Plans for Quality Contracts Scheme for buses in North East rejected

The Quality Contracts Scheme Board has rejected plans from the North East Combined Authority, through transport executive Nexus, to take control over local bus services in the region.

The authority’s proposal for a QCS had met with fierce resistance from the three main bus operators in the area, Go North East, Stagecoach and Arriva.

It was the first time that the legislation supporting such schemes had been put to the test, the QCS Board said. In an opinion published today (3 November] it concluded that:

• The scale of the Tyne & Wear proposal was large. “The proposal is enormously ambitious and could, if delivered successfully and the risks don’t materialise, provide Tyne & Wear with a transport system unrivalled in Great Britain outside London.”
• In the Voluntary Partnership Agreement (VPA), Nexus could be proud that it had led three bus companies to put forward a proposal “that is in itself novel and groundbreaking, with the makings of potentially effective governance allowing local citizens real influence over their bus services”. From the Board’s understanding, it was likely that there would be clauses in the forthcoming Buses Bill that could allow, should they wish to, Nexus to establish greater certainty through a new version of a statutory quality partnership.
• Nexus had failed to comply with the statutory requirements on consultation set out in Section 125 of TA2000. “This is primarily because the representation of the difference in scale of benefits between the QCS, and the VPA in the formal consultation document was such as potentially to mislead respondents and we saw evidence respondents had been so misled”.
• Nexus did not apply an optimism bias on top of its modelling of the four specific risks chosen. “We saw that the risk contingency was likely to be spent on 31% of possible outcomes. An optimum bias should have been applied on top of this risk contingency." There was therefore a likelihood that the scheme would run out of money. There was a further cash flow issue in the early years. "For those reasons, the Board is not convinced that the scheme is affordable and, on that basis, we cannot conclude that it will lead to an increase in the use of bus services and it is our opinion that the requirements of Section 124(1)(a) TA2000 are not demonstrated."
• They [the Board] were satisfied that service quality would improve compared to the ‘do minimum’. In the Board’s opinion, section 124(1)(b) TA2000 was satisfied.
• The Board saw how the QCS would contribute to local policies and strategies. In its opinion, section 124(1)(c) TA2000 was satisfied.
• The effectiveness of the QCS had been significantly overstated due to errors within the modelling. “In particular, Nexus attributed benefits associated with simplified ticketing to passengers who did not buy a ticket. We reject, as reverse engineering, the latest version of events that simplified ticketing and customer charter were simply a proxy for a wider package of benefits. That assertion is not supported by any of the core documentation of the scheme.” It was the Board’s opinion that Section 124(1)(d) TA2000 was not met.
• The proposals generated negative cash impacts on the three existing operators in the range of at least £85m to £226m. The mean of those figures was significantly in excess of the net present value of benefits likely to be delivered by the QCS. “The sheer scale of those figures is such that they will do real harm to the existing operators. The Board is firmly of the view that Parliament never had in mind that the introduction of a quality contract scheme would lead to cash impact on businesses of the order of hundreds of millions of pounds.” In addition, the benefits that could be delivered by the VPA were of similar orders of magnitude to those delivered by the QCS. The Board had “no hesitation in concluding the negative impacts on the operators are wholly disproportionate to the benefits accruing both to the travelling public in Tyne & Wear and the well-being of the wider citizens”. It was its opinion that Section 124(1)(e) TA2000 was not met.

Nexus Managing Director Tobyn Hughes said it was extremely disappointed that the Board’s opinion was negative regarding the proposal, adding that there were “aspects of it that we simply do not agree with”.

“Of particular concern is that the Board took a highly pessimistic and surprising view of financial risks, suggesting that Nexus must budget for costs to be up to 40% higher than we know them to be, while at the same time suggesting the bus companies should be compensated out of public funds for missing out on future profits from the very same network of routes," he argued.

Hughes noted that the Board had not been convinced by aspects of the economic modelling of the benefits of the proposal, and had been concerned by changes to the presentation of economic benefits after consultation.  Nexus would look at whether these issues could be rectified, he said.

Nexus’ Managing Director also claimed that the QCS Board had seemed willing to accept the operators’ partnership offer at face value, something which was at odds with the risk-averse approach it applied when considering the transport executive’s proposal.

“The Board also fails to recognise that even if the partnership was delivered in full, many socially important bus services and reduced fare concessions would still be lost,” Hughes said.

He added that the combined authority’s Leadership Board would consider the opinion of the QCS Board at its next meeting. It will be up to the Leadership Board to decide whether to ask Nexus to refresh the technical analysis and submit a revised proposal, or whether to pursue other options.

Hughes warned that it was now “highly unlikely” that the combined authority could reform local bus services in 2017 as planned.

A spokesperson for the North East Combined Authority, said: “The Quality Contract Scheme proposal was put forward in the best interest of passengers. We are very disappointed with this outcome and will consider our response. The North East devolution proposal includes an alternative mechanism for achieving improvements to bus services.” 

Commenting on the QCS Board opinion, Richard Collins, lawyer at national law firm Bond Dickinson LLP, said: “There were valid arguments on both sides of the QCS debate about the best way to ensure the future of good quality public transport in Tyne & Wear and about the commercial positions of the bus operators and Nexus’ own funding requirements.

“The operators have won this battle but the long drawn-out process has made it clear that the current regulatory system needs to change. This looks likely to happen sooner rather than later, with new legislation on the horizon such as the Buses Bill, which may introduce franchising and give greater emphasis and encouragement to partnerships between operators and local authorities.”

Collins added: “Against the background of the drive towards a Northern Powerhouse, which implies devolution of power to local authorities, more challenges to bus operators may be around the corner as local authorities take more control over regional infrastructure and services. That creates opportunities too - and may in turn motivate operators to think seriously about introducing and enhancing partnership arrangements with local authorities in advance of having their hands forced.”