Literature Review ( Has to be done using UK English)
LITERATURE REVIEW: WHAT IS THE EFFECT OF DEREGULATION ON LOCAL BUS COMPANIES IN THE UK?
The UK bus industry was regulated by the 1930 Road Traffic Act following the faster growth of the sector throughout the 1920s. In nearly 50 years, the publicly owned bus companies had dominated the local bus service industry. However, the White Paper Buses was issued by the Department of Transport in 1984 and it asserted that the regulations had brought about extremely high costs, insufficient innovation and an internal cross-subsidy structure that was either ineffective or inequitable. The department also noted that a number of the challenges facing the bus industry would have been overcome in case the limitations on access were removed.
The proposal of the Department of Transport was executed through the Transport Act of 1985 (Marsh, 1991). Thus, the UK local bus services industry, with the exception of London, was deregulated in 1986 (Cowie & Asenova, 1999). According to Dodgson and Katsoulacos (1988), deregulation as a term mainly refers to the three key changes that comprised the removal of the quality controls that the Road Traffic Act of 1930 had put in place, reconstitution of bus companies that were municipally owned and privatisation of National Bus Company, and reduction of subsidy. From that time onwards, the local bus services has been operated by various private operators as supported or commercial services under the subsidy of the Local Transport Authorities.
In this regard, it is vital to observe that the London bus service did not under deregulation even as they operated under the franchise system in which the operators of the bus services were required to partaking in the bidding for contracts to be able to run certain routes for certain durations, normally 5 years.
GWA Comment: There is no paragraph outlining what this literature review will be reviewing. There is no direction to the reader as to what this literature review will do. It is also fine to have subheadings for each point that you make. For an essay of this size, we expect a minimum of 3 strong points addressing the research question. When you make a point you need to state why this point is important and relevant to the research question then critically review. This means putting forward positive and negative arguments for the point you are trying to make.
In evaluating the deregulation of the local bus services and its effects Gomez-Ibanez and Meyer (1990) maintain that amongst the major arguments for the deregulation of the UK local bus services industry outside London regarded the observation that the increasingly competitive market forces that it had brought along with it were increasingly prone to reduce the costs, mainly as a result of the lower wages and the increased productivity. Indeed, the distinctive regulatory regimes within the UK local bus services market where in London a system comprising of increasingly regulated and competitive tendering exists, as well as outside London where the bus services market has undergone deregulation, have resulted in a number of approaches meant to assess the various effects of the deregulation of the local bus services industry on the welfares and competition. In this regard, Gwilliam (2008) developed a quality competition mode to assist in the determination of the equilibrium number of organisations , quality levels and the fare levels on the high density urban routes. Savage (1993) has made use of the outcomes in the analysis of the probable effects of rivalry or competition rather than to the effects of the regulated bus service operations on welfare. As a result, the effects were proven to rely on two major things, namely;
The weight that the public monopolists offered with the objective of retaining the proceeds rather the consumers surpluses. Thus, the higher the weight, the highly liable it is that every consumer will gain when market equilibrium is attained.
The total unit cost behaviour resulting from the increments in the bus service quality relative to the consumers’ willingness behaviour to pay for such quality increments. Upon rapid increments in the total unit costs compared to the high income consumers’ willingness to pay for such quality enhancements, it is highly liable that each consumer will experience reductions in his/her welfare following the deregulation.
Additionally, the economic theory proposes that the local bus services industry deregulation should lower the fares while at the same time increasing the demand in instances where there is competition. Nevertheless, following the 1986 deregulation of the local bus services industry, it was observed that the despite the bus kilometres increasing, the bus fares increased even as the passenger journey registered a fall in real terms (White, 1995). Further, between 1986 and 1997, real term increment in the bus fares was noted to have averaged 24% even as the passenger journeys declined by approximately 31% (Button & Keeler, 1993). Two key reasons might have led to such an occurrence: the reduction of subsidy as a consequence of the macroeconomic policy of the government of the reduction and lack of intense competition (Fairhurst & Edwards, 1996). Through the employment of the broad array of economic equations along with the model that includes the demand equation, the unit root tests along with the equation for price mark-up, Gwilliam (2008) came to the conclusion that in case the subsidy reductions were not affected, then the deregulation of the local bus services industry would have brought to a halt the long-run reduction in the bus patronage within the non-metropolitan and metropolitan areas of UK. Moreover, he also carried out an evaluation of the welfare gains resulting from the deregulation for the duration between 1986 and 997.
Still, with regards to the effects of the deregulation of the local bus services industry in the UK, Cowie and Asenova (1999) asserts that as a result of the deregulated services in the bus service market, a number of regions, large areas and counties have ended up with a single and bigger player in the market, and with increased amounts of market share. Thus, a bigger percentage of the UK towns have a single major player in relation to significance and this include towns such as Bristol, Aberdeen, York, Brighton, Cambridge and Cardiff amongst others. Nearly a third of the Local Transport Authorities that makes up almost a fifth of UK’s population are offered bus services by only a single and larger national operator. According to the market research carried out by Fairhurst and Edwards (1996), the prices tend to only reach the competitive degrees in instances where at least three operators are operating within the same local market. Owing to this observation, it is only the threat posed by novel operators who enter the industry tend to encourage the existing operators to maintain both competitive services and prices. Within the local bus services industry and market, the main barriers to entry for the new operators include the maintenance facilities, buses and depot. The afore-stated elements act as an indication that entry into the local bus services industry is quite straightforward. Nevertheless, a matter concerning the bus depots that are either leased or owned by the operators and utilized exclusively by such operators, given that this is liable to result in an exclusionary behaviour that, in turn, affects the local bus services market as seen in the case of the Cardiff Bus Company’s engagement in what was termed as predatory behaviours (Gwilliam, 2008). The exclusionary behaviour by the bus company in the local markets has, therefore, been observed to destroy competition in a number of ways. For instances, in case successful, it might result in the reduction in competitors and the eventual loss of competition on given bus routes, and this leads to the reduction of incentive that the incumbent gain in order to offer better value, dependable and regular services. Further, through denying the rivals the access to a given route, the rival’s aptitude and incentives in relation to entering the other routes served by the incumbent are likely to be reduced. Also, by being observed as acting in such a manner towards the probable entrants, the incumbent operator is liable to develop repute for aggressive response to either competition or entry of other bus service operators. Such repute might prevent probable entrants who may have considered entering into the market. Moreover, in evaluating the effects of deregulation of the local bus services in the UK, Morrison (1997) noted that the deregulation had resulted in increments in the bus fares by approximately 9%, particularly in instances where only a single national operator offer services compared to instances where two or more national operators serve similar routes. That is, as a result of the deregulation of the local bus services, new entries into the industry has been restricted and the existent operators have been noted to violate their positions through the charging of higher prices and offering poor quality services.
The other notable effect of the deregulation of the local bus services industry regards the observation that it led to bus wars. As a consequence of the intense competition between the operators, bus wars erupted and required the authorities’ intervention in order to stem out the unsafe and unscrupulous practices. For instance, Morrison (1997) noted that in the year 1988, Southern Vectis became the initial operator to draw the attention of the industry regulators when it was coerced by the Office of Fair Trading to enable access to the Newport bus station. The company was also castigated for operating additional services so as to stifle competition. Further, in relation to the bus wars, Gwilliam (2008) notes that in the year 2000, Stagecoach Manchester was reprimanded for employing several bus inspectors whose duties included using clients from the rival bus companies’ services, even as it was also castigated for engaging in bus wars with UK North on Wilmslow Road and rout 192 in 2007 thereby causing cause within Manchester. The UK North was found to engage in perilous work practices and this resulted in the two managers being jailed (Gwilliam, 2008). Moreover, according to Fairhurst and Edwards (1996), in 2005, Cardiff Bus was found to partake in predatory behaviours with the objective of stifling competition. As a result of the bus wars, Stagecoach was ordered by the Competition Commission in November 2009 to sell Preston Bus following its negative effects on competition within the regions, and this forced Preston Bus to sell in early 2010 (Cowie & Asenova, 1999). Owing to the deregulation of the local bus services industry, Gwilliam (2008) has concluded by noting that bus wars tend to occur periodically as was also observed in 2011 when Transdev and Connexions got engaged in bus was in Wetherby.
With regards to the effects of the deregulation of the local bus services industry on the trends in public expenditures, Fairhurst and Edwards (1996) observed that considerable reductions on expenditures have been realized. Thus, prior to the deregulation, the bus services operators were provided with the revenue support that included the general support to fare and service levels; however, following the deregulation, the payments made to the operators were only for the services that they had tendered for, as well as the various costs linked to the public transport activities within the local authorities and the Passenger Transport Executives. Passenger Transport Executives payments include all administration costs, service publicity and specific inherited obligations, including the pensions costs. The rapid reductions in revenue support has been linked to the higher percentage of the registered bus kilometres required to operate within the regions that were deregulated, as well as the low costs for the services tendered. Regardless of it allows the covering of the actual long-run costs is a totally different matter. Moreover, the payments relating to the concessionary fares compensation (CFC) have also been included. B Following the deregulation, such costs have surpassed the revenue support payments made to the bus services operators as the percentage of the travel that is represented by the holders of the concessionary pass (mainly pensioners) has increased, even as the average fare levels, on which the compensations are based, have increased in actual terms. Further, according to Gwilliam (2008), in the rural parts of the UK, smaller transitional grants were made available to the bus service operators after the deregulation with the objective of offsetting the possible losses regarding cross-subsidy; however, this was effectively brought to an end in 1990.
The deregulation also had effects on the degree of service and particularly with regards to the innovation in minibuses. According to Savage (1993), before the 1980s, the bus services were being provided nearly by the big, heavy, single and double deck and custom-designed buses; however, a research was carried out in the 1980s by a nationally owned company in Exeter, Devon, a region in which the infrequent services offered using the bigger vehicles were replaced through a network of increasingly frequent services that utilized the 16-seat minibuses. Such vehicles were mainly based on the chasses of the commercially bought light freight vehicles that had relatively rudimentary bodywork. The service operators and the researchers definitely regarded the research a success as this mode of operation was quickly and broadly adopted in the years that followed. Still, White (1995) asserts that the proponents of bus service deregulation forecasted a widespread adoption of the 16-seat minibus owing to the success attained by private operators using such vehicles in the developing nations. Amongst the key benefits included decrements in capital, maintenance and running costs (Cowie & Asenova, 1999). Button and Keeler (1993) opine that the commonality of the chasses with light commercial freight vans implied that the vehicles were comparatively inexpensive and would be maintained by the mechanics and through the available commercial vehicle garages. Nevertheless, the reduction in the seating capacity when contrasted again the bigger vehicles imply a higher per passenger cost (Dodgson & Katsoulacos, 1988). Characteristically, at least three minibuses are needed to replace every big bus.
Even though the service operators had hoped to gain from the shift to the minibuses as a result of the generation of ridership through the virtue of increased frequencies, the revenues generated were likely to surpass the cost increments. Gomez-Ibanez & Meyer (1990) made a number of calculations and came to the conclusion that in order to counterbalance the disadvantages associated with costs, a frequency elasticity of nearly 0.4 was necessary. However, such kinds of elasticity are not uncommon. Additionally, the minibus was observed as having other additional benefits. Thus, the bus service operators had the desire to reduce their workers’ salaries and wages, as well as change the employment terms for the drivers (Simpson, 1996). Thus, the bringing in of the novel level “minibus driver” enabled them to recruit their workers on very low hourly rates, and with the increased flexibility in relation to the scheduling of duties. Moreover, this was also witnessed in the field of engineering where the bus service operators recruited several mechanics from the commercial garages as opposed to employing expert bus mechanics (Beesley & Glaister, 1985). In this regard, Dodgson, Newton and Katsoulacos (1992) opined that it is vital to note that the bus services operators’ aptitude to reduce the salaries and wages of their employee was supported by the higher rates of unemployment experienced outside south-east in the 1980s. In actual sense, the minibuses were rarely found in regions of the UK that had lower rates of unemployment (Morrison, 1997).
Another notable effect of the deregulation of the local bus services industry regards the merger of bus companies. The mergers and acquisitions have resulted in a number of concerns have been noted with regards to the future competitiveness (Mackie, Preston & Nash, 1995). The mergers and acquisitions have resulted in increments in concentration of buses outside Liverpool and Manchester (Heseltine & Silcock, 1990). The initial concern regards the acquisition of the bus services companies by their competitors directly. Marsh (1991) asserts that a wave of acquisitions of the smaller and independent bus companies by bigger and publicly owned organizations, and companies that were formerly publicly owned has been witnessed in the local bus services industry. A number of such acquisitions including those that occurred in West Hertfordshire, Sheffield, Harrogate, Teeside and Nottingham and entailed companies that had been in active competitions with those that they acquired (Marsh, 1991). According to Heseltine and Silcock (1990), the subsequent kind of merger that was observed was mainly between the former government-owned bus companies that had been territorial neighbours and not essentially competitors. The deregulation of the bus services industry enabled such kinds of mergers to occur in spite of the efforts of the government to avert it within the disposal programmes. A good instance entails the dominance of the Badgerline Holdings in the south-western region, Stage coach Holdings in the southern coast region and Scotland, Yorkshire Rider in the western Yorkshire region and Western Travel within the south-western midlands region Gomez-Ibanez and Meyer (1990). In concurrence with this observation, Morrison (1997) observes that agglomerations of several bus services companies that had been privatized distinctly by the government have been witnessed. Out of a total of 65 operational local subsidies in the UK, Wales and Scotland, and were initially owned by the government, approximately 20 still exist as distinctly owned entities and are not part of groups of either two or more firms. Still, 20 companies have been acquired by three bigger conglomerate companies (Beesley & Glaister, 1985). The UK does not that laws and regulations that deal with the various anti-competition practices and mergers. Nevertheless, reference to the Monopolies and Merger Commission, which is the governmental agency tasked with investigating such cases, may only be made in instances where a takeover has accumulated given size of assets, or in instances where the two organizations have a joint market share over a considerable region of UK of more than 25%. According to Marsh (1991), a limited number of the bus service companies might meet the initial conditions and founded on the most recent rulings of the court, the last condition is increasingly unlikely to bind. In this regard, Simpson (1996) maintains that the law is palpably deficient with regards to its dealings with the bus service industry that is apparently local in temperament. A number of the most recent mergers have result in specific single firms gaining virtual monopoly of big cities and regions of the UK, even as they fail to attract legal attention (Romilly, 2001). Moreover, the government has further been criticized for its tardiness with regards to carrying out investigations of cases that entail predatory activities against the smaller bus services companies.
References
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