Down the road to riches: The stock market flotation of two more bus companies for big profits this summer is certain to revive the controversy over privatising local services. William Kay and Neil Thapar report

THE argument over the privatisation of Britain's bus services is set to catch light again this summer, as two more bus companies float on the stock market and the Government sells the 10 London bus operators.

Appetites were whetted on Friday, when NatWest Ventures announced a pounds 25m employee buyout of Greater Manchester Buses South. On past form, the new shareholders should multiply their investment several times over within a few years.

As the profit motive for running buses becomes more widely accepted, so the managements are growing bolder.

Only last November, Trevor Smallwood, executive chairman of Badgerline, was eulogising about what 'efficient, cost-effective and environmentally friendly' buses could do to relieve traffic congestion.

But the latest stock market arrivals are more hard-nosed. Martin Ballinger, managing director of Go-Ahead Group from Gateshead, said: 'We have a very focused urban strategy. We have not acquired companies that rumble around the country lanes.

'In a way, we are cherry- picking because we can't carry on with the motor car in city centres for ever. The motor car is going to have to be severely constrained, and buses are the obvious alternative.'

Such views justify the fears raised when privatisation was heralded by the 1985 Transport Act, that operators would go for the intensive city-centre market at the expense of remote country areas - already extensively abandoned by the railways for similar reasons.

While Badgerline maintains a mixture of city and country routes, Mr Smallwood concedes Go-Ahead's logic.

He said: 'I would not disagree that the more important theme is related to urban operations. Nevertheless, we urge a sensible approach to rural routes.

'Whilst they may not be perceived as having the growth prospects of urban routes, they can be very profitable and therefore have a long-term future in our group.'

Brian Wilson, the Labour Party's transport spokesman, commented: 'The industry's privatisation is leading to deeply monopolistic activities, and the ill-gotten wealth initially created for a few people is now being multiplied by takeovers and a squeeze on local operators.'

Since they were floated less than a year ago, Stagecoach shares have jumped from 112p to 177p, increasing the company's equity by pounds 86m. Based in Perth, Stagecoach has used its quotation to buy other local bus companies round the country.

So far, however, that tactic has not had the same effect on Badgerline. Even though it has bought two companies this year for a total of pounds 61m, the group's stock market value is only pounds 7m higher than the pounds 99m at which it started four months ago.

GRT Holdings, the Aberdeen-based bus operator, will be hoping for better luck. Bought out for pounds 5m by its 640 managers and staff five years ago, it is poised for a stock market flotation that is expected to value it at about pounds 40m.

Moir Lockhead, chairman, and fellow directors, who initially invested about pounds 150,000 of their own money in the buyout, will become paper millionaires. They will own about 25 per cent of the business at launch. The workforce, which has grown to about 1,800, is expected to own about 30 per cent.

At the time of the buyout, the staff were not asked to stump up any cash but have seen the value of the shares soar about tenfold to around 140p - the last price at which they changed hands through the company's internal market.

The company was set up to run Grampian Regional Council's bus operations after the 1985 Transport Act was brought in to revolutionise Britain's local and national bus services.

However, privatisation has so far failed to halt a long-term decline in the number of people using public transport in general and buses in particular. According to the Department of Transport, the number of local bus journeys per person per year has fallen from 116 in 1975/6 to 79 in 1989/91.

Prior to the Act, local services were regulated by Traffic Commissioners and by local authorities, which also operated the services.

The first key impact of the Act was to completely deregulate local bus services. This enabled anyone to set up a service by meeting simple regulatory and safety requirements and giving 42 days' notice. The move was intended to create competition in the hope that entrepreneurial flair would help curb fare increases and/or improve services.

At the same time, all local authority services were required to become limited companies, and unprofitable though socially desirable routes were put out to competitive tendering.

The winners would be the company asking for the lowest subsidy on each of these unattractive routes.

The Act also led to the privatisation of the National coach companies, National Express and its Scottish equivalent, followed by the sale of local services.

The London bus auction, due to be completed by the end of this year, will throw a fresh spotlight on the urban versus country debate.

When he announced the sale Steven Norris, minister for transport in London, said ambiguously: 'The private sector has transformed many industries. I am sure the privatisation of the London Buses will prove to be a similar success.'

Shareholders in the two quoted bus companies, plus the two about to float - Go-Ahead and GRT Holdings - will be looking to their managements to snap up one or more of the London operations and apply tested techniques of cutting costs and improving revenue.

Badgerline already has a few London routes through its Thamesway subsidiary.

'To halt the decline in passenger miles,' said Mr Smallwood, 'we have to produce a mixture of reliability, higher bus quality and buses being given priority over cars. We have to make it more attractive for the business traveller to switch to buses with better seating and a more futuristic image. We have got to get down to understanding people's basic requirements.'

So it will be a combination of stick and carrot: better buses, but stiff penalties for using cars in town.

As an increasing number of bus companies head for the stock market at values far in excess of the prices set at time of their buyouts, a fresh political row is breaking out over the sale of public services at knockdown prices.

Many fear that the government's shake-up of the industry is leading to a massive accumulation of Britain's profitable urban routes by a few large companies.

Critics believe the big companies are rapidly gobbling up small local operators and their growing power will eventually lead to a carve up of routes between them - as appears to have happened in Leicester. That would not only drive out serious competition but also expose the public to possible abuse of monopoly power.

Mr Wilson said: 'Bus services, like many other public assets, have been sold off at scandalously low prices.'

Although Mr Lockhead, GRT's chairman, acknowledges that fares have continued to rise above inflation he refutes Mr Wilson's criticisms.

'Bus fares have gone up largely because of declining passenger volumes,' he claimed, 'and as we recover volumes the position on fares will reverse.

'Deregulation has allowed us to try innovations, and entrepreneurial flair has given passengers a better quality service while reducing overall subsidies.

'The entry costs are very low,' he pointed out. 'You can buy a second-hand bus and start up without much difficulty. We would like tougher enforcement of the registration of licence operators.'

(Photograph omitted)