Backhouse Jones Watermark


16 July

The recent introduction of The Bus Services Act 2017 has opened the door for Mayoral Combined Authorities outside of London to begin implementing bus franchising operations in their area. The legislation also provides a procedure for Non-Combined Mayoral Authorities to implement franchised bus services, however this process is more onerous and requires the completion of more steps.

These procedures are introduced by amending The Transport Act 2000.

Changes such as these come off the back of the perceived success of an historically well-funded franchising framework in London.

What is a Franchised Bus Service?
Where there is a franchising scheme in place, the recognised franchising authority, the local government transport authority, will determine the details of all the services to be provided, and control when and where those services run. Effectively the scheme creates a monopoly on the local bus network and gives that monopoly to the local transport authority who become known as the franchising authority.  The franchising authority will then arrange a competitive tendering process to select which operators actually operate the particular services for a defined time period, no one else is permitted to operate in competition with the franchisee.

The authority also has responsibility for ensuring and maintaining the standard of the services being provided.

There are a number of potential models, but, for example, the operator may receive the remuneration from the transport authority agreed in the tender for providing the services and all the ticket revenue is retained by the franchising authority.  This would often include a cashless ticket payment system as well, oyster and contactless payment in London for example.

According to Section 123A(4) of The Transport Act 2000, a ‘franchising authority’ can be any of the following entities or organisations:

  • A mayoral combined authority
  • A county council in England for an area for which there are district councils
  • A county council in England for an area for which there is no district council
  • A non-metropolitan district council for an area for which there is no county council
  • An Integrated Transport Authority for an integrated transport area in England
  • A combined authority which is not a mayoral combined authority

That being said, where any authority, other than a mayoral combined authority, seeks to become a franchising authority; they may only do so if the Secretary of State permits it.

As set out above, where a franchised bus scheme has been approved and implemented, no other services can operate in the franchised area without the prior agreement of the franchising authority.
This creates significant ‘buyer’ control in the franchising authority, but with it comes significant financial risk.

It can also be difficult, once franchising is implemented, to return to a de-regulated model. Such concerns are one of the reasons that only mayoral combined authorities have automatic access to such schemes, and why other entities must adhere to a longer process.

Mayoral Combined Authorities – How to Set Up a Franchising Scheme
One needs to look no further than The Transport Act 2000, in order to find the procedure that must be followed in order to implement a franchised bus services scheme into a local area.

This, of course, only applying to Mayoral Combined Authorities (MCA). Any alternative entity will have to follow the longer process outlined later.

The five key stages of establishing a franchised bus scheme, if you are a MCA, as outlined by The Transport Act 2000, is as follows:

  1. Prepare an Assessment of the Proposed Scheme

The requirement to put together such an assessment lies in the provision contained in section 123B of the 2000 Act. According to subsection (2) of that provision, the assessment must predict the effects of the proposed scheme and the impact it will have on the local area, and; compare that proposed scheme with one or more alternative course of action.

The purpose of such a requirement is to ensure that the users of the services see the benefit of the alternative bus operation frameworks for their locality.

There are, naturally, a number of other things that the assessment must display before the Government will be comfortable permitting them to establish a franchising scheme. The proposed franchising authority must outline how they would operate the scheme and how they would fund and budget and the infrastructure.

In putting together this report, the franchising authority may request information from incumbent or existing operators that they consider may further the analysis. Following this, they must also commission an auditor to review the final assessment, pursuant to section 123D of the 2000 Act.

The review by the auditor must state whether, in their opinion, the information relied upon in composing the assessment was of sufficient quality, the analysis of the information is of a sufficient quality and that the authority had due regard to any guidance issued.

  1. Consultation and Engagement

Following the first step, the proposed franchising authority must publish a consultation document relating to the proposed franchising scheme. In accordance with section 123F of the 2000 Act, this consultation document must contain the following:

  • A description of the area in which the proposed scheme relates
  • A description of any areas that lie within the initially identified area
  • A description of the local services to be provided
  • The date on which the scheme is proposed to be made
  • The date(s) on which the franchising authority intends to enter into local service contracts
  • The period or periods it is proposed will expire between the making of local service contracts and the provision of local services under those contracts
  • A description of the proposed scheme
  • A statement explaining how the authorities will incorporate small-medium sized operators into the provision of local services.
  • The date by which the response to the consultation must be received.

As part of the consultation, the proposed authorities must consult all persons operating local services in the relevant area, as well as all other persons holding a PSV operator’s licence or a community bus permit.

  1. Response to the Consultation

Once the above-mentioned consultation has been published, the proposed franchising authority must publish a report explaining the authority’s (authorities’) response to the consultation, and their decision on whether to proceed with the franchising agreement.

As per subsection (2) of that same legislation, notice of the response to the consultation must be given to the Traffic Commissioner.

Again, the authority or authorities must show consideration as to how small-medium sized providers of local services will be incorporated into the franchising scheme.

Also included in this step is the actual making and publication of the franchising scheme, as required by section 123H of the 2000 Act. The idea here is to ensure that there is actually a scheme at the ready to be implemented that demonstrably betters the local services and its users from the alternative de-regulated schemes. Clearly, this analysis can be contentious.

  1. Transition

Where the authority decides to proceed with the franchising agreement, the market will have to transition into this more regulated framework. In order to do so there are a number of measures outlined in the 2000 Act that will facilitate this.

Under section 123I of that legislation, incumbent local services may be postponed until full implementation can occur. However, before making such a decision they must consult persons operating local services who would be affected by the decision, as well as other persons who it would be appropriate to consult. There is also the concept of registered local service requirements enabling franchising authorities to record and keep track of who falls into the relevant area.

  1. Implementation

Having implemented the franchising scheme, the relevant locality could see a number of potential benefits. These include integrated multi-modal ticketing under one brand and one simple oyster-style ticketing system. There is also likely to be the ability to cap and regulate fares, to ensure that commuters and users are encouraged to use the bus service. Obviously, these capped fares have to work economically, and this will be a challenge.

Environmental policy can be furthered given that the franchising authority will be able to impose standards and regulations regarding the emissions of vehicles, with the intention of improving local air quality.

These controls however obviously have to be paid for and the scheme has to provide affordable transport.


Alternative Entity – How to Set Up a Franchising Scheme
With regards to franchising authorities which are not Mayoral Combined Authorities, they will eventually have to go through the above five-step process, however there is an added step for them. Such organisations must first enter into discussions with the Government, in order to show that they would be a competent and responsible franchising authority.

Consequential to such discussions, Regulations will be put in place to ensure that the approaching authority be properly monitored and regulated. Once these Regulations are imposed, then the Secretary of State must give consent for the proposed franchising authority to act as such, before they enter the first of the five-steps to franchised bus services.

Prior to giving consent, the Secretary of State may request or insist on amendments and additions to the Regulations. Only once consent has been received can an entity such as this enter into the process of establishing franchised bus services.

The risks of franchising
Much is written about the perceived benefits of franchising, but it is important to recognise that there are some significant potential negative outcomes.  The model adopted may mitigate some of these, but they need considering.

The franchising authority is required to fund the franchise contract. Clearly the authority will factor this into their model of ticket revenue, however it would be very easy and appealing to model a fleet of new, franchising authority liveried and eco-friendly vehicles, then model the perceived growth in revenue these might attract!

Of necessity this is educated guesswork and, if wrong, the revenue could fail significantly leaving a black hole in the authority’s budget. On the other hand, a lack of ambition in any proposed scheme is equally politically unattractive. For franchising to work politically the bus users and wider public will need to see the benefits, i.e. vehicles, route network and ticket price and integration.

Also, the provision of the vehicles, garage facilities and staff are very grey areas.  The operating companies only have a fixed term contract with no security for their business thereafter. If that term is 5 years they may be asked to bid for the contract including the provision by the operator of the specified fleet.  Because there is no security after the 5-year term, the operators have to write off the acquisition costs of the capital expenditure in the fleet within that time or there has to be a guaranteed (cast iron) sale price for the amount not written off over the term (and therefore paid for in the franchise contract) for the bespoke fleet to whoever takes over the contract at the end of the term. Similarly, the TUPE and redundancy costs and the costs of any outstanding lease on premises that the losing operator has no use for once they lose the contract.

The franchising authority has to make special provision for the small medium operators.  It is difficult to see how this works over time.  A medium privately-owned bus company providing services in a particular town which loses a tender for those services will most likely fail financially at that point and close down. They simply will not be there at the next tender round in five years. Even if the owners decide to bid the next time this will be a new start and, of necessity, be a very risk averse bid.

As with the advantages the risks can be mitigated with the model of franchise adopted.  No doubt enormous amounts of energy by economists will be put into this in the process of assessing the viability of franchising.

In the end though, as has been seen with a number of rail franchises these models and the variables that feed into them are not reliable predictors of outcomes – with franchising the financial risks of failure for these rests with the local authority.

The danger is also political.  A loud mayoral fanfare heralds a fabulous new bus network, five years down the line a failing fleet of new technology eco-buses and the increasing costs of operating them means reducing service with older failing vehicles. This will reflect straight back to the mayoral responsibility for starting down the franchising route.

Franchising outside London is a major shift in the model for bus service provision. London was recognised as being significantly better public funded per passenger journey than the non-London services and this makes a significant difference to the potential outcomes.

There are currently numerous private businesses who provide these local bus services from large PLCs to small family businesses.  The potential for imposition of franchising in any locality presents significant threats to those businesses, particularly the small/medium sized operators.

The franchising authority needs to recognise that it is taking, from the outset, the substantial financial risks associated with the model it adopts, particularly in capital costs and ongoing running costs. If the franchising authority does this and properly commits to funding the bus service network that it believes will service the local area over the long term, even where revenue is weak at least in the early years, then the benefits referred to above are available.

This is likely to be a long-term project with the wider economic benefits of the integrated, modern, eco, franchised local bus operation being measured and acknowledged, rather than relying on tendering to provide the fixed costs and ticket sales to guarantee these fixed costs are covered from the outset.

If the authority insists that, from the start, the costs must be mitigated by the tender process and that the ticket revenue must overall exceed this cost, without looking in the long term, then the obvious risk is that tendering becomes a price only issue. Rather like many subsidised local rural and school services now, the provision becomes underfunded, sporadic, unattractive to the user and provided by operators who bid low and use poorer, cheaper vehicles.

It should, therefore, be recognised that franchising is only one of the tools already available to local transport authorities to influence bus provision.

Quality partnerships (formal and informal) are another model where agreed partnership with local operators can achieve many of the perceived advantages of franchising but without the financial risk to local authorities and without the risk of loss of livelihood to the small or medium operators that comes with franchising. This model also allows local authorities to step away from the partnership if they fall on austere times again and cannot fund their side of the partnership.

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