Institute for Transport Studies, University of Leeds, LS2 9JT, UK
telephone: 00 44 113 233 6617
fax: 00 44 113 233 5334
Since the introduction of bus service tendering in London in the mid 1980s, there has been, according to London Transport Buses (1999), “a dramatic improvement” in both the quality of bus services provided and the value for money achieved. However, the rules of the game have changed considerably over time. Whereas in the first instance a gross cost regime was used to let just a part of the network to public sector operators, in recent years the whole of the network has been let in successive tranches, most of the operators have been privatised and there has been a move to net subsidy tendering.
The cost savings in the initial period have been well-documented, see for example various papers by Wendell Cox in this series. Outside London, the evidence has been that net subsidy tendering has led to fewer bidders per tender and increased costs to the letting authority. There has been concern in London that tender costs have been rising and bids per tender falling. London Transport Buses (LTB) policy is now to use the type of contract which will deliver best value for money.
The first part of the paper sets the background and provides a (very brief) potted history of the tendering and privatisation process in London since 1984. The second part of this paper reviews the rationale for tendering and its strengths and weaknesses compared with other forms of market organisation. The third part paper examines recent tenders let by LTB and assesses whether there is any evidence that the theoretical strengths and weaknesses of tendering are apparent in practice. A model is presented which analyses the effects on the cost per mile of the awarded contract of: the number of tenderers, the identity of the successful tenderer, the accepted bid, the lowest and highest compliant bids received and the acceptance of joint bids for packages of routes. The results of the model are used to suggest ways of ensuring that tendering obtains in practice the benefits claimed in principle.
PART A: THE LONDON STORY
In 1986, bus services in Britain outside London were deregulated under the terms of the Transport Act, 1985. In London, however, the “benefits” of deregulation were deferred on the grounds that, since 1984, London Transport had had a statutory requirement to involve the private sector in the provision of public transport services in London (unlike the rest of the country). As a result, there had been increasing competition for the right to supply bus services in London through the adoption of a tendering process whereby progressively more routes were put out to competitive tender, the bidders being drawn from London Buses subsidiaries, National Bus Company operators, municipal operators and private operators. In the early stages, the routes put out to tender were largely smaller, outer-area routes so as to facilitate the introduction to the market of smaller independent operators (Glaister and Beesley, 1991). As time passed, more and more routes were put out to tender such that by the end of 1993, almost half the bus miles operated were supplied under contract (Kennedy, 1995a).
In 1994, London Buses Limited was split up into 13 different companies and sold to the private sector, a mix of Management and Employee buyouts, trade sales and new companies. Over time, some of these have been resold. Part of the justification for privatisation was to enable the transfer of risk to the private sector; the Tendered Bus Division (the body responsible for letting contracts) moved from the gross cost contracts to net cost contracts where the operators bear some of the revenue risk. In the first instance, these contracts were negotiated with the incumbent...