Nexus’ own consultation document on Quality Contracts exposes the deep flaws in the proposal, writes Nigel Featham of Arriva North East

It’s hardly an exaggeration to say that the proposal to place bus services in Tyne & Wear into the hands of the local transport authority has generated considerable debate, much of it of an emotional nature and from behind well-entrenched lines.

Arriva clearly has an interest in the outcome of the Quality Contract Scheme consultation, and it will surprise no one to hear that we oppose the concept of Quality Contracts. But before anyone starts to cry, “well, you would” and level charges of self-interest against us, I’d like to explain that we base our uneasiness over this specific Nexus proposal very much on the facts. Whose facts, you may ask? The answer is those cited by Nexus itself.

The Nexus Consultation Document on its proposed Quality Contract Scheme runs to a mammoth 1,800 pages. Arriva, like all other interested parties, has ploughed through the detail in a quest to understand the logic, the financial case and the very nature of how the QCS will work. We didn’t expect to like what we read, but that’s not the issue. What we didn’t expect to find were some rather gaping holes in the Nexus QCS argument that would, in my view, cause any objective and unaligned observer to conclude that this QCS, at least, is far from implementable.

If you’ve not read the document, or even if you have, I’d draw your attention to the following inconsistencies that, in my view, leap off the page and cast considerable doubt on the viability of the proposed QCS in Tyne & Wear:


Hole Number 1: Nexus is merely deferring falling off the funding cliff edge, with no Plan ‘B’

The QCS plans are intended primarily to plug a funding gap for Nexus rather than improve bus services. If nothing changes, in 2015 Nexus would just about run out of money to operate the Tyne ferry, maintain tenders and continue concessionary support for child fares. To avoid falling off this funding cliff edge Nexus suggests that it can, by taking over bus services, acquire bus operators’ profits and divert some of these to close the funding gap.

Of course, “plugging funding gaps” was never the intention behind QCS legislation but even if the ploy worked this time, what will happen the next time Nexus has a funding gap? Reading the document gives the distinct impression that the cliff edge has been allowed to stay in place to provide a rationale for the QCS, but it won’t solve the bigger problem.


Hole Number 2: Nexus is prepared to gamble despite acknowledging it could lose £113m under a QCS

Nexus states an impressive business case for QCS saying that if bus revenues rise smoothly in line with inflation, if growth targets are met over the next 10 years, if bid costs are as planned, the scheme will generate a surplus
of £46m over 10 years. That’s a lot of  “ifs”. A consideration such as recessionary impact over the next 10 years is not allowed to sully the positive outlook.

Yet Nexus knows it’s taking an almighty risk, with its own sensitivity testing on bid costs leading it to conclude it could lose £113m over 10 years. That Nexus is prepared to gamble that future bus revenues and bid costs will meet its business case is an almighty and unacceptable risk – totally inconsistent with an organisation living off reserves and about to fall off a funding cliff?


Hole Number 3: The ‘magic margin’ that doesn’t actually exist

The report contains a fundamental mistake in its thinking about bid costs that, in itself, renders the whole exercise flawed.

The Nexus plan is founded on the premise that operators will build a much lower margin into bids (the margins the authors think apply in London), rather than the higher margins that they say currently exist in Tyne & Wear. The whole basis of Nexus’ thinking is that this difference in margins – they calculate 4%-5% – will fund the QCS.

There is a fundamental error in this assumption. Under the London system buses are (mainly) on operating leases with interest above the line whereas outside London buses are (mainly) bought and owned by operators and margins are therefore before the interest costs of buying buses. The difference between lease and buy has around a 4%-5% margin impact. So this accounting oversight has an inescapable conclusion – there is no 4%-5% excess margin for Nexus to capture.


Hole Number 4: Nexus can’t run bus services, and has misjudged the cost of doing so

Nexus admits it does not have the in-house skills required to run a 1,000-plus bus network and recognises it will need to hire in the skills. It obviously needs to fund this administrative layer, and argues that it will do so from its increased margins, which, as above, are highly unlikely to materialise.

Nexus not only ignores the fact of where these in-house skills will come from, it only puts aside £500k per year to cover the cost of running the QC. We aren’t told how many people this translates into but £500k per annum is patently not enough to cover service planning, handling bids, monitoring, compliance and administration.


Hole Number 5: Nexus will promote passenger growth

Nexus’ promises on passenger growth are far from convincing as its own track record at running a public transport system, the Metro light railway system, demonstrates. Metro patronage is in sharp decline with numbers down by half a million in the past year alone.

Unsurprisingly then, Metro fares are increasing faster than bus fares (hardly a passenger incentive) while subsidy requirements for Metro are rising (hastening an even faster arrival at the edge of the funding cliff).


Hole Number 6: Nexus cannot deliver its fare freeze promise

A raft of modelling statistics and projections from Nexus argue that fares can be frozen in line with inflation. It sounds too good to be true. It is too good to be true. It’s not just that the overall margin, revenue and passenger growth projections are unreliable, but proposals, under a QCS, to introduce a zonal fare system will immediately change the fares for 80% of passengers.

Fare revenue modelling is notoriously difficult, but Nexus’ case isn’t helped by its reliance on out of date “black book” price elasticity assumptions (-0.42) and its interpretation of existing travel patterns. Despite a study for the Department for Transport demonstrating the opposite, Nexus still claims that having a zonal fare structure of itself will generate growth.


Hole Number 7: The proposal leaves the ITA and Nexus wide open to challenge which will at best mean years of delay until the QCS can be implemented.

Clearly, in the face of such gaping weaknesses in the consultation document, challenges are inevitable, and not just from operators dismayed that businesses they have worked years to build up will be taken from them without compensation and with scant justification.

Unions representing drivers who will be forced to move depot are also keenly interested. Passenger groups have been alerted to the fact that around 20% of customers will be forced to pay higher fares under the zonal fare system. Perhaps the person with most to be concerned about is the official at the ITA who will have to sign the plans off as “affordable”.


Hole Number 8: Partnership and collaboration with operators is rejected out of hand despite the benefits offered over a QCS

While public debate has focused on the QCS, operators have continued to develop partnership proposals as a better alternative. These proposals offer substantial benefits over the QCS and can be delivered quickly, collaboratively and affordably.

Partnership proposals include the implementation of a fully commercial, operator-led smart ticketing system within one year (the QCS version requires public funding and work on it won’t even start for two years), 100 low carbon buses for the region (the QCS offers none) and as many as 50 buses buses on kickstart style initiatives and to improve existing routes to generate organic growth (the QCS only offers 18). Of course, most importantly of all, the revenue risks in a partnership environment stay with the operators, completely de-risking Nexus’ position. Nexus has continued to resist these partnership proposals but the door remains open.

Publishing the business case has been a key milestone in the QCS process. Whatever one’s starting position in the debate I feel the holes in the Nexus argument simply cannot be ignored if bus services in Tyne & Wear are not to be plunged into chaos, and an insuperable burden placed on the ITA and local councils over the next 10 years. The evidence, Nexus’ own evidence, doesn’t lie.


About the author: Nigel Featham is regional managing director for Arriva in Yorkshire and the North East. He joined Arriva in 2008 and was previously managing director of Network Warrington.


Further coverage on bus regulation can be found inside the latest issue of Passenger Transport.

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