After Plymouth Citybus, who might be next in the municipal queue to sell?
Rightly or wrongly, there appears an unwritten rule that municipal bus operators should run marginal services at unprofitable times as a kind of social dividend. They run more services as commercial than they would perhaps like (though perhaps fewer than their shareholder council would wish). How else would you explain some of the low margins in this sector?
One of England's most unusual: Reading's MAN 18.240/East Lancs (sic) Kinetic+
This manifests itself in a number of ways. One is that financial performance obviously suffers. Another is a false expectation that services will continue regardless. A third is that low dividends lead cash-strapped councils to consider realising assets locked up in an arms length business over which they have less than 100 per cent control.
As local government belts tighten, does this make the remaining municipal operators easy targets in the sights of their controlling councils? Take a look at the reasons why Plymouth council felt it should consider a sale and then ask whether others are doing the same:
- Plymouth council retains a high level of risk in owing Citybus (is this really true in Citybus’ case? Increasing competition may, however, reduce the future dividend, though it may weaken the prospect of a good sale price)
- There are considerable financial benefits in a sale (times are tough at the moment. The council estimates £10mil for Citybus. Hmmm. Difficult to ignore)
- Bus company ownership is no longer a core business (hasn’t been for a while councils have still retained ownership till now—and remember that social dividend)
- High quality bus services aren’t dependent upon ownership of an arms length company (true, but that doesn’t mean a private sector operator would be any better)
Reading, by increasing fares, is already looking to recoup losses it says are due to the recession, reducing some mileage in July, with threats of redundancies in the autumn not ruled out as the company aims to balance supply with demand (now there’s a good old 1970s term you don’t hear every day!). This follows news earlier in the year of job growth at Reading Transport.
5 comments:
There was an interesting article recently in Transit by Adrian Higgs about the municiple band of compnays, BTW I work for one.
He suggested an excellent exercise to demonstrate in cold hard facts, or figure.
Cost up your current network, then a network totally commercial which would be fitting a PLC.
You then show network coverage/frequency difference and potential cost to the LA to keep the current network.
Selling off may suit the extreme short term needs - but remember the cost of supporting marginal services doesn't come cheap.
Local Authority operations can, in theory, access cheaper capital than private ones.
However it can easily be rendered more expensive as public interference in operations impedes revenue generation (and surplusability).
A tricky one.
Anonymous hits it on the head - establish how much the social dividend is worth to the local area in financial terms. (Although this exercise may suit some municipals better than others.)
One of the issues is that a municipal operator will have different criteria for whether services are worth running. Anything that covers its marginal cost can be run, as it would add to profit, but may reduce the margins. A plc will want to report on margins and will be more inclined to withdraw a service that only just exceeds average cost, as it reduces the margin.
Once a municipal goes to a plc, there will be pressure to make increased margins and profits year on year.
As Chairman of Reading Transport Ltd I can assure you that the issue of its future ownership is not being discussed by councillors or the board.
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