Examination of Witnesses (Questions 60-79)|
WEDNESDAY 8 MAY 2002
60. How many of those 16 per cent are cross-subsidised?
(Mr Lockhead) A lot of them. Journeys, not just the
routes. There are journeys within a corridorit is cross-subsidised
through journeys, it is cross-subsidised across the network, there
is a whole series. And the reason we have to do that and we want
to do that is because we sell a ticket for people to travel the
61. What I am trying to get at is some idea
of how much of the non commercial operation, which is the minority,
is cross-subsidised because that will impact, one way or the other,
the public subsidy required.
(Mr Lockhead) The whole of the network, at various
times of the day and week, has cross-subsidisation. It has to
be because we do not know that we are going to carry the same
number of people on every journey every day on that route, do
we? It varies.
62. I am told in my area that each route stands
or falls on its own merit, and if it falls, it goes; if it stands,
it stands, and that means public subsidy. It is important. Is
there any way in which we can get a bit more clarity on how much
cross-subsidisation goes on in your companies, where it goes on,
and what effect that has on public subsidy requirements?
(Mr Lockhead) I just find that it is almost an impossible
task to include every route and every journey.
(Mr Cochrane) Clearly, there is a proportion of our
business that I think you are getting at which is subject to competitive
tendering on a three year basis, which is where the local authority
determine that there is a social requirement for that service.
I think what Mr Lockhead is saying is that the core commercial
network is run without subsidy, but within that core commercial
network, there will be elements that we will cross-subsidise because
it is in our interests to provide a complete network of services.
63. But what Mr Stevenson was putting to you
was that members who raise questions of bus services that have
been removed are always told precisely this: "If this particular
route is not viable, it is not viable." Now you are telling
us that as a routine matter of economic maintenance you cross-subsidise
(Mr Lockhead) There is a point at which the number
of people on a particular route just do not justify having the
64. We are not arguing with you, Mr Lockhead,
we are trying to make sense of what it is you are telling us.
(Mr Lockhead) We are telling you that there is massive
cross-subsidisation both within the commercial network and the
non commercial network, but there comes a point, in looking at
the root structure, when you can see demand has fallen, maybe
because there has been jobs lost in certain areas, or maybe because
there is a demographic change. We therefore change the timetabling.
65. Is it possible to identify what cross-subsidy
takes place in the non commercial 16 per cent?
(Mr Lockhead) The non commercial is routes that are
brought in for all sorts of different reasons. They are open book.
They are tendered routes.
66. Is it possible to identify
(Mr Lockhead) Every local authority has a list of
67. So we can do that?
(Mr Lockhead) They have it, yes.
68. Could I ask two more quick questions to
all three companies. What are the rates of return on your operations
that you require, or is that commercially confidential?
(Mr Lockhead) You mean a margin on sales?
69. Profit, yes. Rate of return.
(Mr Lockhead) In the past, the operating profit, as
a margin of revenues, has been around 12-13 per cent. We need
that to sustain the investment, and that margin is coming down.
It is coming down as a result of higher costs for insurance, fuel,
pensions, NI, and all the other things that you are well aware
70. That is consistent with your
(Mr Lockhead) Yes.
Mr Stevenson: I see.
71. When can we start crying about the rate
coming down too far?
(Mr Cochrane) The point at which we do not have sufficient
funds to support further investment in new vehicles, because,
clearly, profits fund that investment in new vehicles.
72. You could still do that at 10 per cent.
(Mr Cochrane) That is a moot point, I think. Our assessment
is that you require around 12-13 per cent to support the significant
investment that the entire industry has made. In fact, I think
only in three out of the last nine years has the industry earned
more in profits than it has invested in new vehicles, so our commitment
is there in terms of investment, but we do need to earn an adequate
return to support that ongoing investment.
(Mr Lockhead) I think it is a key point that we invest
more than we earn, year on year, and if you look at our investment
record against the other levels of investment in the infrastructure
for bus travel, you will see that we are much further ahead.
73. Is that rate of return required based on
your operations as a whole, or does every subsidiary company have
to achieve it?
(Mr Clayton) Speaking for my business, we have a portfolio
of businesses. The rates of returns in some of them will vary
as a result of external factors. I can quote but one to you: the
effects of Foot and Mouth last year had a fairly disastrous effect
on the profitability of our North Wales operation. It would not
come as a surprise to anyone. We have not closed down North Wales
as a consequence. Equally, there have been occasions, to be absolutely
blunt, where we have made a complete fist of things, and we need
to put that right, and that has had an impact on margins.
74. I do not wish to take you into great detail,
I am simply interested in whether or not your rate of return your
companies require, as has been indicated, is that for your operations
as a whole, or do you require each of your subsidiary companies
to achieve it?
(Mr Clayton) Speaking for us, we are looking at the
return as a whole. We have to balance up the good and the bad.
75. Is that the case?
(Mr Cochrane) Yes.
(Mr Lockhead) There is no doubt we could not get the
returns in Cornwall and some parts of the Lowlands of Scotland.
It just would not be practical. There is no sufficient patronage
base, and we do have a low return.
Chairman: I have three Members trying to get
in and I want brief questions, please. Mrs Ellman and Mr Campbell.
76. You do not like the Traffic Commissioner's
national targets for reliability. Are you against targets, or
do you have a new suggestion for us on how it should be done?
(Mr Clayton) I think targets are welcome in the sense
that it gives everyone something to aim for, but unrealistic targets
clearly have little value. I think there has been a dialogue with
the Traffic Commissioners which is still ongoing. Our view would
be that a national target is very laudable, but it must be coloured
by local experience. What can be achieved will vary from area
77. Are you saying, then, that you are in the
process of agreeing local targets?
(Mr Clayton) We are not at the moment. I think that
is what we should be doing. There is some tension, and some tension
is probably no bad thing between the industry and one of its principal
78. If you had a Statutory Quality Partnership,
there could be enforceable agreements where, let us say, the operators
were committed to having a standard of buses or vehicles, and
the local authority was committed to a certain infrastructure,
both legally enforceable. Would you welcome that?
(Mr Lockhead) If we have a Statutory Quality Partnership
we have the same. We have partnerships where the local authorities
79. Let us not exchange too much time on this.
(Mr Lockhead) Just what you have described.