The QCS Board review process involved a thorough and detailed debate of the merits of Nexus’ QCS proposal. Two of the public interest tests in the Transport Act put economics at the heart of the QCS Board’s deliberations. These were the requirements that the scheme provided ‘value for money’ (criterion D); and that it imposed adverse effects on operators only to the extent that these were ‘proportionate’ to the benefits created (criterion E). Oxera witnesses gave their views on the economics of the case at the QCS Board hearings.
One fundamental economic challenge was the question of how a QCS proposal that left the network unchanged would generate the benefits needed to justify the costs and disruption (criterion D) and adverse operator impacts (criterion E). The transfer of a portion of operating margin from the private sector to the public sector was central to Nexus’ financial plans—but such transfers do not create economic value in themselves. This issue was identified by Oxera at the statutory consultation phase of the QCS, and ultimately conceded by Nexus.
[17]
More broadly, any QCS needs to be affordable. The business model envisioned by Nexus was not risk-free, and financial viability depended on many factors outside the NECA’s control—such as macroeconomic conditions and their impact on demand levels, and cost inflation (e.g. the price of fuel)—that are passed on through higher contract prices. Significantly, Nexus’ proposal made firm long-term commitments regarding fares and service levels based on uncertain revenue flows, thereby opening up a significant risk of financial deficit to the local authority.
Notwithstanding these issues, Nexus asserted that the scheme offered value for money (i.e. that it met criterion D), largely due to the impact of ‘quality factors’ such as improved ticketing. While these were unrelated to ‘hard’ factors, such as the frequency, cost or speed of services, quality factors were assumed to create hundreds of millions of pounds’ worth of passenger benefits for relatively little financial cost. However, the QCS Board found multiple shortcomings in Nexus’ valuation of these measures. For example, the Board found that it was not reasonable to assume that concessionary passengers who did not purchase tickets would benefit from improvements to those tickets.
[18]
These concerns, among others, led the QCS Board to conclude that criteria D and E of the public interest tests were not met.
[19] Moreover, the QCS Board also found that the errors made in the economic analysis (such as those described above) should have been corrected and re-consulted upon by Nexus; and that by not doing so it may have misled consultees