stagecoach group plc response to consultation: 22 november

Stagecoach Group plcResponse to Consultation: 22 November 2013

NON-CONFIDENTIAL (REDACTED) VERSION

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TYNE AND WEAR INTEGRATED TRANSPORT AUTHORITY: PROPOSAL FOR A QUALITY

CONTRACTS SCHEME IN TYNE AND WEAR

CONSULTATION RESPONSE OF STAGECOACH GROUP PLC ('STAGECOACH')


This is a redacted version of Stagecoach's response submitted

to Nexus on 22 November 2013

CONTENTS

1 OVERVIEW………………………………………………………………………………………….4

1.1 Introduction…………………………………………………………………………………………..4

1.2 Executive summary of Stagecoach's response………………………………………………….5

2 BACKGROUND: STAGECOACH AND BUS SERVICES IN TYNE AND WEAR....…..….....9

2.1 Introduction………………………………………………………………….……………………….9

2.2 Stagecoach's dedication to its customers………………………………………………………10

2.3 The existing high customer satisfaction with bus services in Tyne and Wear……………...11

3 THE PROPOSAL IN ITS LEGAL CONTEXT EXEMPLIFYING FUNDAMENTAL REASONS WHY IT WOULD BE WRONG FOR A QCS TO BE IMPLEMENTED...............12

3.1 Introduction………………………………………………………………………….………….…..12

3.2 Legal framework…………………………………………………………………………………...13

3.2.1 Consultation requirements………………………………………………………………………..13

3.2.2 Statutory Public Interest Criteria must all be satisfied…………………………………………14

3.2.3 The ITA must take the Guidance issued by the DfT into account……………………………15

3.3 Fundamental problems with the Nexus Models………………………………………………..15

3.4 The VPA: a more proportionate and appropriate measure…………………………………...19

3.4.5 Summary…………………………………………………………………………………………...19

3.4.7 The key elements of the VPA…………………………………………………………………….20

3.4.8 Oxera's assessment of the current VPA proposal……………………………………………..22

4 PUBLIC INTEREST CRITERION A: INCREASE IN BUS SERVICES USAGE…………….25

4.1 Introduction…………………………………………….…………….………………….…………25

4.2 Analysis……………………………………………………………….…………………..………..25

5 PUBLIC INTEREST CRITERION B: BENEFITS TO LOCAL PERSONS IN TYNE AND WEAR………...………………………………………………………………………………28

5.1 Introduction………………………………………………………………………………………...28

5.2 Analysis………………………………………………………………………………………….… 29

6 PUBLIC INTEREST CRITERION C: LOCAL TRANSPORT POLICY……………………….33

6.1 Introduction………………………………………………………………………….…….….……33



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6.2 Analysis……………………………………………………………………………………….…….34

7 PUBLIC INTEREST CRITERION D: ECONOMIC, EFFICIENT AND EFFECTIVE…….…. 35

7.1 Introduction…………………………………………………………………….………………….. 35

7.1.1 Nexus' approach to measuring the concepts of 'economic, efficient and effective'is materially deficient………………………………………………………………………………35

7.1.2 Nexus' interpretation of the measure of 'economy' is inconsistent with the Guidance………………………………………………………………………………….36

7.1.3 Nexus' application of its 'efficiency' measure is inconsistent with the Guidance………………………………………………………………………………….37

7.1.4 Nexus' interpretation of the measure of 'effectiveness' is inconsistentwith the Guidance………………………………………………………………………………….38

7.2 Analysis………………………………………….………………………………………….………39

7.2.1 A QCS would not be economic………………………………………………………………….. 39

7.2.2 The Proposal is not affordable…………………………………………………………………...43

7.2.3 A QCS would not be efficient……………………………………………………………………. 44

7.2.4 A QCS would not be effective…………………………………………………………………… 45

8 PUBLIC INTEREST CRITERION E: PROPORTIONALITY………………………………….. 47

8.1 Introduction…………………………………………………………………………………………47

8.2 Analysis……………………………………………………………………………………………..48

8.3 The actual benefits of the QCS are not sufficient to justify the scale of theadverse impacts on operators…………………………………………………………………… 50

8.4 A QCS would have significant adverse effects on Stagecoach at both a group and local level……………………………………………………………………………………... 53

8.5 The Proposal would result in significant adverse effects on Stagecoach employees………………………………………………………………………….. 54

8.6 Proportionality: conclusion………………………………………………………………………. 54

9 HUMAN RIGHTS IMPLICATIONS OF A QCS………………………………………………... 55

9.1 Introduction……………………………………………….……………………….………….…... 55

9.2 The Proposal involves an interference with Busways' possessions……………………….. 56

9.3 The Proposal would breach A1P1 as it is unlawful under domestic law…………………… 56

9.4 The failure to offer compensation renders the Proposal disproportionate in breach of A1P1………………………………………………………………………………… 56

9.5 The Proposal is otherwise disproportionate and therefore breaches A1P1……………….. 57

9.6 Busways would be entitled to seek damages for a breach of A1P1……………………...… 58

9.7 Busways' employees would also be entitled to seek damages for a breach of A1P1……………………………………………………………………………………. 58

10 TUPE AND EMPLOYMENT IMPLICATIONS OF THE PROPOSAL……………………….. 58

11 PENSIONS…………………………………………………………………………………………65

11.1 Introduction………………………………………………………………………………………... 65

11.2 Analysis……………………………………………………………………………………………. 65

11.2.1 Future service……………………………………………………………………………………... 65

11.2.2 Loss of past service value for defined benefit members………………………………...…… 66

11.2.3 Funding of benefits……………………………………………………………………………….. 66



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11.2.4 Difficulty in comparing funding…………………………………………….…………………….. 67

11.2.5 Effect of business transition on funding…………………….…………………………………...67

11.3 Pensions: conclusion…………………………………………….………………………………..70

12 CONCLUSION………………………….……………………….…………………………………70

ANNEX A Stagecoach's commercial response paper

ANNEX B Voluntary Partnership Agreement – Heads of Terms

ANNEX C Oxera Report

ANNEX D Oxera Logical Flaws Paper

ANNEX E Oxera industry study (redacted)

ANNEX F Counsels' Opinion

ANNEX G Unite letter of 24 July 2013



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STAGECOACH'S CONSULTATION RESPONSE

1. OVERVIEW

1.1 Introduction

1.1.1 This is Stagecoach's response to the Tyne and Wear Integrated Transport

Authority ('ITA') proposal for a quality contracts scheme ('QCS') in Tyne and Wear,

developed and published by the Tyne and Wear passenger transport executive

('Nexus') in July 2013 (the 'Proposal'). It should be read alongside Stagecoach's

commercial response paper, at Annex A.

1.1.2 Following an informal consultation in 2012 (the 'Informal Consultation'), in which

Stagecoach participated and raised material concerns regarding the proposed

scheme, Nexus abandoned its previous proposal (the 'Original Proposal') for a

QCS in Tyne and Wear. However, notwithstanding Nexus' recognition of the flaws

in the Original Proposal, in many material respects Nexus has carried forward

critical flaws into the Proposal. As a result, there remain substantial flaws in the

Proposal which render it so substantively defective that it is not capable of

providing a proper platform for any further consideration of a QCS in Tyne and

Wear.

1.1.3 As Nexus is aware, the ITA is actively involved with operators, through the North

East Bus Operators' Association ('NEBOA') in developing a voluntary partnership

agreement as an alternative to a QCS (the 'VPA'). It is Stagecoach's firm view that

the VPA offers a more economic, efficient and effective alternative to the QCS

proposed by Nexus. The VPA forms part of this response and the current draft

Heads of Terms are attached hereto at Annex B. Stagecoach notes that the VPA

has evolved since the earlier version that Nexus considered in the Proposal and

requires reconsideration by Nexus.

1.1.4 In order to demonstrate some important examples of the problems with Nexus'

Proposal for the purposes of this formal consultation, Stagecoach commissioned

an independent report from leading economic consultants, Oxera Consulting

Limited ('Oxera'), dated 22 November 2013 (the 'Oxera Report'). The Oxera

Report is part of this response and is attached hereto at Annex C.

1.1.5 In the Oxera Report, Oxera has considered both the detail of the Proposal and its

supporting evidence in the form of appendices and spreadsheet models provided

by Nexus. Oxera has compared Nexus' economic modelling with established best

practice; it has also focussed on verifying the underlying assumptions with use of

academic and governmental estimates. In particular, Oxera has:

(A) considered each of the main assumptions underpinning Nexus' view of

how bus services will look in Tyne and Wear in 2015 absent the QCS

envisaged in the Proposal (the 'Nexus Do Minimum'), assessing the

extent to which these assumptions are supported by the available

evidence. Where they are not supported by the available evidence,

Oxera has suggested a more suitable alternative assumption modelled

this in its alternative 'Do Minimum Scenario' (the 'Oxera Do Minimum'),

and examined its impact;



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(B) considered Nexus' assumptions regarding costs, the impact of soft

measures, fares and revenue growth and the sufficiency of Nexus' risk

contingency, focusing on whether these are based on appropriate

evidence and the impact of alternative assumptions;

(C) completed an analysis of the economy, efficiency and effectiveness of the

Proposal, following the approach recommended by the statutory

guidance issued by the Department for Transport ('DfT') under section

134A of the Transport Act 2000 (the 'Act') (the 'Guidance'). As part of

this analysis Oxera has assessed Nexus' approach to the interpretation of

the measures of 'economy', 'efficiency' and 'effectiveness' in a separate

paper attached hereto at Annex D (the 'Oxera Logical Flaws Paper');

(D) assessed the risk modelling undertaken for the Proposal, focusing on

whether the risk model is aligned with the objectives of the ITA's Bus

Strategy for Tyne and Wear published in 2012 (the 'Bus Strategy'), and

whether Nexus' assumptions within it are robust; and

(E) undertaken a like-for-like comparison of the Proposal and the VPA,

assessing the VPA on the same basis as the QCS (ie examining both its

affordability and its performance against the five mandatory statutory

criteria set out in section 124(1) of the Act (the 'Public Interest

Criteria')). This approach is consistent with the Guidance, which requires

any assessment of economy, effectiveness and efficiency to include a

discussion of alternative options to a QCS.

1.1.6 Stagecoach has consulted with Leading Counsel Michael Beloff QC and Junior

Counsel Naina Patel, both of Blackstone Chambers, in relation to the Proposal and

this response, and (without any waiver of privilege) this response incorporates

Counsels' input. In addition, in order to highlight the material deficiencies in

relation to Nexus' approach to the measures of 'economy', 'efficiency' and

'effectiveness' (for which see further at section 7 below), as well as to the

proportionality of the Proposal (for which see further at sections 8 and 9 below), Mr

Beloff QC and Miss Patel have produced an Opinion which is attached hereto at

Annex F ('Counsels' Opinion').

1.2 Executive summary of Stagecoach's response

1.2.1 Stagecoach's firm view is that there is no proper basis for the ITA to pursue a QCS

in Tyne and Wear.

1.2.2 The current bus network in Tyne and Wear is fit for purpose and attracts a high

degree of customer satisfaction (see further, in particular, section 2.3 below).

Indeed, the Proposal itself advocates maintaining the current network upon the

adoption of a QCS (see paragraph 4.5.1(e) of the Proposal) demonstrating Nexus'

view that the current network is adequate and provides a good level of service to

bus users in its current form.

1.2.3 The Proposal is disproportionate. The benefits of a QCS have been materially

overstated by Nexus and are significantly outweighed by the adverse impact that

the Proposal would have on operators. The VPA would be more appropriate. Given

the availability of the VPA as an alternative course of action, which provides

benefits that are at least equivalent to those purportedly offered under the QCS

without the adverse effects on operators, it would be unreasonable, inappropriate

and irrational for Nexus to recommend that the ITA implement the Proposal.



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1.2.4 Fundamentally, as the Oxera Report emphasises, the Proposal advocated by

Nexus is based on flawed calculations and inaccurate assumptions. In particular:

(A) Nexus relies heavily upon the Nexus Do Minimum. However, the Nexus

Do Minimum has been inaccurately presented by Nexus, resulting in the

comparative merits of the QCS being substantially overstated. A more

reasonable and accurate representation is provided in the Oxera Do

Minimum at section 2 of the Oxera Report.

(B) Nexus' approach to measuring the QCS's 'economy', 'efficiency' and

'effectiveness' is materially deficient, resulting in a distorted presentation

of information. Such fundamental errors call into question the credibility

and robustness of Nexus' analysis.

(C) Nexus forecasts that a QCS would be financially sustainable and

affordable. However, this forecast is based on two critical assumptions:

that the introduction of a uniform customer charter and simplified ticketing

will result in a substantial increase in passenger demand; and that Nexus'

cost forecast is correct. On Oxera's analysis, neither assumption can be

supported by the available evidence. In particular, the uniform customer

charter and simplified ticketing are unlikely to have any effect on

passenger demand and operator costs are likely to be significantly

greater once adjusted to reflect the transition costs of moving to a QCS.

On Oxera's analysis of its central case (see further at section 7.2.2 below

and section 3.8 of the Oxera Report) the projected value of operating

costs over ten years (£1,655 million), the margin earned by operators

(£140 million) and other costs (£11 million) is greater than revenue

(£1,649 million), leaving a funding shortfall of £157 million (even if the risk

contingency is used). Oxera estimates that there is a 87% chance that

the QCS will require additional funds.

(D) Oxera's conclusions that Nexus' base assumptions are flawed are

supported by the study of a second Oxera team, commissioned by the

three main operators in the district (Go North East, Arriva and

Stagecoach) (the 'Oxera industry study'). A redacted copy of the Oxera

industry study is attached hereto at Annex E. This second Oxera team

was appointed to validate the calculations made by Nexus by reference

to the underlying data of the three main operators. A separate team was

needed (with a confidentiality ring in place) to protect commercially

sensitive information. For that reason, the unredacted Oxera industry

study is being submitted to Nexus separately.

(E) The Oxera industry study demonstrates that Nexus has materially

overestimated fare rises and margins under the Nexus Do Minimum and

materially underestimated the costs of implementation of a QCS. Oxera

has not revised these assumptions in the Oxera Report, but the Oxera

industry study suggests that Oxera's estimate of the costs of delivering a

QCS has been understated and that the Oxera Do Minimum also

overestimates fare rises and margins.

1.2.5 The Proposal does not fulfil the mandatory Public Interest Criteria set out in section

124(1) of the Act. It therefore fails to meet the requirements of the Act and so any

attempt to implement a QCS is open to legal challenge.



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1.2.6 Further to and in support of the legal analysis, on Oxera's analysis there is a

greater than 50% chance that the QCS will not meet at least one of the first, third

and fourth public interest criteria:

(A) A QCS would not increase bus patronage in Tyne and Wear. As set out

at table 3.7 of the Oxera Report, an ongoing annual RPI + 5.3% increase

in fares would be needed for the QCS to be affordable. This is both a

greater rate of increase than the RPI + 3% assumed in the Nexus Do

Minimum and significantly higher than what fare increases would be if

historical profitability levels were to be maintained (on average RPI +

0.6%). Adjusting for this increase Oxera estimates that patronage over

the ten year period of the QCS envisaged under the Proposal would

reduce by 149 million passenger journeys.

(B) Although a QCS may bring limited benefits to bus users in Tyne and

Wear, such as by increasing the quality of buses, given the unaffordability

of the Proposal it is likely that the quality of services will suffer over time

due to a lack of investment (see paragraph 248 of the Oxera Report).

(C) A QCS would not contribute to the implementation of local transport

policies of the ITA. The fare rises or network changes required to make

the QCS affordable would result in a decrease in patronage and either

maintained or increased levels of public sector support for the bus

network (see section 3.5.10 of the Oxera Report).

(D) A QCS would not contribute to the local transport policies of the ITA in a

way that is economic, efficient and effective:

(1) A QCS would not be economic. Oxera estimates that Nexus has

underestimated the resource costs of the Proposal in the range of

£89 million to £147 million (see section 3.2.5 of the Oxera

Report).

(2) A QCS would not be efficient. Oxera estimates that, taking into

account its more realistic and robust assumptions in relation to

the costs of a QCS, there is a 99% chance that the Benefit Cost

Ratio ('BCR') will be less than 1, ie that the costs of a QCS will

be greater than the benefits (see further at section 7.2.3 below

and section 3.5.9 of the Oxera Report).

(3) A QCS would not be effective. The probability that the QCS will

deliver the objectives of Nexus' bus strategy is very low, with a

22% chance that there will need to be an increase in public

funding above the target set out in the Bus Strategy or a greater

than 50% chance that fare increases would be such that

patronage would decline by more under the QCS than under the

Oxera Do Minimum. Further, given that all cost and revenue risk

is transferred to Nexus under a QCS there is a much greater

chance that the bus network will require additional public sector

support than under the Oxera Do Minimum. A QCS could also

have a number of unintended consequences (see further, at

section 7.2.4(B) below, page 5 of the Oxera Report and

paragraph 25 of the Oxera Logical Flaws Paper).



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(E) The Proposal is disproportionate. The actual benefits of the Proposal (as

modelled by Oxera) are significantly outweighed by the negative

consequences for operators.

1.2.7 All in all and as set out more fully in Stagecoach's commercial response paper, the implementation of a QCS would result in the public paying more for a scheme that does not deliver its promised policy objectives. As Stagecoach's commercial response paper explains, the QCS will not even achieve its primary objective of saving local authorities money.

1.2.8 Moreover, the VPA offers benefits that are at least equivalent to those which the QCS purports to offer. It would be manifestly disproportionate and therefore unlawful to impose a QCS, which has adverse effects on operators, where there is an enforceable voluntary alternative that provides superior benefits, carries lower risks, and does not involve severe effects on operators' existing businesses. In particular:

(A) There would be a greater than 50% chance that patronage will be greater

under the VPA than under a QCS. The VPA would increase the number

of buses in the Tyne and Wear network by 50 and, on Oxera's analysis,

would result in an extra 43 million passenger journeys than under the

Oxera Do Minimum. The VPA also includes soft measures equivalent to

those in the QCS.

(B) The VPA would be more likely to bring benefits to bus users in Tyne and

Wear than the QCS. Among other things, it would have an earlier

implementation date, provide for a uniform customer charter while

maintaining customer contacts with individual operators (who enjoy a

high level of customer satisfaction), include cross-boundary services,

provide network stability, and include multi-operator smart ticketing and

reduced fares for 16 to 18 year olds.

(C) The VPA would contribute to the ITA's local transport policy by satisfying

the aims of the Bus Strategy. As set out above, it would be more likely

than the QCS to increase patronage, likely to result in greater

accessibility following the joint review of the bus network and more likely

than the QCS to reduce the level of public sector support to the bus

network (because public sector authorities are shielded to a greater

degree than under a QCS from financial shortfalls in the overall network).

(D) In contrast to the QCS, the VPA would contribute to the local transport

policies of the ITA in a way that is economic, efficient and effective:

(1) The VPA would be economic. Under Oxera's central case, the

resource cost of the VPA would be £69 million to operators and

£0 to Nexus more than in the Oxera Do Minimum, which is

considerably less than the QCS which would cost operators £211

million and Nexus £11 million more.

(2) The VPA would be efficient. Under Oxera's analysis, the BCR of

the VPA is more than 90% likely to be higher than the QCS. The

overall BCR of the VPA is estimated to equal around 3.6,

reflecting the fact that benefits are likely to be significantly more

than costs, while the BCR of the QCS is estimated to equal

around 0.6, reflecting the opposite.



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(3) The VPA would be effective. The VPA has a greater than 50%

chance of providing greater patronage than the Oxera Do

Minimum, and has a much greater chance of reducing the

required level of public sector support for the bus network. It

therefore has a much greater chance than the QCS of supporting

two of the three main policy objectives of the Bus Strategy. The

VPA is also likely to have fewer unintended consequences than a

QCS, as the market structure is already well known.

(E) As the VPA is a voluntary arrangement, it does not carry the adverse

impacts on operators that are carried by the Proposal, including the

extensive destruction of the goodwill in their existing businesses.

1.2.9 Nexus has failed to appreciate the complex human rights, pensions and Transfer of

Undertakings (Protection of Employment) Regulations 2006 ('TUPE') issues that

would arise were a QCS to be made (see further, in particular, sections 9, 10 and

11 below).

2. BACKGROUND: STAGECOACH AND BUS SERVICES IN TYNE AND WEAR

2.1 Introduction

2.1.1 Nexus' apparent motivation for the introduction of a QCS is to further the ITA Bus

Strategy 2012, the first objective of which is to "arrest the decline in patronage"

(see the Proposal, paragraph 4.3.1(a)(i) page 76).

2.1.2 However, it should be noted (as Nexus does in the Proposal at paragraph 3.5.2)

that, according to the DfT's National Travel Survey in 2009/10, the North East had

the highest number of trips per person on local buses of any English metropolitan

area, excluding London. In addition, the Competition Commission (the

'Commission') in its 20 December 2011 report on the local bus market (the 'CC

Report') found that "the number of passenger journeys made on local bus services

has been relatively stable for the past ten years" (paragraph 20 at page 10). It is

also noteworthy that the Commission's view in its Provisional Decision on

Remedies relating to the same investigation (the 'Provisional Decision') was that

area-wide franchising schemes (of which a QCS is an example) are most

appropriate to cases in which there has been "significant market failure" (see

paragraphs 8 and 435 of the Provisional Decision). The bus market in Tyne and

Wear is not such a market.

2.1.3 Nexus' own analysis purports to show (at Appendix F to the Proposal) a long term

decline in patronage. However, as Nexus identifies, since 2001 this decline has

been largely due to a decline in fare paying adult passengers (with some transfer of

adult passengers to the English National Concessionary Travel Scheme, 'ENCTS')

rather than a decline in overall patronage in Tyne and Wear. Once children and the

over 60s and disabled are included, the decline in total patronage between

2001/02 and 2011/12 is only 5%.

2.1.4 This slight decline should be viewed in the context of general economic trends in

Tyne and Wear which will continue regardless of the implementation of a QCS (for

example, increasing car ownership and an ageing population). Nexus itself

forecasts that there will be a loss of 2.6 million journeys (approximately 0.3%) over

the ten year period to 2024/25 due to the impact of these demographic factors.



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2.1.5 These overarching trends do not only affect buses. Indeed, in Appendix F to the

Proposal it can be seen that the Metro is also affected by a decline in patronage

(Proposal, Appendix F, paragraph 2.5). Finally, it should be noted that even if a

QCS is introduced, on Nexus' assumptions this will only reduce the rate of decline,

rather than increase patronage in absolute terms.

2.1.6 It is fundamental that the Proposal should be based in the correct context of bus

services in Tyne and Wear, having regard to what customers already enjoy in that

area. This section:

(A) provides (in section 2.2 below) some relevant background in respect of

Stagecoach; and

(B) summarises (in section 2.3 below) some key points about bus services

more generally in Tyne and Wear.

2.2 Stagecoach's dedication to its customers

2.2.1 Stagecoach North East is part of the Stagecoach Group which is one of the largest

bus operators in the United Kingdom, with a fleet of around 8,000 buses and

coaches. Its services play an important role in helping people in rural and urban

areas access work, education, health, shopping and leisure, with 2.5 million

passengers travelling on its bus services every day. It is a major employer in the

UK, providing jobs for over 20,000 people. Stagecoach sets out further detail in its

commercial response paper, submitted herewith at Annex A.

2.2.2 Stagecoach's priority is to put its customers first. It has been, and continues to be,

committed to investment in its services and operations, having over the past four

years invested nearly £300 million in new vehicles, all of which are designed to be

fully accessible to elderly passengers, people with disabilities and families with

young children, and to meet strict emissions standards. Stagecoach focuses

closely on the recruitment and training of its people, as well as the provision of

improved passenger information and the overall customer experience.

2.2.3 In Tyne and Wear, around 90% of bus services are provided commercially by the

area's bus operators. Stagecoach is a major operator in this region, with local

operations in Newcastle, South Shields and Sunderland. Around 96% of its

services are provided commercially.

2.2.4 Stagecoach is proud of its level of investment in Tyne and Wear which includes

over £27 million in new buses in the five year period to 2011/2012, replacing

around 56% of its fleet or 200 buses, a figure which is well ahead of routine fleet

replacement. This represents an average investment of £5.4 million per annum.

Unlike capital expenditure on the Nexus-run Metro, this investment is made without

recourse to the public purse. Nexus has acknowledged the high quality of buses

and operator investment in Tyne and Wear, for example in its submissions to the

Commission during the local bus services market investigation. The Commission

reflected these submissions in its CC Report, including Nexus' recognition that

Stagecoach was motivated to invest in its product to keep and to attract customers

(see in particular CC Report, Appendix 6.4, paragraphs 61 and 62). Stagecoach's

investment extends beyond its fleet to, for example, its people in terms of training

and its property, plant and equipment.



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2.2.5 As explained further for example at paragraph 5.2.2 below, Nexus' Proposal would

result in fare increases for a significant number of Stagecoach's passengers.

Stagecoach has the lowest fares nationally and Stagecoach's fares are generally

regarded as the lowest of operator fares in the Tyne and Wear region. For

example, its Dayrider product, which gives one day's unlimited travel on all

Stagecoach buses throughout Tyne and Wear, is extremely good value when

compared to the rest of the country, including London. So too is Stagecoach's

Megarider product in Tyne and Wear extremely good value: it gives seven

consecutive days of unlimited travel within a customer's chosen area on

Stagecoach North East buses. The simplicity in Stagecoach's fare offerings is

mirrored in the information it provides to passengers.

2.2.6 Along with the simplicity of its fare offerings, Stagecoach also offers customers in

Tyne and Wear simplicity in terms of its core network. This has evolved in order to

ensure that there is a comprehensive high frequency service on core corridors.

One remarkable feature of the Proposal is that the network suggested by Nexus

exactly matches that which is already provided by Stagecoach. This is probably

no coincidence since, as Nexus will recall, Stagecoach's core network, Superoute,

was designed in partnership with Nexus.

2.2.7 In addition, Stagecoach is part of the long-established and popular 'Network One'

range of multi-operator, multi-modal tickets in Tyne and Wear. In terms of bus

multi-operator products, which the Proposal suggests as a benefit (page 333),

Stagecoach notes that Nexus' representation to the Commission was that it

regarded multi-modal ticketing as more convenient for customers in Tyne and

Wear than pure bus multi-operator products (see CC Report, Appendix 6.4,

paragraph 71). Nexus' position before the Commission is consistent with its

previous reluctance as part of Network One to support bus-only products. Network

One is nevertheless now in the process of introducing a range of bus-only

products.

2.3 The existing high customer satisfaction with bus services in Tyne and Wear

2.3.1 Nexus' pursuit of the Proposal is at odds with the prevailing situation and customer

experience in Tyne and Wear, which Nexus has itself acknowledged (for example,

see paragraphs 3.7.1, page 67 and 4.5.1(2), page 97 of the Proposal). It would be

irrational for Nexus to promote the Proposal to the ITA and for the ITA to pursue it

in circumstances where Nexus has accepted that North East has a good bus

system.

2.3.2 Nexus' representations to the Commission included that Tyne and Wear has

historically been a good bus territory and has a strong bus market, since relative to

the rest of England it has had lower car ownership and thus higher reliance on

public transport (CC Report, Appendix 6.4, paragraph 4(d)). As noted above,

Nexus explained that the quality of buses in Tyne and Wear was "generally very

high and that problems seen in other urban areas – such as low vehicle quality,

problems with on-road competition and bus wars – were unusual in Tyne and

Wear" (CC Report, Appendix 6.4, paragraph 61) and that the market worked well,

with no major criticisms from customers (CC Report, Appendix 6.4, paragraph 62).



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2.3.3 Nexus' promotional statements and representations to the Commission are

consistent with the Government's own statistics. In April 2008, the Government

gave the statutory independent national rail watchdog, Passenger Focus,

additional responsibilities in respect of bus services to represent the interests of

England's bus passengers outside London. One of its functions is to monitor the

performance of bus services. In its pilot survey covering six local authorities

(including Tyne and Wear), Tyne and Wear performed above average on every

measure of passenger satisfaction. 'Mystery passenger' surveys conducted in

2010 / 2011 gave Tyne and Wear the highest overall satisfaction score of the areas

surveyed. Taking the two sets of results together, Tyne and Wear bus services are

consistently amongst the best for the majority of service attributes that are

measured. The high satisfaction of passengers with Stagecoach's services in Tyne

and Wear is reflected in these results.

2.3.4 Passenger Focus' report of March 2013 on the Bus Passenger Survey of autumn

2012 reported a very high overall level of satisfaction for both Stagecoach's

services in Tyne and Wear and bus services generally in that area (both at 87%).

A clear majority of passengers were satisfied with all aspects of the journey, from

bus stop facilities, to waiting for the bus, the journey itself and bus drivers. Notably,

Stagecoach in Tyne and Wear had the (joint) second lowest levels of overall

dissatisfaction for the 29 bus operator areas analysed. Of course there remains

room for improvement but this is a continuing process (to which Stagecoach is fully

committed), which does not need the draconian and disproportionate remedy of a

QCS. As noted, Tyne and Wear achieved a very high score for overall satisfaction

compared to the other 28 areas in England that were analysed. As matters stand,

none of the worst performing areas have decided that a QCS would be an

appropriate measure to introduce. To take a notable example, the South Yorkshire

Integrated Transport Authority ('SYITA') had considered introducing a QCS in

South Yorkshire. However, following consultation SYITA decided instead to enter

into a VPA with local operators, this being the option that would "best serve the

needs of the travelling public"1.

3. THE PROPOSAL IN ITS LEGAL CONTEXT EXEMPLIFYING FUNDAMENTAL REASONS

WHY IT WOULD BE WRONG FOR A QCS TO BE IMPLEMENTED

3.1 Introduction

3.1.1 This section:

(A) summarises the legal framework within which the Proposal and any QCS

must be considered (section 3.2 below);

(B) outlines the main features of the models on which Nexus relies for the

Proposal (the 'Nexus Models') for each of the Nexus Do Minimum and

the QCS and fundamental problems with the Nexus Models, as identified

by Oxera (section 3.3 below); and

1

http://www.sypte.co.uk/printPressRelease.aspx?id=3116&SelectedImage=1.



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(C) highlights the key features of the proposed VPA, which Nexus must take

into account. As summarised above, Stagecoach submits that it would

be manifestly disproportionate and therefore unlawful to impose a QCS,

in circumstances where operators are developing the VPA as a viable

and proper alternative to the QCS, consistent with what Nexus has

encouraged them to do (section 3.4 below).

3.1.2 Sections 4 to 8 that follow then address the specific Public Interest Criteria in

section 124(1) of the Act in turn, demonstrating why in Stagecoach's view,

supported by the Oxera Report and the legal analysis, they would not be met.

3.1.3 Sections 9, 10 and 11 set out further problems with the Proposal:

(A) As section 9 highlights, the Proposal has serious consequences, non-

compliant with the Human Rights Act 1998 ('HRA'), in particular the

property rights scheduled thereto which are protected under Article 1 of

the First Protocol ('A1P1') to the European Convention on Human Rights

('ECHR').

(B) Section 10 highlights important employment-related concerns with the

Proposal, which persist notwithstanding the further work that Nexus has

purported to do since the Original Proposal and Informal Consultation.

(C) Section 11 summarises material pensions-related issues connected with

the Proposal and the implementation of a QCS that Nexus has failed to

appreciate or properly grasp.

3.2 Legal framework

3.2.1 Consultation requirements:

(A) Nexus must comply with the statutory consultation requirements as set

out in section 125 of the Act.

(B) In conducting this formal consultation Nexus must also act in accordance

with its public law obligations of fairness, including conducting the

consultation with an open mind, without any pre-determination and taking

the product of the consultation conscientiously into account before

making any decision on whether to progress to the next stage of the

process, in particular when making a decision to refer the Proposal to the

QCS board. Nexus has acknowledged the importance of this

requirement stating that it "must approach the statutory consultation

process and any hearing before a duly constituted QCS Board with an

open mind as to the merits of the QCS" (Proposal, page 222). This is a

duty which is continuing and has not yet been finally discharged.

(C) Furthermore, if modifications are made to the Proposal following the

conclusion of the consultation process, the ITA / Nexus must re-consult

those previously consulted under section 125(3) of the Act, who would, in

their opinion, be affected by the proposed modifications, before the QCS

Board can approve the Proposal (see section 126(5) of the Act).



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3.2.2 Statutory Public Interest Criteria must all be satisfied:

(A) Under section 124(1) of the Act, the ITA may only make a QCS if it is

satisfied that all five of the mandatory Public Interest Criteria are met,

namely that the proposed QCS will:

(1) result in an increase in the use of bus services in Tyne and Wear

(including reducing, arresting or reversing a decline in the use of

bus services) (Criterion A, see further section 4 below);

(2) bring benefits to persons using local services in Tyne and Wear,

by improving the quality of those services (Criterion B, see

further section 5 below);

(3) contribute to the implementation of local transport policies

(Criterion C, see further section 6 below);

(4) contribute to the implementation of those policies in a way which

is economic, efficient and effective (Criterion D, see further

section 7 below); and

(5) any adverse effects of the proposed QCS on operators will be

proportionate to the improvement in the well-being of persons

living or working in Tyne and Wear and, in particular, to the

achievement of the objectives above (Criterion E, see further

section 8 below).

(B) Section 124(1) therefore imposes a high threshold for the ITA to

overcome before it has the power to make a QCS. The requirements are

cumulative and must all be satisfied before a QCS may lawfully be

imposed (although there is no requirement in any circumstance that a

QCS must be imposed). Although Nexus suggests that the test of 'will'

equates to one of whether it is reasonable to conclude that the particular

scenario may come about, the deliberate use of the word 'will', without

qualification, requires a higher degree of certainty. The deployment of

this tense is designed to ensure that the expensive and time-consuming

mechanism of a QCS is not set in motion if there is no cogent or

compelling justification for it.

(C) Stagecoach's view, as explained in this response, is that overall the

Proposal falls far short of the thresholds of section 124(1) and would not

meet the mandatory statutory requirements of the Act. In any event, it

would be an irrational exercise of the ITA's discretion to press ahead.

Stagecoach's reasons as to why the Proposal would not be capable of

satisfying the Public Interest Criteria are explained in sections 4 to 8

below, taking each criterion in turn. These reasons are supported by the

Oxera Report, which notes that the Public Interest Criteria are inter-

linked, and are, in effect, an economic test of whether a QCS would offer

an overall benefit in terms of social welfare, and by Counsels' Opinion.



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(D) It is important also to recall that the ITA's powers are further

circumscribed by the relevant legislation which governs the ITA, including

the HRA (see section 9 below). It must also discharge its obligations

under the Equality Act 2010.

3.2.3 The ITA must take the Guidance issued by the DfT into account:

(A) In performing their respective functions under the Act relating to any

QCS, the ITA and Nexus must have regard to the Guidance issued by the

DfT under section 134A of the Act. This is a specific obligation under

section 134A(2).

(B) Accordingly, the ITA and / or Nexus must give "great weight" to the

Guidance, interpreted according to the ordinary meaning of its words. If

either the ITA or Nexus wish to depart from the Guidance, they must give

"cogent reasons" for doing so, which must be spelled out "clearly,

logically and convincingly" (R(Munjaz) v Mersey Care NHS Trust [2006] 4

All ER 736, at paragraph 21).

(C) As the Guidance emphasises, the Public Interest Criteria are intended to

ensure that a QCS may only be made "where there is a demonstrable,

evidence-based case for doing so and where any adverse effects on

operators have been duly taken into consideration…" (see eg Guidance,

paragraph 7). The Guidance stresses that a QCS would have a

"substantial effect" on local operators (see Guidance, for example

paragraphs 5 and 11).

(D) While Nexus has referred to the Guidance in some places in the

Proposal, it has not been consistent in its approach and it has not

appreciated the clear message in the Guidance, that a QCS would have

a substantial material adverse effect on operators and should only be

made where there is a demonstrable evidence-based case for doing so.

We refer to Counsels' Opinion (in particular, paragraphs 4.2 and 5.2).

(E) The Guidance explains that the assessment of the economy,

effectiveness and efficiency of a QCS should "include some discussion of

alternative options that have been considered". With this is mind, it

should be noted that, in contrast with the Proposal, the VPA is consistent

with the statutory Public Interest Criteria under section 124(1) of the Act

(as described more fully in section 3.4 below).

3.2.4 As will be clear from what follows, the errors in Nexus' modelling of the Do

Minimum Scenario, the Proposal and the VPA are key to the errors Nexus has

made in its assessment of the mandatory Public Interest Criteria set out in section

124(1) of the Act.

3.3 Fundamental problems with the Nexus Models

3.3.1 In addition to the claimed climate of declining bus patronage (see Proposal,

paragraph 3.6.3), Nexus contends that shrinking public funding (see Proposal,

paragraph 3.6.2) will require it to cut bus services from 2015/2016 in order to

eradicate its budget deficit.



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3.3.2 These services cuts are likely to focus on Concessionary Travel and Secured Bus

Services, the two largest publicly funded items of expenditure (Proposal, paragraph

3.6.3(i)). Nexus has reflected the impact of these changes in its modelling of bus

services in Tyne and Wear in the absence of the QCS Proposal being

implemented, ie the Nexus Do Minimum.

3.3.3 There are five main assumptions for the Nexus Do Minimum (see Proposal,

paragraph 1.2.2), namely:

(A) commercial fares will increase at RPI + 3% per year based on historic

trends in fare increases (see further Proposal, paragraph 3.6.4(c));

(B) the discretionary scheme for child concessionary fares will end in

2015/2016 to meet part of the budgetary shortfall of £7.6 million in

2013/2014 (Proposal, paragraph 3.6.2(k));

(C) Secured Bus and Scholar Services2

will be reduced in 2015/2016 and will

cease completely by 2021/2022 because they are uneconomic to run on

a commercial basis, with only a proportion of secured passengers

switching to commercial services (Proposal, paragraph 3.6.2(k));

(D) In order to continue to fund the ENCTS, the levy imposed on the Tyne

and Wear councils will remain constant to 2020/2021, but will then need

to increase by 3.56% from 2021/2022 and by RPI + 1.5% each year from

2022/23 because of the increase in commercial fares referred to at (A) in

the above list (see Proposal, paragraphs 3.6.2(o), 3.6.2(p) and 5.3.3);

and

(E) Bus patronage on the services covered by the Proposal will fall from 127

million bus journeys in 2014/2015 to 109 million by 2024/2015, resulting

in a decline of 18 million at the end of the ten year period and 110 million

across the ten year period.

3.3.4 However, Oxera has analysed the Nexus Do Minimum and has challenged its

assumptions, including in the following respects:

(A) commercial fares will not increase at RPI + 3% per year, because this

assumes a large increase in the margin of bus operators which does not

reflect the historic trend in margins which are overstated (Oxera Report,

paragraph 22). A more realistic assumption is bus costs + 1.1% (or

equivalently RPI + 0.6% under Nexus' RPI and bus cost forecasts);

(B) the levy imposed on the Tyne and Wear councils in order to continue to

fund the ENCTS is likely to increase, rather than remain constant to

2020/2021, because the amount of reimbursement required for ENCTS

will increase as fares increase (Oxera Report, paragraph 47);

2

Scholar Services are not expressly mentioned in paragraph 1.2.2 of the Proposal, but we are instructed that Nexus' modelling reveals that Scholar Services will be reduced.



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(C) reducing Secured Services in 2015/2016 and ceasing them completely by

2021/2022 may not be better value for money than other reductions, such

as increasing the efficiency with which Nexus operates. These options

have not been analysed in the Proposal (Oxera Report, paragraph 40).

In any event, Scholar Services may have to continue to at least half the

existing service level due to Nexus’ statutory obligations (Oxera Report,

paragraph 41). Consequently, the levy enabling provision of Scholar

Services and Secured Services would be at a higher level than Nexus

has assumed (Oxera Report, paragraph 47); and

(D) as a result, bus patronage on the services covered by the Proposal will

only fall from 127 million bus journeys in 2014/2015 to 119 million by

2024/2025, resulting in a total decline of only 8 million at the end of the

ten year period and 49 million3

across the ten year period.4

3.3.5 In contrast to the Nexus Do Minimum, Nexus presents the Proposal as a

mechanism that introduces competitive tendering for bus services across

the existing network, together with a number of soft measures, the effect of

which it contends is that:

(A) commercial fares will increase by no more than RPI (Proposal,

paragraphs 1.2.6(d) and 5.9.2);

(B) the discretionary scheme for child concessionary fares will continue;

(C) services previously provided as Secured and Scholar Services will

continue to be provided by being included in tenders for commercial

services, albeit at a level of service that reflects the one-off reduction in

service in 2015/2016;

(D) the levy imposed on the Tyne and Wear councils will remain constant to

2018/2019, but will then rise broadly in line with RPI for the remainder of

the ten-year term, ie by less than under the Nexus Do Minimum

(Proposal, paragraph 5.3.3); and

(E) bus patronage on the services covered by the Proposal will rise by 17

million across the 10 year period. In addition, they will rise by 127 million

across the ten year period relative to the Nexus Do Minimum as a result

of Nexus continuing to provide services previously provided as Secured

Services, as well as introducing various soft measures such as a uniform

customer charter and simplified ticketing (Proposal, paragraph 6.3.3(b)

and assessment of the Nexus affordability model).

3

The 49 million figure is drawn from Nexus’ model.4

The 10 million extra journeys, compared with the Nexus Do Minimum Scenario at the end of the ten year period, reflect an increase of 9.5 million from lower fare increases, 0.5 million from Scholar Services continuing at 50% (based on a review of Nexus’ affordability models) and no additional impact of the higher levy (as the levy only applies up to 2020/2021).



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3.3.6 Nexus contends that the Proposal is affordable and deliverable within acceptable

tolerances (Proposal, paragraph 1.5.5). In reaching this conclusion, Nexus has

made a number of further assumptions, namely that:

(A) the annual turnover of the Tyne and Wear bus market is £150 million

inclusive of public subsidy (Proposal, paragraph 5.4.4) with the result that

revenue at the start of the Proposal is estimated to be £149 million, of

which £103 million is revenue and £46 million is levy income (Proposal,

paragraph 5.8.1);

(B) for operators, the operating costs per vehicle will be as at 31 May 2012

(Proposal, paragraph 5.5.8), adjusted by a forecast blended inflation rate

calculated from a range of different indices (Proposal, paragraphs 5.6.3-

5.6.6) and the operating margin on each contract will reflect current

operating margins (Proposal, paragraph 5.5.9); and

(C) for Nexus, a number of additional costs will be incurred (Proposal,

paragraph 5.7.1) and a risk contingency of £78 million needs to be

reflected (Proposal, paragraphs 5.7.2 to 5.7.3).

3.3.7 Oxera has analysed Nexus' assessment of the QCS Proposal's affordability

and challenged its assumptions, including in the following respects:

(A) Nexus has failed to reflect in its analysis the fact that the operator costs

of implementing the Proposal include both running costs and transition

costs (both of which are underestimated). Transition costs are likely to

be highly dependent on the outcome of the tender process, with costs

being least if existing operators each win one contract and greatest if a

single new entrant wins all three contracts, and Nexus has failed to model

these at all (Oxera Report, paragraphs 70 to 73 and table 3.1); and

(B) Nexus has failed accurately to reflect in its analysis the fact that the

introduction of a uniform customer charter (see Oxera Report,

paragraphs 108 to 110) and simplified ticketing (see Oxera Report,

paragraphs 111 to 119) are unlikely to have any impact on bus

patronage, given studies by the DfT and qualitative surveys

commissioned by Nexus on these topics.

3.3.8 This analysis also illustrates concrete examples of how there have been failures by

Nexus to take into account relevant considerations, namely here transition costs,

and errors of fact on Nexus' part, namely here as to the impact of soft measures.

Both of these examples have a material impact on Nexus’s conclusions as to

affordability.



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3.3.9 Separately, but giving further support for the above, the three major operators in

the district (Go North East, Arriva and Stagecoach) requested that a second team

at Oxera with access to data from all three operators test two of Nexus' base line

assumptions: fare rises (and margins) in Nexus' Do Minimum and unit costs (per

PVR and per operating hour). The Oxera industry study has found that Nexus has

overstated the margins and fare rises under a QCS and underestimated the costs

of delivering a QCS. In both cases Nexus has made assumptions materially out of

line with what historical data would suggest, and in each case the effect of the

disparity is to artificially improve the case for the introduction of a QCS. The scale

of the changes observed suggests that data relied on by Nexus in forming its

assumptions was not of sufficient detail and quality to form an accurate picture of

the costs of implementing a QCS.

3.4 The VPA: a more proportionate and appropriate measure

3.4.1 Coincident with its formulation and pursuance of the Proposal, Nexus has been in

discussion with Stagecoach and others in NEBOA regarding the development of a

VPA.

3.4.2 The Proposal considered an earlier draft of the VPA from May 2013 (Proposal,

paragraph 6.11.1(d)), which is now long superseded.

3.4.3 Nexus acknowledged in the Proposal that VPAs "can and have delivered some

benefits" (Proposal, page 36). In considering the earlier version of the VPA, Nexus

acknowledged that NEBOA "aims to meet many of the objectives within the Bus

Strategy and has attempted to implement, through their proposal, a governance

structure which will support it" (Proposal, page 315). Nevertheless, Nexus

expressed concerns about the deliverability of the earlier draft VPA and concluded

that the QCS would deliver "far greater benefits" than that draft in the context of the

tests under section 124 of the Act.

3.4.4 As Nexus is aware, discussions regarding the development of the VPA have been

continuing and are now at an advanced stage. Accordingly, the questions raised

by Nexus in the Proposal in respect of the earlier VPA require revisiting by Nexus

against the current VPA proposal, which Nexus has continued to encourage the

operators to develop. Stagecoach summarises the key elements of the proposed

VPA at paragraph 3.4.7 below and Oxera's assessment of the same, beginning at

paragraph 3.4.8 below.

3.4.5 In summary:

(A) the implementation of a QCS would be manifestly disproportionate and

therefore unlawful in circumstances where an enforceable VPA is

available that offers benefits that are at least equivalent to those which

the QCS purports to offer, carries lower risks and does not involve severe

adverse effects on operators' existing businesses;

(B) the VPA will achieve the deliverables in paragraph 2.7 of the Proposal in

a way which is more effective and sustainable than could be achieved

under a QCS, without the significant adverse effects on operators that the

imposition of a QCS would bring;



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(C) the risks under the VPA are considerably less than under a QCS;

(D) a VPA would provide the fastest, most cost effective and lowest risk route

to delivering further significant improvements to Tyne and Wear's bus

networks – many of these benefits could be in place by April 2014. They

would also be capable of delivering financial benefits within the ITA's

timescales for its projected cuts to bus expenditure; and

(E) by contrast, a QCS would be likely to increase costs, as was found in the

CC Report5. There are currently severe financial pressures on the public

sector, which a QCS would be apt to aggravate by transferring costs

currently borne by operators in the private sector to the public sector.

The QCS legislation has not been tested, but the work performed so far

by Stagecoach and Oxera which underpins this response highlights just

how damaging the adverse effects could be.

3.4.6 Stagecoach has obtained specific competition law advice on the proposed VPA

and received confirmation that the proposed VPA would not, if implemented in the

currently proposed form, give rise to an infringement of competition law, provided

that the operators comply with the terms of the Information Protocol which is

proposed to be included in the VPA.

3.4.7 The key elements of the VPA are as follows:

(A) Smart Ticketing and better value fares: the introduction of competitively

priced smart ticketing across Tyne and Wear during 2014, at least one

and possibly two years earlier than the Proposal, including multi-modal,

multi-operator and single operator tickets with daily, weekly, monthly and

annual tickets and new discount fares for 16 to 18 year olds.

(B) Investment in extra buses and new low carbon vehicles: an investment of

around £50 million in nearly 300 new greener vehicles in the next three

years. 125 low carbon buses operating by 2016. 54 of these are already

in operation with a further 40 to be introduced during 2014 and the

remainder before the end of 2016. From 2015, new buses will meet Euro

VI emissions standards. Double-decker buses to replace single-decker

buses on routes as required, providing more seats for existing and new

passengers.

(C) Better customer information and on-board facilities: real-time bus

information accessible from smartphones and websites during 2014.

Provision of local bus service location data from bus operators to Nexus

to feed the real time information platform. New buses to be fitted with

free Wi-Fi equipment on many routes.

5

Competition Commission (2011) paragraph 15.454.



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(D) A stronger, more stable bus network: guaranteed maintenance of current

overall level of commercial bus services in the region for at least the next

five years. Within this guarantee, there will be an extra 50 vehicles over

the next three years to kick-start commercial services and improve

existing commercial services to attract more passengers to bus travel.

There will also be a joint review with Nexus of the supported network to

identify the most cost effective means of meeting Nexus' criteria for the

bus network with the minimum of support from Nexus, with a view to

delivering approximately £500,000 savings a year to Nexus.

(E) Reduced public spending: takeover of some secured services by

operators, providing guaranteed savings of around £400,000. Further

savings by operators funding the cost of bus information, including

timetables, leaflets, maps and fare information.

(F) Increased community participation: a clear consultation process for

network and services changes. Establishment of Tyne and Wear Bus

Partnership Board and District Bus Partnership Boards and introduction

of formal consultation requirements with Nexus and ITA representatives

to enable greater involvement by local politicians and the community.

Consultation benefits to extend to stakeholders and customers in areas

adjacent to Tyne and Wear. Services will be assessed against Key

Performance Indicators with public reporting requirements and remedial

action plans for underperformance. Mechanisms for responding to

changing demand due to housing, retail or industrial developments.

(G) Increased customer commitments: the introduction of a formal uniform

customer charter incorporating clear performance standards and

provision for refunds in the event of avoidable breaches by operators.

Clear arrangements for people with disabilities, with NEBOA committed

to meeting the Public Service Vehicle Accessibility Regulations

('PSVAR') six months in advance of the statutory deadline and all buses

being low floor by April 2014. In addition, all Stagecoach double decks

operating in the QCS area have been low floor and fully DDA compliant

for several years. Provision for assistance to be provided to customers

by other operators in the event of a breakdown.

(H) Financial commitment from bus operators: to ensure enforceability, the

VPA will provide for payments into a service improvement fund in the

event of operators not meeting operational targets (for example, targets

relating to punctuality, reliability and route and destination displays) and

provides for an aggregate liability of £1 million in the event that operators

fail to perform their other commitments under the VPA (for example, fail

to provide new vehicles and low carbon buses).

(I) Shared commitments from Nexus and local authorities: the VPA also

includes commitments from local and transport authorities, including a

commitment for Nexus to at least maintain stability of funding in real

terms over five years for the provision of secured services and

commitments from local authorities to invest in measures to speed up bus

journeys and improve the waiting environment.



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3.4.8 Oxera's assessment of the current VPA proposal highlights:

(A) Unlike Nexus' assumption in respect of the earlier draft VPA that

commercial fares will fall by 1% in 2014/15 relative to the Nexus Do

Minimum, Oxera assumes that bus fares will remain unchanged in

2014/2015 under the current VPA proposal, as there is no rationale

underlying Nexus' assumption of a fare reduction. Fares are assumed to

rise by RPI + 1% from 2015/2016 onwards in order to maintain stable

margins for bus operators. This growth rate is lower than Nexus'

assumptions of fares growth at RPI + 3% under the earlier draft VPA, as

well as Oxera’s estimate of fares growth of RPI + 5.3% needed to make

the QCS financially self-sufficient. This is higher than Nexus'

insufficiently substantiated assumption that fares will grow at RPI under

the Proposal (Oxera Report, paragraph 245).

(B) Oxera assumes that under the VPA the discretionary scheme for child

concessionary fares will end in 2015/2016. This is consistent with Nexus'

VPA assumptions. In contrast, the discretionary child concessionary

scheme is assumed to continue up to 2024/2025 under the Proposal

(both Oxera and Nexus' analysis).

(C) In Oxera’s VPA analysis, it is assumed that Scholar Services will be

provided at current levels up to 2020/2021 and reduced to 50% of current

levels from 2021/2022 onwards. In addition, a review and rationalisation

of Secured Services is likely to result in £0.5 million per year of cost

savings, which could be used to provide equivalent services on a

commercial basis. As a higher level of services are assumed to be

provided, the levy imposed on the Tyne and Wear councils to fund

Secured and Scholars Services under the Oxera VPA is higher than

under both the Nexus VPA and Nexus QCS analyses (see the

assessment of the Nexus affordability models and paragraph 242 of the

Oxera Report).

(D) The levy imposed on the Tyne and Wear councils in order to continue to

fund the ENCTS is likely to increase rather than to remain constant to

2020/2021 as assumed by Nexus because the amount of reimbursement

required for ENCTS would increase as fares increase (see Oxera Report,

paragraph 48). This assumption is applied across Oxera’s analyses and

consequently, the levy enabling the provision of Scholar Services and

Secured Services is modelled at a higher level in the Oxera VPA than

both the Nexus VPA and Nexus QCS analyses.

(E) Under the Oxera VPA assumptions, bus patronage on the services will

still fall by 6 million at the end of the ten year period and by 21 million

across the ten year period. However, it will increase by 43 million across

the ten year period relative to the Oxera Do Minimum. This is a larger

increase than estimated comparing the Oxera QCS with the Oxera Do

Minimum (see assessment of the Nexus affordability models and

paragraph 283 of the Oxera Report).



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3.4.9 In order to compare the benefits of the VPA to those that Nexus asserts the

Proposal would bring and the Do Minimum scenario, Oxera has also assessed the

VPA against the statutory Public Interest Criteria in section 124(1) of the Act. This

analysis shows that, contrary to Nexus' analysis, the VPA offers superior benefits

to the QCS. The VPA is more likely to increase patronage, bring benefits to users

of local bus services by improving the quality of services, and achieve the

objectives of the local transport policy in an economic, efficient, effective way. The

VPA is an option that is enforceable and more sustainable and more appropriate

than a QCS.

3.4.10 Oxera's analysis also shows that the risks of the VPA are lower than that of a

QCS:

(A) Oxera has established (Oxera Report, section 4.4.4) that the VPA

contains an element of risk with respect to meeting the requirements set

out under the Public Interest Criteria. However, this risk is qualitatively

different to that under the QCS:

(1) the risks could be perceived as less severe as they do not

represent the probability that a VPA will fail to meet legal

requirements for its introduction;

(2) the allocation of risk falls more heavily on private operators than

in the QCS;

(3) if the performance of the VPA falls short of expectations, the

outside option of a renewed QCS or partnership agreement

remains available. The QCS represents an unchangeable

commitment for the period considered.

(B) Even allowing for these differences, the risks under the VPA are found to

be considerably less than those in the QCS:

(1) as a commercially delivered scheme, the VPA does not carry

affordability risk in the same way as a QCS;

(2) assuming that private operators will maintain their margins, there

is a greater than 50% chance that patronage will be greater than

the Oxera Do Minimum and as a result, the VPA appears

favourable under the first and third limbs of the Public Interest

Criteria;

(3) patronage is more likely to be higher under the VPA than a QCS;

and

(4) BCR under the VPA is higher than that under a QCS 90% of the

time.

(C) With both narrower bands of possible outcome and lower risks against

the public interest criteria, these findings demonstrate that the VPA would

represent a more prudent approach to delivering the ITA Bus Strategy.



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3.4.11 Additionally, Stagecoach reminds Nexus, by way of example, that the South

Tyneside Partnership already in place helped to achieve the reinstatement of the

half-hourly service to The Lonnen area of South Shields. The service had been

reduced to an hourly service during the day due to a significant deterioration in its

punctuality. This measure helped to improve punctuality, while the South Tyneside

Partnership worked to resolve some of the delays along the line of the route. This

allowed the half-hourly service to be reinstated for the morning and early afternoon

sections of the timetable. Work is ongoing to allow the remainder of the service to

be reinstated.

3.4.12 Further, a year after the implementation of the agreement entered into between

operators and SYITA in Sheffield, known as the "Sheffield Bus Partnership" ('SBP')

in the autumn of 2012, "all partners consider the SBP a success so far"6.

According to the latest available figures, fare-paying passenger numbers have

increased by 9.1% and overall patronage has increased by 0.8%. On current

trends, there will be an overall increase in patronage of 1.5% by the end of the first

year, reversing a long-term decline in patronage. There have also been

improvements in punctuality, customer satisfaction, and fleet and other operator

investment.

3.4.13 A similar partnership approach in Oxford (in the form of a 'qualifying agreement'

under the Transport Act 2008, rather than a VPA) has led to an increase in

patronage in Oxfordshire by 8.3% in 2011/2012 compared to 2010/2011. It has

also yielded substantial benefits to passengers, including an additional 62 diesel-

electric hybrid buses (with consequential environmental benefits) and a highly

successful reworking of the system of multi-operator bus tickets. Previously

subsidised routes are now run on a commercial basis, with the result that more

than 95% of bus passengers in Oxford now travel on commercial routes.

3.4.14 Furthermore, so far as a key focus of Nexus' concerns regarding the earlier draft

of the VPA related to delivery risk, and in particular the ability of operators to

withdraw from the VPA (Proposal, pages 323 to 327), Stagecoach considers that

many of the points raised by Nexus are not fundamental and could be addressed

through discussions with NEBOA. For its part, Stagecoach is satisfied that the

proposed VPA would offer Nexus contractual certainty while providing appropriate

termination rights to protect operators' (and Nexus') interests. It is relevant that

Nexus focuses on hypothetical circumstances in which an operator might be able

to exercise termination rights (for example in the event of a default by local

authority), without considering the likelihood that such circumstances would arise

and that an operator would exercise their right to terminate. In failing to do so,

Nexus has significantly overstated the delivery risks of a VPA.

3.4.15 An assessment of the deliverability risk also needs to take into account the fact that

the option of implementing a QCS remains a possibility in the event that a VPA

were to fail, and operators will be aware of this possibility when performing the

VPA.

6

See page 5 of SBP's report of October 2013, which was provided to Nexus.



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3.4.16 Another concern expressed by Nexus in the Proposal related to the enforceability

of a VPA. This issue has been addressed in the current draft VPA, which is a

contractually binding and enforceable regime under which operators must make

payments into the Service Improvement Fund in the event that operational targets

are not met, with an aggregate £1 million liability in the event that operators fail to

discharge their other obligations under the VPA (for example, by failing to provide

new vehicles or low carbon buses). Issues concerning the appropriate remedy for

any breach of the VPA (as raised by Nexus at pages 329 to 330 of the Proposal)

would fall to be determined by the courts applying general principles of contract

law, and the same issues of principle would also arise in relation to the

enforcement of a QCS scheme. Nexus' criticisms of a VPA on this basis are

therefore unfounded.

4. PUBLIC INTEREST CRITERION A: INCREASE IN BUS SERVICES USAGE

4.1 Introduction

4.1.1 The Guidance explains that for this criterion to be met, the ITA "must be satisfied

that the bus usage will be higher under the [QCS] than it would have been in the

absence of the [QCS]. This means that the [ITA] will need to form a view of the

likely future pattern of bus usage in two scenarios: first, assuming that current

policies and plans are carried forward into the future; secondly, assuming that the

[QCS] is implemented" (paragraph 53).

4.1.2 Nexus maintains that the QCS would result in an increase in the use of bus

services in Tyne and Wear, or a reduction / arrest / reversal of a decline in the use

of bus services. Nexus states that there has been a long term decline in patronage

and that under a QCS an additional 127 million trips would be taken over the ten

year period.

4.1.3 Nexus calculates this figure by combining the fall in patronage estimated under the

Nexus' Do Minimum (used as a comparator by Nexus to measure the benefits of

the Proposal), which Nexus estimates to be approximately 94 million, and the 34

million additional passengers Nexus estimates will choose to travel by bus as a

result of the introduction of soft measures in the QCS.

4.1.4 However, Nexus' conclusion is predicated on certain assumptions, in particular that

the introduction of 'soft measures' relating to the uniform customer charter and

simplified ticketing will stimulate demand. This conclusion is reached

notwithstanding assumptions also made by Nexus relating to continuing population

decline and no positive economic change, which are inconsistent with it.

4.2 Analysis

4.2.1 Nexus' calculations are not robust. They are based on incorrect assumptions and

fail to take a number of significant issues into account. The Oxera Do Minimum

(see section 2 of the Oxera Report) provides more realistic alternatives for three of

the four main assumptions made by Nexus in its analysis, ie fare changes, growth

in the ITA levy for the ENCTS (the 'Levy') and the provision of Secured Services

and transport to school for pupils as provided for under the Education Act 1996

(the 'Scholar Services').

4.2.2 As a result, the Nexus Do Minimum has been misrepresented and is based on

inaccurate assumptions with the result that the patronage loss has been overstated

by Nexus by up to 61 million passenger journeys.



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(A) Approximately 95% of Nexus' overstatement of patronage loss arises as

a result of flawed assumptions made by Nexus in relation to fares (see

section 2 of the Oxera Report). Fare increases that would be

implemented by operators are significantly overstated in the Nexus Do

Minimum. As a result, the benefits of the Proposal relative to the Nexus

'Do Minimum' scenario are artificially high.

(1) Nexus has projected fare increases above RPI of 3% per annum

(which implies fare growth of an average of 3.5% above costs per

annum) which lead to a substantial and unrealistic increase in

operating margins over time. Such high margins are: contrary to

historic trends where margins have remained fairly stable;

unlikely to occur in reality, in particular, in view of Nexus' view

that demand for bus service will be reduced by demographic

changes; and are significantly in excess of the CC's estimates for

large bus operators considered in the context of the investigation

leading to the CC Report7

(see section 2.2 of the Oxera Report).

(2) The Oxera Do Minimum discussed at section 2 of the Oxera

Report suggests that an assumption more consistent with stable

margins would be for fares to grow at 1.1% above bus cost

inflation. Such an assumption results in 58 million less in

patronage loss than in the Nexus Do Minimum (see section 2.2.4

and table 2.6 at page 9 of the Oxera Report).

(B) Nexus has failed to take into account that a material amount of patronage

loss in Nexus' Do Minimum is as a result of the proposed withdrawal of

Scholar Services.8

(1) Nexus' intention to withdraw Scholar Services in their entirety in

the Nexus Do Minimum may be in breach of its legal obligations

under the Education Act 1996.

(2) Nexus justifies the necessity to withdraw the Scholar Services on

the basis that the Levy will continue in its current form and remain

constant from 2015/2016 to 2020/21. This position is based on

assumptions which are not robust. First, the costs of

reimbursement of operators and the size of the Levy are linked to

Nexus' assumptions about the increases in commercial fares

which as set out at paragraph 4.2.2(A) above are not supported

by evidence. Second, Nexus has assumed that the Levy remains

constant notwithstanding that the ENCTS reimbursement

requirements increase over time.

(3) The Oxera Do Minimum is a more appropriate counterfactual

than Nexus' Do Minimum. In order to comply with statutory

requirements it assumes that 50% of School Services continue to

run leading to a reduced decline in patronage by 2.4 million over

the ten year period.

7

CC Report at section 10, and in particular paragraphs 10.86 to 10.90.8

The impact of the Oxera assumptions presented in points 4.2.2(B)(1) to (2) is not additive.



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(4) As a result of its more appropriate assumptions regarding School

Services, Oxera assumes that the Levy grows by 50% of the

increase in ENCTS funding requirements over the 2015/2016 to

2020/2021 period. This implies a 1.7% increase per year on

average and leads to a 2.5 million reduction in patronage relative

to Nexus' assumptions due to the resultant increase in funds

available for school and secured services (see section 2.6 of the

Oxera Report).

(C) Nexus has also overstated the impact on passengers of the soft

measures included in the Proposal and places heavy and unjustified

reliance upon them. The increase in demand for bus services as a result

of the introduction of a uniform customer charter and simplified ticketing

has been overstated by Nexus by 34 million passenger journeys resulting

in an inflated BCR of 1.2. The evidence underpinning the stated demand

increases is not sufficiently robust to use as a central estimate. A more

reasonable central estimate is to assume no uplift in demand as a result

of the uniform customer charter or simplified ticketing with the result that

the BCR drops from 1.2 to 1.0 (see Oxera Report at 3.3.3).

(1) Nexus states that the introduction of a uniform customer charter

will increase demand for bus services resulting in 12.9 million

additional passenger journeys over the ten year period of the

QCS (see Oxera Report at 3.3.1). However, there is no robust

evidence to support such a proposition.9

A more reasonable and

appropriate central assumption as modelled by Oxera would be

that the introduction of a uniform customer charter will have no

effect on demand. Operating on the basis of Oxera's modified

assumption reduces passenger revenue by £15.9 million in

2012/13 real terms of the ten year appraisal period and reduces

the BCR from 1.2 to 1.1 (see 3.3.1 of the Oxera Report).

(2) Nexus claim that the introduction of simplified zonal ticketing

structures in the QCS will result in a demand uplift of 2.7% over

two years due to a reduction in journey time of 3%. This

approach is not consistent with the evidence available (see 3.3.2

of the Oxera Report). A more reasonable assumption, as

modelled by Oxera, would be that simplified ticketing will have no

impact on demand. Operating on the basis of Oxera's modified

assumption will reduce fare revenue by £25.8 million in 2012/13

real terms over the ten-year appraisal period and reduce the BCR

from 1.2 to 1.1 (see paragraph 119 of the Oxera Report).

9

Department for Transport (2009), ‘The Role of Soft Measures in Influencing Patronage Growth and Modal Split in the Bus Market in England’, October, page 89.



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4.2.3 The lack of affordability of the Proposal will have a detrimental effect on passenger

demand:

(A) As discussed further in paragraph 7.2.2 below, the Proposal is not

affordable. As a result, Nexus would need to increase fares by 5.3%

above RPI in order to fund the scheme. Oxera calculates that such an

increase in fares would have the effect of reducing patronage over a ten-

year period by 149 million from 1.28 billion to 1.14 billion, compared to

the expected 1.22 billion total patronage in the Oxera Do Minimum (see


(B) Nexus has used outdated evidence on how passengers respond to fare

increases. Stagecoach's commercial experience suggests that

passengers are much more resistant to changes in fares than would be

suggested by Nexus' evidence. [redacted]

4.2.4 The VPA is more likely to be conducive to an increase in use of bus services:

(A) The VPA will increase the number of buses used in the Tyne and Wear

network by 50. On Oxera's analysis, the VPA will result in an extra 43

million passenger journeys than under the Oxera Do Minimum (see

paragraph 310 of the Oxera Report). There will be a greater than 50%

chance that patronage will be greater under the VPA than under a QCS

(see page viii of the Oxera Report).

(B) To the extent that 'soft measures' could lead to an increase in patronage,

the VPA offers equivalent benefits to the QCS. Under the VPA, operators

would introduce a formal uniform customer charter covering all services

but with individual operators retaining contact with customers. This

provision is made on the basis that the VPA partners are committed to

the highest levels of customer service and all operators in the QCS area

have had negative experiences of the efficiency and accuracy of Nexus'

initial handling of complaints. The VPA also provides for competitively

priced multi-operator and multi-modal smart ticketing across Tyne and

Wear.

5. PUBLIC INTEREST CRITERION B: BENEFITS TO LOCAL PERSONS IN TYNE AND

WEAR

5.1 Introduction

5.1.1 The Guidance explains that for this criterion to be met, a reduction in fares alone is

not sufficient – there must be improvements in the quality of the service (paragraph

55).

5.1.2 Nexus is of the opinion that a QCS would meet Criterion B due to a range of

factors, including arresting the decline in bus patronage, maintaining accessibility,

delivering better public value for money, retaining secured services, increased

coherence as a result of one team of network planners being responsible for the

whole network, the provision of a uniform customer charter and standards of

service, a more stable network, better performance standards, consultation over

fare changes, improved safety, and reduced levels of condensation.



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5.1.3 However, it is not clear at all that Nexus' Proposal meets Criterion B, not least

because of the significant affordability gap identified by Oxera. It is likely that such

'benefits' as the QCS purports to offer would have to be sacrificed in order to make

the Proposal affordable. Additionally, certain aspects identified by Nexus are not

properly 'benefits'. For example, arresting the decline in bus patronage should be

seen as an outcome of improved quality of service, rather than an improvement of

quality in itself; likewise, delivering better value for public money.

5.1.4 Nexus has also failed to take into account that there is currently a high level of

satisfaction amongst network users (see further section 2.3 above).

5.2 Analysis

5.2.1 The benefits brought to persons using local services in Tyne and Wear as a result

of quality improvements in the QCS have been significantly overstated by Nexus.

(A) Whilst the increase in the quality of buses under the QCS by the

mandating of Euro V or higher quality buses implies benefits to persons

using local services, Nexus has failed to take into account that, if, as per

Oxera's analysis (for which see further at paragraph 7.2.2(B) below), the

Proposal is not financially sustainable, the resulting under-investment

may lead to a long-run decline in the quality of service (see paragraph

248 of the Oxera Report).

(B) The impact of benefits to persons using local services of the introduction

of a uniform customer charter and simplified ticketing is not supported by

evidence. As described further at paragraph 4.2.2(C) above a more

reasonable approach, as modelled by Oxera, would be to remove the

effects of these measures from the model with the result that the BCR of

the Proposal drops from 1.2 to 1.0 on Nexus' definition of the BCR (see


(C) Nexus states that under a QCS there will be minor improvements in

accessibility compared to a loss of accessibility in Nexus' Do Minimum

(Proposal, page 234). However, this apparent loss of accessibility is a

direct result of Nexus' proposal to withdraw Secured Bus Services and

School Services (see further at paragraph 4.2.2(B) above).

(D) Nexus states that in the Nexus' Do Minimum, core network Secured Bus

Services start to be withdrawn in 2015/16 and will be fully withdrawn by

2018/2019 with core commercial services being retained, and that in

comparison under a QCS core secured and commercial services will be

retained (Proposal, page 235). However, Nexus has greatly

overestimated the level of Secured Service support for the core network.

For example, as of July 2013 Stagecoach has no core network secured

bus services and therefore its core services are not at risk in the Nexus'

Do Minimum (or indeed under a VPA).



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(E) Nexus states that Secondary Secured Bus Services will start to be

withdrawn in 2015/2016 and will be fully withdrawn by 2018/2019 with

secondary commercial bus services being retained in the Nexus' Do

Minimum resulting in a decrease in access for passengers, compared to

all Secondary Secured or commercial services being retained under a

QCS (Proposal, page 235). However, Nexus has not taken into account

that in reality many passengers would cascade onto other services in the

network. Nexus will recall that it is for this reason that NEBOA in the VPA

has expressed a willingness to work with the ITA to identify interchange

nodes, thus reducing the reliance on unsustainable secured services and

reducing the cost to the public purse.

(F) Nexus states that a QCS will ensure network stability. On page 237 of the

Proposal Nexus states that the network will only 'flex minimally' for the 10

years of the QCS with future network changes being introduced once per

year. However it is not possible for Nexus to guarantee that under a QCS

the network will only flex minimally for the duration of the QCS. Indeed,

Nexus reserves the right to reduce the network by 10% (paragraphs

4.8.4(b)(i) and 4.11.8 of the Proposal). The Stagecoach core network has

been exceptionally stable for 10 years due to the dense urban nature of

the network, its careful management and continued investment. Nexus'

proposition assumes little to no change in demand patterns over the next

decade. Further, it is also not possible to guarantee that changes will take

place once a year. In order to operate in an efficient and cost effective

manner it is imperative that the network is able to respond to punctuality

problems when they arise. The manner in which Nexus has presented

the Nexus' Do Minimum is disingenuous. Nexus states that there are six

fixed change dates per annum in the Nexus' Do Minimum. In fact, as

previously agreed with Nexus, there are two per district and operators are

committed to consulting Nexus three weeks prior to the statutory

registration date for network changes. Nexus has failed to take into

account the increase in resources necessary to implement a once yearly

change. At present Nexus frequently fails to update on-street publicity for

network changes in one district within an acceptable time. To do so

county wide once a year will require a significant increase in resources.

(G) Nexus states that punctuality will be monitored and enforced as a

contractual condition, but has failed to take into account that common

standards for punctuality are already in place as set and enforced by the

Traffic Commissioners.

(H) Nexus incorrectly takes the standardisation of specification of buses in

the Proposal into account. This is not a relevant consideration to the

benefits of bus users.

5.2.2 There are a number of material disbenefits of the Proposal to persons using bus

services in Tyne and Wear, including:

(A) the Proposal sacrifices ticket choice for the majority of passengers in

exchange for a simple message for some potential new passengers, for

example, by withdrawing Transfare tickets for adult single trip journeys.

Although there is currently a low take up of these tickets, it remains a

matter of customer choice; and



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(B) the introduction of simplified ticketing will result in fares increasing for

19% of Stagecoach adult fare-paying passengers with a wide disparity in

geographical impact. In Newcastle less than 1% will pay more and in

Sunderland and South Shields up to 48% of passengers will pay more.

5.2.3 The VPA provides superior benefits to persons using local services in Tyne and

Wear as a result of quality improvements than the Proposal:

(A) The VPA has materially better provision for low carbon emission buses

than the Proposal, which contains no such requirement. The VPA

provides for a total of 125 low carbon buses. 54 low carbon buses are

currently deployed across Tyne and Wear and Stagecoach has

committed to deploying 40 gas buses in Sunderland, 17 of which will be

deployed during the first half of 2014 and the remainder by the end of

2014. An additional 31 low carbon buses will therefore be introduced

under the VPA. In contrast, under a QCS existing low carbon buses are

likely to be removed and replaced with Euro-V compliant buses.

(B) The VPA will have an earlier implementation date than the QCS of April

2014 meaning that bus users will have access to the significant benefits

of the VPA more quickly than if a QCS was implemented. As set out in

figure 3.10 of the Oxera Report, under robust assumptions the QCS has

a likely commencement date of April 2016. Therefore, in the ten-year

period from April 2014 bus users are likely to enjoy two extra years of

enhanced bus services under the VPA than under a QCS.

(C) Nexus states that the Proposal provides a unified and consistent

customer offer and will guarantee standards of customer service through

the implementation of a uniform customer charter (paragraph 1.2.4(a) of

the Proposal). The VPA also provides for a uniform customer charter

covering all services but with individual operators retaining contact with

customers. This provision is made on the basis that the VPA partners

are committed to the highest levels of customer service and all operators

in the QCS area have had negative experiences of the efficiency and

accuracy of Nexus' initial handling of complaints. The VPA will also

provide simple integrated information to customers using common

partnership branding on all materials. In contrast, the current Traveline

service offering multi modal and operator information is provided on the

basis that it is funded by operators.

(D) Cross-boundary services would be included under an expanded VPA to

include Durham and Northumberland. Teeside could also be included

through a co-operation agreement between the two VPAs.

(E) The VPA will provide network stability. It provides for a commitment to no

commercial network changes in the first 12 months of the VPA. All

subsequent changes will be subject to discussion with the ITA and Nexus

in advance of a final determination.

(F) Under the VPA local monitoring and performance reporting will cover all

five districts within the proposed QCS area. Results will be reported

publicly and scrutinised by local and regional bus boards. Payments for

non-compliance will be made to a Service Improvement Fund and used

to address issues affecting local performance.



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(G) The commitment in the VPA to clean buses is equivalent to that in the

Proposal (at paragraph 4.7.5(1)). Operators commit to clean all buses

daily, internally and externally, prior to entering service with provision for

compliance monitoring from Nexus.

(H) Both the Proposal and the VPA provide identical provision for driver

training in accordance with applicable statutory requirements.

(I) Under a QCS Nexus proposes that all drivers are required to hold valid

Standard DBS Certificates or Enhanced DBS certificates where required.

Nexus has failed to take into account that all of Stagecoach's existing

drivers have Enhanced DBS and that the VPA makes identical provision

to the Proposal.

(J) The Proposal and the VPA are equally enforceable. Where agreed

standards are not met, operators will make a payment to the Service

Improvement Fund, to be used to improve bus services for passengers in

the local area.

(K) Both the Proposal and the VPA provide equivalent measures for

consultation over network changes. The VPA provides a commitment to

consult the public and stakeholders on service changes by virtue of the

annual planning process.

(L) There is no material difference between the provision for consultation on

fare changes in the VPA and the Proposal. The VPA includes a

commitment to discuss changes to operator-only fares with Nexus in

advance of their implementation and invites an ITA representative to

become a member of Network Ticketing Limited's Board. It also provides

for a commitment to discuss Network One fare changes with the

Partnership Board in advance of their implementation and to provide

opportunities to interested parties to discuss fare changes as the

Proposal does.

(M) The VPA's on-street standards are equivalent to those of the Proposal.

The VPA sets out a commitment to additional monitoring of standards in

all areas with financial penalties for non-compliance paid into a Service

Improvement Fund.

(N) The VPA also provides a high standard for accessible buses. NEBOA is

committed to meeting PSVAR requirements at least six months in

advance and have committed to be 100% low floor by April 2014. In

addition, all Stagecoach double decks operating in the QCS area have

been low floor and fully DDA compliant for several years.

(O) The Proposal's requirements for destination displays are equivalent to

those in the VPA with the exception that the Proposal permits only

electronic displays. Stagecoach operates electronic displays on all its

buses.

(P) Nexus' proposals for improving safety by ensuring CCTV on all buses do

not materially differ from the VPA. Nexus has failed to take into account

that onerous provisions in relation to regular monitoring of CCTV images

by staff are likely to be challenged by trade unions on behalf of their

members.



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(Q) Both the QCS and the VPA adopt the approach set out in Nexus' Do

Minimum in respect of accessibility targets, smart enabled ETM's, two

way voice/data communications and multi-modal commercial adult

ticketing through Network One and therefore contain identical provision.

(R) Although the Proposal provides that all buses under a QCS will be in

common livery in order to introduce a common brand, the VPA provides

that the partnership logo will be applied to all buses. In addition, all front

line staff will wear a partnership pin badge. Therefore there is no material

difference between the provisions in the VPA and the Proposal in this

respect.

(S) There is no material difference between benefits to passengers in relation

to bus heating and ventilation in the Proposal as opposed to the VPA.

Both the Proposal and the VPA provide requirements to ensure that all

buses be fitted with a means of avoidance of condensation, double

glazing or forced air ventilation. In both cases ventilation and heating

systems on buses are maintained to ensure a comfortable environment

appropriate to outside temperature at all times with compliance

monitored.

(T) The VPA provides for a governance process which is not materially

different to that set out in the Proposal. The VPA provides for a common

forum to discuss network and fares / ticketing issues. Although service

changes are not entirely at the discretion of Nexus / the ITA, as in the

Proposal the VPA provides for restrictions on changes with some service

changes requiring ITA / Nexus approval and changes arising from the

Network Review requiring a majority agreement of the Regional

Partnership Board.

(U) Both the VPA and the Proposal provide for full interoperability of

Smartcards and the implementation of smart pricing subject to the

availability of suitable technology. However, as Nexus will be aware, the

introduction of multi-operator Smart cards has been delayed by Nexus'

failure to deliver a technical paper, as required by an NTL board meeting

in May this year.

(V) The Proposal provides for price changes to be limited to once per year.

[redacted]

(W) The VPA and the Proposal both provide for 100% of buses in operation to

be fitted with Driver Behaviour Management ('DBM') Systems and

associated schemes to address poor results and reward good results. All

of Stagecoach's existing buses are fitted with DBM systems.

6. PUBLIC INTEREST CRITERION C: LOCAL TRANSPORT POLICY

6.1 Introduction

6.1.1 Criterion C relates to the QCS contributing to the implementation of local transport

policies. Under section 108 of the Act, those policies must be developed for the

promotion and encouragement of safe, integrated, efficient and economic transport

to, from and within Tyne and Wear, with local transport authority functions being

carried out so as to implement those policies.



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6.1.2 The ITA's transport policies are within the ITA's Local Transport Plan (covering the

period from 2011-2021), which is supported by a three-year delivery plan (covering

2011-2014). Policies which relate specifically to the bus market are contained

within "The ITA Bus Strategy for Tyne and Wear: 2012". The Bus Strategy contains

three 'strategy objectives' (see page 25 of the Bus Strategy). These are: to arrest

the decline in bus patronage, maintain (and preferably grow) accessibility and

deliver better value for public money. These strategy objectives are supported by a

selection of specific deliverables and principal and supporting targets.

6.1.3 It is Stagecoach's contention that the VPA provides an alternative, less intrusive,

means of delivering these strategy objectives.

6.2 Analysis

6.2.1 The Tyne and Wear bus market is not a failing market where intervention is needed

through a QCS. Nexus' assumption that there is a trend of declining patronage in

Tyne and Wear fails to take into account some important caveats. As set out at

paragraph 26, page 9 of the Oxera Report, the decline in patronage has not been

consistent over the period considered by Nexus. In fact, patronage growth has

been positive on average (at 0.5% per annum) since 2005/2006 and, according to

Nexus' Annual Report 2013, increased by 2% in 2012/2013. This is in addition to

the problems with Nexus' assumptions regarding the decline in patronage in the

Nexus Do Minimum, discussed at paragraphs 3.3.4(A) and 4.2.2(A) above.

6.2.2 The QCS would not contribute to the implementation of the ITA's local transport

policy. As set out at 7.2.2 below, there is a greater than 87% chance that the

Proposal will not be affordable even after Nexus' proposed risk contingency is used

(see paragraph 195 of the Oxera Report). As a result, Nexus will need to take

steps to fund the affordability gap:

(A) In the event that the affordability gap is funded by fare increases, there is

a greater than 50% chance that fare rises under the QCS will be such

that patronage will decrease as compared to the Oxera Do Minimum (see


(B) In the event that the affordability gap is funded by additional public sector

support, there is a 81% chance that public sector support for the bus

network will remain the same or increase under the Proposal as

compared to the Oxera Do Minimum (see paragraph 195 of the Oxera

Report).

6.2.3 The VPA would contribute to the implementation of the ITA's local transport plan:

(A) The VPA leads to an increase in passenger journeys relative to the Do

Minimum. Whereas passenger journeys fall from 126.8 million in

2014/2015 to 118.9 million by 2024/2025 under the Oxera Do Minimum,

they fall from 128.4 million to 122.7 million in 2024/2025 under the VPA.

This is largely the impact of the commitment by the operators in the VPA

to raise the number of buses used on the Tyne and Wear network by 50

to increase patronage, with a smaller impact coming from the use of

secured savings in the provision of additional bus services. Over the 10

year period, the VPA enables an additional 43 million passenger journeys

compared to the Oxera Do Minimum. An analysis of the risk suggests

that there is over a 50% chance that the VPA will increase patronage

above the Oxera Do Minimum (see Oxera Report at 4.5).



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(B) The second objective of the Bus Strategy is to increase accessibility.

While it is difficult to draw a definitive conclusion on this issue due to

Nexus' modelling approach, the joint review of the bus network is likely to

result in an increase in the offering of secured services and therefore

greater accessibility relative to the Oxera Do Minimum (see Oxera Report

at 4.5).

(C) The VPA is likely to meet the third objective of reducing public sector

support of the bus network (see Oxera Report at 4.5). In a VPA, public

sector authorities are shielded to a greater degree than under a QCS

from financial shortfalls in the overall network (see Oxera Report at

paragraph 295. Under Oxera's central and risk assumptions, the VPA

would result in a level of public subsidy lower than the benchmark 100%

of the time and the VPA therefore represents a more favourable outcome

under this criterion than the QCS (see Oxera Report at 4.4.3). There will

be further savings by bus operators taking full responsibility for the cost of

bus information, including timetable leaflets, maps and fares information.

The VPA will reduce the demand for public sector expenditure through

the joint review of secured services, which is expected to save Nexus

£0.5 million a year.

(D) The VPA includes a greater commitment to low carbon buses, in

accordance with the third objective of the local transport plan, whereas

the Proposal contains no such commitment.

6.2.4 Insofar as it is self-evident from the relevant documents that the ITA's policies have

been formulated in order to accommodate a QCS proposal, it would be

inappropriate and improper for the ITA to base its decision on whether to proceed

with a QCS on those documents rather than on the basis of objective evidence and

analysis.

7. PUBLIC INTEREST CRITERION D: ECONOMIC, EFFICIENT AND EFFECTIVE

7.1 Introduction

7.1.1 Nexus' approach to measuring the concepts of 'economic, efficient and

effective' is materially deficient

(A) As set out in letters sent to Nexus by Stagecoach's legal advisers Herbert

Smith Freehills LLP of 23 September and 4 and 18 October 2013,

Stagecoach's firm view is that Nexus' approach to assessing the

economy, efficiency and effectiveness of the Proposal is materially and

substantially flawed. Nexus deviates significantly, and in some cases

entirely, from the Guidance. The resulting distorted presentation of

information and the failure to provide an easily accessible comparison of

the costs of the QCS and the VPA has prevented Stagecoach and other

consultees from carrying out an accurate assessment of the Proposal. In

order to avoid proceeding with a consultation process that is fatally

flawed and would generate significant wasted costs, Nexus must

reconsider its analysis of the Public Interest Criteria set out in section

124(1) of the Act. However, in light of Nexus' letter to Herbert Smith

Freehills LLP of 11 October 2013, Stagecoach, as requested by Nexus,

sets out its and its advisers' concerns in relation to Nexus' interpretation

of the Guidance below and refers Nexus to Counsels' Opinion, at Annex

F hereto.



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(B) Nexus has presented three measures on which it claims that the value for

money of the proposed scheme can be assessed: the benefits of the

scheme minus the costs of the scheme; the benefits of the scheme

divided by the costs of the scheme; and the total benefits of the scheme.

Across all three measures, the transfer of revenue between operators

and Nexus is treated in a way that is inconsistent between Nexus and the

operators. Moreover, the information available in Nexus' Proposal does

not give decision-makers and respondents to the consultation sufficient

information on which to reach a conclusion about the value for money or

otherwise of the scheme. The result of this combination of logical flaws is

that Nexus presents a distorted picture of the value for money of the

proposed QCS against alternative policy options, by not considering the

level of risk transfer or the ability of the ITA to manage that risk.

(C) Had a more rounded and logical approach been followed, it would be

expected that respondents to the consultation on the Proposal would

have been more aware of: the costs of the QCS; the risks associated with

the delivery of the QCS (the QCS transfers the revenue, cost and

operational risk from operators to the ITA); and that the likely range of

outcomes in terms of the relationship of costs to benefits is considerably

wider than that presented in the Proposal. This would have enabled

decision-makers and consulted parties to be able to appreciate that the

risks of the QCS are much greater than suggested in the Proposal, so as

to be able to form accurate judgments on the value for money of the

scheme.

(D) The legal opinion obtained by Nexus from James Pereira does not

engage with the substantive question of whether Criterion D has been

met. Mr Pereira concludes only that the approach taken by Nexus to the

consideration of the Public Interest Criteria is reasonable and lawful (at

page 11 of his opinion), but makes no comment as to Nexus' conclusions.

Supported by Counsels' Opinion, Stagecoach disagrees with Mr Pereira's

position that the approach taken by Nexus was reasonable, given the

flaws in Nexus' analysis outlined here in sections 7.1.1 to 7.1.4, and

believes that a QCS would not meet Criterion D.

7.1.2 Nexus' interpretation of the measure of 'economy' is inconsistent with the

Guidance

(A) The Guidance cites the National Audit Office's ('NAO') definition of

'economy' (see Guidance, paragraph 60) namely: "minimising the cost of

resources used or required". Minimising the cost of resources required is

particularly important given that liability for the costs of the QCS will rest

with the ITA, which is funded by the public sector. However, in the

Proposal Nexus appears to have rejected the approach set out in the

Guidance, and instead measures the 'economy' of the proposed QCS as:

"The net present value, representing the absolute difference

between the benefit of the scheme and the costs of delivering it is

associated with the economic criteria." (Proposal, page 269)



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(B) Nexus states that it has taken this approach because "the net present

value is a better and more appropriate measure of the economic criteria

than cost alone, as this measure takes into account the adverse financial

impact on the Operators and measures the scale of the overall impact".

However, in doing so, Nexus has introduced a novel means of measuring

economy and has introduced new factors not considered relevant by DfT.

The 'economy' measure as described by the Guidance and the NAO is

explicit in requiring an assessment of the cost of resources required to

deliver the QCS. However, the measure used by Nexus fails to reflect this

requirement by not providing an explicit measure of these costs with the

result that none of the measures used by Nexus to assess the Public

Interest Criteria provides an accurate assessment of the costs of the

proposed QCS and the alternatives. In other words, Nexus' approach to

measuring the 'economy' of the Proposal fails to appropriately consider

the true costs of the QCS compared to those of the VPA.

(C) Even if Nexus' 'economy' measure was correct, its application is

inconsistent. Nexus' definition of costs fails to focus on the costs of

resources required to implement a QCS, focussing instead on the net

increase in revenue (see section 3 of the Oxera Logical Flaws Paper).

(D) As set out at section 3 of the Oxera Logical Flaws Paper, in

circumstances where Nexus' measure was consistent with the Guidance,

there would be a focus on the resource costs of the QCS compared to

the VPA. For example, using the costs as estimated by Nexus, the

resource cost of the QCS (ie the costs that arise as a result of the use of

more resources to implement the QCS compared with the Nexus Do

Minimum) would be approximately £11 million for Nexus (present value)

and £104 million for the operators (present value) as opposed to an NPV

of £262 million upon Nexus' interpretation of the measure of economy

(Oxera advises that this figure cannot be logically divided between Nexus

and the operators). By contrast, the resource cost of the VPA (ie the

costs that arise as a result of the use of more resources to implement the

VPA compared with the Nexus Do Minimum), using the costs estimated

by Nexus, would be £0 for Nexus and £4.3 million for operators as

opposed to an NPV of £3.1 million upon Nexus' interpretation of the

measure of economy. This also illustrates that Nexus has failed to

appreciate that an aspect of economy lies in the minimisation of

resources.

7.1.3 Nexus' application of its 'efficiency' measure is inconsistent with the

Guidance

(A) The Guidance cites the NAO definition of 'efficiency' (Guidance, page

18), namely:

"the relationship between the output from goods or services and

the resources used to produce them"

(B) Nexus measures the efficiency of the Proposal by "looking at the efficiency ratio of the benefits and revenues of the scheme cost of delivering them" (Proposal, page 269).



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(C) Notwithstanding that Nexus' approach is conceptually aligned to the

Guidance, its treatment of the revenue transfer from operators to Nexus

under a QCS within the VfM model is inconsistent with the Guidance.

Nexus includes the transfer of operator revenue to Nexus as a benefit of

the scheme but the expenditure by Nexus on the contract payments as a

cost of the scheme.

(D) The Guidance refers to costs as the 'resources' required. This would not

include the costs of any transfer of financial sums from one party to

another. It is therefore contrary to the Guidance for Nexus to include the

contract payments by Nexus as a cost of the scheme, given that this

transfer does not use any resources.

(E) Further, it is inconsistent for Nexus to treat the change in revenues

accruing to operators (the difference between the loss of fare revenue

offset by an increase in revenue from contract payments) as a benefit of

the scheme while splitting the same transfers received by Nexus between

the benefits and costs. Rather, the correct way of making this calculation

in accordance with the Guidance would be to include the expenditure by

Nexus on contract payments as a dis-benefit (ie a negative benefit).

Nexus' approach results in substantially underestimating the volatility of

the Proposal (see paragraph 33 of the Oxera Logical Flaws Paper).

7.1.4 Nexus' interpretation of the measure of 'effectiveness' is inconsistent with

the Guidance

(A) The Guidance cites the NAO definition of effectiveness (Guidance,

paragraph 60), namely: "the relationship between the intended and actual

results of public spending". However, in the Proposal Nexus measures

the effectiveness of the proposed QCS by "looking at the present value of

benefits and revenues of the alternative proposals and the level of

confidence that this level of improvement will be delivered" (Proposal,

page 269).

(B) In taking this approach to measuring the effectiveness of the Proposal,

Nexus' measure fails entirely to assess the objectives of the QCS or the

VPA, the likelihood that either scheme will deliver those objectives, or the

likely level of any over- or under-achievement of those objectives. This is

contrary to the Guidance and the NAO definition of effectiveness, which

clearly require such an assessment (see paragraph 22 of the Oxera

Logical Flaws Paper). Further, Nexus' interpretation of the 'effectiveness'

measure results in an assessment of the likelihood of delivery of the

present value of the benefits and revenues of the QCS in a way which is,

in large part, unsupported by any evidence beyond assumptions.



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(C) In circumstances where Nexus' interpretation of the 'effectiveness'

measure was consistent with the Guidance, the focus of Nexus' analysis

would be switched from the benefits of the QCS (estimated by Nexus to

be £1,606 million) which will always be considerably larger than those of

the VPA (estimated by Nexus to be £6.60 million) because of the transfer

of revenue from the private to the public sector involved, to the

probability that the QCS or VPA will actually deliver the stated benefits

and the likelihood of any unanticipated consequences of a QCS (see

paragraph 26 of the Oxera Logical Flaws Paper). For example, following

an approach consistent with the Guidance, there is a less than 50%

chance that the QCS will meet its objectives (see further at paragraph

7.2.4(A) below).

7.2 Analysis

7.2.1 A QCS would not be economic

(A) Nexus' simplified approach to forecasting the costs of operators under the

QCS is not robust and significantly underestimates the incremental costs

of delivering the Proposal in the order of £89 to 147 million10

and in the

most likely scenario upon implementation of a QCS by £107 million (see

table 3.5 of the Oxera Report).

(1) Nexus' application of historical costs (based on a well-established

network) to a new network scheme is inappropriate and fails to

take into account a number of significant categories of costs to

the operators entirely (see table 3.3 of the Oxera Report)

including:

(a) Vehicle related costs, including those due to:

(i) the purchase or lease of new vehicles to be

compliant with the QCS scheme, estimated to be

[redacted] per bus per annum and likely to be

further inflated due to lack of stock availability

and manufacturing pressures;

(ii) write-offs of vehicles currently in service and not

compliant with the QCS scheme, estimated to be

[redacted] per bus;

(iii) incremental running costs resulting from

contractual requirements under a QCS, for

example double glazing and ventilation and

heating systems, estimated at [redacted] per bus

per year;

(iv) repainting and refitting requirements for existing

buses prior to the implementation of a QCS

estimated at [redacted] per bus; and

10

Scenario 1 – £89 million, Scenario 2 – £107 million Scenario 3 – £127 million, Scenario 4 –£147 million (For explanation of scenarios see further at 7.2.1(A)(3) below).



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(v) the costs of mandatory mid-life refurbishment of

all buses prior to the eighth year of passenger

service, estimated at [redacted] per bus.

(b) the costs of setting up and refitting depots (approximately

[redacted] per depot for existing operators and £4 million

per depot for new entrants or expanding incumbents);

(c) monitoring and compliance costs due to duplication of

these functions as between the operators and Nexus

estimated at £0.66 million a year;

(d) pension liabilities incurred – on an ongoing basis and

including contributions to funding deficits Busways makes

contributions in respect of defined benefit pensions of

[redacted], but in circumstances where Stagecoach

loses its routes or exits the market this could result in

liabilities being recast on a more prudent basis and

immediately becoming payable of approximately

[redacted]; and

(e) the costs of any employment related disputes arising as a

result of the implementation of the Proposal.

(2) Those costs of operators that are taken into account by Nexus

are subject to inappropriate assumptions with the result that they

are materially underestimated (see table 3.2 of the Oxera Report)

including:

(a) Stagecoach could be subject to increased driver costs of

[redacted] (excluding any pensions considerations) due

to the inevitable need to harmonise pay and working

conditions (notwithstanding the lack of such a

requirement in the Proposal) because of the

unsustainability of maintaining differing conditions across

employees as a result of the QCS. In its letter to

Councillors of 24 July 2013, Unite the Union requested

that such harmonisation be implemented if the QCS is

implemented (see letter appended at Annex G).

(b) Overheads, estimated to be [redacted] per peak vehicle

requirement ('PVR'); and

(c) bid costs, estimated to be [redacted] for an incumbent or

£350,000 for a new entrant.

(3) Recognising that the costs of the scheme will be highly

dependent on the various potential outcomes of the tender

process, Oxera has modelled four scenarios which demonstrate

the range of costs arising from those different outcomes (and

which Nexus must take into account if it is to take a prudent

decision as to whether to proceed with a QCS. Oxera's four

scenarios are as follows (see table 3.1 of the Oxera Report):

(a) Scenario 1: Existing operators, each wins one contract;



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(b) Scenario 2: Two existing operators, each wins one

contract, the third is won by a new entrant; (Scenario 2 is

the scenario modelled by Oxera as the most likely

outcome of the tender process and therefore is used as

Oxera's central case);

(c) Scenario 3: A single current operator wins all three

contracts; and

(d) Scenario 4: A single new entrant wins all three contracts.

(4) In each of Oxera's four scenarios, the cost of vehicles is the

factor most materially affected by the introduction of a QCS.

Nexus' underestimation of this cost, for example, accounting for

the purchase of higher-specification vehicles, the reduction in

useful life and the introduction of leasing arrangements more

than doubles Nexus' expected cost per vehicle.

(5) Further, the combined impact of Nexus' failure to adequately

capture the costs of vehicle scrappage and refurbishment,

depots, bid teams, duplication of scheduling and compliance and

finance costs amounts, in each of Oxera's four scenarios, to a

similar level as the additional vehicle costs.

(B) Using Nexus' interpretation of the 'economy' measure, but incorporating

costs to the operators which have not been captured by Nexus, reduces

the NPV from £262 million (based on Nexus’s assumptions on both the

QCS and the Do Minimum) to £67 - £144 million11

(based on a

comparison against the Oxera Do Minimum)12

(see table 3.5 of the Oxera

Report).

(C) However, taking an approach to the 'economy' measure which is

consistent with the Guidance, ie taking into account the incremental

resource cost, the resource costs increase from £115 million (using

Nexus’s assumptions on both the Do Minimum and the QCS) to £204 to

£262 million and, in the most likely scenario upon implementation of a

QCS, to £222 million13

(using Oxera’s assumptions on the QCS and the

Do Minimum) (see table 3.5 of the Oxera Report).14

11

£144 million – Scenario 1, £122 million – Scenario 2, £98 million – Scenario 3 and £67 million – Scenario 412

Note that the change in the NPV does not equal the change in resource costs because of a change in profits accruing to operators.13

Scenario 1 – £204 million, Scenario 2 – £222 million, Scenario 3 – £242 million, Scenario 4 –£262 million(For explanation of scenarios see further at paragraph 7.2.1(A)(3) above) The increase in costs to operators per scenario is as follows: Scenario 1 – £193 million, Scenario 2 – £211 million Scenario 3 – £231 million, Scenario 4 –£251 million, on the basis that Nexus' costs are £11 million in each scenario.

14Even if Nexus' incorrect interpretation of the 'economy' measure is followed and the additional costs set out

above are included the NPV of the QCS is reduced in the range of £118 million - £195 million depending on the scenario considered. In the most likely scenario, Scenario 2 the NPV of the Proposal is reduced by £140 million.



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(D) Further separate economic analysis carried out by a distinct Oxera team

working on behalf of NEBOA has also shown that Nexus has materially

understated the total costs of operators in Tyne and Wear under the

Proposal. Nexus' conclusion that a QCS is affordable is particularly

undermined by the more accurate base assumptions regarding fare rises

and costs provided in the Oxera industry study (see paragraph 3.3.9

above and the Oxera industry study, submitted separately as explained in

paragraph 1.2.4(D) above).

(E) The costs of the ITA / Nexus under a QCS have been substantially

underestimated:

(1) Investment risks and costs fall on the ITA which is not structured

to bear this kind of risk. Under the current market arrangements

and the VPA, most of the cost, revenue and operational risk from

running bus services in Tyne and Wear is borne by the operators.

Under the Proposal, these risks would be transferred to the ITA

who would be responsible for adjusting the funding of the bus

network to meet any shortfall: by increasing fares; reducing

service levels; or increasing public funding. The Oxera Report

shows that the level of additional funding required could be

significant, with a funding gap of more than £171 million under

50% of the scenarios considered by Nexus (see table 3.11 of the

Oxera Report). Central government guidance is for the party who

is best able to manage the risk to take it,15

but Nexus has not

demonstrated that it is better able to manage these risks than the

operators and as such is committing the ITA to take a

considerable degree of risk which it has not demonstrated that it

is well placed to manage.

(2) At page 235 of the Proposal, Nexus suggests that there is no funding issue under a QCS. However, at the very least, any analysis of a QCS must assume that ENCTS funding must rise by RPI on an annual basis. In circumstances where ENCTS is insufficiently funded by central government this will be the case in each of Nexus' Do Minimum, the Proposal and the VPA.

(3) The Proposal is unclear as to whether the costs of information services such as Traveline which is currently funded by operators have been properly taken into account.

(4) The Proposal is unclear as to whether the costs of increased resources associated with proposed annual network changes have been properly taken into account.

(5) Costs of administration and on-going revenue costs associated with daily smart price capping, estimated to be £1.8 million in Year One and £0.4 million in Year Two by Nexus are more likely to be significantly in excess of £5 million in Year One and in excess of £1 million for ongoing operating costs in future years.

15

Green Book, page 83 found at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/220541/green_book_complete.pdf.



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7.2.2 The Proposal is not affordable

(A) Nexus concludes that the Proposal is affordable on the basis that the

overall revenues (£1,696 million) exceed the overall costs (contract costs

of £1,605 million and Nexus' costs of £89 million) by £0.9 million, even

allowing for full use of the risk contingency of £78 million.

(B) However, Nexus' cost assumptions are not robust and result in unrealistic

fare level increases in order for the Proposal to be affordable:

(1) In Oxera's central case, Scenario 2, the Proposal is unaffordable

unless fare levels are increased at a faster rate than the RPI +3%

projected in the Nexus Do Minimum. As set out at table 3.6 of

the Oxera Report, as a result of Nexus' underestimation of the

costs of the Proposal, the total cost of the QCS is greater than

the expected revenue and creates a deficit of £111 million as

opposed to the £79 million surplus under Nexus' cost

assumptions (see also paragraph 134 of the Oxera Report). In

order to restore affordability, Nexus would need to increase fares

3.6% above RPI every year.

(2) In each of scenarios 3 and 4, fare increases above the level

provided for by Nexus in the Proposal will also be necessary in

order for the scheme to break even (see table 3.6 at page 45 of

the Oxera Report).

(C) When taken together, Nexus' overstatement of the increase in patronage

and revenue as a result of soft measures (as discussed further at

paragraph 4.2.2(C) above) and Nexus' significant understatement of the

true costs of the QCS (as discussed further at paragraph 7.2.1(A) above),

result in fare level increases which are even more unsustainable if the

Proposal is to be affordable:

(1) On Oxera's central case, the projected value of operating costs

over ten years (£1,655 million), the margin earned by operators

(£140 million) and other costs (£11 million), is greater than

revenue (£1,649 million) (see paragraph 244 of the Oxera

Report). This leaves an overall funding shortfall of £157 million.

(2) As a result, Nexus would need to increase fares by 5.3% above

RPI in order to fund the scheme. A fare increase at that level is

significantly greater than that assumed by Nexus in the Nexus Do

Minimum (ie RPI + 3.0%). It is patently unsustainable and would

have a significant detrimental effect on patronage and bus user

satisfaction.

(3) As set out at paragraph 245 of the Oxera Report, Oxera

calculates that such an increase in fares would have the effect of

reducing patronage over a ten-year period by 149 million to 1.14

billion, compared to the expected 1.22 billion total patronage in

the Oxera Do Minimum.



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(4) Such fare rises and the resulting loss of patronage are contrary to

the aims of the QCS and would ensure that it would fail to meet

the Public Interest Criteria. The only other options available to

Nexus in order to address the significant deficit would be to

reduce service levels of the network or increase public

expenditure on bus services neither of which is in the interests of

the public or bus users in Tyne and Wear.

7.2.3 A QCS would not be efficient

(A) Nexus' underestimation of the costs (see further at paragraph 7.2.1

above) and overstatement of the benefits (see further at paragraph 5.2

above) of a QCS, present a distorted view of the Proposal. When Nexus'

interpretation of the measure of efficiency is combined with the more

reasonable and reliable assumptions under Oxera's central case,

Scenario 2, the combination of increased costs and reduced benefits

results in a BCR of 0.6 which is significantly less favourable than that put

forward by Nexus and results in a 99% chance that the BCR of the QCS

is less than one (ie that the that the costs of the Proposal outweigh the

benefits). Therefore, once allowance is made for these factors, Nexus'

methodology cannot support a recommendation for a QCS on the

grounds of economy or efficiency.

(B) The savings in public spending under a QCS have been overestimated

by Nexus:

(1) Nexus has quoted savings of £70 million (or on average £7

million a year) under a QCS (Proposal, page 8). However, in the

Proposal, Nexus states that the total levy payable over the ten

year period of a QCS would be £21 million less under a QCS

than in the Nexus Do Minimum (or on average £2.1 million a

year) (Proposal, page 234).

(2) Nexus' figures are driven by the inflationary assumptions

stipulated in the Nexus' Do Minimum and an ability to deliver a

QCS where there is no relationship between costs and fares,

which is patently inaccurate and unworkable should costs

increase by more than RPI (as they have done in the past).

(C) Lead in times for both existing and new operators in ordering and

acquiring buses that are compliant with the requirements of the Proposal,

building or relocating depots and reconfiguring existing operators'

networks or setting up network capabilities for new entrants will all cause

very significant delays. For example, from the date of award of a QCS

contract it will take bus manufacturers at least six months to a year to

build the required vehicles. In addition, the lead in time required to build a

new depot is likely to be at least a year (see table 3.17 and Fig 3.10 of

the Oxera Report). These practical difficulties have previously been

recognised by the Commission, which at paragraph 409 of its Provisional

Decision noted that a measure such as a QCS would involve "substantial

practical challenges and risks". Under the VPA, passengers would be

enjoying the benefits of new low carbon buses and network expansion,

when under the QCS, the procurement process would still be running.



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(D) If Nexus / the ITA decides to implement a QCS, Stagecoach will

challenge, and no doubt other operators will seriously consider their

options for challenging, the scheme by means of court or tribunal

proceedings. Such proceedings would lead to inevitable delays of at least

1 to 2 years (and could extend to a far longer period if operator(s) seek to

challenge the QCS on the basis of human rights arguments). There is

also the possibility of legal challenges against individual members of the

ITA which may also exacerbate these delays.

(E) If Nexus / the ITA proceeds to implement a QCS and is later found to

have done so unlawfully, Nexus / the ITA may have to bear the costs of

reimbursing operators for the period when the QCS was unlawfully in

place. This would undoubtedly be a substantial cost for Nexus / the ITA.

We refer also to section 9 below in relation to potential HRA-based

claims.

(F) It is illogical to say that the QCS would lead to further efficiencies. Due to

the fixed and short-term nature of contracts under a QCS there is no

long-term incentive for successful bidders to put in place long-term

efficiencies. Running bus services under a QCS is likely to lead to a loss

of commercial incentives for operators to invest in their services and grow

patronage. Research has shown that there has historically been a

difference in management incentives between deregulated markets, such

as London, and contract-based markets, such as a QCS. Contract-based

markets offer a reduced incentive to make investments, as potential gains

from such investment are limited. In addition, operators in a contract-

based market are largely indifferent to levels of patronage, focusing

instead on managing costs and meeting performance requirements.

Comparative analysis of London and the rest of Great Britain reveals that

while growth rates in costs have been similar, the growth rate in revenues

has been higher outside London. These differences are consistent with

the differences in management incentives outlined above (see the Oxera

Report at Appendix 1).

(G) For the reasons set out above, the Proposal is neither economic nor

efficient. On Oxera's central case, Scenario 2, the overall NPV of the

QCS when compared to the Oxera Do Minimum is negative at £-114

million (see paragraph 136 and table 3.8 of the Oxera Report). The BCR

also falls below one, to 0.6 (by Oxera’s definition). The chance of the

QCS costs exceeding the benefits is 99%. The NPV of Scenarios 3 and 4

compared to the Oxera Do Minimum would be even more negative given

that they represent more disruptive cost scenarios (see paragraph 139,

page 48 of the Oxera Report and further at paragraph 7.2.1(A)(3) above).

7.2.4 A QCS would not be effective

(A) On Oxera's analysis, the probability that the QCS will deliver the

objectives of the local transport policy is low:

(1) There is a 22% probability of there being a need to increase

public funding to above the target set by the ITA in the Bus

Strategy (see Oxera Report at page v and paragraph 185);



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(2) There is also a greater than 50% probability that fare increases

would be such that patronage would decline by more under the

QCS than under the Oxera Do Minimum;

(3) The probability of meeting the accessibility target is not

evaluated. However, it follows from the above analysis that the

likelihood of the QCS meeting all three strategic objectives is less

than 50%; and

(4) Under the QCS, all cost and revenue risk will be transferred from

the operators to Nexus resulting in a much greater probability of

the bus network requiring additional public sector support than

under the Oxera Do Minimum.

(B) The QCS is also likely to have a number of unintended consequences,

such as:

(a) adversely affecting the affordability of the bus network in

Tyne and Wear by preventing the network from adapting

to reflect unanticipated changes in costs or patronage;

(b) diluting incentives to increase revenue and grow

patronage;

(c) increasing the carbon emissions from bus services in

Tyne and Wear through the removal of hybrid and gas

buses; and

(d) other potential difficulties in maintaining services in the

event of a failing supplier.

(C) Moreover, under the QCS, all cost and revenue risk will be transferred

from the operators to Nexus. As set out above at paragraph 7.2.1(E), in

such circumstances, central government advice states that the party best

placed to bear risk should take it. It is clear that operators are better

placed to bear the risk than operators.

(D) The Proposal is unaffordable and unrealistic (see further at paragraph

7.2.2 above). Therefore, the stated benefits cannot be delivered by

Nexus. As a result, the Proposal cannot be said to be effective.

7.2.5 Nexus' inappropriate modelling and incorrect assumptions throughout the Proposal

demonstrate that its approach is not robust and is subject to significant deficiencies

which call into question both the reliability of Nexus' assessment of the Proposal

and, fundamentally, Nexus' ability to manage and run the bus network in Tyne and

Wear properly.



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7.2.6 The VPA would implement the local transport policy in a way that is

economic, efficient and effective

(A) The VPA would implement the local transport policy in a way that is

economic, efficient and effective:

(1) The VPA would be more 'economic' than the QCS. Under

Oxera's central case, the resource cost of the VPA will be £69

million to operators and £0 to Nexus more than in the Oxera Do

Minimum (see section 4.5 of the Oxera Report). However, this is

considerably less than the QCS which would cost operators £211

million and Nexus £11 million more (see 3.2.6 of the Oxera

Report).

(2) The VPA would be more efficient than the QCS. Under Oxera's

central case, the BCR of the VPA is 3.6, substantially higher than

the 1.9 figure estimated by Nexus (see Oxera Report, at 4.5)

There is a 90% chance that the BCR of the VPA is greater than

one (ie that the benefits outweigh the costs) (see Oxera Report,

paragraph 4.4.4). In contrast, the BCR of the QCS is 0.6 in

Oxera's central case (ie the costs of the scheme are greater than

the benefits) and there is a 99% chance that the BCR of the QCS

is less than one (ie that the costs are greater than the benefits)

(see paragraph 334, Oxera Report). The BCR of the VPA is more

than 90% likely to be higher that the BCR of the QCS (see Oxera

Report, 4.4.4).

(3) The VPA would be more effective than the QCS. On Oxera's

analysis, the VPA has a greater than 50% probability of providing

greater patronage than the QCS and has a much greater

probability of reducing the required level of public sector support

for the local bus network and therefore to better support two of

the three main policy objectives of the Bus Strategy. It also

seems likely that the VPA will have fewer unintended

consequences than the QCS as the market structure is already

well known (see 4.5 of the Oxera Report).

8. PUBLIC INTEREST CRITERION E: PROPORTIONALITY

8.1 Introduction

8.1.1 Proportionality is a critical express criterion which must be met in addition to

Criteria A, B, C and D for a QCS to be lawful. A QCS must also be proportionate

for it not to involve an unlawful interference with the property rights of operators

under the ECHR. Nexus appears to have acknowledged this, stating in the

Proposal that "[t]he ITA must conclude that the proportionality test is met for a QCS

to be lawful. The ITA is advised that meeting the proportionality test is also highly

relevant to establishing that the human rights of Operators have not been infringed"

(Proposal, paragraph 6.2.2).



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8.1.2 As to what proportionality means, as the Guidance explains (paragraph 67), the

ITA will need to be satisfied that the benefits to people living and working in Tyne

and Wear are likely to be sufficient to justify the scale of the adverse impacts

identified. In conducting this balancing exercise, the ITA will need to decide what

weight to attach to each of the so-called benefits which it hopes will result from the

QCS and the expected adverse impacts, according to the likelihood of them arising

in practice.

8.1.3 Nexus has failed entirely to attempt to calculate the scale of the detriment to

operators as a result of the implementation of a QCS in Tyne and Wear or to

compare them with the benefits to the users of local bus services in the area

covered by the QCS in order to form a view on the proportionality of the QCS. It is

irrational and inappropriate for Nexus to recommend the Proposal to the QCS

Board without undertaking this fundamental analysis. This response provides

sufficient information to enable Nexus to calculate properly the adverse impact on

Stagecoach. Therefore, Nexus must carry out this analysis prior to taking any

further steps in the process.

8.1.4 As set out in section 9 below, the ECHR similarly requires that where the State, in

this case the ITA / Nexus, interferes with a person's (in this case Stagecoach's)

possessions, there is a reasonable relation of proportionality between the means

employed and a legitimate aim sought to be realised. A fair balance must be struck

between the demands of the general interest of the community and the protection

of individual rights.

8.1.5 The Oxera Report demonstrates that the benefits identified in the Proposal are

unrealistic and overstated. As such, little weight should be placed upon Nexus'

estimates. On the other hand, the adverse impacts of the QCS are real and as

supported by the Oxera Report have a high degree of likelihood. They must

therefore be given "significant weight".

8.1.6 All in all, there is no realistic prospect of the Proposal meeting Criterion E or

complying with the ECHR. The proposal is disproportionate. The extent to which

the scheme is disproportionate is heightened by the fact that the VPA, a voluntary

scheme not involving interference by the State, offers superior benefits to the QCS.

To implement the Proposal would therefore be unlawful. See further Counsels'

Opinion at paragraphs 5.7 to 5.8.

8.2 Analysis

8.2.1 The benefits of a QCS to people living and working in Tyne and Wear have

been overstated

(A) Nexus claims to have considered the alleged improvements in the

wellbeing of persons living or working in Tyne and Wear and to have

taken account of the likely impacts if Criteria A, B, C and D are achieved

(Proposal, paragraph 6.7.1).



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(B) Nexus relies on its analysis of Criterion B to demonstrate that the

Proposal will bring benefits including: arresting the decline in bus

patronage, maintaining accessibility, delivering better public value for

money, retaining secured services, an increase in coherence due to one

team of network planners being responsible for the whole network, the

provision of a uniform customer charter and standards of service, a more

stable network, better performance standards, a common fleet livery,

consultation over fare changes, improved safety, and reduced levels of

condensation (Proposal, paragraph 6.4). Nexus identifies further alleged

improvements for the purposes of Criterion E (Proposal, paragraph

6.7.2(b)(i)), including that the Proposal would "support economic

regeneration and development in Tyne and Wear by improving the

efficiency, reliability and integration of the transport network."

(C) For the reasons set out in section 5 above, this analysis is flawed. As the

Oxera Report demonstrates, the benefits projected by Nexus for a QCS

are implausibly large and based on assumptions which are inconsistent

with the available evidence.

(D) Whilst a QCS may deliver some limited benefits to the people of Tyne

and Wear (when compared to the Oxera Do Minimum) as a result of

improvements in quality, such as by mandating that all buses in the

scheme be Euro V compliant, the critical analysis conducted by Oxera

and Stagecoach of Nexus' analysis demonstrates that the improvements

claimed by Nexus are not likely to derive from the Proposal. By way of

example, as set out at paragraph 4.2.2(C) above, the impact of soft

measures forms a key part of the benefits that the QCS aims to deliver.

However, Nexus has significantly overstated the benefits delivered to

persons living or working in Tyne and Wear in this respect through its

unsupported claims that simplified ticketing and a uniform customer

charter will generate material amounts of additional patronage.

(E) Fundamentally, as discussed further at paragraph 7.2.2 above, the

Proposal is not affordable. In Oxera's central case the Proposal would

have a funding shortfall of at least £157 million with a 87% chance that

the QCS would require additional funding, even in circumstances where

the entire risk contingency is used to fund the deficit. Nexus has not

properly considered the financial sustainability of the Proposal and its

impact on the proposed benefits of the scheme. In circumstances where

the Proposal is not financially sustainable, there is a risk of future under-

investment and therefore a decline in the quality of services for bus

users.

(F) The outcomes identified by Nexus would be more likely to follow from a

VPA, where the risk and commercial incentive remains with the

operators.

(G) In any event, the benefits identified do not outweigh the adverse impacts

on operators.



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8.3 The actual benefits of the QCS (as modelled by Oxera) are not sufficient to justify the

scale of the adverse impacts on operators

8.3.1 Nexus recognises that the Proposal could have a "material adverse impact" on

operators (Proposal, paragraph 6.7.1(c), page 283) and that the "substantial

financial and operational impacts" on operators should be given "significant weight"

when considering proportionality (Proposal, paragraph 6.12.7). As the Guidance

states, a QCS would indeed have a substantial impact (see eg paragraph 5)

whether in the "most extreme case" acknowledged by DfT (paragraph 63) where

an existing operator is forced as a consequence of the QCS to cease to provide its

services in Tyne and Wear, or in the case where the operator wins the QCS tender

but loses its commercial freedom as a result of the QCS.

8.3.2 Nexus further accepts that as a result of the introduction of a QCS it is "inevitable

that one or more of the existing large operators will be materially worse off", and

may "well have a material adverse impact on the profitability and capital value of

each of the large operators" (Proposal, page 293).

8.3.3 Nexus' method for considering the adverse effects on operators is at paragraph 6.9

of the Proposal. Nexus claims to have identified "[p]otential adverse effects on

operators", the likelihood of those effects arising and their likely scale, with

consideration to (i) actions operators could take themselves to mitigate the effects

of the Proposal; (ii) the mitigating effect of the strategies in the Proposal itself; and

(iii) the benefits to operators of the Proposal.

8.3.4 The scale of the adverse impact on operators in Tyne and Wear means that it is

not possible to justify the limited benefits of the QCS. By way of example,

notwithstanding that Nexus overstates the lost profits of operators under the Nexus

Do Minimum, Nexus severely understates the impact on operators from lost profits

as a proportion of benefits.

8.3.5 The potential adverse effects identified by Nexus are listed in paragraph 6.10 of the

Proposal, including:

(A) Operators' profits

(1) Nexus recognises that there may be potential adverse effects on

operators as a result of both the loss of profit/value in respect of

their existing business and the risk of future on-going operational

losses. Nexus acknowledges that due to the manner in which

Nexus has structured the three main contracts, a QCS will attract

losses, for example, even in circumstances where an existing

operator wins a contract they will be required to invest in further

equipment and infrastructure, or to dispose of existing assets at a

loss (Proposal, 6.10.2(c)(ii)).

(2) However, Nexus undermines this recognition through a series of

assumptions which, Stagecoach submits, are either incorrect or

unreasonable for Nexus to make.

(3) Firstly, Nexus seeks to promote the Proposal on the basis that

under the Nexus Do Minimum there will be a series of adverse

consequences on operators (Proposal, 6.10.2 (d)). As set out at

section 4.2 above the Nexus Do Minimum is based on

assumptions that are not consistent with the available evidence

and therefore create a more positive picture of the QCS than is

reasonable to assume.



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(4) Secondly, Nexus appears to be proceeding on the basis that it is

unlikely that a cost efficient current operator would be

unsuccessful. This begs the question as to why a QCS is

needed at all.

(5) Thirdly, Nexus evidently considers that the adverse effects on

operators would be of their own making as a result of their

commercial decisions, rather than attributable to the QCS

(Proposal, 6.10.2(i) and 6.10.3(b)). Nexus' assumption is wrong.

It fails to recognise that the QCS would deprive operators of the

material and valuable commercial freedom enjoyed in the current

deregulated system. It fails to appreciate the impact on

shareholders of the size and profitability of a company being

reduced as a result of a QCS and the potential impact on the UK

bus industry as a whole.

(6) Fourthly, Nexus underestimates the impact on operators that

choose not to bid, or that are unsuccessful. Nexus assumes that

the adverse effects on operators which operate at a national level

are effectively cancelled out because the operator can simply

reallocate resources and absorb local adverse impacts within

their wider businesses. While, as Nexus states, operators are

capable of reacting to change and reallocating resources, this is

in a commercial context. The imposition of a QCS would deny

operators the opportunity to make rational commercial decisions

about their businesses. For example, while it may be possible to

sell or reallocate certain assets such as buses, an operator

cannot move or reallocate its depots and is likely to suffer a

significant loss of profit and in stranded assets in the event that

they must be disposed of as a result of a QCS.

(7) Fifthly, Nexus appears to have misunderstood the overall

conclusions of the CC Report, which when read in their entirety

do not support Nexus. For example, the Commission concluded

that a QCS would be "significantly more onerous" than its

package of remedies "both in terms of implementation costs and,

in particular, the restriction on commercial freedom and the

economic interests of existing operators, both large and small"

(emphasis added) (CC Report, paragraph 15.458, see also

paragraph 15.460). Nexus should consider these conclusions

properly.

(8) The financial impact of a QCS on operators would, in reality, be

very significant. Applying Oxera's assumptions, the QCS would

result in a collective real NPV impact to operators’ profitability of

[redacted] over the ten year period. Whereas, on Oxera's central

case the benefits of the scheme overall are estimated at £161

million (NPV) (see paragraph 214 of the Oxera Report).

Therefore, on Oxera's analysis, at the industry level, the ratio of

operators' lost profits to the benefits of the scheme is 50% (as

opposed to 9% under Nexus' assumptions).



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(B) Cross boundary services

(1) Nexus notes operators' concerns that a QCS may have adverse

effects on cross-boundary services (at paragraph 6.10.6 of the

Proposal), and in particular that a QCS may render a cross-

boundary service no longer commercially viable for an operator

that fails to secure a contract under a QCS, or that secures a

contract which does not match its current service provision, given

the costs of operating the cross-border service in isolation to the

rest of the operator's network. This possibility is not satisfactorily

addressed by Nexus' draft collaboration agreement, to be entered

into between the ITA, Northumberland and Durham County

Councils and Hartlepool Borough Council (see Appendix V to the

Proposal). While Nexus undertakes to fund the reinstatement of

services lost due to the impact of a QCS through a competitive

process (see for example 7.3 of Appendix V), this fails to remedy

the adverse effect suffered by the operator in question.

(C) Bidding costs associated with quality contracts

(1) Nexus appears to be continuing to proceed on the basis that

large operators would have the relevant expertise to deal with

bids for a QCS and that this would mitigate any cost involved,

notwithstanding Stagecoach's submissions to the contrary as part

of the Informal Consultation process in 2012.

(2) Although the large operators may have certain expertise in

procurement, the QCS is a new procurement regime and a

specialist team will be required to deal with the bidding process,

as is the case (for example) in rail franchise bids.

(D) TUPE

(1) Nexus has not analysed sufficiently the TUPE implications of a

QCS for both outgoing and incoming operators (see further

section 10 below). In particular, Nexus has not identified the

costs and disbenefits arising from the effects of TUPE if a QCS

were to be implemented. Nexus appears not to appreciate how

complex an area this is.

(E) Pensions

(1) Nexus bases its analysis on the assumption that operators will

manage any pension scheme liabilities resulting from the

implementation of a QCS when determining their tendering

strategy (Proposal 6.10.10(d)).

(2) Nexus fails to take properly into account the significant

implications of these costs for both outgoing and incoming

operators (see further at section 11 below). For example, these

costs may well render a cost efficient operator's bid

uncompetitive.



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8.4 A QCS would have significant adverse effects on Stagecoach at both a group and

local level

8.4.1 Stagecoach's business in the market affected by the Proposal represents

[redacted] of the group's total profit from the UK bus market. In circumstances

where Stagecoach is forced to exit the market, Stagecoach's business would be

subject to significant financial adverse effects, including:

(A) The overall NPV cost impact on Stagecoach would be [redacted], ie

greater than half the total NPV benefits of a QCS under Oxera’s

assumptions (see table 3.18 of the Oxera Report) including:

(1) the loss of business value to Stagecoach in Tyne and Wear

(including lost profits) estimated to be [redacted];

(2) significant network run-down costs including write-offs and disposal loss of existing assets, estimated to be [redacted] for vehicles and [redacted] with respect to depots;

(3) an employee redundancy cost estimated to be in the region of

[redacted], depending on the applicability of TUPE; and

(4) the crystallisation of [redacted] in pension liabilities under the

Tyne and Wear Local Government Pension Scheme ('T&W

LGPS') and Stagecoach Group Pension Scheme ('SGPS').

(B) There is also the potential for further adverse effects on Stagecoach

which are not directly quantifiable at this stage but which may

nonetheless be significant, for example:

(1) additional loss of shareholder value arising from an expectation

that further QCS schemes will be implemented elsewhere, or that

the policy environment for Stagecoach will be more difficult

following the introduction of the QCS. It is not possible to

ascertain beforehand the value that investors will associate with

this. However, it may be possible to derive this based on share

price movements following a decision to proceed with the QCS

and the associated costs to shareholder value could be very

large. Stagecoach’s market capitalisation as at November 2013 is

approximately £2 billion and, consequently, a 1% related

movement in the price would amount to a £20 million impact; and

(2) the legal costs associated with potential employment law claims,

in particular, class action claims, resulting from the

implementation of a QCS.

8.4.2 In circumstances where Stagecoach bids for a Quality Contract and is

unsuccessful it would also be subject to the additional costs of preparing the bid,

estimated at [redacted].



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8.5 The Proposal would result in significant adverse effects on Stagecoach's employees

8.5.1 Although Criterion E refers specifically to operators, in considering the

proportionality of the Proposal Nexus should also take into account the significant

adverse effects on Stagecoach's employees. As set out in detail in section 11

below, members of defined benefit pension schemes could expect to lose between

[redacted] of the value of their current pension benefits. An average Busways

member of the T&W LGPS, for example, could expect that the value of the pension

he had earned before the introduction of a QCS would grow by around [redacted]

under QCS proposals.

8.5.2 Employees transferring to smaller employers as a result of the QCS are likely to

lose their entitlement to on-going defined benefit pensions, and instead be offered

lower value, higher risk defined contribution arrangements.

8.6 Proportionality: Conclusion

8.6.1 It is plain, therefore, that a QCS would be disproportionate as the adverse impacts

on operators, businesses, shareholders and staff are not outweighed by the so-

called benefits. This would be the case even if the VPA was not put forward as a

viable alternative. In circumstances where the VPA has been proposed and offers

equivalent or superior benefits to the QCS (see section 3 above), the

disproportionality of imposing a QCS is heightened to the extent that doing so

would be irrational. As discussed in section 9 below, the imposition of a QCS

would also be unjustified under the ECHR. The QCS would therefore be unlawful.

8.6.2 This conclusion is supported by the CC Report. The Commission decided that a

QCS regime would be "significantly more onerous" than its package of remedies

"both in terms of the implementation costs and, in particular, the restriction on

commercial freedom and the economic interests of existing operators, both large

and small" (CC Report, paragraph 15.458). It also found that some potential

benefits which may arise under a QCS were "capable of being delivered within a

deregulated market and would be enhanced by elements of [the Commission's]

remedy package, particularly those relating to ticketing and partnerships"

(emphasis added) (CC Report, paragraph 15.459). The Commission's comments in

the CC Report are consistent with its general regulatory approach, according to

which "competition in the market" is preferred to "competition for the market", which

would describe the situation if a QCS were implemented16

.

16

See paragraph 55 of the Commission's "Notice of possible remedies under Rule 11 of the Competition Commission Rules of Procedure", published 6 May 2011, as part of the Local Bus Services Market Investigation.



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9. HUMAN RIGHTS IMPLICATIONS OF A QCS

9.1 Introduction

9.1.1 As public authorities Nexus and the ITA must comply with the HRA. The HRA

effectively incorporated the ECHR into domestic law. Section 6 HRA provides:

"It is unlawful for a public authority to act in a way which is incompatible

with a Convention right"

9.1.2 Under section 7 of the HRA, 'victims' are able to bring legal proceedings alleging a

breach of the rights under the ECHR or rely on such breaches in other legal

proceedings. A 'victim' includes a corporate body, and the general rule is that

where damage is suffered by a particular company the 'victim' is that company

(Agrotexim v Greece (1995) 21 EHRR 250). In some cases, a majority shareholder

might also be a 'victim' for the purposes of Article 1 of Protocol 1 of the ECHR

('A1P1') (X v Austria 21 CD 34 (1966) at 44). In the case of Stagecoach, the most

direct victim would be Busways Travel Services Limited ('BTSL'), the legal entity

which has operated bus services in Tyne & Wear for 27 years.

9.1.3 A1P1 guarantees the right to peaceful enjoyment of possessions. It provides:

"Every natural or legal person is entitled to the peaceful enjoyment of his

possessions. No one shall be deprived of his possessions except in the

public interest and subject to the conditions provided or by law and by the

general principles of international law.

The preceding provisions shall not, however, in any way impair the right

of a state to enforce such laws as it deems necessary to control the use

of property in accordance with the general interest or to secure the

payment of taxes or other contributions or penalties."

9.1.4 The courts have repeatedly recognised that the goodwill in a business is a

possession for the purposes of A1P1 (see, for example, Tre Traktörer v Sweden

(1991) 13 EHRR 209 at 54 to 55).

9.1.5 In order to comply with A1P1, any interference with a person's possessions must

be justified. This requires that the measure:

(i) is lawful under domestic law;

(ii) pursues a legitimate aim in the general or public interest; and

(iii) bears a reasonable relationship of proportionality between the means

employed and that aim.

9.1.6 Proportionality requires that a fair balance is struck between the demands of the

general interest of the community and the protection of individual rights; an

individual should not have to bear a "disproportionate and excessive burden"

(Broniowski v Poland (2005) 40 EHRR 21 at 150). These requirements must be

met in all cases involving an interference with possessions, and do not depend on

whether the interference is classified as a "deprivation", a "control of use" or

another type of interference (Sporrong and Lönnroth v Sweden (1983) 5 EHRR at

paragraph 69).

9.1.7 The key issues in determining whether the Proposals are in accordance with the

requirements of A1P1 are likely to be (i) and (iii) above.



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9.2 The Proposal involves an interference with Busways' possessions

9.2.1 Nexus accepts that the introduction of a QCS will 'materially interfere' with the

peaceful enjoyment by operators of their business in Tyne and Wear (page 287

Proposal). A1P1 is therefore engaged by the Proposal.

9.3 The Proposal would breach A1P1 as it is unlawful under domestic law

9.3.1 For the reasons set out in Stagecoach's response and supporting documents, the

Proposal, if implemented, would not be lawful as a matter of domestic law as, on a

proper analysis, the Public Interest Criteria in section 124(1) of the Act cannot be

satisfied in this case. Further to section 9.1 above, its imposition would therefore

also constitute a breach of A1P1. This separate breach of A1P1 would entitle

Busways to seek damages (see section 9.6 below).

9.4 The failure to offer compensation renders the Proposal disproportionate in breach of

A1P1

9.4.1 In considering the proportionality of the Proposal it is necessary to consider the

drastic nature of the interference it involves and the consequences that it would

have on the existing operators' businesses. The legal effect of imposing a QCS is

that it would become unlawful for an existing operator to continue to operate their

bus services in Tyne & Wear. This would lead to an immediate destruction of the

goodwill in these existing businesses.

9.4.2 The Proposal would lead to the destruction of the entire goodwill in Busways. This

goodwill has been generated by the operation of a successful business over 27

years and is attributable to the loyalty of its customers, the success of its branding

and marketing initiatives and its licences to operate particular routes. It is reflected

in the value of Busways above and beyond that of its separable assets, such as

the resale or scrappage value of its buses, depots and other tangible assets.

Busways would be deprived of this additional value by the imposition of the

Proposal. As set out in section 11 below, the Proposal may also cause Busways to

suffer a loss in value due to increased annual contribution in the region of

[redacted] per annum and the triggering of funding payments of around

[redacted].

9.4.3 It is no answer to this deprivation of the goodwill in Busways that some of its assets

might be able to be sold and redeployed elsewhere – either within Tyne and Wear

under a QCS contract (by a Stagecoach entity or another operator), outside of

Tyne and Wear (for example by another Stagecoach entity) or for another purpose

altogether (for example if depots were sold for a different use). Such sales would

allow Busways to realise the value of some of its separable assets, however the

additional value attributable to the goodwill in the business as a whole would have

been destroyed.

9.4.4 The Proposal, if implemented, would break unprecedented ground in the UK,

precipitating the deprivation of the goodwill in a business without any proposal for

compensation (para 6.12.7 at page 363 of the Proposal). This failure to offer

compensation renders the imposition of a QCS disproportionate, and therefore

unlawful. In James v United Kingdom (2006) 42 EHRR 49, the European Court of

Human Rights ('ECtHR') said that:



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'… under the legal systems of the contracting states, the taking of

property in the public interest without the payment of compensation is

treated as justifiable only in exceptional circumstances… [T]he protection

of the right of property [A1P1] affords would be largely illusory and

ineffective in the absence of any equivalent principle. Clearly,

compensation terms are material to the assessment of whether the

contested legislation represents a fair balance between the interests at

stake and, notably, whether it does not impose a disproportionate burden

on the applicants…"

9.4.5 The application of this principle in the context of measures rendering previously

lawful businesses unlawful was recognised in R (Kelsall & Ors) v Secretary of State

for Environment, Food and Rural Affairs [2003] EWHC 459 (Admin). The case

involved a ban on fur farming which meant that the claimants' previously lawful

businesses became illegal. Paragraph 62 of the judgement notes that:

'… The Secretary of State accepts that the Claimants' businesses were

possessions within the meaning of [A1P1], and that they were deprived of

those possessions by the Act. The [ECHR] requires that compensation

should be reasonably related to the value of the property taken…'

9.4.6 The imposition of a QCS, which would make the existing operators' businesses

unlawful, would therefore breach A1P1 in the absence of compensation being

offered.

9.5 The Proposal is otherwise disproportionate and therefore breaches A1P1

9.5.1 In addition to the failure to pay compensation rendering the Proposal

disproportionate, the Proposal is also disproportionate for the reasons set out in

section 8 dealing with Criterion E (Proportionality).

9.5.2 In particular, Nexus has overstated the benefits of a QCS to people living and

working in Tyne and Wear. As the Oxera Report demonstrates, the benefits of a

QCS projected by Nexus are implausibly large and based on assumptions which

are inconsistent with the available evidence (see, for example, paragraph 7.2.3

above). The actual benefits of a QCS, as calculated by Oxera, are not sufficient to

justify the scale of adverse impacts on operators. These adverse effects have

been underestimated by Nexus, which are based on a series of incorrect or

unreasonable assumptions. In terms of the A1P1 analysis, as discussed in detail

above, the adverse effects on Busways amount to the total destruction of the

goodwill in that company and may cause it to incur significant pension liabilities.

As a result, if the Proposal is implemented Busways will have to bear a

"disproportionate and excessive burden" in breach of A1P1 (see paragraph 9.1.6

above).

9.5.3 The availability of an alternative, less intrusive, means of achieving the same aim is

highly relevant to the consideration of whether a particular measure is

proportionate for the purposes of complying with A1P1. In that regard, the

availability of the VPA, which offers superior or equivalent benefits to the QCS

without any interference with existing operators' rights, exacerbates the extent to

which the Proposal is disproportionate for the purposes of A1P1.



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9.6 Busways would be entitled to seek damages for a breach of A1P1

9.6.1 For the reasons outlined above, the Proposal would breach A1P1 if implemented.

This breach would entitle Busways to seek damages, as was recently confirmed in

R (on the application of Infinis plc and Infinis Re-Gen Limited) v the Gas and

Electricity Markets Authority [2013] EWCA Civ 70). In that case, the Court of

Appeal confirmed that substantial damages were payable for a breach of A1P1

even in circumstances where the relevant public authority had been acting in good

faith. The basic principle upon which damages were payable and assessed was

restitution in integrum, that is to put the claimant in the position he would have

been in had the breach not occurred. The Court of Appeal cited with approval one

of its earlier decisions, which held that "[w]here the breach of a Convention right

has clearly caused significant pecuniary loss, this will usually be assessed and

awarded."

9.6.2 In the case of the Proposal, the existing operators would therefore be able to seek

damages from the ITA and / or Nexus for a breach of A1P1 equivalent to the

destruction of goodwill in their existing businesses and any other losses flowing

from its imposition, such as additional pensions liabilities.

9.7 Busways' employees would also be entitled to seek damages for a breach of A1P1

9.7.1 As set out in detail in sections 10 and 11 below, the imposition of a QCS would

have significant adverse effects on Busways' employees, resulting in the loss of

value in their pension benefits. This amounts to an interference with their

possessions under A1P1, which would be unlawful for the reasons discussed

above, in particular in the absence of compensation. Busways' employees would

therefore also be entitled to substantial damages.

10. TUPE AND EMPLOYMENT IMPLICATIONS OF THE PROPOSAL

10.1.1 The Proposal has sought to address a number of the material issues raised by

operators during consultation in respect of the Original Proposal. For example, the

Proposal now maps existing routes and depots onto the new QCS contracts.

However, many operators run a rota system such that their employees are not

assigned to particular bus services/routes and instead work in relation to routes

across the region.

10.1.2 However, there remain a number of employment-related concerns about the

Proposal.

(A) Uncertainty – Whilst more detail has been provided in the Proposal,

including a framework for determining allocation arrangements, there

remains a general lack of detail which creates uncertainty as to whether

or not the Proposal will adequately deal with all appropriate issues

(particularly how the allocation process will work and what costs and

potential liabilities will be incurred by the current operators). For example:



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(1) Allocation – The draft allocation arrangements in Appendix R to

the Proposal do not set out the detail of how the ITA will allocate

affected employees to particular QCS contracts. Instead they

refer to a consultation process taking place with operators and

trade union representatives to agree on the detail of how the

allocation process will operate. It is, therefore, not possible to

determine at this stage if the allocation process creates any

issues that would impact on the current operators, the employers

of the affected employees. It is also unclear:

(a) when the consultation process will be, although we note

Nexus mentions in its request for workforce information

that this will be following receipt of the workforce

information at the end of September 2013;

(b) what the final allocation arrangements will be;

(c) if employee representatives other than trade union

representatives will be invited to share their views, as

anticipated by The Quality Contracts Schemes

(Application of TUPE) Regulations 2009 (the '2009

Regulations');

(d) when the allocation process will take place in respect of

each QCS contracts;

(e) whether there will be any indemnification from the ITA to

current employers should the ITA's allocation decisions

create legal liability for current employers (see paragraph

10.1.2(C)(2) below for more details)17

; and

(f) whether affected employees could appeal the decision of

the ITA should they disagree with the assignment and

allocation process.

(2) Travel allowances – The Proposal introduces the concept of

travel allowances and other payments being made to employees

required to move to a new depot. It refers to a mechanism being

established in consultation with trade union representatives

(again, no mention is made of employee representatives) to

require operators to offer travel allowances to employees

required to move to a new depot. This would happen as a result

of the current operator failing to secure the relevant QCS

contracts resulting in that employee having to move to a new

location, or if they are put into the 'surplus pool' of employees

who have transferred to the new operator and subsequently

another operator offers them employment at a new location. This

seems an onerous additional cost for operators, which will need

to be factored into their costs of running the contract and also

creates uncertainty as to:

17

Stagecoach notes that in London, there have been examples of successful Employment Tribunal claims in relation to restrictions upon changes of contracts.



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(a) which operator will make the payment (presumably the

new employer?);

(b) how much this will be;

(c) how long the payments will need to be made to these

employees; and

(d) when this consultation will take place.

(3) Facilitator – The Proposal introduces the concept of a facilitator

from Nexus who would work with all operators to ensure a

smooth transition to the contracts. The facilitator would be

supported by a trade union representative. It is unclear:

(a) what this role will involve and how much power the

facilitator will have to determine any disputes that arise. It

is assumed that the facilitator will not determine the

allocation of the affected employees. To the extent the

role does involve determining issues, there would seem

to be a risk of bias given there is no representative from

the operator to assist the facilitator and ensure a

balanced representation of views. Also, there does not

appear to be any legal basis for a facilitator to make

decisions in place of an employer;

(b) who will pay for the facilitator and the trade union

representative to perform their roles. The trade union

representatives are not full-time union representatives

and work within the business. They may not be able to be

released from their duties to assist with this depending on

the extent of the role; and

(c) in depots where more than one union is represented how

the union representative will be determined.

(B) Running counter to Government plans – The knock-on effect of using

QCS contracts (ie that TUPE will be deemed to apply), runs counter to

the Government's current plans to remove unnecessary gold-plating of

TUPE. The Government has been in consultation over plans to change

TUPE to remove unnecessary additional provisions which go further than

is required by the European Acquired Rights Directive, so-called gold-

plating. The 2009 Regulations and in particular deeming TUPE to apply

where QCS contracts are entered into is an example of gold-plating

TUPE. It creates a situation where TUPE will be deemed to apply even

where it may not have applied if the UK legislation simply implemented

the Directive (but also having the concept of a service provision change)

and went no further. It seems inconsistent to be pushing forward with an

approach the implications of which are at odds with the current political

trend.



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(C) Practical problems with the Proposal – The Proposal refers to a

number of issues having been raised during the previous consultation by

current operators in relation to TUPE, suggesting that these issues

seemed more theoretical than practical. To show more clearly the

practical consequences of applying some of the proposals, set out below

are some worked examples reflecting real-life issues that may arise.

(1) Assignment – Operator A manages its bus drivers (and support

staff) on the basis of a rota system such that employees are not

allocated to particular bus routes and regularly move between

routes. Whilst the drivers are expected to be considered

principally connected to the local services it is much less clear for

those in Operator A's head office for the North East region. The

ITA determines which of the staff at the head office for the North

East region are principally connected to the local services and

which are not, then allocates all the principally connected

employees to particular QCS contracts.

(a) Given the employees are not already assigned to a QCS

contract a consultation process will need to be

undertaken with the representatives of the affected

employees before the allocation takes place. Whilst the

allocation process anticipates the involvement of the

trade union representatives, if the affected employees

are not represented by trade unions either a separate

consultation process will need to take place with those

representatives (once they have been elected, if

necessary) which duplicates the process or these

representatives should be allowed to make

representations to the ITA as part of the allocation

process.

(b) If the allocation process takes place too far in advance of

the transfer, the allocation may be based on information

that is out of date (given Operator A's rotas change

regularly) thereby increasing the risk of the allocation

being incorrect and giving rise to liability (ie an employee

claiming against Operator A that the allocation is

incorrect). If it takes place too close to the transfer date

there is an increased risk that an affected employee

could argue that the assignment is temporary such that

their employment is not transferring by operation of

TUPE.



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(c) In respect of the staff at the head office for the North East

region, those who are determined by the ITA not to be

principally connected by virtue of not spending more than

50% of their time on local services, they could claim

against Operator A that the assignment was done

incorrectly. Whilst under the 2009 Regulations they are

not principally connected, according to the case law on

assignment in relation to TUPE, there is a wider set of

factors to consider, rather than time alone. The

employees could be assigned for the purposes of TUPE

even if they are not principally connected for the

purposes of the 2009 Regulations. This could give rise to

potential liability for Operator A notwithstanding that it

was the ITA which made the determination of whether or

not the employee was assigned/principally connected.

(2) ITA liability – The ITA identifies that 75% of Operator A's staff at

the head office for the North East region are principally

connected with the provision of the local services and allocates

them to particular QCS contracts on an ad hoc basis given the

staff are not currently assigned to particular routes, depots or

contracts. Some of Operator A's employees bring claims in the

Employment Tribunal against Operator A in relation to the

assignment/allocation process. Employees in group X who are in

the 25% who the ITA did not consider were principally connected

with the provision of the local services allege that they are

principally connected and should TUPE transfer to a new

operator. Employees in group Y were identified as principally

connected to the local services but the employees are

challenging which operator they should be transferred to (ie to

which QCS contracts they are allocated). This is because the

measures proposed by Operator B are more detrimental than

those proposed by Operator C. Liability arising from such claims

will rest with Operator A notwithstanding that the liability was

incurred by the ITA, given the ITA does not appear to be

providing indemnification to Operator A in relation to its acts or

omissions. It is worth noting that the affected employees may

bring claims in the Employment Tribunal irrespective of whether

the trade union representatives (or any other employee

representatives) were consulted on, or agreed with, the approach

taken to assignment and allocation of employees.



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(3) Compulsory redundancies – Operator A is successful in obtaining

one of the QCS contracts. Either as a result of the allocation

process or because the current operator was running an

inefficient route, Operator A considers that there are too many

employees transferring to it to run the routes in the QCS

contracts. Operator A also already has some employees who

could work on those contracts (for example, some cleaners and

engineers). Operator A would usually follow a lawful redundancy

process to reduce the additional headcount. TUPE permits such

genuine redundancies on the basis that this is an economic,

technical or organisational reason entailing changes in the

workforce. However, the Proposal prohibits compulsory

redundancies amongst the transferring employees. This would

leave Operator A, if it wanted to make compulsory redundancies,

having to make them amongst its existing workforce. This may

recreate its own unfair dismissal liability as the transferring

employees would not be pooled with the existing employees

performing the same role, as a result of the Proposal. Not only

does this prohibition encourage inefficiency within Operator A, it

increases costs unnecessarily. It is also potentially unattractive to

employees who could receive an enhanced redundancy package

upon redundancy then look for alternative employment with

another operator who has a shortage of employees. It would

seem more sensible for all not to have a prohibition on

compulsory redundancies where those were needed.

(4) Redundancies generally – Operator A has employees in the head

office for the North East region who perform services for the

wider group, such that they will not be principally connected with

the provision of the local services. At one of its depots Operator A

also has drivers who work on a service not covered by the QCS

contracts and teams providing services not covered by the

Proposal including printing. Again they will not be connected with

the provision of the local services. These employees will need to

be relocated or be made redundant as a result of the Proposal,

assuming Operator A loses access to its main depot or

headquarters, which is a reasonable assumption.

(5) Third party contractors' employees – Operator A has contracts

with third parties to provide catering services at some depots and

the head office for the North East region. They are not employed

by Operator A. It is unclear what will happen to those individuals.

If the services provided under those contracts do not transfer

then these individuals would not transfer by operation of TUPE to

a new provider of the services, potentially resulting in

redundancies.



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(6) Harmonisation of terms and conditions of employment – Operator

A wins one of the QCS contracts which means that employees

from different operators will transfer by operation of TUPE to

Operator A. Those employees have different terms and

conditions of employment creating a multi-tier workforce. Unite

the Union has already sought assurances from the ITA that,

among other things, terms and conditions within Operator A will

be 'harmonised up' (in other words, all employees will receive the

best terms from across the employee population). TUPE prohibits

harmonisation of terms and conditions, anticipating instead that

employees will transfer on their current terms and conditions of

employment. To seek to give employees more favourable terms

goes well beyond what is anticipated by TUPE and the 2009

Regulations. It would likely also be commercially unacceptable to

Operator A because:

(a) this would result in significantly increased employment

costs, potentially jeopardising the viability of the operator

model for the contract – this position would be

exacerbated if there is a surplus head count given the

ITA plans to prohibit compulsory redundancies;

(b) there is uncertainty about how much these increases

would cost around the time Operator A is bidding for the

contract, which means that it could not realistically

accurately cost into its bid these additional costs.

(D) The unusual nature of the introduction of the QCS contracts with the

current operator not being a contractor of Nexus and having no

commercial or contractual relationship with the new operator creates its

own difficulties. There is no incentive for the current operator to assist

with the smooth transition of the services and employees. New operators

will take on the obligation to pay any holiday entitlement accrued but

untaken prior to the transfer without reimbursement from the current

operator (which in the ordinary course would otherwise be the current

provider's liability). The current operator has the ability to change the

transferring employees' terms and conditions of employment prior to the

transfer without restriction. This creates uncertainty for bidders for the

QCS contract as to the total employment costs associated with the

employees transferring to them and their actual terms of employment if

their bid is successful. The current operator will also be unlikely to

release employees for route, vehicle, maintenance or systems training

either because they are unable to do so for staffing reasons (given they

will be unlikely to recruit more staff if they will not be providing the service

going forward) or because they are unwilling to do so where the current

provider will not get the benefit from the training.



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11. PENSIONS

11.1 Introduction

11.1.1 Nexus claims to acknowledge that the impact on operators from pensions "will be

wide-ranging, and will affect their operations and profitability"18

. Stagecoach is

concerned, however, that Nexus appears to be paying this critical issue only lip

service, and also that Nexus has not sought to address the material loss of pension

value that will be suffered by long serving employees who are members of defined

benefit pension schemes, such as the T&W LGPS.

11.1.2 Nexus has sought to dismiss these important issues through an alleged lack of

information. Stagecoach notes that the ITA is effectively connected with the

pensions authority for its part of the T&W LGPS and accordingly will have access

to the relevant information and expertise required to understand the real concerns

about the detrimental effect on members’ pension benefits and the impact on

funding of those benefits.

11.2 Analysis

11.2.1 Future service

(A) The Proposal states19

that employees will have similar benefits following

transfer to a new employer. The practical reality is that this is not the

case. The Quality Contracts Schemes (Pension Protection) Regulations

2009 (the 'Protection Regulations') require comparable future service

benefits only where it is reasonable to do so. Where it is "not reasonably

practicable" for the new operator to grant comparable benefits, the

obligation simply does not apply. Large existing employers (especially if

they already provide defined benefit pensions) are likely to be judged

able to provide such pension benefits. Smaller newer employers are

likely to say that they cannot reasonably provide such benefits because

the risk and volatility inherent in a defined benefit pension scheme is not

something that they can bear given the size of the pension commitments

they would be taking on relative to the smaller scale of their businesses.

These operators are therefore likely to introduce defined contribution

arrangements which tend to provide lower levels of benefits to employees

while transferring all of the risks onto the employees, and which have

lower costs for employers than defined benefit pension schemes.

(B) Nexus is silent on the criteria it will use to judge whether smaller

operators will be exempted from the requirement to offer defined benefit

pensions or whether the failure to provide these more generous pensions

would prevent a smaller operator from bidding for routes. The effect of

this is that those smaller operators who are not required to provide

defined benefit pension arrangements will have a material advantage in

costings over the larger operators, and this will drive down the quality of

pension provisions for employees.

18

Paragraph 6.10.11.19

In several places, see as an example 1.6.1 and 6.10.10(d).



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11.2.2 Loss of past service value for defined benefit members

(A) The 2009 Regulations apply only to future service benefits. They do not

maintain the value that members have built up in their existing pension

arrangements. When members transfer to their new employers, they will

cease to participate in their existing pension arrangements and their past

service benefits will become 'frozen' or 'deferred', growing only with CPI

inflation. Their deferred benefits in those arrangements will lose the

linkage to their future pay increases and will, instead, increase only with

CPI price inflation each year. This results in a loss in expected pension,

as a direct result of the QCS regime, of between [redacted] of the

expected future value of the benefits which members have built up in

their existing defined benefit schemes.

(B) Using as an example a bus driver who is a member of the T&W LGPS,

with an age of 55 and a service period and pension scheme membership

of, say, 35 years, and who plans to retire at age 65: under a QCS the

member’s accrued benefits will grow each year in accordance with the

increase in CPI (currently estimated at say 2.2%). However, following the

basis used for the LGPS pension scheme, the member's pensionable

salary would however increase by around [redacted], being an additional

of [redacted] each year more than CPI.

(C) While the impact on each employee will depend on their specific

circumstances, looking at this average member, compounded over the 10

years to his retirement, the value of the pension he had earned before the

introduction of a QCS would grow around [redacted] under QCS

proposals when compared to the current arrangements. Busways has 96

active members in the T&W LGPS who would lose out in this way if their

contracts were transferred under a QCS. Busways also has 356

members under the SGPS who could be similarly affected.

11.2.3 Funding of benefits

(A) Nexus has not recognised the effect that the piecemeal awarding of

contracts will have on the cost of providing for the past service pension

benefits that employees have built up with existing operators. The

estimated cost of providing for future pension payments is determined by

the trustees of the pension scheme who have to form an estimate about

how much of the pension payments will be met from future investment

returns and how much needs to be set aside from employer (and

employee) contributions. If the Trustees can have confidence that the

business which backs the pension scheme has a good track record and

is strong and viable into the future, then trustees can take a longer term

view on investment, with a degree of confidence that the employer should

be able to make up any investment shortfall if one should arise, and so,

resulting in lower pension costs and contributions.



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(B) If bus services are regularly retendered, when setting the pension funding

assumptions, trustees may feel inclined to make the assumption that the

business has no (dependable) future life beyond the next retender20

phase. Consequently, the investment assumptions may be more

cautious and take a shorter time horizon, leading to higher pension costs

for future benefits and a higher deficit value on existing pension liabilities.

(C) The defined benefit pension cost in the accounts of Busways is

comprised of contributions for the annual service cost of [redacted], plus

deficit contributions in respect of the T&W LGPS of [redacted].

Stagecoach estimates that annual contributions for annual service cost

for Busways’ defined benefit pensions would increase by around

[redacted] p.a. under the Proposal as employers will be required to fund

fully pension liabilities on the more expensive buy-out basis over the (7

year) life of the relevant contracts.

11.2.4 Difficulty in comparing funding

(A) The funding cost of providing for a pension scheme is made up of an

estimate for the cost of annual benefits, plus contributions for the cost of

making good any estimated shortfall relating to historic benefits. It would

be overly simplistic to say that shortfall payments (or "past service

deficits") are the responsibility of existing operators. Shortfall payments

for past service deficits can represent a material expense paid out of the

reserves of the operating companies to the pension scheme and while

they represent a real cash cost to those businesses they may not be

directly expensed in individual route costings. The shortfall payments are

estimated, and will vary markedly from valuation to valuation. As

explained above, the deficits are further affected by the view taken on the

viability of the businesses which support them. This means that pricing

pensions within the labour component of contract bids will make it

impossible to compare those labour costs and therefore the bids.

(B) Similarly, on any route, there will be a range of employees with different

pension benefits, ranging from defined contribution to private defined

benefit to T&W LGPS members. Where an existing operator covers a

wide range of routes, the differences in pension costs can be averaged

out. But where individual routes are being tendered, it will not be

possible to do this and this will result in significantly different costs for

similar routes, again making it difficult to compare bids. Where bidders

are bidding for different packages of routes, a similar effect will be found.

11.2.5 Effect of business transition on funding

(A) The transfer of routes and the effective confiscation of business from

existing operators will have a disproportionate and materially adverse

effect on the ability of operators to fund their pension schemes on an

ongoing basis. Where business is lost, not only does the cost of meeting

those pension commitments go up but the ability of the remaining

business to support those liabilities is reduced.

20

Paragraph 6.10.8 of the Proposal notes a suggested contract period of 7 years. This compares with the liabilities in defined benefit schemes which, even if accrual were terminated today, would last for another 60 years or more.



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(B) The effect is also influenced by pension legislation. Pension legislation

(section 75 Pensions Act 1995) requires full funding (on the conservative

'buy out' basis) whenever an employer ceases to have any employees in

a defined benefit pension scheme. Similarly, LGPS administering

authorities are likely to seek full funding on a de-risked basis more akin to

a buy-out basis in respect of the pension liabilities for those employees

who are transferred to other employers. The normal 'ongoing' funding

basis seeks to spread the estimated cost of pension benefits over a

period of years reflecting the ongoing contributions and employer support

over a long period of time; the ability to do this is lost if the section 75

debt is triggered. The effect of TUPE-ing employees to another employer

as a result of the contract process is that the number of employees in an

existing employer will be reduced and may eventually result in the

triggering of payments for a section 75 debt or de-risking basis.

(C) The Proposal states that new operators are not required to take

responsibility for any deficits under existing operators' schemes21

. This is

misguided and does not respect the long term relationship between the

members, the pension scheme and the role of a viable strong employer in

supporting the provision of pension benefits over a long timescale.

Whether on the initial introduction of a QCS or on subsequent re-bidding

of routes, if deficits are left behind with existing operators and so are

removed from the business which has supported them, there is increased

likelihood that deficits will not be funded and ultimately members will not

receive the full pension benefit they had expected.

(D) Nexus blithely suggests22

that existing operators will simply "manage their

pension scheme liabilities". This does not reflect what is commercially

acceptable, ignores the magnitude of what it is suggesting and does not

appreciate the scale of potential pension shortfalls that would arise to be

paid under the more expensive section 75 or de-risking basis.

21

Proposal, 4.10.2(b)22

Proposal, 6.10.10(d)



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(E) Nexus seeks to compare the Proposal with how it considers operators

would manage risks elsewhere in the country but without offering any

insight or knowledge as to how operators do this. There is no sensible

comparator to what is proposed under a QCS. In a commercial (non-

regulated) environment, when an operator disposes of a business, it

normally transfers the pension liabilities that relate to and are supported

by that business. Similarly when acquiring businesses, it is common to

transfer the relevant pension obligations with the business. Stagecoach,

for example, has successfully completed acquisitions and disposals on

this basis several times in recent years, such as on its acquisition of

Traction Group in 2005 and the disposal and the re-acquisition of the

East London Bus Group in 2005 and 2010 respectively. In each case the

pension obligations were transferred with the businesses. Indeed, when

Stagecoach Group acquired Busways Travels Services in 1994 the T&W

LGPS pension liabilities where treated as an integral part of the business

acquired, with funding to be maintained on an ongoing basis. It is also of

note that the liabilities had previously been transferred into the company

by the local authority in 1989 as part of the de-regulation arrangements.

If, in 1989 or 1994, those pension liabilities would have been treated in

the same way as now proposed under a QCS, then this would have

triggered additional de-risking contributions in the region of [redacted].

(F) If Defined Benefit pension commitments are to be maintained then the

only sensible way to deal with them is that they should follow the

business which gave rise to and which supports them, with funding

maintained on an ongoing long term basis.

(G) It should be noted that in other contract based models, such as in

London, it is only defined contribution pension arrangements that are

protected when contracts or routes transfer between different employer

groups.

(H) Stagecoach considers that the Pensions Regulator would also encourage

this approach as it prevents pension schemes being left with inadequate

support from the businesses which sponsor them and becoming a liability

of the Pension Protection Fund. The opportunity is simply not there to do

this with QCS because there is no relationship between existing and

future operators. The only way to accomplish a transfer of liabilities under

a QCS is if it is built into the contract tender requirements.

(I) Busways Travel Services supports participation by its employees in two

defined benefit pension schemes for its employees:

(1) The T&W LGPS, with 96 active members and around 950

deferred or pension members; and

(2) The SGPS, with 356 active members and around 1,900 deferred

and pensioner members.

(J) [redacted]



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(K) Under the Proposal, as well as employees losing a major part of their

pension benefits, as described in paragraph 11.2.5 above, it is possible

that the administering authority will seek immediate funding on a more

expensive de-risked or buy-out basis. Stagecoach would estimate that

this would increase the funding deficit from [redacted] which the

Administering Authority could seek to impose on the Company as its lost

parts of its business or if the business become less profitable under the

QCS proposals.

(L) [redacted]

11.3 Pensions: Conclusion

11.3.1 As set out the QCS pension protection provisions are materially deficient and are

likely to have a material detrimental effect both on employees and employers:

(A) Members with defined benefit pension benefits can expect to lose

between [redacted] of the value of their current pension benefits, and for

an average member of the T&W LGPS for example his defined pension

benefits would [redacted] under the QCS proposals;

(B) Employees transferring to smaller employers are likely to lose their

entitlement to on-going defined benefit pensions, being replaced with

lower value higher risk defined contribution arrangements.

(C) The annual contribution cost of providing defined benefit pension

arrangements will materially increase as employers will be required to

fund such benefits over the term of the QCS contracts, rather than on the

current on-going basis. For the current Busways employees Stagecoach

estimates that the increased annual contributions would be in the region

of [redacted].

(D) Following the transfer of routes under the Proposal, Trustees and

Administering Authorities of pension schemes would be required to or

may be inclined to seek immediate payment under the very expensive

buy-out like level of funding for past service pension commitments . In

the terms of Busways, it is estimated that this could trigger funding

payments of around [redacted].

11.3.2 Nexus has failed to give appropriate consideration to this deficiency in the Proposal

and, in particular, in relation to Criterion E (see further section 8 above).

11.3.3 As to how Nexus might remedy this deficiency, please see Stagecoach's

commercial response paper (Annex A).

12. CONCLUSION

12.1.1 It is plain, therefore, that the Proposal is manifestly flawed. The Proposal deviates

substantially and, in some cases, entirely from the Guidance. The resulting

distorted presentation of information has prevented consultees from carrying out an

accurate assessment of the Proposal with the result that the consultation process

is manifestly flawed. In order to comply with its obligations as a public authority,

Nexus must reconsider its analysis of the Public Interest Criteria before making a

recommendation to the QCS Board.



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12.1.2 Further, Nexus has failed entirely to calculate the scale of the detriment to

operators as a result of the implementation of a QCS in Tyne and Wear or to

compare it with the benefits to the users of local bus services in order to form a

view on proportionality. It is irrational and inappropriate for Nexus to recommend

the Proposal to the QCS Board without undertaking this fundamental analysis.

12.1.3 A QCS in Tyne and Wear would not be appropriate, rational or justified. The

Proposal would not deliver value for money and, on Oxera's analysis, is not

affordable.

12.1.4 The proposal does not fulfil the mandatory statutory criteria in the Act, all of which

must be met before a QCS can be made. A QCS is more likely to reduce, rather

than to increase, patronage and to decrease benefits to passengers. It would not

deliver the local transport policy in a way that is economic, efficient or effective.

12.1.5 Overall the QCS would be an entirely disproportionate measure which is not

necessary in Tyne and Wear. The benefits of a QCS are significantly outweighed

by the adverse impact that the Proposal would have on operators.

12.1.6 The VPA would be more appropriate. Given the availability of the VPA as an

alternative course of action, which provides superior or equivalent benefits to the

QCS and has significantly less adverse effects on operators than the QCS it would

be unreasonable, inappropriate and irrational for Nexus to recommend that the ITA

implement the Proposal.

Herbert Smith Freehills LLP

22 November 2013

stagecoach group plc response to consultation: 22 november

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