Local authority tenders for supported bus services "can restrict competition": CC

The way that local authorities tender for supported bus services, which would not be provided without public subsidy, and the limited number of potential bidders in local areas can restrict competition and increase the cost of supporting these services, the Competition Commission (CC) has concluded.

Publishing the initial findings of its report on the local bus market in the UK (excluding London and Northern Ireland), the Commission said that “too many operators face little or no competition in local areas” and the great majority of routes experience a high degree of concentration.

It now plans to look at how bus markets can be opened up further. The CC will also consult on whether local transport authorities should take measures to encourage competition, “including whether franchising might be required in cases where there has been a particularly marked failure of competition”.

Jeremy Peat, Chairman of the Local Buses Inquiry Group, said: “There are a large number of towns and cities where bus operators face limited competition and little prospect of significant change. In a market that was deregulated in anticipation of widespread competition that is clearly a problem and there are evident risks of disadvantages for passengers when there is little to keep local operators on their toes.”

Peat said that some positive effects could be achieved through bodies already present at local level, such as LTAs and traffic commissioners. “In many cases, those on the ground will be best placed to tackle the issues,” he argued.

But he also called for views on whether more hard-hitting measures were required in the most affected areas.

The inquiry group chairman acknowledged that head-to-head rivalry on certain routes had let to ‘bus wars’ and other behaviour that did not benefit passengers.

“We have found that head-to-head competition can be unstable, given the unusual characteristics of the bus industry, and this instability has the effect of preventing competition taking root over a longer period,” Peat said. “Where there is extensive competition on a route, only one operator tends to succeed in the longer run. That operator then has the field to itself but this outcome is not necessarily as a result of the operator concerned being the most efficient provider.”

Key findings from the CC report included:

• Local areas are, on average, persistently and highly concentrated
• Incumbent operators can benefit where multi-operator network tickets are inferior to their own network tickets
• Incumbents have an advantage in that they are running an existing network
• Entrants can sometimes have difficulties in accessing bus stations on fair terms and developing depots
• The five largest operators – Arriva, FirstGroup, Go-Ahead, National Express and Stagecoach – provide 69% of local bus services in the whole reference area
• Partnerships between operators and LTAs do not cause an adverse effect on competition, “although the concessionary fares schemes could encourage higher fares if new guidance to travel concession authorities is not followed”
• Concern about adverse publicity and relationships with LTAs can moderate operators’ behaviour
• The low number of operators in some areas, along with the design of tenders themselves, restricts competition for tendered services.

The Competition Commission has proposed a number of possible remedies, including measures to increase the number of multi-operator ticket schemes, restrictions on aggressive behaviour by bus companies, and ensuring fair access to privately owned and managed bus stations for all operators.

The report also contains recommendations for LTAs on the circumstances in which to pursue Quality Contracts, or other franchising models, in areas most affected by a lack of competition. The CC also sets how LTAs could use their other powers – such as Quality Partnerships – to promote competition or improve outcomes for local consumers.

However, it has “for the moment” ruled out price controls and selective divestment of local bus operations.

The CC expects to consider further responses and hold further hearings before issuing its final report in November 2011.