The introduction of the Bus Services Act 2025 brought the possibility that Local Transport Authorities (LTAs) could choose to establish a new Local Authority Bus Company (a LABCo). The Department for Transport has recently published guidance on establishing a new LABCo to support LTAs considering this. The setting up of a new LABCo presents opportunities for an LTA, but also brings risk – and just because something is now permitted (much like bus franchising itself), it doesn’t mean that it’s right for every LTA.
The DfT guidance is deliberately open on what a LABCo can look like. It is equally clear that nobody has to build one. A LABCo can either be built from scratch, or established by acquiring an existing operator. This is likely to be operationally easier, providing ready access to staff, depots, vehicles and customer relationships – but is likely to come with a higher upfront cost than setting up a new company.
The real question is whether choosing to run buses helps an LTA deliver better services for their residents, or drive improvements across their region.
“There is no requirement for an LA to establish a LABCo.”
- Establishing a new local authority bus company, DfT
An expanding local authority toolkit
The permission to set up a LABCo adds to the tools available to an LTA. Importantly, a LABCo does not offer a solution by itself – it would need to be established either:
- as part of a franchising scheme
- following the establishment of a franchising scheme; or
- under an enhanced partnership (EP).
Introducing bus franchising can grant an LTA control of routes, timetables, fares and standards, but it is a heavyweight (and involved!) statutory process. An enhanced partnership is lighter but is reliant on engaged private operators motivated to continue to work with the LTA. A LABCo has several potential uses: it can hold service levels and brand identity steady through a transition into franchising, then bid for franchised routes once the scheme is live. Where requirements are met, it can take direct awards under the Teckal exemption and act as an operator of last resort on routes the market will not sustain. It can also be used within an EP if an LTA can be satisfied that it will be of benefit to the passengers by improving the quality of bus services.
The key question is therefore: What is the point of the LABCo?
The LTA should be able to articulate what specific value a LABCo can offer over the status quo (or reform without the inclusion of a LABCo). This should also include appropriate consideration of the key risks that setting up a LABCo presents.
Risks of setting up a LABCo
Financial sustainability
The establishment of a LABCo will include requirement for potential significant financial resources – as a minimum the company will need to be set-up as a self-sustaining entity. If this set-up is occurring during a wider franchising reform programme, this can add further significant expense to bus reform (and could still result in a LABCo that is ultimately unsuccessful in being awarded franchises.)
Response from existing commercial operators
It is entirely possible (or likely!) that existing operators would see the set-up of a LABCo in their area as an existential risk. They might therefore be expected to react with aggressive business practices in order to seek to drive the LABCo out of business. In any operator area, existing operators are likely to have an institutional, business, and local level of knowledge that significantly outstrips anything a new LABCo can present – particularly any newly established LABCo – and can be expected to use this to their advantage. This risk can best be mitigated by establishing the LABCo within a franchised network, as franchising removes the commercial competition for routes and passengers that gives incumbent operators both the means and the motive to retaliate against a new entrant.
Risk of challenge
The guidance notes the possibility of making use of a Teckal exemption to directly award contracts to a LABCo, sidestepping a broader procurement process. Any such decisions will need to be robustly considered (and appropriate legal advice received), as these could be subject to challenge, which could be costly (and embarrassing) should the legality of any such awards be successfully challenged.
Risk of failure
Setting up a LABCo brings with it a risk of failure to consider. If a LABCo is stood up, operates and later fails, the routes it ran are likely to see patronage decline in the meantime. This will serve to make the market less attractive to commercial operators and increase the cost and difficulty of securing a replacement operator to step in to operate socially essential routes.
Expertise/capability
The expertise required to operate a bus company is significantly different from that required in local government. This spans a wide range of specialist disciplines, including:
- Engineering and fleet maintenance
- Statutory transport manager(s)
- Fleet insurance
- Scheduling and rostering
- Union negotiations
- Fares and ticketing strategy
These requirements are in addition to the commercial and governance capability needed to run the company itself. The LTA should consider whether it has, or can buy in, appropriate expertise that can operate the LABCo. This is important whether a new LABCo is established or an existing operation is purchased – unless key leadership roles are secured, institutional knowledge could rapidly be lost.
Additional reform considerations
The guidance notes that where an LTA is exploring franchising, and may consider including a LABCo in future, it may wish to include it in its franchising assessment, but is under no statutory obligation to do so. However, it also notes that if the LTA commenced any part of the statutory franchising process, and now wishes to consider establishing a LABCo as part of its franchising plan, then it should re-start the assessment, with the LABCo forming part of the business case. This could add significant time and cost to an LTA’s franchising journey.
Political headwinds
In setting up a LABCo, the LTA will want certainty that there is support from council members and wider political leaders. The LABCo will also want to be established to be resilient in future – a LABCo that could be disbanded on a change in political leadership cannot provide long term certainty for the delivery of change.
Asset (and liability) ownership
Depots, garages and bus fleets are significant capital assets, and will ultimately sit on the LTA’s balance sheet. Not only could this come with significant liability implications (depending on how assets are funded), if the LABCo struggles, this could represent significant capital risk for the LTA, with fewer options to walk away than a private investor would have. Buying an existing operator could bring vehicles, maintenance liabilities and staff across together, so due diligence on asset condition matters as much as due diligence on the numbers, and the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) brings consultation and industrial relations work with it.
Benefits of setting up a LABCo
Control
One of the key benefits of a LABCo is it gives an LTA a delivery vehicle it fully controls, that can operate in a commercial environment, that can still be folded into a franchising scheme later. This presents some opportunities for an LTA to direct an operator to act in a specific manner. This could allow, for example, an LTA to establish a LABCo to run rural transport routes where there is genuine market failure and no competition.
Consistent service
A LABCo can act as a ‘bridge’ into franchising, holding service levels and brand continuity, and then bidding for franchised routes once a scheme goes live.
Potential to reduce procurement costs
A LABCo can be utilised, through Teckal exemptions, as an operator of last resort to be direct awarded routes the commercial market won’t sustain.
Access to competitive financing
A LABCo, as a government entity, can access financing routes such as the Public Works Loan Board (PWLB) or the National Wealth Fund, sources which can be both cheaper and more readily accessed than private investment alone.
Five things need to stand up to scrutiny before an LTA commits to setting up a LABCo
- the specific purpose a LABCo will serve
- funding sufficient to establish and run it on a self-sustaining basis;
- stable, robust and transparent governance;
- commercial, financial and procurement capability; and
- clear support from members and wider political leadership.
- Strategic considerations, DfT LABCo guidance
Practical implications of setting up a LABCo
For most LTAs the opening consideration is “what is the outcome we are trying to achieve, and which of the tools available to us gets us there with the least risk we cannot carry”. The answer may include a LABCo – but it shouldn’t be assumed that it does so. In our experience, local authorities (just as others do), can suffer from optimism bias in delivering new projects, underestimating the costs and complexities of delivering a new service for which it has previous limited experience, and also overestimating the potential benefits that can be delivered – this is why thorough, frank and detailed consideration of the benefits and risks of establishing a LABCo should be undertaken before further action is taken.
What should you do next?
Before committing resource to a business case, an LTA should test its answer against the five-point scrutiny checklist above, and set out clearly what a LABCo would achieve that reform without one could not.
Speak to Neil Peckett or your usual Grant Thornton contact to talk it through.