Transport economics Why is transport important?
Is the bus market really contestable?
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- Market share of bus operators
- New policies to reverse the decline 17
- London vs The rest of the country
- British Rail Privatization
- Features of BR operation
- BR Privatization
- Benefits from privatization
Is the bus market really contestable? Some economists have argued that the bus sector was never truly contestable and, as a result, many areas of the country have seen their services dominated by large bus companies who face no competition. Many of the larger companies forced smaller operators out of the market using unfair tactics and predatory pricing. This effectively gave them a local monopoly. It is very difficult for a new firm to start to run services in areas dominated by one of the big players. New firms would find great inertia among passengers who would be unwilling to switch providers if their journey needed more than one bus. Therefore entering the market on ‘single routes’ would be difficult, but so to would trying to compete on all routes as the capital required would be significant. The frenzied competition seen on routes post-deregulation has now disappeared. Many routes are now being provided by a single company with monopoly power. This may explain why the fruits of deregulation have not been fully realised. The table below shows how the structure of the bus market has changed. Note that mergers mean that the situation is complicated, however the concentration ratio has risen and the market has become more oligoplistic in nature. Market share of bus operators (%) Operator 1989 1992 1995 1999 2006 Stagecoach 3.9 4.9 13.4 16.4 17.8 Badgerline 3.1 5.0 First Group (Badgerline & GRT merger) 12.6 23.0 23.0 GRT 0.6 1.2 British Bus/Arriva 2.8 3.4 8.8 13.6 16.6 National Express Group 0 5.9 7.7 6.2 5.1 Go-Ahead Group 1.7 1.7 4.3 6.5 9.3 There is some evidence to support the view that there is contestability in areas where subsidy is available. The new Rural Bus Subsidy Grant (see below) attracted a variety of tenders for new services as the graph below shows with more than 5 tenders being offered in 8% of cases and 78% of services attracting more than one. However the fact remains that there is little contestability in many areas of the bus industry now it is established. New policies to reverse the decline17 In March 1999, the Government announced new proposals to improve bus services in its document 'From workhorse to thoroughbred'. These included: a new framework for local authority influence over buses statutory backing to ensure quality standards greater powers to ensure that buses follow their timetable new technology to improve bus information more joint ticketing The key element of the programme is the Rural Bus Subsidy Grant (RBSG) which is available to support new bus services and enhance existing ones. For a relatively modest sum, initially, £32.5m a year, now £48.5m, many more services have been provided in rural areas, often evening and weekend services. Half the contracts awarded cost local authorities less than £1.20 a mile. London vs The rest of the country It would seems relevant to consider why busses in London are doing so well compared to the rest of the country. There are a few obvious differences. In London bus companies compete for franchises. They bid to run a route with the highest bidder getting the right to run the route for a period of time. In the rest of the country bus firms compete with each other for passengers on the road. London has a large daily influx of commuters who find it inappropriate to drive to work. London has an integrated transport policy (run through Transport for London) under the auspices of the Mayor. This includes the implementation of the Congestion Charge. It is ironic that the franchise system in London produces such good results, yet on rail it seems less successful. The Office of Fair Trading does not allow the franchise system to operate outside London (maybe because the law set out how busses were meant to work), but it could improve the system and reduce waste/increase efficiency. However London is different to other areas and it might well be that transplanting the London system to other areas might not work. British Rail Privatization18 The railway network has a long history of being commercially unviable. The figure below shows how the railway industry was organised over its history. The reverse of policy is striking. 
The problem faced by BR in the 1980’s were considerable. It did have strengths in that it was a single network, had good management and was moving towards a more commercial attitude. It had huge problems however. These were: People were leaving rail as a means of both passenger and freight transport. Road was taking most of this traffic. See charts on next page. Investment in the network was determined by the Treasury. In the 1950’s and 60’s this was a real problem due to the ‘stop-go’ nature of fiscal policy which halted projects without warning. (For example the modernisation of the West coast line was not completed due to this.) In the 1980’s much needed investment was denied due to political decisions. See chart on next page. Something had to be done and privatisation was proposed. It had the potential to solve the industries problems if properly constructed. Features of BR operation BR lost money overall. BR was heavily dependent on external subsidies, especially for provincial services. Safety is an important consideration and an area of great public concern. Unlike other forms of transport rail must have its own dedicated infrastructure. The economic issues that had to be addressed before privatization could proceed were; How to allocate costs for the operation of trains on particular lines. How to determine network fares. The solution the government implemented was to split the infrastructure from the operation of trains and to split up the network into regions, each with its franchised operator. Freight was also split up, but on a different basis and the ownership of the rolling stock was separated from the service operators. The services that needed financial support would continue to get it, but companies would have to bid for the right to run each service (franchise) and asking for less subsidy would be an important, probably the determining factor in the process (as service levels were laid down). As we shall see saving money for the government was a very important factor. BR Privatization 
The structure of the industry post-privatisation was: Passenger services franchised to private operators. (Train operating companies or TOC’s). Any organization can bid to run trains over the infrastructure in 25 franchise areas (now reduced to 21). The Office of Passenger Rail Franchising (OPRAF) oversaw this. The Franchisers of routes are shown on page 66 of Bamford. The OPRAF set minimum standards of service and monitored franchise operations. Freight and parcel services to be sold off. Only two companies operate freight services over the whole network. The Red Star Parcel operation was so unprofitable that a price of £1 was asked for a buy out by the existing management. The rolling stock was split between three companies (ROSCOS) who would lease it to the operating companies. The new operators were able to buy their own new stock, but most wished to run the existing stock. The separating of the companies from the rolling stock reduced the capital cost of entering the market, the existence of three leasing companies ensured competition, however Stagecoach now own Porterbrook one of the ROSCOS. A track authority, Railtrack, was responsible for the infrastructure, track, signaling, stations and other property assets. It was originally to be publicly owned and be responsible for maintenance, timetables, and determine charges for train operating companies. However Railtrack was sold off in 1996. Railtrack did not have their own maintenance department, they hired private subcontractors, some of which are former BR organisations. This arrangement did not work at all and maintenance was poor and in many cases dangerous. Network Rail took over when Railtrack was forced to close down by the government. They have taken back a great deal of the maintenance inhouse. A regulator, The Office of Rail Regulator (ORR), to safeguard the interests of passengers. As with other regulators, such as OFWAT and OFFER the regulator will aim to ensure fair competition and protect consumer interests. Following the initial years of operation the Strategic Rail Authority (SRA) took over the role of the OPRAF as well as the ‘leadership’ of the industry. This was prompted by a number of rail disaster and a realisation that there was nobody with an overall vision for the industry. Railtrack collapsed due to the impossible task of raising the required finance to invest in the network. The main problem was the track access charges for the TOC’s was set before the decision on what level of investment in infrastructure was required. Following several well publicised problems the government demanded more and more investment from Railtrack. The only ways Railtrack could do this was to borrow or get government subsidy. Subsidy did not come in the required amounts and Railtrack was effectively bankrupted by the Transport Secretary (Stephen Byers). Network Rail was put in its place - a ‘not for profit’ company. Regulation of privatised industries is usual. The regulator is there to safeguard the public interest and in this case the issue is the promotion of public service and safety over profit. The resulting, rather complicated, industry structure is shown on the next page. Quite amazingly the government reorganized the rail industry again in summer 2004. This is dealt with at the end of this section. Benefits from privatization The government view was that privatization would bring the following benefits; Increased efficiency due to reduced waste. Greater concern for customer needs. Management will be free to operate a market led service. Increased employee motivation. Lower subsidy expenditure by central and local government. There would be an increased level of investment. The first was based on the belief that competition would force firms to reduce costs. In the case of the TOC’s the competition came from trying to win the franchise. Getting the franchise meant accepting the lowest subsidy, to reduce the need for subsidy costs must be kept down. (Notice that this does not mean prices are low or quality maintained, a crucial point when customer service is considered.) Private firms would, they argued, give better service as they tried to gain more customers. The managers would be able to innovate to keep costs down and customers happy in a way that BR was not allowed to do due to Treasury constraints. Employees were not really better motivated as, on the whole, they opposed privatisation (or their unions told them to). In fact industrial relations are reported to be ‘better’ than before despite various disputes on working practices. For a government committed to reducing state expenditure lowering subsidy was an end in itself. The money raised from the sale of the network (Railtrack raised over £4bn) could be used to finance expenditure in other areas or reduce taxes (being politically more popular taxes were kept lower). Directory: files -> quia -> users users -> L y aura un quiz sur le vocabulaire users -> 007. Explain and demonstrate basic cad commands and techniques users -> Vocabulary review users -> Three Approaches to Defining Jazz Mark Gridley, Robert Maxham and Robert Hoff Copyright 1989 by Oxford University Press users -> Inventions and Inventors Web Quest Introduction users -> How do we handle these contacts? users -> A brief History of the Personal Computer users -> Lecture #13 the civil war from The Election of Lincoln to the Surrender at Appomattox Election of 1860 users -> Hours: 05 Term: Winter/Spring 2005 Days users -> Ch. 1 Thinking Geographically Download 4.92 Mb. Share with your friends:
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