could I ask two more questions? There is undoubtedly evidence that competition works in some places and not in others. Your findings are pretty damning about collusion in the north-east. Given that you did not change your recommendations very much between the draft report and the final report, why did you not publish those findings until after the draft report?
Jeremy Peat: Essentially the information which led to us publishing our addendum to provisional findings on geographic market segregation-that evidence-only came to our attention very late in the inquiry. We undertook some very urgent work to dig out as much as we could of that evidence and to examine it as carefully as we could. We published it on 1 November, but we could not do it any earlier because we did not have that information at an earlier stage.
Q345 Graham Stringer: That is a fair point, but given that you found evidence of collusion-I accept that it is very difficult to find evidence of collusion between bus companies-why is that not evidence that you might be better, or probably would be better, having off-road competition where the bidding was transparent among the different commercial bus companies?
Jeremy Peat: We took it as evidence that if one goes down the partnership route, one must be careful that one does not go too far so this type of collusion can be encouraged or permitted. We also took it as evidence that the more competition there is in markets so that potential entrants can come in, the less the parties are likely to collude because they will understand that if they do so in ways adverse to the interests of passengers, others will be encouraged into the area and they will not be able to get away with any form of action that is against the passengers’ interests.
Q346 Jim Dobbin: This is an interesting discussion and the issue of collusion is one of the points I was going to raise as well. When deregulation occurred originally there were hundreds of little buses running all over the country, but it was not too long before the major companies came in and just shifted them off the road, one after another. That is why you have ended up with the situation where you have major companies now who quite happily talk to each other and say, "We won’t fight each other." "We won’t compete", in other words. That is very serious and it should be highlighted more in the report. We should be asking why this is the case.
There is a simple question: if you are not going to compete with each other, how open would you be to renationalisation?
Jeremy Peat: I am not quite sure the question is there. Let me just say that we are certainly aware that post-deregulation there were serious concerns about "bus wars" as they were termed in different areas. We certainly found evidence continuing now-nothing as dramatic as happened in that period-of what we call "cheap exclusion", whereby there was action by some operators that inhibited the entry of others or proper competition from others.
We have recommended that there should be a code of conduct prepared by the traffic commissioners and monitored by them that prevents these anti-competitive actions and discourages operators from inhibiting proper and fair competition from large or small operators within the territories where they operate.
Q347 Jim Dobbin: The point I am making is that we have a private sector deregulated system that is working a nationalised system inside itself.
Adam Land: There is one point that I think is worth making. When we looked at bus markets in the United Kingdom we found a lot of diversity within them. There are really quite a large number of different sorts of models, including some markets in which large operators are going up against each other head to head and other markets-Oxford for example-where you have competition within a framework of proper co-operation and partnership that is laid down by the local authorities. There is quite a lot of diversity. So when we think about bus markets outside London we are not thinking of a single market or a single model; there is a lot of diversity. That was one of the things we were looking to capture in our report. We did not want to over-conclude from what we found in any one area, but to try and understand the totality of how competition overall is working outside London.
Q348 Kwasi Kwarteng: I want to pick up on this idea of competition. Presumably the clue is in the title. You think competition, broadly, is a good thing in terms of what you do.
Jeremy Peat: Yes.
Q349 Kwasi Kwarteng: I want to focus on the geographical segmentation. Are there particular areas in the country where you found that competition is particularly helpful and other areas where you found that the kind of agenda you are pushing probably does not work as well?
Jeremy Peat: A major difficulty with this inquiry was that there were something like 240 different markets for buses across the reference area-that is England, Wales and Scotland, excluding London. Each of them is different. That was one of the great complexities we faced in working out how to look for ways of enhancing competition to the benefit of passengers across those areas.
We undertook 11 detailed case studies of areas and we learned a lot about those areas. We also learned a lot from visits to 15 or 20 areas and other bits of work about the markets in other areas, but we could never become experts on each and every one of the different areas. We therefore focused on looking at the factors that we thought lay behind good and bad competition performance. That is where we discovered, in our view, that there were impediments to entry and proper competition that inhibited the development of competition in a range of areas.
Q350 Kwasi Kwarteng: You have spoken incredibly generally about this. Other colleagues on the Committee have asked for specific details and I am going to do the same thing. Are there any specific markets that you think are working well and that you would want to see replicated across the country? Are there any things that we can learn from particular areas? You say you favour sustained head-to-head competition. I also want to know why this is not happening as much as you would like to see it.
Jeremy Peat: The three good examples in urban areas we have identified are Oxford, Nottingham and Sheffield, where we believe that that is working well. We saw in Norfolk a new entrant coming in and competing very strongly with the incumbent and the service improving substantially. We saw in North Devon and in Cornwall examples of good strong competition to the benefit of passengers. Those were examples of good, competitive performance that we would like to see replicated elsewhere across GB.
Q351 Kwasi Kwarteng: Why do you think this is not happening?
Jeremy Peat: We think it is not happening because there are barriers to entry and to proper competition. That is why our remedies focus on opening up the market to more entrants and to more potential competitors.
Douglas Cooper: I was going to give some examples of where we identified specific problems rather than good markets. An example would be in the west midlands where there were issues with a large operator, who, through their network tickets, was able to make entry for any rival much more difficult. There are other examples where lessees-to-be or operators were sticking to their particular areas and patches without a willingness to encroach on other areas, presumably because of the fear of retaliation.
Jeremy Peat: Just to follow up with a specific on the west midlands, following our recommendations we are aware that there are significant changes taking place in the way ticketing is going to operate in the west midlands. That will lead to more multi-operator tickets that are zonal rather than across the whole area and where the pricing is determined in a way that is more appropriate rather than any one operator having dominance. There are significant changes that will be to the benefit of passengers.
Q352 Kwasi Kwarteng: Do you think this is something that can be easily replicated? You have identified where you think the strengths are in terms of the geographical location, which I appreciate. How difficult do you think it will be for you, or for us as a nation, to widen best practice?
Jeremy Peat: It is not going to be easy. I quite accept that this is a very complicated and difficult area. There will be a role for each local authority to look at the interests within its area. It can look from a slightly wider perspective than we can. There will be a need for traffic commissioners taking a role in looking at the way in which operators undertake their activities. There will be a need to look at how partnerships can be developed. That again will need the local authorities to work with the Department for Transport. We need the OFT to take a proactive view to policy so that small mergers, which can have a major impact in particular areas, are looked at rather than just being nodded through, which leads to the large operators getting more and more dominant in some areas.
We have covered all these points. There is no magical solution. There is no one remedy that we can hold up and say, "That is going to change the bus market across the whole of GB." We do believe that the remedies we have proposed, packaged together with local knowledge built in, can lead to a lot of the positive lessons being passed around other parts of GB.
Kwasi Kwarteng: Thank you; that is very helpful.
Q353 Chair: Mr Peat, I am a little perplexed. You have just mentioned Oxford as an area where competition has been affected. Yesterday a number of members of this Committee went to Oxford. We saw a very successful partnership scheme operating where competition had failed. It is very curious that you quote that as an example. It does not give us much reason to feel that what you are saying is based on solid fact.
Jeremy Peat: I think you will find that in Oxford there are numerous examples of the two major operators competing on specific routes within a context that has been set which gives a lot of priority to buses per se and therefore makes the market a good one for the bus sector, but there is still competition between operators within that partnership context.
Chair: The partnership scheme we saw was about the operators working together with the local transport authority. It was not to do with more competition. I know that Mr Stewart wants to ask something.
Q354 Iain Stewart: I want to refer to one of the aspects we found in Oxford yesterday-the multi-operator ticketing system that they use. That seemed to be working very well with no animosity, with fair play and a good system for divvying up the revenue. But that is within a partnership arrangement. I am interested to know, where there is competition and multi-operator tickets outwith a partnership arrangement, how you can have fair play. There is evidence that some dominant bus companies will make the tickets unviable or unattractive. Who should be policing it? Is it the local authority, you, the Department for Transport or the traffic commissioner?
Jeremy Peat: We have suggested what is effectively a three-stage process for multi-operator tickets. We see no reason why the parties cannot work together in the best interests of the passengers now and improve along the lines of the approach to multi-operator ticketing that we have set out in our report. The governance arrangements are sorted out so that you do not have one party dominant and fixing the prices to suit them. You will have a bus-only ticket in the zones where people travel rather than some area that suits particular operators rather than others. There are various changes that we have proposed. We believe a lot can be done and a lot is happening. Strathclyde has already decided to move to zonal bus tickets, which they did not have before. There are other things that are happening in other locations. There is stuff that can be done now and it is happening.
The Department for Transport is working on guidance on multi-operator ticketing, which it hopes to get out this year. That will again provide further information and advice to local authorities and others. We hope there will be a follow-up with legislation during the course of 2013, which will provide an enforceable context, which does not exist at the moment. We do believe there can be, and will be, significant progress along the three lines I have discussed.
Q355 Iain Stewart: Who would enforce? That is what I am trying to get at. Who takes ownership of this? I agree with you on the guidelines and legislation if necessary, but you need someone to make sure that it actually happens.
Jeremy Peat: You will often find that the passenger transport executive or the local transport authority are the bodies that would have responsibility for making sure that it operates appropriately, just as with our Bus Station Access Order, which we ourselves are going to put out within the next month or two. That will be an order allowing full and fair access to bus stations for all parties, whoever owns them. There may then be a role for LTAs in dealing with any disputes. We will introduce the rules and then it will be for the LTAs to make sure that they are fully and properly implemented.
Q356 Kwasi Kwarteng: For my own elucidation, looking at your report, again it was very general, and I was just wondering whether there was a reason for that. You mentioned Oxford and then the Chair tackled you on that. Why was the report couched in such general terms and why did I have to push you to give examples? From private sector experience, if I were going to look into this, I would say, "Here are the five best practice examples. This is why they are a good thing and this is how we are going to implement this nationally." There seems to be a reticence on your part.
Jeremy Peat: My reticence is because, as I said, there are 239 different markets.
Q357 Kwasi Kwarteng: Sure, but you are an intelligent man. You can distil large amounts of information.
Jeremy Peat: We have attempted to do that. We did 11 very thorough case studies and we visited other areas. We learned a lot of lessons from them. What I am aware of is that I am not an expert on any one area; we cannot be. In an ideal world, one would have detailed studies undertaken in each of the major metropolitan areas and elsewhere, but that was not possible within the context. We have endeavoured to do sufficient work on particular areas to learn lessons, to listen to examples of good and bad practice and examine those, and then to draw out general threads of what leads to good and bad practice and activity and see how we can work to encourage the good practice and discourage the bad. I am sorry if that is a general answer, but that is the way this had to work given the amazing diversity of the market that we were examining.
Q358 Kwasi Kwarteng: I was struck by the fact that the report itself was quite thin on concrete examples. I found that bizarre.
Jeremy Peat: There are full appendices on each of the case studies that are there. We are not usually used to our reports being called "thin".
Q359 Chair: Is the answer perhaps to Mr Kwarteng’s question that the solution is not so clear-cut and that there are areas where you see encouraging more competition as the answer but equally areas where you are looking at partnership solutions?
Jeremy Peat: That is certainly right, Madam Chairman. The answer is that there is no one solution for this sector, and one should not believe that that is the case. One is not going to get to a position where you have a different regulator for each of the 239 urban areas that we identified who works to impart different remedies in each of those areas that are appropriate for those areas. We had to work in a way that was practical and could lead to remedies that we believed could be implemented with a degree of local participation in the way they took place and taking account of the local differences, but with a menu of remedies that we genuinely believe would work in different packages in different locations.
Q360 Julie Hilling: My question probably follows on from that. The one place where I have seen competition work is in Manchester. There are buses through Mr Leech’s constituency at a frequency of more than one a minute. There is a stop in the night, where overnight, the buses stop for five minutes before they start again-going through the student quarter. What I do not understand how your proposals are going to assist in my constituency, or in an area like that, where the concern is wanting more frequent buses than maybe one an hour or every half an hour, where the routes clearly are not greatly revenue-producing and where people want more routes. I do not understand how your proposals are going to assist in an area like that.
Jeremy Peat: We did divide the bus sector into two components. There was the commercial sector and the tendered services. What we have across GB is about one third of the services-I think that is right-supported by the public purse in different locations because they are not sufficiently profitable to operate in the way that you and other residents would wish, fully on the basis of commercial considerations. In those areas, the question for DfT, the Scottish Government and the Welsh Assembly Government is to consider how much they wish to devote to supporting such services and then trying to develop the best procedures they can for getting a good number of tenders to get efficient delivery of the services they deem appropriate in particular areas.
We have recommended that the tendering procedures could be improved. It has been agreed by DfT, and I believe by the Scottish and Welsh Governments, that they will look again along the lines we have proposed at improving the tender process so that we get more people responding to tenders and we get better information to people who want to come in. You should get a better delivery of services for the same amount of money. Then it is up to the Governments to determine how much funding is available.
Q361 Julie Hilling: But these are not just tendered services; they are commercial services. The market would not produce more. Are you therefore saying that we need more quality contracts, where there is a package of services and people then tender for both commercial and tendered services? I do not see how competition is going to solve it.
Jeremy Peat: Our analysis shows that if you increase competition-if you add one more operator on a service-you get a significant increase in the frequency of service. The main impact of increasing competition is on frequency, and that is what our analysis demonstrates.
Douglas Cooper: I want to clarify something. When we talk about "frequency" it is not the number of buses per hour; it is also the time they start and the time they run in the evenings, whether they run on Sundays and so on. That is because for a monopoly operator it is easy to cut services at the margin and try to focus people on their core services. When they are in competition, we found the evidence was that they were looking at their competitors and trying not to leave a gap open for them where someone could get a foothold in their territory.
Jeremy Peat: We do believe that competition will lead to a better service in the purely commercial area for people in the areas you are describing.
Q362 Chair: But it is the local authority who decides which tendered services they want to go for, isn’t it? This is not done nationally. It is done on a local basis.
Jeremy Peat: Then there is the question of the funds that are available for that. We were not looking at the question of what funds were appropriate to allocate to it because that is beyond our remit.
Q363 Chair: Your remit was pretty narrow, wasn’t it?
Jeremy Peat: Our remit was as laid down by Parliament.
Q364 Chair: But it was still pretty narrow because it did not allow you to think about these things.
Jeremy Peat: I gather that under the legislation that may be considered following the Queen’s Speech there may be an opportunity for Parliament to revisit that, but that is for others and not us.
Chair: We will see.
Q365 Graham Stringer: You estimate in the report that the lack of competition has a cost of up to £305 million. I think that is the figure.
Jeremy Peat: That is correct.
Q366 Graham Stringer: How much will the remedies and measures in the report reduce that cost of £305 million?
Jeremy Peat: Do you want to answer that, Adam?
Adam Land: Thanks for that. It is hard to tell. When we estimated the detriment associated with lack of competition we came up with a range. It was quite a wide range of between £100 million to about £300 million. When we looked at the remedies we were looking at their impact and proportionality as well. In terms of their effectiveness and how they will address that, when we looked at the main barriers to competition, among the things we identified were difficulties with ticketing. There were other barriers associated with responses to entry and difficulties in accessing key facilities and so on.
We think the remedies that we have are targeted at a number of the main problems. I could not put a number on it, but we think we will be able to address quite a lot of the causes of the detriment that we have found. We also looked at the costs and estimated that the ongoing costs of our remedies were pretty modest. They were less than £10 million per year, so we were comfortable that the remedies were going to do substantially more good than harm.
Q367 Chair: How much more good?
Adam Land: I do not think that was something we could state with-
Q368 Chair: You did not quantify the amount of good.
Adam Land: We quantified the harm. We formed a view about the effectiveness of our remedies on that. We reached a judgment that we would comfortably recoup the costs that we would be putting on to the industry. Putting a precise number on it is a very difficult task and it was not a task that we felt comfortable doing. There are a lot of things that need to happen, not least in the implementation of our remedies, to see it through.
Jeremy Peat: The first point is that we are very keen to see full and proper implementation. A lot of that is outside our hands now. It is for others to implement.
Q369 Graham Stringer: Remedies 64(a), (b) and (c) are rather good. The question I am really asking is whether they go far enough. There is nothing wrong with those remedies in terms of improving competition, but why have you not looked at divestiture? You also found evidence, when we talked in private, of excessive or very high returns on capital employed. You have said yourself that there are areas where there is very little competition. You have the powers to order businesses to divest themselves. Why didn’t you look at that as a remedy because that would have really dealt with some of the competition issues?
Jeremy Peat: We did at a very early stage. We looked at divestiture as a possible remedy. The difficulty is to whom do you divest? If one divested the operation of one major operator in an area to another operator, and there still was not scope for proper competition and risks of competition, then there was nothing to prevent the new owner from retreating into the bad practices of the old owner. We felt that in order for this whole system to work, you had to have the ability for people to enter this market and exert competitive influence. Divestment alone would not work.
Q370 Graham Stringer: That is rather a weak argument. All Members of Parliament look at their own areas, but if you look at my area, which is dominated by FirstGroup, if you divested their interests and put two operators in there and allowed them both to use their depots, why would that not work? Your recommendation (c) on access to bus stations is a good recommendation. If you divested to two operators in those bus stations, why would that not work?
Chair: Was that considered, Mr Peat?
Jeremy Peat: Certainly; we looked at divestment. We were not sure that it would have the effects that were required, and it would have been a very intrusive measure that would have required a lot of detailed action across the whole of the area we are talking about. Each individual area would, again, have had to be looked at individually. It would have been very time-consuming, very costly and very intrusive. We did not believe it would necessarily have the benefits that you and we were seeking, without, at the same time, opening up to competition in the way that we now believe can be achieved.
Q371 Graham Stringer: I have a final question. One of the consequences of on-road competition is congestion, which has very negative impacts on people. What weight did you give to congestion in your studies and investigations?
Chair: Did you look at congestion?
Douglas Cooper: Not as a direct and specific issue itself. We were aware that through partnerships and the traffic commissioners’ restrictions there were systems to control congestion should that aspect of competition get out of hand.
Jeremy Peat: We were aware of examples of what we call "cheap exclusion", where one operator deliberately runs more and more buses in order to inhibit the action of a potential competitor, or running a bus just ahead of a competitor’s. The role of the traffic commissioner is extremely important in that and in other areas.
Q372 Chair: Do you agree that the traffic commissioners should be strengthened?
Jeremy Peat: I read the evidence that the senior traffic commissioner gave you. I was disappointed that she said that she did not have the resources to work on a code of conduct. We tried to limit the amount of extra work we put to the commissioners because we are aware of the inhibitions, but we believe they have a very important role to play. I would be disappointed if their resources prevented them going forward with the limited extra work that we believe is very important.
Q373 Chair: Does that mean that if they could show they needed more resources to do what you consider very important work, you would support that?
Jeremy Peat: Personally, I most certainly would. I believe that they are a very important part of this whole process. They are on the ground and knowledgeable, and very much respected by the operators and the LTAs. They have a critical role to play.
Q374 Chair: Did any of the passenger groups who spoke to you say they wanted more competition?
Jeremy Peat: We tried very hard to speak to passenger groups. We carried out a major passenger survey. We held a whole host of focus groups, and we spoke to Passenger Focus and others. We received a variety of evidence, but there was considerable support for the outcome of competition without necessarily believing that the competition-
Q375 Chair: You are making an assumption there about the outcome. Did any passenger groups say that they saw more competition as the solution to the problems?
Jeremy Peat: Passenger Focus was supportive of that.
Adam Land: When you look at some of the remedies, in particular in the ticketing area that we have been discussing, as you will have heard yourself, there is strong support from passenger groups and from passengers.
Q376 Chair: So they supported some of the remedies you put forward, but did any of them see this as the total solution to the problem?
Jeremy Peat: There were very different views. Frankly we got limited views from some of the passenger groups that we spoke to, but we got very clear views from passengers we spoke to that what mattered to them was frequency, reliability and quality of service. That is what they were really interested in.
Q377 Chair: They were talking about the outcome; you are looking at the means. They spoke about the outcome and not the means.
Jeremy Peat: That is right. We can discuss the outcome with them but it is difficult to get into the technicalities.
Q378 Kwasi Kwarteng: Picking up from the Chair’s question, how conscious of competition do you think passengers are? As a consumer you are focused on the outcome and you do not really care about how it is provided, whereas clearly you are interested in the mechanism by which it is provided. How conscious do you think consumers are?
Jeremy Peat: First of all, we are interested in the outcome. That is what we are really interested in. The process is a means to that end. I was surprised when I got on a bus or when we were travelling round that people knew what the different competitors were and they knew how they worked. Those passengers out there were pretty well informed.
Chair: Thank you very much for coming and answering our questions.
Examination of Witness
Witness: Norman Baker MP, Parliamentary Under-Secretary of State, Department for Transport, gave evidence.
Q379 Chair: Good morning Minister and welcome to the Transport Select Committee. How satisfied are you with bus services outside London?
Norman Baker: I am never fully satisfied, which is why we attempt to change the arrangements for BSOG, for example. It is why we have been looking at particular incentives through the Better Bus Area, the Green Bus Fund and so on. Essentially, I want to make sure that bus services are as attractive as possible to people and that they represent a mode of transport of choice rather than by default in particular areas. We are making progress in that respect but there is more to do. I note that Passenger Focus in their analysis of satisfaction levels, as they measure them, came up with a pretty high figure for satisfaction. I think it was 89%; it was very high-if we could get 89% as politicians, we would be doing rather well in terms of satisfaction with bus services. Even the lowest was about 75%, so there is satisfaction from those who use them. There is probably a less impressive percentage from those who do not use them and have chosen not to use them. Therefore, it is perhaps skewed in that way. Even that high figure is not to say that we could not make improvements.
Q380 Chair: Do you want to expand the market for buses?
Norman Baker: Do I want to expand the market in what sense?
Q381 Chair: Do you want more people to use buses?
Norman Baker: Absolutely.
Q382 Chair: What do you intend to do as a Minister to support that?
Norman Baker: First of all, you have various strands of funding that are designed to achieve that end. If you look at the Local Sustainable Transport Fund, for example, which is £560 million, a large number of the Tranche 1 projects-£155 million was approved last year-were bus-related matters. I am sure that Tranche 2, when it is announced very shortly, will have further bus-related projects. Those projects can look, for example, at punctuality and problems with punctuality along particular routes. If we can get particular junctions sorted out or bus priority lanes put in-and that is what some of this is funding-that will improve the offer that the bus can make.
We are also improving the quality of the bus through the Green Bus Fund to make sure that people feel good about the bus they use rather than feeling it is a clapped-out vehicle that they don’t want to use. By all those means, and those are just two examples, we are seeking to make the bus more attractive and therefore push up the number of bus passengers.
Q383 Chair: Do you see the Competition Commission’s report as being important in improving bus services? Which of its recommendations do you intend to take forward?
Norman Baker: Yes, I do see it as important. We did not commission it; they commissioned it themselves. We inherited it. It was a long process and we have published a formal response to it, which says that, by and large, we will take forward nearly all of their recommendations, which I think are reasonably well judged. I am particularly interested in the ones that relate to multi-operator ticketing, which has proven to be successful in Oxford, for example, and Liverpool. That has the potential to improve the offer for the passenger. I am also interested in the recommendations on operator behaviour in terms of notification periods. We are taking those matters forward as well.
Q384 Chair: What about their view that head-to-head competition is the solution?
Norman Baker: I tend to agree with them that, in some areas at least, head-to-head competition, and competition in the market rather than for a market, is the appropriate method, provided it can be handled in a way that is sensible and does not end up with the bus wars we had in the late 1980s. Equally, I accept that there are many who believe that competition for the market-i.e. through a quality contract or other such mechanism-is another appropriate way. I do not think it is for us in the Department for Transport to decide what is best in each particular area as to how the buses are organised.
Q385 Chair: So you support quality contracts.
Norman Baker: Chairman, you will know I am on record as having done so before the last election. They are there in legislation. They are there as part of the Local Transport Act 2008. They remain on the statute book. There is no intention to repeal those provisions, but it is up to local PTEs, ITAs or councils, whatever it is, to make up their own minds as to whether or not they wish to avail themselves of those powers.
Q386 Chair: If local transport authorities want to go forward with quality contracts or quality partnerships, is that something the Department would facilitate rather than seek to obstruct?
Norman Baker: We certainly would not seek to obstruct it. We will help local councils if we are asked to, just as we would help local councils who want to look at Better Bus Area applications or other methods to help the buses in their area. We are neutral in a sense, as a Department, as to what the outcome should be for each particular area. It is for elected local councillors and others to decide what they want to do.
Q387 Kwasi Kwarteng: I appreciate your concerns for localism and local decision making, which are obviously part of the Government’s broader agenda, but I want to ask a very general question. You as the Minister have a good sense of bus operators in Britain and what the problems are. Do you think very broadly that more competition is needed across Britain or less?
Norman Baker: There is no simple answer to that. It depends on the area and the individual circumstances. There are places where you might argue that the lack of direct competition has caused detriment to the passenger and to the public purse. The Competition Commission themselves identified the cost to the passenger as being a minimum of £115 million and a maximum of £360 million from the faulty application of competition. Therefore, it could be argued in that sense that the lack of competition has caused a market failure to the detriment of the passenger.
Equally, however, there are certain routes for which clearly competition would not be viable because the routes simply could not sustain two operators going head to head and, therefore, a different solution may be necessary. That is why I think there is no blueprint that the Department for Transport can produce that can be applied equally across England. The situation in Manchester may be different from the situation in Brighton and the situation in Exeter.
Q388 Graham Stringer: The Government have said they are going to fully implement the recommendations of the Competition Commission. Is that right?
Norman Baker: I do not know that we said "fully". For example, there was a suggestion that BSOG might be used for a particular purpose, which we do not intend to take forward. By and large we are implementing the recommendations, yes.
Q389 Graham Stringer: What is the schedule for doing that?
Norman Baker: It depends. Each recommendation has a different arrangement. For example, the operator behaviour recommendations will require secondary legislation. That should be in place by April 2013. We are producing the multi-operator ticketing guidance now. We will have that ready as soon as we possibly can. If multi-operator ticketing requires primary legislation, because we have not been able to persuade local authorities and bus companies to work together on that successfully, then obviously that requires a slot in the House of Commons from the Leader of the House, which will be later in this Parliament, I hope. Each recommendation will be taken forward as soon as it practically can. That will depend on whether it can be done right away or whether it requires either secondary or primary legislation.
Q390 Graham Stringer: What about access to bus depots?
Norman Baker: The Competition Commission identified particular failures in particular geographical locations relating to access to bus stations. They have suggested that should be remedied for those particular locations. Clearly if further legislation is required on that, then we will look at it, but I understand that can probably be done without legislation.
Q391 Graham Stringer: Can you expand on that? Is it by secondary legislation or is it the Competition Commission who can make an order on that?
Norman Baker: The Competition Commission has clearly made this recommendation.
Q392 Graham Stringer: I am looking at the implementation, Minister. Who will implement that recommendation? It is a good recommendation, but who will implement it?
Norman Baker: As I understand it, there is now a requirement for fair access to be the norm. I would expect that, in sense, to be self-regulating. If it does not become self-regulating, then that is a matter that we will look at.
Q393 Graham Stringer: You said in the "Green Light for Better Buses" paper that you would look at legislation by the end of Parliament to force disclosure of information on newly deregistered services.
Norman Baker: Yes.
Q394 Graham Stringer: Wouldn’t it be a good idea to bring that forward so there can be improvement in the buses? It is urgent for many of our constituents.
Norman Baker: It depends on what can be done and how quickly it can be taken forward. Apart from the requirement for legislation, which necessarily imposes a timetable on us or any other Department looking to do things, we also have to take into account the capacity of the Department to respond to the changing scenario that I and others at ministerial level are creating for officials. We have a major programme coming to take forward to secondary legislation, for example, on operator behaviour. I am also requiring a consultation on BSOG, which is quite complicated to get right. We have to be realistic about what we can ask officials to do all at one time, particularly at a time when civil service numbers are declining.
Q395 Graham Stringer: You have said that it is up to local people in integrated transport authorities or county councils to decide whether they want to go for quality contracts. In the way the BSOG system is likely to work under the Better Bus Areas and quality contracts, is there not there a disincentive for the quality contracts? In effect, the bus operators can stop the BSOG being transferred and you would get a BSOG plus top-up under the Better Bus Areas. That is complicated, but there are two different parallel systems. One gives a disincentive for quality contracts. What can you do about that?
Norman Baker: The first thing is that, obviously, if local authorities can work together with a bus company in a partnership arrangement, there is a financial reward. That is quite right because we want to encourage co-operation for common purposes. As far as the passengers are concerned, if you can get those two sides working together rather than opposing each other, that has to be better for the passenger. That does not take away the right of the local authority to opt for the powers within the Local Transport Act 2008 to have a quality contract.
As far as the final financial outcome in terms of incentives or otherwise, that has not yet been decided. That is the straight answer. There will be a consultation formally on BSOG later this year. That narrow but important matter will be considered as part of that consultation.
Q396 Graham Stringer: My final point is that in the real world Stagecoach, Arriva and FirstGroup are not going to co-operate with quality contracts, are they? They are at war with the concept of quality contracts.
Norman Baker: I am glad you have asked that question because it gives me the opportunity to say that I would expect any bus company to adhere to the law as Parliament has passed it. It has been through a proper process in this House and through Parliament by the previous Government; it is there on the statute book and has been enacted. That is the law, and local authorities are entitled, if they wish to do so, to go down the quality contract route.
There are risks to that, as you appreciate very much from having been on the Committee with me, which local authorities will have to take on board. Clearly some bus companies will be unhappy if a quality contract route is chosen. That will necessarily, I imagine, affect their relationship on a day-to-day basis with the local authority. That is a matter that the local authority needs to factor in.
However, I would expect bus companies to respect the law. Certainly if a bus company were to adopt a scorched earth policy or anything similar in the face of a local authority wishing to exercise its right under the 2008 Act to have a quality contract, I would take a very dim view of that. The senior traffic commissioner has already said that she would take a dim view of that. That might cause reputational harm to that particular company.
Q397 Chair: Would you make that view very clear to any company who does threaten a scorched earth policy?
Norman Baker: I hope I have just done so.
Chair: That was it. I think your words might be noted and just might be repeated elsewhere.
Q398 Mr Leech: You are the Minister for Buses and the Minister for Cycling. I know you are a regular cyclist, but when was the last time you used a bus?
Norman Baker: I use a bus nearly every day in London, as a matter of fact.
Q399 Mr Leech: In your opinion are bus services in London better than in most other parts of the country?
Norman Baker: In some respects they are and in other respects they are not. London is a compact area, and the population and the geographical nature of London lends itself to good bus services in a way that is more difficult for, say, a small county town to justify. We therefore have a frequency level of buses and a route choice of buses that is highly desirable, and that other places would doubtless like to have.
Having said that, the model in London does have downsides. I am not personally convinced that it is as efficient as it might be. There seem to me, as an observer and a user of buses, to be quite a large number of buses running around London well below capacity. I wonder whether a more efficient timetable might be applied. I do not want to generalise on this but I suppose I am about to do so, but it is also the case that the engagement between the driver and the passenger is slightly different in London than it seems to be elsewhere. I think that is because of the nature of the farebox arrangements in London, where the buy-in from the passenger appears to me to be less important in London than it might be elsewhere. On the upside, it is a very good service, and if you go to a bus stop a bus will turn up pretty quickly. It is called real-time information. By and large the bus fleet is new and clean. I would say there are advantages both ways. It is not an either/or.
Q400 Mr Leech: The Competition Commission concluded that enhanced competition was generally a better solution than the franchise system we have in London. Would you agree that it would appear, on the face of it, that the basis for that assumption was simply that the bus system in London costs more?
Norman Baker: I am not sure that the London bus system actually does cost more. I asked my officials to work out the cost per passenger to the public purse from buses in London and elsewhere. From memory, it is 45p per journey or per mile in London. I probably need to look at my notes on that. The total net Government support per passenger journey in London is 45p. In the English Met area it is 57p. In the English non-Met area it is 71p. That is when concessionary travel reimbursements are taken into account, so I am not sure that issue about the cost is entirely accurate.
Q401 Mr Leech: The argument is that sustained head-to-head competition will improve services for passengers, but the Competition Commission also accept that sustained competition is rare. Will their recommendations actually lead to more sustained competition? Is there a potential downside, where there has been sustained competition, that other services will lose out as a result of sustained competition on certain routes?
Norman Baker: The Competition Commission clearly believe that the remedies they have identified and put forward will deal with the problem which they sought to paint. They identified the detriment to the passenger in the quantification I gave you a moment ago and they put forward a series of recommendations. They clearly believe that they will deal with that, otherwise, presumably, they would have gone further in their recommendations.
Q402 Chair: They did make those recommendations, but when we questioned them this afternoon about what evidence they had that lay behind some of those recommendations, it either was not forthcoming or it seemed pretty thin. Will you be asking more questions before you accept all of these points?
Norman Baker: I do not know what they said and if they were or were not able to justify their recommendations. What I would say is that they have produced a very full report which would weigh quite a lot and therefore is packed full of their analysis. Perhaps they were not able to explain their analysis rather than the analysis not being there. It certainly seems to me that some of their recommendations will deal with the competition point. The operator behaviour issues, the length of notice period given and so on seem to me to be sensible steps that will help competition.
I should say that we in the Department are also trying to help competition in our own way. For example, I have allocated £50 million to help with smart-card enabling for small and medium-sized operators to make sure that they can compete fairly against the big five. I do recognise that it is important to make sure that we do not end up with a concentration of bus services in a very small number of hands.
Q403 Iain Stewart: I was intrigued by some of your initial comments about the Department being neutral in the type of arrangements that local authorities can have. I very much agree with the localism point. Are we not seeing a trend emerging whereby different types of model will work in similar areas? For example, we were in Oxford yesterday and that partnership arrangement looks as if it could easily be applied in other small cathedral-type cities. There will be another model that would work in larger urban conurbations. While not compelling any local area to follow a particular model, should the Department not be taking more of a lead to say, "Hang on, this model that works in Oxford could do well in your area"?
Norman Baker: I entirely agree with you that the model that might work in one place would be different from the model that might work somewhere else. That is one of the reasons why I say we are neutral on the model to be used. It would be quite wrong to try to impose from the centre a model that says, "This is what you will do." That is clearly not going to be as effective as allowing local authorities and areas to work out what is best for them.
We provide guidance of all sorts from the Department across the range of our functions. I want to stress that in the era of localism we are now moving into, the local government family itself has a role to play in identifying best practice in a way that it has not always done before. In drawing the conclusions that you have just drawn, they have a role to play as well as the Department.
For example, PTEG has done good work over the years, I think, in identifying some good practices within its member authorities. The same has not necessarily been the case, in my view, across county council areas. More can be done within the local government family to identify best practice, but in so far as we issue guidance and keep an eye on matters we will continue to issue guidance. The recent paper "Green Light for Better Buses" of course does set out some of that thinking, which I hope is helpful to local authorities.
Q404 Iain Stewart: I want to follow that up by raising the dreaded term integrated transport, where the competition is not just between bus operators but between local rail services or private cars-park-and-ride schemes. Again, do you see any models developing that suit particular areas that go wider than just the local bus market?
Norman Baker: There has been an historic problem that, generally speaking, with the possible exception of PTE areas but even there, local elected councillors have concentrated on road-based solutions because that is where their powers have been. Their solutions have tended to be either road amendment-type solutions-road building and road maintenance-or they have been bus solutions, vehicles which use the road. They have not been able to factor in, in a way that I think is appropriate, rail-based solutions. They have not been able to look at corridors in the way they ought to have done. One of the steps that my colleague Theresa Villiers is taking is to look at the devolution of some railway powers to local government, to encourage them to look at transport in a more holistic way and to make those sorts of assessments and choices that hitherto they have not been able to do.
In terms of bus versus car, if you put it in those terms, although I do not necessarily see it in that way, local authorities have to make the judgment-they can do so already-as to whether or not they want to provide, for example, priority bus lanes for public service vehicles. I would argue that it is not bus versus car, because if you get the bus working well it takes a large number of cars off the road and eases congestion as well. Those sorts of judgment are already there.
There are plenty of examples of good and bad practice, frankly, around the country. Any local authority that wants to look at its transport system seriously, I would have thought, would want to look around the country to see what has worked and what has not.
Q405 Kwasi Kwarteng: An issue has been raised about excessive profits. What are your views on that? Do you think that outside London there is a case for suggesting that companies are making too much money as operators?
Norman Baker: The Competition Commission concluded that in some cases they were making too much money. Indeed, they identified the loss to passengers as a consequence. They believe, as you know, that the answer to that is more realistic competition. By and large, their recommendations are designed to increase competition, with the expectation that if the competition is fairly provided and not inhibited by unwelcome and unsatisfactory practices, then that will in itself bring the price of bus journeys down.
There are clearly examples-I can think of ones not very far from me-where on a particular route where competition exists, the fares are significantly lower than a route of comparable length, operated by the same company, where no competition exists. Clearly if competition can be made to work, that in itself will bring prices down and therefore excess profits down.
Q406 Kwasi Kwarteng: So you are broadly supporting the Commission’s findings on that.
Norman Baker: Yes.
Q407 Julie Hilling: Minister, I want to pick up on a couple of comments you have made and ask for some explanation. You did say that there need to be other solutions on routes that cannot sustain traditional competition. What do you see those other solutions as being?
Norman Baker: Local authorities have powers that they do not always use. The extreme power is a quality contract, but there are also statutory quality partnerships that can determine maximum fares, frequencies on routes and so on. Some of those powers are available to local authorities if they choose to use them. I do not think actually that local authorities exercise their powers as much as they might do.
Q408 Julie Hilling: That takes me to the next question. We have talked in today’s session and other sessions about Stagecoach’s threat to adopt a scorched earth policy if a local authority introduces the quality contract. You said previously that there would be reputational damage. However, I am not sure that that would be enough. Is there anything else you can offer from a departmental position to a local authority who may want to take the other options that you have just outlined?
Norman Baker: As I say, the option is there in the legislation and they are free to adopt options that are legally available to them, if they wish to do so. In terms of reputational damage, I would not underestimate the impact that has. Gerald Ratner was the first person who came to mind. You can have reputational damage that can be quite significant for your company. The idea that a particular operator, whoever they might be, would risk that and become potentially-depending on how it is presented to and interpreted by the public-some sort of pariah is not a risk that they would want to take. The threat of damage to reputation is a real one.
Q409 Julie Hilling: Is there nothing else that you can offer?
Norman Baker: Clearly any operator has to work within the law. There are restrictions on what operators can do as well as there are on local authorities.
Q410 Julie Hilling: One of the issues that affects my area is when an operator decides that a route is no longer commercially viable and really puts a local authority in a position of what I would say is extortion: "We are going to stop running this route. The only way we will run this route is if you then take it on as a tendered route." Do you have any solutions to that under the current system?
Norman Baker: That is part of the question that Mr Stringer asked earlier about tendered bus services in particular. There is some belief among some people that if a route is deemed no longer viable, the expectation is that it will then be tendered and the local authority will effectively provide a subsidy for a route that may or may not be commercial. That is particularly believed to be the case in areas where the tender is unlikely to be subject to competition and there is likely to be only one bidder for that particular route.
Part of the recommendation from the Competition Commission was that local authorities would be provided with extra powers to request and to make available information from operators about the revenue and patronage of commercial bus services if they were deregistered. We believe that would be a useful step to take. We are committed to taking that forward. Mr Stringer would like it done right away. We think it probably requires primary legislation, which is why we have to wait, but that is a useful remedy for that particular problem.
Q411 Paul Maynard: The senior traffic commissioner was at one of our earlier evidence sessions. I paraphrase this, so she might well complain, but she was struggling to fulfil all her duties due to lack of resources, particularly in terms of VOSA. How would you respond to her perspective on her ability to do her duties?
Norman Baker: It is a long established principle with the traffic commissioners that their activities are covered by the fees which come in. They have to be broadly in equilibrium with each other, and indeed they broadly are. Last year the traffic commissioners spent £14.2 million and the fees that came in were about £12 million. The difference was covered by the wider VOSA budget.
Any organisation or element of the public service may well argue that it needs more money. Indeed, I argue with the Treasury that we need more money at the Department for Transport. We all do those sorts of things, so I am not surprised that the senior traffic commissioner wants to have more resources. I entirely understand that.
Q412 Paul Maynard: In the general wider bus community there seems to be a perception that the traffic commissioners are that rare beast-a regulatory success story. Do you think there is any scope for widening their role in the light of the Competition Commission report and the provision of bus services generally?
Norman Baker: The Competition Commission do not really propose very much widening of the role for traffic commissioners. They talk about different arrangements for termination periods and so on, but that is just different deadlines within existing rules. I do not see the traffic commissioners’ role being much more onerous as a consequence of the Competition Commission’s recommendations that we are taking forward. I agree with you that they are a success-they are seen to be a success-and I think Beverley Bell does a good job.
Q413 Paul Maynard: Given that they are a success, is there no scope for you to think parallel to the Competition Commission? Why should you be restrained solely by the Competition Commission’s findings? Could you not create your own ideas?
Norman Baker: We do, I have to say. Indeed, "Green Light for Better Buses" is a distillation of our ideas in the Department. We were aware that the Competition Commission were reporting on a range of areas, obviously dealing with competition primarily. At the same time, we have business plan commitments to look at; for example, the allocation of Bus Service Operators Grant. We have other policy commitments, such as making sure our buses are greener and cleaner. What I wanted to do, and I made it very plain to local authorities and operators alike at an early stage, was to try to get one package together so that we could deal with any changes to the structure of the bus industry at the same time, rather than coming back with a series of incremental changes that they were not expecting. I have learned one thing from talking to business over the years, as an MP, a Minister and indeed as a council leader before: you can ask business to do almost anything, providing you don’t keep chopping and changing, and there is some certainty of direction as to where you want them to go. What I try to do is give certainty of direction. The combination of the Competition Commission recommendations and our response, with our own initiatives that the "Green Light for Better Buses" policy document produced, gives that direction of travel.
Of course there are other things we could have done, but you have to work out in any one situation whether or not any steps you take are going to be beneficial, or whether they are simply going to create work for somebody, and whether they help with our objectives to use the bus industry to create growth and facilitate access to employment, help cut carbon and provide socially necessary routes. Do they do those things? We think our proposals do. I do not think we should just add further proposals to make it look fuller.
Q414 Graham Stringer: Peter Hendy, who was our first witness, said that there are people in the bus industry who should not be there. Basically they are rubbish bus operators. He did not use those words, but I do. He thought that the reason there were people in the industry who were still there was because the traffic commissioners did not have sufficient resources to deal with them, and that VOSA generally needed more resources. Everybody wants more resources and you gave a good general answer, but there is a particular problem here, which we are dealing with in the Competition Commission report where the bus industry is not providing a service as well as it could do. Do you not think that Peter Hendy is on to something, and that there should be more traffic commissioners or assistant traffic commissioners?
Norman Baker: I am not that sure I do. Is more regulation, more inspection and more enforcement always a good thing, or does it actually slow down the service to the public? Does it add extra costs that are reflected in fares? There is a balance to be struck. I would say that there are a number of measures that could be used to identify whether the bus industry is delivering or not. One is the Passenger Focus survey, which actually suggests they are delivering to the public’s satisfaction. One is the level of fares and the level of competition that exists. One is the number of complaints that come into Bus Users UK from members of the public. There is a whole range of measures that you can look at to see whether or not there is a problem. I would think that Peter is over-egging the pudding on that one.
Q415 Graham Stringer: On the recommendations in the Competition Commission report, you have said the timetable is not clear but you are accepting most of them. When we asked the Competition Commission whether those recommendations would deal with the burden of up to £300 million that they had identified, they were not sure what percentage of that cost would be dealt with by the recommendations. Do you not feel that the Competition Commission could have gone further and that the Government should look at extra measures to improve the bus industry?
Norman Baker: On the last point, we are looking at extra measures, which are set out in the parallel document "Green Light for Better Buses". That takes significant steps to improve the industry. For example, the proposal to devolve BSOG to local authorities for tendered services is a very welcome step forward and one that local authorities appear to be supportive of and the bus industry sees the sense of. I think there are wider steps we are taking.
In terms of the Competition Commission’s recommendations themselves, if they say-I have not heard them say it but you tell me they have-that they are not sure how much of the £300 million, which of course is the top level of the estimate, is going to be dealt with by their measures, it could be that all of the £300 million will be dealt with by their measures, or maybe it won’t be. I am not sure it necessarily means an underperforming outcome from that. Given that there is such a wide range of detriment identified-and it is a wide range anyway-it would be very difficult for them to be 100% certain as to what their measures would do. I would have expected them to have concluded that if there was a problem of a particular magnitude, then the measures they are taking would deal with that problem in the average and I would expect the measures to reflect that.
Q416 Chair: Minister, you mentioned the Government’s document "Green Light for Better Buses". Will Better Bus Areas funding be available to encourage quality partnerships where they are requested locally?
Norman Baker: Yes, I think so. I do not see why not.
Q417 Chair: I want to raise the issue of the regulation of fares. On the rail, some train fares are regulated. No fares are regulated on the buses. Is that fair?
Norman Baker: You will have to go back in history as to why that was done. These are long-standing arrangements on both bus and train, as you will appreciate. I imagine the thinking was that a rail line is one where on most occasions there is no competition. There is in some circumstances-between London and Birmingham, for example-but most rail lines have no competition and therefore there is a need to regulate in order to protect what was otherwise a monopoly, whereas, presumably, the thinking was that buses were subject to competition and if one particular bus operator exceeded in fares terms what was reasonable then somebody else would come in and undercut them. I imagine that is the logic.
Q418 Chair: It is the logic, but as we see in the report, it has not worked quite that way.
Norman Baker: There are remedies that are put forward by the Competition Commission to deal with that as they see fit. In nearly all cases we are adopting those recommendations as Government policy. It is also fair to say that in the last couple of years we have, unusually, seen a decline in bus fares.
Q419 Chair: In some areas, but not all. I want to clarify who set the remit for the Competition Commission’s inquiry.
Norman Baker: I do not know, to be honest with you. I imagine they set it themselves. They are an independent body. They are not subject to being leant on by either my Department or another Department. Competition authorities have to be independent to do their job properly. I imagine that they received complaints from members of the public or others, or local authorities, and decided on the basis of a cursory examination that there was prima facie evidence and an inquiry was required. That was all pre-election, as you will appreciate.
Chair: Thank you very much, Minister, for answering our questions.