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09 Mar 2023

Start your engines: bus infrastructure

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The Bus Services Act 2017 introduced two new bus service operating models: franchising and enhanced partnerships.  You can find out more about the differences between these two models in one of our previous articles in this series on the bus industry by clicking here.

As a brief reminder, under the bus franchising model, the franchising authority (the authority) is solely responsible for specifying the bus routes, services, timetables and frequencies. This gives the authority the ability to co-ordinate bus services with passenger and potentially employer and other local stakeholder needs. This could include integration with other transport modes such as a train and tram. One of the major touted advantages of the bus franchise model is that it can address market failures caused by deregulation. This might be, for example, where rural communities lost bus services due to the route not being profitable. Transport for Greater Manchester is the furthest ahead in its bus franchising programme, with the first franchised services commencing later this year following the announcement of the successful bidders for Tranche 1 just before Christmas 2022.

Before the engines of the first franchised bus services can start, certain infrastructure needs to be in place to support delivery by the successful operator. Two highly relevant pieces of infrastructure are the bus depots from which services are operated, buses maintained and drivers managed, as well as Intelligent Transport System (ITS) equipment installed on the buses. ITS equipment includes CCTV, vehicle tracking, bus stop announcements (and any screens displaying bus stops), driver monitoring equipment, ticketing and payment machines.

Clearly, where bus services are subject to franchising, there will be significant interest from the authority about both of these types of infrastructure. When it comes to ITS, for example, there may be an interest in ensuring a consistent approach to ticketing and onboard announcements across all bus fleets to ensure a streamlined customer experience that delivers the desired service quality. So we might expect to see much more detailed requirements in bus franchise service contracts relating to infrastructure than bus operators will be used to. What are the risks and opportunities likely to be?

Depots

Much like deregulated bus services, under franchise arrangements operators are required to provide their own depot facilities. 

Bus depots serve a number of functions. Operationally, they are used to allocate vehicles and crews to each route, dispatch buses on those routes in accordance with the timetable, process any cash fares taken on return and manage drivers. They may also manage the service, such as coordinating gaps between services or when a bus breaks down or otherwise needs to be taken out of service. Depending on the size and any restrictions on the relevant depot site, as well as the extent to which the operator carries out maintenance and repairs in-house, the depot may also have workshops, maintenance facilities and mess facilities for staff. As a minimum, this will include facilities for fuelling (including charging electric vehicles), inspections, washing and cleaning, tyre changes and minor servicing and repairs. Finally, the depot will need parking space where buses can be kept overnight when not in use and, ideally, parking for employees.

The space and facilities required to provide depot facilities can be a significant barrier towards entry into the bus market. It is not just the simple cost of the land, buildings and office facilities, equipment and consumables. The location is also important for bus depots because if they are too far away from the starting points of the relevant routes, then operators will incur ongoing fuel costs through dead mileage while increasing wear and tear on the vehicles. For urban routes, depot facilities should preferably be in a central location or, failing that, close to the busiest routes to minimise such dead mileage. There will also be a degree of strategy on depot location relating to future routes the company may want to bid for.

The incumbent advantage

Incumbent operators have an advantage when it comes to bidding for routes because their depots will already be in place. This means incumbents can bid more keenly on price as their cost base is fully known and understood. In contrast, new market entrants will have to identify potential depot locations and work on an estimated cost basis, which will affect their ability to offer a competitive price. As one of the main arguments for bus franchising is to enable local franchising authorities to improve services to rural and remote regions that may otherwise not be provided (because they are not profitable), this is a potential stumbling block. The cost of setting up necessary depot facilities could make bus franchising unattractive to precisely the kind of new entrant (including social enterprises) that franchising authorities may be keen to see enter the sector.

Given that many authorities are keen to promote the use of electric vehicles as part of the push to meet 'Net Zero' commitments and improve urban air quality those incumbent operators who own or lease their depots gain an additional advantage when it comes to bids.  Firstly, if they already use electric buses to provide deregulated services, then the charging infrastructure will already be in place to enable the running of the same.  Therefore, unlike new entrants, they do not have to negotiate and enter into the contracts needed to procure and install the same and so will not incur additional cost, which would have to be reflected in their bid prices.  Our previous article here discusses the key issues relating to procurement of electric buses.

Even if an incumbent does not already have electric buses in place, they will be able to commence negotiations to price for the installation during the bid process.  Not only does this provide them with greater bid price certainty but it also reduces any potential delays in contracting for and managing the installation of the same.  The process for procuring charging installation can be lengthy and complicated.  Third party consents may be needed (e.g. from a landlord or mortgage holder) before any installation can commence, which can be time-consuming to managing – especially if there is no requirement on that third party to be reasonable or timely in considering and giving consent.  The installation and maintenance contracts will need to factor in the risks of carrying out works and services in an operational depot, which can be complicated to negotiate.  Then there may be long lead-in times for both the supply of equipment to site and the availability of a contractor to commence works.  Clearly then, the sooner this process can be kicked off, the better for a bidding operator. 

Depots are typically leased or owned outright by operators on an exclusive basis. Unlike the rail industry where depot facility owners are typically subject to a regulatory regime which facilitates fair provision of access on a charged basis to those who may need it, there is no obligation on bus operators to provide access to their depots. Equally, there is no legislative or regulatory mechanism to force them to grant access on equitable terms. The failure of the National Bus Strategy of March 2021 to make any mention of depot access suggests that this was not an issue of interest to the Government in its overhaul of bus service provision. 

An alternative approach?

Although franchise authorities are not permitted to provide bus services themselves, there are no constraints on them setting up their own depot facilities. Such developments may offer synergies here with the wider goals of Mayoral Combined Authorities. This might include encouraging development and use of brownfield sites and bringing construction jobs to particular areas. 

This approach would also enable the authority to own strategic assets that can assist in levelling the playing field and encourage new entrants to the market, while reducing operating costs.  This would be analogous to how franchise authorities already generally own and licence out access to bus stations and their facilities to operators to ensure that there are central hubs for the co-ordination of bus services. It would enable those facilities to be made available to successor bus operators, rather than requiring new depot facilities to be provided if the successor is not the incumbent.

On-Bus Equipment – Intelligent Transport Systems (ITS)

Most operators will utilise some form of intelligent transport system including CCTV, vehicle tracking, announcement equipment, driver monitoring equipment, and ticketing machines as part of their general business. Where bus services are not regulated, it is up to each operator what the specification of this kit is and in what combination it is provided. This means there is a lack of consistency in how or what data is collected – if data is even collected at all. This could offer another incumbent advantage where bus franchising is introduced, as local authorities may not have access to all of the relevant information about how bus services are currently provided.

Tensions

To co-ordinate bus services more efficiently and ensure consistency of the passenger experience across franchised services, it is necessary for franchise authorities to take a more prescriptive approach to the ITS equipment used and installed by operators. The approach will be specified by the authority in the bus franchise services contract.

There will be tensions here. Bus franchises will last for a fixed term – and so operators will be reluctant to incur the capital expenditure on ITS equipment that may not be recouped from the payments received under the contract. This is especially given the risk of that operator having no guarantee of future success when the bus services next come up for tender. Equally, franchise authorities will want the certainty that ITS equipment will be ordered and fitted in time for the commencement of each franchise term and will then be maintained in good operational condition throughout the franchise. The authorities will also want to benefit from the economies of scale that come from such bulk orders to ensure that the contract payment represents value for money. 

Resolving those tensions

There are at least two ways of addressing these tensions. Firstly, franchise authorities can stipulate the ITS equipment specification that must be fitted to vehicles, leaving operators free to procure the equipment. The cost of procurement and on-going maintenance of the equipment would then be reflected in the contract payment. Operators will then be penalised if the equipment is not fitted in time for franchise start or otherwise fails during the franchise agreement term through a service credit/liquidated damages mechanism. 

Under this option, as long as the bus operator has correctly estimated that cost in its bid, it knows that it will be able to recover the cost through the contract payment, so it will be protected.  Although the operator will still take risk on delivery and in-life maintenance, this can be offset by having appropriate on-going support contracts with the supplier. Again, the cost of those can be reflected in the contract payment. At the end of the franchise term, the operator is free to dispose of the ITS equipment if it does not win or bid when the routes are retendered.

Meanwhile, the authority has the comfort of the contract to ensure that the equipment it wants is in place and kept operational, albeit it will be paying for the same through the contract payment.  It also will not have to worry about technology obsolescence at the end of the term and can specify more up to date ITS equipment specifications for any re-tender. However, it will not automatically be able to realise any potential cost savings associated with the re-tender through retaining or upgrading existing ITS equipment, as it will have no control over it at the end of the franchise.

A second option is for the authority to assume procurement and maintenance risk for the ITS equipment. There are a number of benefits to the authority here. Firstly, assuming that it is purchasing ITS equipment for vehicles across all franchise routes, the authority could achieve considerable economies of scale and savings in the long run.  In addition, it would retain ownership of the ITS equipment, meaning that when it comes to reprocuring the franchises, it can provide it to the successful bidders, likely resulting in lower contract costs than if the successful bidder had to buy new. 

In this second option, there will be a number of interface issues to be tackled. For example, ensuring that the operator has made the buses available so that the ITS equipment can be installed and then training its staff on how to use the equipment properly. These interface issues would need to be worked through within the franchise agreement, which would make the agreement more complicated to manage and agree. This is not least because these points will affect how the contract payment mechanism works: operators are unlikely to want any deduction to their payment if the ITS equipment fails or does not work as the parties intended. 

There are also additional costs to the authority in negotiating and managing contracts with the relevant ITS equipment suppliers, which would need to be factored into its overall value for money calculations.  Finally, unless specific terms are negotiated with suppliers allowing the authority to take advantages of improvements in ITS equipment technology going forward, it could be left with obsolete kit at the end of the franchise term that no longer meets its requirements.

Conclusion

The franchising model opens up opportunities for franchising authorities to exercise more control over some of the infrastructure assets that are necessary to run bus services.  However, such opportunities are not without cost and risk and need to be considered in the context of the authority's overall objectives for transport within its region. How bidders respond to those proposals – and the prices they will offer – also needs to be factored in. All of these factors impact the competitive tension and ultimately value for money. As RuPaul might say if involved in bus franchising, "Start your engines and may the best bidder win!"

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