Later this month the Quality Contract Scheme (QCS) board is expected to decide whether the North East Combined Authority’s (NECA) proposed Tyne and Wear QCS should go ahead. As the transport world awaits the decision, Bond Dickinson looks at the story so far and weighs up the potential repercussions of the outcome.

Bus regulation may not immediately leap off the page as a hot topic, but current events in the North East are bringing into sharp focus longstanding political and economic tensions about how this vital source of public transport should be managed, and feelings are running high.

Background

Outside of London, bus services are operated commercially, with local government playing a limited role  by providing subsidies to operators to run socially important but unprofitable routes. Under the proposed QCS - the first ever proposal for a scheme of this kind to reach this stage - NECA, via its transport executive, Nexus would control the market in local bus services, deciding what services are needed, how frequently, at what fares, and whether any additional facilities or services are required. In practice, the QCS would work as a form of franchising scheme put out to competitive tender; operators would no longer be able to run services based on their commercial needs, but would have to bid for contracts to operate services on terms set by Nexus or face not running any services at all in the region.

Despite the historic lack of appetite for such schemes (the relevant legislation has been in force for 15 years without ever previously being used), Nexus sees the QCS as the only viable option to save local bus services from steady decline. They cite the continuous fall in adult fare-paying passengers in the region since the late 1980s, together with the loss of some non-profitable routes, problems that Nexus say are compounded by a non-standardised ticketing system with tickets only valid for use on certain operators’ buses. In order to maintain secured services and discretionary concessions in the face of decreasing availability of public money, Nexus has said that it is currently using up its reserves – and that these will be exhausted by the end of the 2016/2017 financial year.   

Pros and cons

On its face, the QCS seems attractively customer-focused, with Nexus placing emphasis on benefits such as a simplified, cross-operator, multi-modal ticketing structure; fare-capping; preservation of secured services; and the stability of a bus network where permanent changes can only take place after engagement with the public. In economic terms, Nexus argues that the scheme will not only pay for itself, but also reduce Nexus’ underlying budget deficit over the 10-year life of the scheme.  

However, that view is very far from settled. Nexus is facing strong opposition from the heavyweight incumbents in Tyne & Wear. Stagecoach, Go North East and Arriva are all worried about the damage a QCS scheme would do, and fought Nexus hard at specially-convened hearings earlier this year, labelling the proposal as “disastrous”. Indeed, reacting to tough scrutiny of its economic case, Nexus’ response to the QCS Board was that they could always cut services or increase fares to meet economic demands. 

But with change clearly in the air, what’s the alternative? The operators vigorously promote a Voluntary Partnership Arrangement (“VPA”) instead - a formal, but voluntary, arrangement between a local authority and operators under which the local authority provides upgraded facilities in return for the operators investing in improved services. Nexus concedes that the proposed Tyne & Wear VPA has a number of benefits, including reduced multi-operator fares, 50 additional buses in the network, and better vehicle quality. 

However, Nexus also identifies a number of sticking points, including the uncertainty caused by the ability of operators to terminate their participation in the arrangements, as well as the fact that, although the VPA would slow the current decline in bus passenger journeys, it would still lead to deep cuts in publicly-funded bus services and the provision of non-statutory discounted fares. Further, the VPA does not provide for caps on fare increases.

The decision for the QCS board

Presented with these alternatives, the QCS board’s decision is likely to turn on the economic risk inherent in the QCS. Nexus admits that the QCS would introduce “significant risks” due to NECA becoming responsible for all bus revenue and, importantly, the costs associated with providing the services. Nexus believes these risks can be managed, but the scheme’s detractors point to the projected cost of £1.6bn over 10 years, with “massive unpredictability” as to the scheme’s outcome. 

In addition, it is common ground that introducing the QCS would have a huge negative impact on bus operators. Whilst Nexus does not deny that the bus operators will be adversely affected – accepting in their submissions to the QCS that operators would experience a plunge in operating margins from 14% to 8% -  its position is that this would be proportionate to the benefits provided to passengers by the scheme. So what might October’s decision bring? Should the QCS be approved, Tyne & Wear’s operators may well seek to have the decision overturned on appeal. If unsuccessful, they will need to act quickly to mitigate the anticipated adverse economic and reputational effects. Nexus suggests that this might be done by disposing of their depot(s) and redeploying vehicles rather than writing off their value, but it is difficult to see how this could be done easily and on commercially-satisfactory terms. Of course, operators will be anxious to ensure they win contracts covering their existing business and the history of the dispute may make negotiations with Nexus rather awkward. 

On the other hand, if the QCS board decides to reject the proposal, Nexus may submit a modified proposal, to which the board must respond within 4 weeks. Whether Nexus has an appetite to do so will surely depend on just how dismissive the QCS board’s opinion proves to be. And, although Nexus has dismissed the proposed VPA in its current form, it has said that, with negotiation, it may achieve “a form that is acceptable in legal terms”.  Prudent operators – in the region and elsewhere - will therefore no doubt be considering ways in which the VPA proposals might be modified to make them more palatable to local authorities.

Industry implications

The decision is likely to have a knock-on effect outside the region, too. A successful QCS application could act as a catalyst, serving as a clear warning to the industry that where opportunities for greater control of local services are presented to local authorities, they will be taken. Equally, should the scheme collapse, it could serve as a warning to any local authority who, in former transport minister Norman Baker’s words, wishes to use bus policy as a “plaything”.

Operators in other regions should be alert to this possibility and consider how best to pre-empt or de-fang a QCS application by focussing on the benefits offered by partnership / VPA-type schemes.  Big players like First as well as smaller operators  have made very clear their preference for partnerships, which have much more yet to deliver and can be formed to meet the objectives of cities as they look to buses to strongly support their agendas. Indeed, the attraction of such partnerships is certain to continue growing, allowing operators to combine forces with local authorities but retain a greater degree of control and market share than under a QCS.

On the flip side, if the application is unsuccessful, the concept of QCSs might simply die a death, particularly in light of the uncertainty surrounding the recent Buses Bill and what looks like a clear direction of travel towards formal franchising of bus services. Whilst localism evidently remains high on the government’s agenda, one has to wonder how the Buses Bill will affect QCSs, if at all – will the Bill repeal the legislation enabling QCSs, or work alongside it? If Tyne & Wear becomes part of a combined authority with a mayor, will the mayor be able to overrule the QCS board’s decision? And, of course, an important unanswered question is whether any of this has represented a sensible use of taxpayer and shareholder resources, with the costs of the process running into the millions.

If approved, the scheme is intended to be introduced from April 2017 and run for 10 years. This month’s decision could well change the landscape for public transport in the region, and indeed further afield, for the foreseeable future.