Municipal bus companies: can public ownership be profitable?

Bus services run by the public sector consistently outperform their private counterparts. So why have municipal buses been banned?

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For anyone who missed the Competition Commission’s 2011 report into local bus services, here’s the big insight it offers: “head to head competition between bus operators is uncommon,” the report found, because of “customer conduct”. The worst, most irrational thing these difficult customers did was to ignore the choice of operators the free market had to offer, opting instead “to board the first bus to their destination that arrives at their bus stop.”

But while the report’s earnest statement of the blindingly obvious is funny, it also reveals a contradiction in transport policy. If the free market is useless to bus passengers who are only interested in getting from A to B, why has competition been thrust upon them?

The deregulation, privatisation, and marketisation of the UK’s buses began in the 1980s but, as the Competition Commission found, there is still no real competition in local bus services. Cat Hobbs, director of the pressure group We Own It, describes a bus service as “a natural monopoly”, and says that where competition is forcibly introduced, “it doesn’t really work”. Since 1986, the year after deregulation was legislated by the Transport Act, bus use across the UK (excluding London) has fallen by 32.5 per cent, while fares have increased 35 per cent above inflation. In London, where TfL has retained control of fares, routes, ticketing policy and the issue of franchises to private operators, passenger journeys have almost doubled in the same period.

The Bus Services Act, pushed through Parliament by Chris Grayling last year, addressed this imbalance to a degree by giving local authorities across the country the same powers as TfL to put routes out to tender to private companies, standardise ticketing, and regulate services. The move was welcomed by transport campaigners. At the same time, however, the Act also barred local authorities from establishing their own municipally owned providers.

The small number of municipal bus companies (there are 11 across the UK) that had existed prior to the Act continue, but their model of ownership is now prohibited by law. The embargo can hardly be based on performance; a municipal company has won UK Bus Operator of the Year for six of the past ten years.

Nottingham City Transport, the largest local authority-owned operator in England, has been found by Transport Focus to have the highest customer satisfaction of any bus operator in the UK. The amount of bus lanes in Nottingham has grown from 200 metres in the year 2000 to 24 kilometres today. Nottingham was the first city in the UK to have smart passes, three years before the launch of the Oyster card in London. The majority owner of NCT, Nottingham City Council, receives a dividend of £2m a year from NCT.

Thirty miles to the south is Leicester, about the same size as Nottingham and with about the same number of people (around 320,000). But Leicester City Council, having privatised its bus fleet in the 1990s, now pays £467,000 a year to subsidise a private operator. Nationally, in 2016/17, £2.21bn was paid out in public subsidies to private bus operators. At the same time, Transport for Quality of Life has found that bus operators paid out £2.8bn in dividends to their shareholders between 2003 and 2013.

In Reading, the local authority owns Reading Buses, the second-largest municipal operator in England. Reading Buses invests £3m a year into the bus network by not having to pay dividends, and has, like Nottingham, been repeatedly recognised with industry awards and very high  ratings for efficiency, cost, and customer perception.

The largest public bus company in the UK is Lothian Buses, owned by Transport for Edinburgh and three other neighbouring councils. In 2017, Lothian Buses returned £6m to the City of Edinburgh Council, which is reinvesting the dividend in the Edinburgh Trams Project. In the same year, Edinburgh’s transport was ranked among the highest in the world – and second in the UK after London – in the Arcadis Sustainable Cities Mobility Index, beating larger and more heavily invested cities including Barcelona, Geneva, Washington DC and Sydney.

Why, then, are local authorities prevented from launching more of these services? Mark Fowles, managing director of Nottingham City Transport, says the reasons are ideological. “Municipal bus companies run against the ethos of the ruling party.” And Chris Grayling has himself asked the public, in a column for ConservativeHome, to remember “how badly nationalisation failed key public services”, and to beware what he described as Labour’s commitment to “a socialist-style planned economy.”

A look at the transport in Grayling’s own constituency, however, tells a different story. State-owned operators run more than half of the bus services in Epsom and Ewell, but the crucial distinction, it seems, is that these operators are owned by foreign governments. Most of the profits from bus fares in the Transport Secretary’s  constituency, then, are reinvested in French and German public services.

But Epsom and Ewell is not unusual in this. Abellio, Arriva and RATP, which are wholly owned by the Dutch, German and French governments respectively, operate 37 per cent of London’s buses.

“Having other governments running our bus and rail network has always been a strange situation,” Mark Fowles observes. “But when you have an open franchising system like in London, there’s European rules that say you can’t disbar other participants from bidding. Our government can’t change it – it’s a matter of European rules. The big question is: why isn’t there a comparable UK operator that provides that sort of service?”

Fowles doesn’t advocate a return to the days of top-down state management, with buses run centrally by the Department for Transport or even by local councillors; but instead recommends service provision by “an arms-length company that happens to be owned by the state”, run on the model of the German Deutsche Bahn, owners of Arriva, or the French government’s RATP Group.

For Cat Hobbs of We Own it, “foreign states owning bus operators while local councils are barred from doing so highlights the absurdity of this ideological commitment to privatisation at all costs. The fact that the government is not allowed by law to run a railway, except as an operator of last resort when things go wrong, and the fact that local councils aren’t allowed by law to set up new municipal bus companies, while we’re happy for publicly owned companies from other countries to run our services, it’s a kind of madness.”

Chris Grayling’s statement that he wants to “retain the strengths of the private sector”, seems contrary to the fact that much of the transport network is already run, and run profitably, by foreign states. His distaste for local authority ownership wilfully ignores the successes of the 11 remaining municipal bus operators across the country that survived the Thatcherite clearings of municipal assets. “Local authorities have other priorities today,” Grayling told Parliament, “and this is about partnership between the private sector and the public sector.” The private sector, he said, “delivers better and newer buses, providing jobs”, whereas the public sector provided “indifferent services that cost the taxpayer” – this is in spite of the fact that Lothian, NCT and Reading Buses collectively made £11m in profits last year, all of which were paid in dividends to their respective councils or reinvested in the network.

With bus use, passenger satisfaction and other metrics pointing to the successes of municipal models, such a commitment to privately run public services looks less like an evidence-based piece of policy and more like a very expensive piece of ideology. And regardless of the Transport Secretary’s unshakeable belief in the benefits of competition and the market in providing public services, and no matter whether buses are owned by private companies, local councils or foreign states, passengers will continue “to board the first bus to their destination that arrives at their bus stop.”