The Dash for Cash

Pseudonymous wonders whether the sale of three municipals is a matter of weeks is a coincidence or is it a sign that something is happening in those town halls up & down the country where the hardened few councils still like to run their own buses…

The answer undoubtedly lies in both the economic reality of running buses today, especially for single area operators and also the dynamics of local government finance. What could the key thoughts be among council councillors and for the directors of these ‘arms-length’ companies?

The economic reality of running buses does not bode well for single operators. Municipals are urban operators. Some, like Reading, Thamesdown and Lothian either are or may well be facing a reduction in passengers and revenue, as general jobs disappear in the economic downturn. There are no magical solutions other than cutting overheads & service. For single operators, overheads are often inflexible—there are no opportunities to share functions like First has been doing recently across its regions. Many of them are tied into local government pay rates and hefty pension & redundancy conditions. Cutting services is unpopular for any operator but for a municipal, the objections are much harder to overcome.

Go Ahead has announced its investment in new ticketing technology, and the trade press has a smattering of articles describing such investment as the next great opportunity for growth. Municipals need to invest too, but are reliant on public resources.

Investment is a serious issue for the remaining municipals. Local government borrowings are severely restricted. Not only do councils have to act prudently but they have to do so in respect of their overall borrowings, not just those for bus companies. Councils have to raise a fair chunk of capital spending from sales of assets—and there’s a double problem for their bus companies. With the property market in limbo, councils cannot sell assets (mainly surplus land and property) for sensible prices, if indeed at all. Councils up and down the land are committed to some long-term capital projects that will have first call on their meagre resources, and have a long list of priorities in front of new buses, technology and even plant, equipment and property repairs. Don’t expect to see too many new buses heading for the remaining municipals for a few years. Some are already looking good—Cardiff, Reading and Lothian have modern fleets, and to miss a few years of investment may not be too painful but for others, with already tired vehicles, the prospects are not looking good, especially with DDA compliance dates beginning to get close enough for concern to set in.

If a council has big commitments on capital spending and is expected to meet it from evaporated asset sales, then in the short-term it may simply be desperate for capital sales. Bus companies are probably one of the best sellers at the moment.

The boardrooms of the ‘arms-length’ municipals will be interesting places these days. Traditionally operating on lower margins than commercial companies, they will be more nervous of falling revenues and any lack of investment to maintain momentum than the big groups. When you operate at say five per cent you can very quickly find yourself in a deficit and with months ahead of you before you can see the benefits of service reductions and reorganisations.

The directors are composed of a mixture of professional bus people and councillors duly representing the local community. All, though, have the same legal obligations to keep their companies trading solvently. Directors will be discussing service cuts, knowing that local councillors will offer stiff opposition to cuts in ‘their’ bus services, and councillor directors will be sitting uncomfortably.

For councillors in control of the council there are compelling reasons for selling up:

• The capital receipt is probably a saviour for other politically sensitive projects that would have to be shelved
• The prospect of ongoing service cuts with huge political fall-out probably looks more painful than the short-term one-off pain from a sale, especially a ‘quick-fire’ one like Ipswich or Islwyn
• There’s a fair chance that the future investment requirements will never easily be met again and, for the more aged fleets, the growing mountain of replacement needs has to be seen against the DDA requirements, something directors will be making very clear to their council owners.

The risk of running a loss at your municipal is potentially disastrous. Councils are struggling not only with their capital budgets for next year, but also with their revenue budgets, and simply cannot afford to have to prop up their bus companies. Any slip into a loss is seriously likely to devalue any sale—and there’s a theory that the market is currently at its highest point, with Go Ahead perhaps making a definite effort to buy up what it can while it still exists. It’s budget time for Councils right now—they have completed their public consultations and they have a good idea of the problems they face, both in terms of cash savings to be made and of important projects and that look shaky.

Go Ahead seems to be doing a very good job of selling their ‘local businesses run by local managers’ message to Councils who, no doubt, find that message a blessing in softening their fellow councillors and peers. The OFT’s unresolved review of competition certainly makes a sales to the neighbouring group much less likely, and in this respect Go Ahead, looks to have no obstacle to overcome.

So it may well be that it is *the* time to sell the municipal bus company!