43: Just the ticket!
Long-distance and city bus de-regulation
The problem: the wrong bus
For half a century after 1930 the United Kingdom bus market was divided into a closely regulated system of route monopolists. The industry was dominated by the state-owned National Bus Company (NBC), which served long-distance routes, and the municipal transport authorities, which were politically-appointed bodies running local services. There were a large number of independent operators too, but they were mostly very small and reduced to running charter (non-scheduled) coach services.
This politicization and monopoly left the UK bus sector grossly inefficient and highly dependent on taxpayer subsidies. Operating costs rose by as much as 15 to 30 per cent above inflation in the decade 1972 to 1982. State subsidies soared: a mere (!) £10 million in 1972, the total had jumped to £520 million ten years later. Most of this subsidy was pocketed by monopolistic, publicly owned bus businesses in the big cities.
The idea: competition for the bus
These problems can be stemmed by reducing the regulatory constraints on the industry and transferring the inefficient, publicly owned bus companies to the private sector.
Example: acting on buses
The Buses Act, passed in 1985, removed UK restrictions on competition by abolishing the strict licensing system previously in force (with the notable exception of London).
The National Bus Company continued to dominate the industry, exploiting its privileged access to major coach stations. But then, in a bid to spur competition, it was broken up and sold off, mainly to management buy-outs, the last one being completed in April 1988. Likewise, Scottish Bus Group's subsidiaries were privatized by August 1991.
Long-distance express coach users immediately began to benefit following regulatory reform. In the year after de-regulation alone, the number of long-distance services increased by a third. New routes sprang up where none had existed before.
Travel costs fell too. NBC, for example, adopted a more aggressive marketing policy, focusing on cheap fares. The travelling public responded in droves and switched from over-priced trains to buses, where the same journey could be undertaken (though perhaps in slightly less comfort and a slightly longer time) for perhaps a tenth or a twentieth of the cost of going by train.
Meanwhile, in the cities, competition and regulatory reform incentivized bus companies to provide customers with a service they actually wanted to use. Independent operators have come forward to run new scheduled services, and tailored their fleet to meet demand: introducing mini-buses, for example, on routes where demand was low or where there was previously no service.
More direct services have been introduced too. Instead of the public having to change buses and wait in cold and badly-lit bus stations, there are more direct services to take them between the exact points they want to travel between.
The results have been pleasing for taxpayers too, with a spiral of decline and subsidy being reversed. Now, bus operators contribute substantial sums to the Treasury through corporation tax and the taxes paid on their employees and the fuel and other materials they consume.
There have been some remarkable success stories in the bus sector following the Buses Act 1985. Five years after it was privatized, MTL Trust Holdings Ltd, formerly a public sector bus operator on Merseyside, was earning £500 million a year as an employee-owned company, operating buses and trains throughout the UK.
Perhaps the greatest success story is Stagecoach, established in 1980 by Brian Souter and his sister Ann Gloag. After building up a popular coach business, in 1986 they started a bus operation. The company has invested in new vehicles, driven down costs and attracted new customers through constant innovation, and is now active in many countries throughout the world. For example, it employs some 7,000 people and operates over 3,000 buses, trolley buses and trams in Hong Kong, China, Australia and New Zealand. And it is the largest provider of motor-coach charter, tour and sightseeing services in the United States, with 12,000 employees operating a fleet of 6,500 coaches in 33 states (and Canada) plus some 3,300 limousines and taxicabs.
Assessment: don't stop the bus
Quality and safety regulation was tightened following the 1985 Act. The industry was not so much deregulated as re-regulated.
Overall, the reforms made in the bus sector have proved a major success. Bus companies now make profits with good returns on capital, where prevously they ran at a loss. Local pay negotiations have also led to the removal of serious distortions in wages. Over-staffing has also been tackled, particularly in the middle tiers of management.
Regulatory reform was a success story, but certainly, the 1985 Buses Act could have been better drafted to prevent predatory pricing activities by some aggressive bus companies. The competition authorities have found that some firms have been deliberately driven out of business by competitors such as Stagecoach drawing on their larger financial reserves. Yet in his ASI study Deregulated Decade John Hibbs concludes, "Without any doubt, some …small companies have been driven out of business when their routes have been flooded with buses owned by a larger firm. Yet there have also been many occasions where small firms have survived by offering better quality, lower fares or more friendly drivers."
Professor Hibbs also points out that although the Buses White Paper 1984 set out a clear framework for deregulation, there was nothing similar with respect to privatization goals. He identifies a range of problems which arose during the privatization process, namely:
Slow progress was made with the privatization of municipally-owned bus companies. Hibbs observes, "The success of these companies, when they were eventually privatized, in quickly and effectively improving the quality of service has been remarkable, but it is unfortunate that it took so long to achieve."
- Valuation problems. The state-owned bus companies which began to be sold in 1985 had highly unreliable balance sheets. Initially, companies were sold cheaply, one business being sold for little more than the value of its fleet; but as the market grew there was a progressive rise which in turn raised the value of the companies sold earlier. Consequently, a number of the initial management buy-outs who risked their capital enjoyed substantial re-sale gains. (Of course, it is possible to address such problems with 'clawback' arrangements that oblige management not to sell a business within five years, or to return some of this windfall profit it they do.)
- Under-utilized property assets were redeveloped by private-sector management. Later on, local politicians imposed restrictive covenants on the properties sold off with municipal bus companies.
- In London, political opposition to wide-scale reform led to bus services being licensed on franchises but not deregulated. The public-sector body, London Buses, became a franchising authority. Franchises are tightly specified and there is little scope for private firms to propose and exploit new routes, or introduce innovative other new methods, let alone tariff structures. Franchise operators are even obliged to paint the buses the traditional London Transport red (which prevents them from creating much brand loyalty).
For futher information:
- Stagecoach have an interesting website at www.stagecoachplc.com, as does the Nationsal Bus Company at www.nationalbus.com.
- Hibbs, John (1985) The Debate on Bus Deregulation: Adam Smith Institute (London) www.adamsmith.org.uk
- Hibbs, John and Bradley, Matthew (1997) Deregulated Decade: Adam Smith Institute (London) www.adamsmith.org)
- Hibbs, John (1999) Don't Stop the Bus: Adam Smith Institute (London) www.adamsmith.org.uk
- Shepard, Anthony (1984) Wheels Within Cities: Adam Smith Institute (London) www.adamsmith.org
Copyright 2002: Adam Smith Institute
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