REVIEW OF THE REGULATION OF ROAD FREIGHT IN THE UK.* by G. Tweddle and P.J. Mackie**

DOCUMENTO DE TRABAJO 95-05

January 1994.

This study was sponsored by the Bank of Spain. The views expressed are those of the authors, and do not necessarily reflect the views or approval of the sponsors.

Institute for transport studies, the University of Leeds.

Abstract

In this paper, we review the historical development of UK road transport regulations before and after 1968. Then we examine the development of the UK freight transport industry in relation to factors such as the changing economic structure, technological progress, the growth of the motorway system and the development of the physical distribution industry. Finally we provide an assessment of road transport regulation in the UK. Though the UK system for regulating road freight transport has some weaknesses, it has allowed operators to provide the country with a high quality service at competitive rates. By minimising restrictions on the number and use of vehicles, operators have the flexibility to make most effective use of them, and maximise their productivity. The main objective of the Operator Licensing system is to promote public safety and environmental quality and most firms comply with these objectives. Weaknesses can be found in controlling a small but persistent number of operators who flout the system, and it is important to control them, otherwise the general standard will fall as other operators attempt to compete. The original purposes of road transport regulations related to the efficiency of the industry, public safety, and protection of the railways. Our judgement is that deregulation has enhanced the efficiency of the industry. In relation to public safety, the majority of the industry acts responsibly, though a higher level of enforcement activity and penalties for offenders might be justified. Whether in a regulated or a deregulated market, this will always be an issue. In relation to the railways, the economic structure and geography of Britain mean that road/rail freight competition is relatively marginal compared with large European countries such as France, Germany and perhaps Spain. In conclusion, therefore, it can be said that deregulation of the road transport industry has worked well and that a return to quantity or price regulation in Britain is at present inconceivable.

JEL Codes, 615, 619

Contents

1. Introduction 2. Historical development of UK regulations: 1927-1968 3. The operator licensing system 3.1 Criteria for issue of a licence 3.2 Review of operator licensing 4. The development of the freight transport industry of the UK 4.1 Changes in the economic structure of the UK 4.2 The growth of national markets 4.3 Technological improvements in vehicle performance and capacity 4.4 Development of the road network 4.5 Improvements in vehicle operation and distribution systems 5. Structure and performance of the road freight industry 6. International comparisons 7. Regulation - an assessment 7.1 Economic regulation 7.2 Safety regulation 7.3 Environmental regulation 7.4 Enforcement of the regulations 8. Conclusion References

1. Introduction

Under the 1968 Transport Act, road freight transport in Great Britain was effectively deregulated. Since 1970, there has been no quantitative control of entry to or exit from the market, and there has never been any specific control over freight transport tariffs. There is, however, quality control both over new entrants and existing firms in the industry. The purpose of quality control is to protect public safety and the environment; the economic performance of this industry is not regarded as an appropriate subject for regulation.

In this paper, we review the historical development of UK road transport regulations before and after 1968. Then we examine the development of the UK freight transport industry in relation to factors such as the changing economic structure, technological progress, the growth of the motorway system and the development of the physical distribution industry. Finally we provide an assessment of road transport regulation in the UK.

2. Historical development of UK regulations: 1927-1968

In the UK, as was the case in most industrialised countries, road freight transport expanded rapidly following the end of the 1914-18 war. Road vehicle technology improved rapidly both during and after the war, and large numbers of military personnel had learnt to drive and maintain the vehicles.

Given the availability of cheap army lorries, and large scale unemployment during the 1920's, many saw the purchase of a vehicle as a way of entering the road haulage industry, thereby solving their employment problem. However, competition was fierce and bankruptcies frequent. The industry was thought to be unstable, though much later (and with hindsight), it was felt that the dangers of allegedly irresponsible operators may have been more apparent than real and that users had been getting a reliable service from road hauliers (Geddes 1965).

Initially the road vehicle replaced the horse and cart for local deliveries, many of which were from rail goods depots. As the decade progressed long distance movement by road became commonplace, some companies operating from more than one depot and offering regular services between regions, such as London and Glasgow. The rapid expansion of road haulage had an effect on the then privately owned railway companies. Rail tariffs were based on the value of the goods being transported (subject to some discounts for volume) and not on the costs of the operation. Thus, the tariff for moving a ton of coal between two places would be much lower than for a ton of merchandise or tinned foodstuffs. Regulation was called for in many industrialised countries (Bayliss 1988).

Road transport on the other hand, based its rates on cost. As a result it tended not only to win traffic from the railways, but to take a greater proportion of the most highly rated and profitable traffic. The effects of the lorry combined with road passenger transport led to large scale closure of rail branch lines during the 1930's.

Regulation of the road freight industry was first proposed by the 1928 Royal Commission on Transport. They recommended that:

a) Lorries over 4 (imperial) tons unladen weight should pay progressively more duty for each successive extra ton weight, to discourage the use of heavy vehicles and to protect the railways from further loss of traffic in the national interest.

b) Road haulage should be licensed to put the industry on an organised basis and as a prerequisite to any attempt to co-ordinate transport generally.

c) The fitness of the vehicle concerned and the wages and conditions of employees of an applicant for a licence should be considered by the issuing authorities.

Nothing further was done until the Salter Conference in 1932 examined these and other issues, and recommended methods of applying a system of regulations.

Regulation came under the 1933 Road and Rail Traffic Act; hauliers were issued with one of five types of licence, existing operators being granted 'grandfather rights':

a) The public carrier's or A licence, which allowed authorised vehicle to carry for hire or reward for a period of two years. Such vehicles could operate anywhere, carrying any suitable traffic.

b) Contract A licences entitled the operator to use vehicles on a contract exclusively for one customer for a period of at least one year and for the period of the contract only.

c) The limited carriers, or B licence allowed the use of vehicles for the carriage of either the operators own goods or carriage for hire or reward, but with restriction of the commodities carried and the area of operation. The licence was valid for one year.

d) Own account operators were granted C licences, valid for three years, which enabled them to carry their own goods as required.

Small numbers of vehicles were granted 'C hiring' or farmers F licence which allowed restricted use for some purposes. The numbers of licence holders of various categories, and their expansion are shown in Table 1. Licences were granted by the Area Traffic Commissioners which had been set up under the 1930 Road Traffic Act. The latter Act placed restrictions on drivers hours. Unlike some other countries, no specific control of road transport rates or prices such as a fixed or bracket rate tariff was introduced.

The system introduced by the 1933 Act remained in place, with some modifications, until 1968. During this period the number of goods vehicles, and the number of operators expanded. However, the own account sector was consistently the most important (supported by contract A holders), and this is an early indication that the users of freight transport services demand a high quality of service; low rates were never the main priority for using road transport.

It is clear that in general consignors want the freedom to choose the quality of service for various commodities, in many cases this will vary by customer or destination. More recent evidence shows that goods within the production chain may require very high levels of reliability in terms of on time delivery, especially where 'just in time' (jit) and supply chain management techniques are in place. On the other hand the movement of finished products to a warehouse for medium or long term storage may demand a lower level of service, even though the finished product may be of considerably greater value (Fowkes et al 1991).

Where consignors feel transport operators, whether road or rail, cannot provide the desired level of service, then they may respond by providing their own account services. In general, in countries whose economies comprise a large proportion of high value consumer goods tend to demand relatively high quality freight services. Where road freight is regulated, then the own account road transport sector tends to be larger. Statistics for 1989 show that UK own account operations carried 41% of the tonnes lifted by lorries, while in the Netherlands the figure was 37%. In Germany and France the figure was 58% and 61% respectively. In Spain it was only 20% (Eurostat 1991)

Table 1: Number of Carriers Licence Holders (,000)

Source: Foster (1978), Table 2.1. (a) A contract licences are included in this paper.

During the Second World War, following a period of fuel rationing, road freight transport came under the auspices of the Road Haulage Organisation. Although licensing was re-introduced in 1946 it was rapidly followed by nationalisation under the 1947 Transport Act. Under this, the Road Haulage Executive bought about half of the 81,000 A licensed vehicle, those engaged in long distance hire and reward haulage (defined as that over 40 miles) into public ownership under the British Transport

Commission (BTC) (Bayliss 1988). However, C licensed vehicles were not affected, and continued to grow in number, while some A and B licensed vehicles continued to operate though restricted to 25 miles from base, except with permit.

Under the 1953 Transport Act the BTC was required to sell off the nationally owned public haulage fleet in transport units. These were granted five year A licences making it possible for firms to enter the industry with substantial fleets, though no single purchaser was allowed to buy more than 50 vehicles (Bayliss 1988). The Act also made some alterations to the licensing system. By far the most important was that the grounds for granting or refusing a licence were amended to give primacy of interest to those requiring transport facilities rather than those providing them. This was the first time the consumers interest had been put before that of the producer's, or the railway's. This represented a significant relaxation of regulation which makes it more difficult to judge the impact of full deregulation in 1968.

The licensing system was virtually unaltered by the 1960 Road Traffic Act, or the 1962 Transport Act. The latter did form the remaining publicly owned haulage fleets into the Transport Holding Company which was eventually privatised in 1980, but now as the National Freight Consortium remains one of the UK's largest transport companies with fifteen and an half thousand vehicles (Davies 1988).

The working of the licensing system was finally reviewed by the Geddes Committee which reported to Government in 1965. Among the most important considerations at that time were:

- the effect of licensing on the efficiency of the industry. By restricting the types of goods carried, destinations served, and ability of own account operators to carry return loads for hire or reward, the licensing system increased empty running and restricted physical productivity

the effect of licensing on the railways. Because of free entry to the own account section of the market and the railways commercial freedom after 1962 to quote competitively for freight traffic, the advantage of licensing for the railways was felt to be much weaker than in earlier times

- the effect of licensing on safety. The licensing system was felt to deal inadequately with the safety performance of operators and to require reform for that reason.

- the bureaucratic and legal costs of the licensing, which were large relative to the benefits the system produced.

The most important recommendation made by Geddes was:

"the abolition of all restrictions on the capacity of the road haulage industry and on the work for which a lorry might be used."

This would allow, for example, own account vehicles to be used for hire and reward if their operators so desired, even to mix their own goods with those of others on the same vehicle. The Committee concluded unequivocally that safety should be the only objective of licensing.

3. The operator licensing system

Many of the recommendations of the Geddes Committee were incorporated into the 1968 Transport Act, including the liberalisation of the licensing system. Introduced by a socialist Government, it proved to be the first in a long series of legislation which deregulated most forms of transport, and other industries, in the UK.

In essence the licensing system is that any person using a vehicle (not exempted) for the carriage of goods is required to hold an operators licence (Ogden 1980). A number of reviews of the system were to be undertaken, the most important being in 1978 by the Foster Committee, plus the Price Commission investigation of road transport.

3.1 Criteria for issue of a licence

An applicant for an Operators Licence must be able to satisfy the Area Licensing Authority of the Traffic Commissioners that (Foster 1978):

a) He is a fit person to hold a Licence, having regard to his activities in carrying on a business in course of which any vehicles are operated, and to his convictions for certain traffic or other offenses relating to the operation of goods vehicles.

b) He will provide satisfactory arrangements for securing that provisions of the Transport Act 1968 relating to the limits on drivers hours (as amended) will be complied with.

c) He will provide satisfactory arrangements for securing his vehicles will not be overloaded.

d) He will provide satisfactory facilities and arrangements for maintaining his vehicles in a fit and serviceable condition and his operating centre will be a suitable one.

e) The provision of such facilities and arrangements will not be prejudiced by his having insufficient resources.

An applicant for a standard licence must also satisfy the Licensing Authority that he is either professionally competent himself or employs a transport manager who is (ie holds a Certificate of Professional Competence, CPC). A restricted licence may be granted without this to a small own account operator who does not intend to ply for hire or reward. EEC legislation resulted in the addition of an international licence in 1973.

Operators Licences came into effect in 1970. In that year there were 120,300 licence holders, but as some firms held several licences in more than one traffic area, the number of actual operators was lower. In addition, some large transport companies undertake business under a number of different identities as well as subsidiaries and joint companies. Given that such companies also own the largest fleets, control of the road freight industry is in far fewer hands than the number of operators licences would suggest.

The number of Operator Licence holders, and the numbers of vehicles increased over the years. However, fluctuations in the pattern are obvious (Table 2) probably related to economic cycles.

Table 2: Percentage of Licensed Operations and Vehicles by Fleet Size FEDEA - D.T. 95-05 by G. Tweddle and P.J. Mackie

3.2 Review of operator licensing

Ten years after its introduction the system was reviewed (Foster 1978). The Committee found that deregulation had worked reasonably well. Most parts of the industry were fairly or very competitive, but instability and bankruptcies were not a serious problem. In the most competitive sections of the market such as tipping and general haulage, financial returns were very low, but in the sections requiring a higher level of organisation and quality, returns were more acceptable. Own account operators in general chose not to engage in a significant amount of hire and reward work for others. Overall, the Committee concluded that the operator licensing system should continue and this was accepted by Government.

The Committee was however, less satisfied that the safety objectives of operator licensing were being fully achieved, and made a number of recommendations particularly to improve the level and types of enforcement activity through roadside checks on vehicles, and to include exempt heavy vehicles in the licensing system on safety grounds. Improving the allocation of track costs to various types of goods vehicles would encourage operators to use vehicles which were more friendly to the infrastructure, and improve inter modal competition.

Reservations about the system mainly concentrated on the availability of information about the licences and the activities of the holders. It should be noted that a separate licence is required for each operating centre. Because of the way in which licences are recorded it has proved difficult to determine the number of genuine entrants and exits from the industry, as many have moved location or changed the company name.

There is no statistical evidence that the UK Operator Licensing system produces a safer road freight transport industry. The accident involvement rates have been falling in many countries due mainly to improved vehicles and better roads. In any case, vehicle defects are an attributable cause of a small proportion of accidents. However, the Operators Licensing system does provide a hurdle requiring an applicant to demonstrate that his maintenance arrangements and understanding of the regulations are adequate.

4. The development of the freight transport industry of the UK

Over the last thirty years, the road freight transport industry was developed and changed enormously. Although deregulation has played a facilitating role; change has really been triggered by external technological and market developments. The most important of these are:-

i) changes in the economic structure

ii) the growth of national markets

iii) technological improvements in vehicle performance and capacity

iv) the development of a road network

v) improvements in the methods of vehicle operation and the systems used to distribute goods

4.1 Changes in the economic structure of the UK

Since 1945 the economic structure of the UK, like most industrialised countries, has changed radically. The most significant effect has been an absolute decline in many basic industries, while the production and consumption of higher value products, notably consumer goods, expanded rapidly. This change is a result of an improved standard of living, which prompts greater levels of consumption and offers a wider choice of goods, produced and delivered cost effectively.

The effects of change have varied within various sectors of industry, and this had differential effects on the transport industry. The production of indigenous coal has seen a catastrophic decline, both road and rail suffering a large fall in demand. Though coal is imported, this is mainly for steel production and generates less demand for inland transport because many of the remaining production sites are close to the port of importation (Table 3).

Table 3: Change in Transport Demand 1962-91

Source: Transport Statistics Great Britain, various years

Steel making has been integrated at a few sites, which minimises the movement of raw steel products, such as billets, while the direct deliveries of metal products such as coil and sections increase. This has resulted in a decline in the carriage of metals by rail while road carriage of metal products increases. A similar pattern has occurred in the production of chemicals and fertilisers resulting in rail loosing over half of this type of traffic between 1964 and 1985.

While the overall demand for foodstuffs has not increased greatly in terms of tonnes lifted, the distances moved have increased significantly. This is a result of the combination of a demand for increased choice, and the expansion of the food processing and packaging industry.

The performance of the construction industries have in general reflected the economic cycles. However, the demand for transport of materials, has increased. This is mainly because raw materials, notably minerals are becoming exhausted and are being sourced from more distant suppliers. On the other hand the manufactured goods sectors have undergone significant expansion. Many firms producing consumer goods use sophisticated distribution networks which form a part of a supply chain management system.

4.2 The growth of national markets

During the last two decades, retailers have expanded through a combination of growth and amalgamation until most retail sectors are dominated by a handful of national operations. Five firms supply most of the UK consumption of groceries. A similar pattern of concentration has emerged in many manufacturing sectors. Many goods are now `branded', and supplied nationally, in many instances from one production site. In parallel with the concentration of production and nationwide marketing has come a revolution in the distribution of the goods. The movement of goods is now controlled jointly by manufacturers and retailers using a network of central storage locations and regional distribution centres in order to match supply with demand.

In general large capacity vehicles are used for movements between depots, many of which are located adjacent to an intersection of trunk roads. This allows maximum efficiency in transport operations, and minimises the number of depots required to supply a national market. This pattern of distribution tends to lead to an overall increase in tonne kilometres as the goods are moved greater distances from fewer sources of supply. However, the number of vehicles kilometres does not necessarily reflect this as the largest capacity vehicles tend to be used.

4.3 Technological improvements in vehicle performance and capacity

Road freight transport has seen rapid and continuous development since the early part of this century. A large number of factors have led to this situation but they may be assessed as falling into three main areas:

i) Technological improvements in vehicle performance and capacity.

ii) The development of a road network allowing high average speeds on infrastructure of good quality.

iii) Improvements in the methods of vehicle operation and the systems used to distribute goods.

The latter factor is of major importance when assessing choice of mode. Changes in economic development have led to different demands being placed on the transport industry, especially with regard to industrial location and the type of goods being moved.

In most countries regulations govern the maximum dimensions of goods vehicles, as well as their maximum gross weight and individual axle or bogie weights. The use of the vehicle to carry various commodities, notably those which are hazardous or of abnormal size or weight, are restricted in different ways. In the UK such regulations are contained in the Construction and Use Regulations (C&U), but other regulations such as Food and Hygiene, and Petroleum regulations, apply to the movement of some commodities. It is a combination of these regulatory instruments which determine the design of goods vehicles and ultimately their productivity (Table 4).

Table 4: Principal changes in Construction and Use Regulations

It is clear that operators can adjust their fleet composition fairly quickly when new technology becomes available, or the regulations allow the use of vehicle which reduce the cost of transport. Table 5 shows the rapid introduction of 38 tonne GVW articulated vehicles in the UK between 1983 and 1991, in many cases either replacing or being converted from 32.5 tonne vehicles. At the same time the total capacity of the industry increased but this was absorbed by the increase in economic activity.

Table 5: Changes in UK National Fleet Composition (000's)

Source: DTp (1991a) and previous editions

It is also clear that the size of the national fleet (and its capacity) is adjusted to reflect the level of economic activity. A major factor in achieving this is the purchase of new vehicles, while older vehicles are not disposed of, thereby increasing the total capacity (Fowkes et al 1993).

4.4 Development of the road network

Apart from the increased size and performance of HGV's, the main factor in their competitive ability has been the improvement of the strategic road network in the UK. This allows much greater average speeds to be attained, and vehicle and driver productive per day increases rapidly (Table 6). Though motorways form only a small part of the UK network, HGV operators make very effecting use of them. In 1991 lorries with five or more axles, those in excess of 32.5 tonnes GVW, are estimated to have performed 45% of their vehicle kilometres on motorways, 36% on trunk roads and 15% on principal roads (DTp 1991a). Although forming a small part of the flat, they were responsible for over half the tonne-kilometres of goods moved by HGV's in 1990 (DTp 1991b).

Speed limits for HGV's in the UK are 60 mph on rural motorways and 50 mph dual carriageways. A dual carriageway road allows heavy vehicles to maintain momentum and overtake slower traffic without delay. As the strategic network is substantially dual multiple lane roads, high average speeds can be achieved over long distances. This means road transport is very competitive for the longest hauls within the UK in terms of transit time. At the same time, the quality of the road network allows high vehicle productivity for vehicles engaged in short and medium distance work, and minimises freight rates.

Table 6: Public Road Length by Type (kilometres).

Source: TSGB (various years).

Where long distance trunking operations are concerned, the reliability offered by high quality roads makes multiple shifting of goods vehicles attractive to the operator as this spreads standing charges associated with an individual vehicle over an increased capacity in terms of tonne kilometres. It also allows the operator to offer a wider range of services to their customers, in the case of the UK guaranteed next day delivery is widely available.

The road network quality also affects the extent of concentration of distribution depots. Where delivery round vehicles can reach their destination area quickly and reliably from a central point, then a manufacturer can distribute their goods nationally from fewer stock holding locations, thereby reducing inventory holding costs. Although such factors are not related to the regulation of the vehicles themselves, a liberalised system allows operators to obtain the maximum benefits from other changes which affect their operating environment.

The rapid expansion of the motorway network and an extensive programme of building dual carriageways during the sixties and seventies was coupled changes in the size and weight of vehicles. Together, these factors greatly increased the productivity of the road freight industry, and resulted in becoming strongly competitive for long distance traffic, both in terms of costs and speed. BR lost long distance traffic as a result.

4.5 Improvements in vehicle operation and distribution systems

The changes in the network of depots (described in section 4.2 above) have been the main change in the industry. It was the result of management treating the supply of goods as an overall function, rather than a series of movement and storage functions costed individually. Latterly, this approach has grown to encompass the whole logistics chain. Provision of a high quality road network has allowed distribution managers to use a variety of operating methods which increase efficiency and minimise costs. Many such techniques use inter-depot trunking as an important element. Inter depot trunking allows vehicles, particularly the tractor units of articulated outfits preferred in the UK, to be used on a shift basis. This may involve two or three drivers using the same vehicle in 24 hours.

Long distance overnight delivery can be achieved, and drivers returned to their depots by using driver changeover and trailer switching techniques. For example, a significant quantity of goods is moved between London and Glasgow (400 miles apart), the operators having an intermediate depot where trailers are exchanged. At night, a vehicle is capable of covering in excess of 400 miles within a drivers shift, if the route makes extensive use of motorways. The vehicles are then available for use during the day for either collection and delivery operations, or other trunk movements.

The technique of using stockless satellite depots has also found favour with many firms in recent years. This allows the delivery of two or more demountable bodies to a depot, which may only be a yard, from a large stock holding depot. Small vehicles then take transferred bodies on delivery rounds. Generally the cost of this type of vehicle technology is relatively high, but is more than offset by reduced costs of depot provision.

Introduction of more efficient operating methods have allowed the road freight industry to increase productivity significantly and reduce costs in real terms. Table 7 shows the effects of productivity changes on articulated vehicles over a ten year period, indicators such as tonne kms and vehicle kilometres showing a rapid increase. Part of the improvement is due to road network improvements. The change in index of haulage rates mirrors the general economic cycle.

2. Based on information on costs supplied by the FTA for a 32.52t gvw vehicle (at 1984 prices). 3. Derived from rates information supplied by the FTA for 16-20 tonne loads (at 1984 prices). Sources: The transport of Goods by Road in Great Britain - 1985. and earlier years. Monitoring 38 tonne goods vehicles. Notes: 1. The figures for 1983 are affected by the introduction of the 38 tonne vehicle from May 1983. Estimates for the years 1982 onwards are not strictly Table 7: Productivity of Articulated Goods Vehicles 1976-1985 FEDEA - D.T. 95-05 by G. Tweddle and P.J. Mackie

5. Structure and performance of the road freight industry

The Road Freight industry in the UK forms a substantial sector. It has grown in line with economic development, and has been flexible enough to adjust to the changing demands of industry. However, to consider the industry as a single entity would be a major misconception. It is made up of many specialist operators and sub-sectors, some only handling a limited range of commodities and using specially built vehicles to do so.

Another misconception of the industry is that it is dominated by small firms. While it is true that there are a large number of owner drivers, in 1993 56.9% of Operators Licences covered only one vehicle, the industry is dominated by a relatively small number of large fleets. So much so, that one fifth of the national fleet consists of fleets of more than fifty vehicles and are registered on only 0.7% of the licences, while one third of them (in fleets of more than 20 vehicles) are on 2% of them. Licences for operations covering over 200 vehicles contain 6% of the national fleet (DoT 1993).

In most cases, an operator tailors his activities to the needs of a small number of customers. Some operations are set up specifically for the use of one customer, usually on a medium term contractual basis. Most of the large companies in the industry offer a variety of services, usually through subsidiary firms or divisions. In this way the industry handles both the requirements of the aggregates producer with a market concentrated within a few miles of a quarry, and the electronic components maker who requires overnight parcels services. Vehicles and operating methods are completely different.

The actual operation of goods vehicles forms only a part of a much wider 'distribution' industry. The demand of industry is not to move goods from A to B, but to match production to consumption at minimum cost. This involves a system of storage as well as movement. In the UK many small operators offer storage and transhipment facilities, while the large consortia can offer to control the supply chain for a manufacturer.

As with other forms of transport such as bus or aircraft operation, there are few if any production economies of scale available in road transport operations above a small fleet size. Therefore road transport operations themselves should not be highly profitable. Entry is easy, the technology is readily available, and the market is inherently competitive. The opportunities for profit arise in the organisation of the supply chain, where expertise in balancing the transport, warehousing and inventory costs against the customer requirements is scarce and valuable. This is why in the 1970s and 1980s large firms such as the National Freight Consortium virtually abandoned low margin businesses such as general haulage in favour of contract distribution of which the transport function is only a part (Beesley, 1992).

It is arguable that the most important contribution of deregulation was precisely to permit complete flexibility in the nature of the contract between manufacturer, distributor and retailer according to market circumstances. Licensing creates rigid choices between using professional haulage or operating a fleet on own account. Freedom to adapt according to market conditions has been an important benefit of deregulation.

Although the number of operators licences with only one vehicle is large, many of those which are on own account tend to be small vehicles used on local work. Those used for haulage tend to be concentrated in the movement of bulk materials, or act as sub-contractors to larger operators. It is these larger operators who are the key to the cost and rates structure of the industry, and are usually the source of new operating methods and services.

Many large operators see themselves as 'distribution contractors' rather than hauliers. Using statistics on operator licences does not reveal the scale of some of the consortia involved because of the problems of the licences being held in more than one Traffic Area, and the possibility of several different firms being in one group. The major UK consortia are listed in Table 8, many of them also operate in North America and to a lesser extent in Europe. Some intend to offer Europe wide services; BOC Distribution Services already distributes temperature controlled foodstuffs in Belgium, France, the Netherlands, Germany and Poland.

Table 8: Large Distribution Contractors

Source: Motor Transport, 17/2/1988, p18.

Apart from the major groups, there are a significant number of operators with a handful of depots and several hundred lorries. Although the major firms control the industry, they are sufficient in number to provide effective competition, both in terms of costs and services offered.

The figures in Table 8 also indicate that the companies are operating in different ways. TNT and Federal Express are primarily national parcels carriers. Lep is primarily a freight forwarder subcontracting most of its transport, it only has a small fleet as a result. Express Distribution and Coco-Cola form part of large manufacturing groups, and act primarily as an in-house distribution companies while simultaneously offering services to other companies.

Possibly the most effective way of demonstrating the various distribution strategies within the UK is to compare that of a multiple retailer with a quarry. Typically the retailer will have several hundred retail stores nationwide. These are supplied by Regional Distribution Centres (RDC's) some of which will be operated by the retailer (as well as the delivery fleet), while others are operated by staff and vehicles of contractors (Table 9). Each store will receive a vehicle, or more likely several loads a day, containing replenishment stock. This will consist of a wide variety of lines, some of which may be chilled or frozen, in which case a multi-compartment trailer will be used.

Table 9: Safeway 1990's distribution division - proposed network

Responsibility for supplying goods to the RDC generally falls on the suppliers. The tendency is for them to deliver their entire portfolio of products on one vehicle, which may be their own, but tends to be through a distribution system also operated by contractors.

In decades past many of these functions would have been undertaken by the manufacturers and retailers, in-house. Between 1980 and 1990 the percentage of goods moved by own account fell from 39% to 28% (DTp 1991b).

A major factor which has led to the increasing use of distribution contractors is information technology (it) and electronic data interchange (edi). This allows firms to control the location and movement of their goods even when they are in the hands of a carrier. The distribution contractors have the financial resources to not only purchase fleets of vehicles, but to provide depot and warehouse facilities on a substantial scale.

At the other end of the scale the output from a quarry is likely to be delivered mainly within a relatively small area, probably using bulk tipping vehicles. It is in this type of operation that most owner driver operation is concentrated. Nevertheless some of these vehicles will be operated on contract, and may be painted in the quarry companies livery.

Between these systems there lies an infinite variety of operational possibilities. Many hauliers offer services to a small number of customers providing a next day delivery for full loads within the UK, and a 48/72 hour service for part loads. In the latter case the load may consist of consignments from several customers which have been consolidated for delivery in the same area.

The distribution industry tends to be one where, although there are a very large number of very small operators, the control of the industry and most profitable activities lie in the hands of relatively few organisations. Nevertheless, there is sufficient competition to result in efficient operation and service quality. Where dissatisfaction arises, companies can and do change contractor, or revert to own account operation.

Here again the regulation of the industry cannot be shown to have specifically improved its efficiency. However, a liberalised system has allowed the industry to develop naturally without unnecessary restriction, and follow a course of customer led demand for services.

Profitability of the industry has been of long term concern, partly because of the effect of bankruptcy on customers and suppliers, but also because firms in financial difficulties may not properly maintain their vehicles. Although a few companies produce better results, the typical profit margin of distribution contractors is between five and eight percent on turnover. Many firms exist on a lower margin.

The rate of return on capital employed varies to a greater extent, depending mainly on the type of operations engaged in. Distribution contractors such as BOC Transhield, Wincanton and Lowfield, specialising in chilled foodstuffs performed well in the mid-eighties. The first of these making a margin consistently over 12%, and rate of return of some 40% (Davies 1988). The rate of return for the industry is generally about one third of this figure, and has been found to be particularly low in the case of tipper work and long distance general haulage (Foster 1978).

Significantly the latter sectors are where the small operators tend to compete. Foster found that in 1976, of a sample of hauliers who either went into liquidation or bankruptcy, 85% had five vehicles or less, and 60% had held an Operators Licence for three years or less. Nevertheless, it was found that the industry was surprisingly stable (Foster 1978). Most business sectors are prone to company failures in early years.

Failure of the larger distribution contractors are rare. A weak company tends to be absorbed by another in order to broaden the customer base. A recent example of this process was that of Glass Glover, which had its origins in a wholesale fruit and vegetable organisation, but was thought to be under-performing following the loss of a major contract. It has now been taken over by Wincanton (Distribution Business 1993).

6. International comparisons

In general the pattern has been for road transport regulation to be imposed in most industrialised countries. During the thirties a number of countries introduce regulations to restrict the capacity and entry to the industry. In the USA this was achieved by the 1935 Motor Carriers Act. Usually this was seen as a way of protecting the railway system from a much more flexible competitor. In some countries such as Germany, this is the prime reason for such regulations to this day.

If this is the prime objective, then own account operation must be regulated in the same way as public haulage. In most cases this has not been the case, and manufacturers tend to invest in significant fleets in order to gain the quality and flexibility of service they require. However, if the capacity of own account operation is regulated it may have a detrimental effect on the competitiveness of firms and protection of the railway cannot be justified on such a basis.

In Germany, the own account sector did have its capacity regulated on the basis of maximum length of haul. However, pressure from manufacturing industry has steadily eroded the restrictions, and own account fleets are now used for 58% of tonnes lifted by HGV's. Nevertheless restrictions on road transport are apparent when comparing the average length of haul in the UK and Germany. In 1989 it was 53km by own account vehicles in the UK, and 93km for hire and reward vehicles, whereas in Germany the figures were 32km and 61km respectively (Eurostat 1991).

It is clear that regulation primarily to protect the rail network cannot be made to work effectively in most industrialised countries. As a result many are now following the lead of the UK in allowing the road freight industry to operate without capacity constraints, concentrating instead on the quality aspects of the industry and improving safety.

Within the EC, the Netherlands has also been at the forefront of liberalising road freight. The French, at one time very protective of their rail network, are eliminating capacity restrictions. The effects appear to be following the pattern which occurred in the UK where haulage rates fell as a result of severe competition, and many hauliers found themselves in financial difficulties. In the longer term those firms which offered high quality services at acceptable rates were the ones who survived and prospered. In France, SNCF is also losing traffic, particularly in wagonload quantities, and may eventually follow BR in abandoning a network service.

More importantly, the length of haul at which SNCF becomes competitive is increasing. It is felt that in the longer term even inter-modal networks in France will have to be based on high volume flows between locations more than 500km apart (ECMT 1993). Many of the shorter routes currently provided are under threat.

Taking a broader approach, both the EC and the newly formed North American Free Trade Area (NAFTA) are adopting a policy of long term deregulation. This would encompass some form of construction and use regulations to establish the size and weight of vehicles, regulations on drivers hours and possibly quality of management, and a system of fair payments for use of the infrastructure. The system is not very different from that of the UK.

At present, individual countries within both trading blocks (EC and NAFTA) have their own regulatory systems. Many types of vehicle are allowed to cross national boundaries in order to allow access to foreign markets using road transport to carry manufactured and perishable goods. There is considerable disparity in vehicle dimensions and weights currently within NAFTA. They are (Railway Gazette 1993)

The Swiss, and to a lesser extent Austrian, authorities have placed severe limits on road freight, mainly to reduce the flow of international traffic crossing the Alps. The maximum weight limit in most of Switzerland is 28 tonnes GVW. Most neighbouring countries have retaliated by limiting Swiss registered vehicles to this limit, thus making them uncompetitive for general haulage in Europe. Swiss manufacturers have found that their unit transport costs are higher than those of their competitors, placing them at a disadvantage.

In general, the most common reason for regulating road transport worldwide has been to protect the railway network, and, in general it has not been successful. When deciding on alternative regulatory frameworks it is essential to set out clearly what the objectives of regulation should be, and how they are to be enforced.

7. Regulation - an assessment

Though the road freight industry seems to be providing its customers with a satisfactory service, there remains doubts in some quarters concerning some aspects of its operation. They are mainly put forward by those outside the industry, and may be more apparent than real. The main concerns surround the low profitability and bankruptcy in the industry, as well as the safety aspects of its operation and some environmental disbenefits.

7.1 Economic regulation

While the large distribution contractors have considerable reserves there are significant numbers of bankruptcies, low levels of investment and instability among smaller operators. This may in part be due to the effects of economic cycles on the industry. Smaller operators are used as sub-contractors and tend to gain the peak traffic demands (short and long term). When economic activity is high, not only do rates increase, but it is often easier to obtain return loads. As a result earnings per vehicle mile tend to rise.

This situation allows small operators to make reasonable profits and re-invest. They then have to weather the more difficult circumstances of lower economic activity. The shipping proverb of 'seven years of famine and one of feast' applies to other sectors of transport, though the cycle may vary in length. The determining factor is the length of time taken to adjust the capacity of the fleet nationally to the level of economic activity.

There are of course other industries which show symptoms of instability. In the UK one of the worst is building contractors. It is questionable to what extent `operator licensing' could or should control this aspect of the transport industry, or whether it is better to use broader legislation in the form of company financial regulation.

British policy is broadly that operator licensing should be used to regulate transport-specific problems such as safety and environmental performance and not matters such as the stability or financial efficiency of the industry, which should be left to the market and to company law. This reflects an official view of road transport, and especially distribution as being for the most part a highly professional and successful industry, well capable of competing in European markets.

7.2 Safety regulation

Road accidents which can be attributed to defective maintenance or insecure loads are small in number. Modern methods of handling goods together with improve restraint equipment have reduce the incidence of the latter. Of 293 HGV's involved in accidents, 7% had contributory defects, which would have played a major part in about 10%, or two, of these accidents.

Although the number of vehicles operating with serious defects is very small, there is a tendency for them to belong to a minority of firms, some of whom are persistent offenders. They are often using old vehicles, offer a cheap but low quality service to their customers, and tend to cut corners to minimise costs. Overloading vehicles is a tactic also used to reduce unit costs.

Though such operators form a small proportion of the total, it is important to keep such illegal firms under control. If they are not kept in check, those who intend to operate within the regulations cannot compete, and they must either adopt a policy of flouting the law in order to compete, or they go out of business.

7.3 Environmental regulation

One failing of the system has been environmental control of operating centres. The 1968 Act intended that vehicles should be based at the 'operating centre' stated on the licence. However, a legal judgement (Cash & McCall v Road Haulage Association) separated the administrative function from the base for the vehicles. This weakened the authorities ability to control activities of licensed operators, though local authorities still normally object to new operating centres on environmental grounds and may place planning constraints on new or expanded depots.

The licensing system does not have any control over depots which are not operating centres. Thus, a warehouse can have vehicles arriving throughout the day and night which may cause disturbance. There are more general nuisance legislation to cover such industrial activities, and this may be a better approach than the licensing system. However, the parking of goods vehicles away from the operating base does give rise to complaints from various sections of the community.

7.4 Enforcement of the regulations

The UK system of quality licensing has been in use for over twenty years and can be used as a basis for use in other countries. However in general the UK Operator Licensing system has allowed road freight to develop freely, providing industry with high quality transport services at competitive costs. There are lessons to be learned from the UK and improvements which may be made. The regulations do have some weaknesses and their has been consistent difficulties in controlling the criminal fringe, though the latter will exploit any system to their own benefit.

The Area Licensing Authorities, through the Vehicle Inspectorate, have powers to carry out both planned and random checks on depots and in particular on vehicles in use on the road. These spot checks are vital to maintain safety standards. In carrying out spot checks the assistance of the police is required in order to stop vehicles, as if others are allowed to do so may increase the incidence of 'hijacking' of vehicles and their loads. The police do not tend to give these activities a high priority, and police officers may be transferred to other duties during a check, wasting the Inspectorates time.

The one month period to register a vehicle on an Operators Licence means that such vehicles are allowed to be used without displaying a licence disc. While this allows responsible operators a degree of flexibility it means Inspectors may have difficulty in establishing whether a particular vehicle is on an operating licence. For example, an operator may be allowed up to five vehicles on his licence, but then proceeds to use seven. It can be difficult to prove that this infringement has occurred. Issuing individual licences to each vehicle (as is the practice in Northern Ireland) would overcome this problem.

When the system was first introduced, spot checks were only undertaken during normal working hours, the Vehicle Inspectors being Civil Servants at that time (Foster 1978). This weakness has been corrected, and random spot checks now take place at night and weekends. It is a small number of operators who persistently break some regulations, though even the responsible majority who are capable of operating within the regulations do have administrative failures and may occasionally breach regulations. Spot checks are required to keep standards high.

One area Licensing Authority stated in his annual report that:

"The most frequent offenses continue to involve overloading, drivers hours and records, vehicle excise, vocational driver and operator licensing. Fines imposed by the Courts totalled £0.25m but individual penalties are often too low to provide serious deterrent" (Whalley 1992).

Thus it seems that even when infringements are detected the deterrents are insufficient to stop the persistent offenders. The answer would seem to be to increase the resources available to check vehicles, mainly though not entirely on a targeted basis to concentrate on the persistent offenders, and simultaneously increase the penalties for proven offenses.

Arguably the major weakness of the UK system is that the Licensing Authority does not have automatic access to operators misdemeanours so that it can assess their fitness. Not only should easily accessible data be available on the number of vehicle, overloading and drivers hours infringements, but prosecutions and warnings given to drivers in the operators employ should be added. The latter would indicate whether an operator is using poorly trained drivers, or setting unrealistic schedules. If such a data base of infringements on each operating licences could be created it would be a significant improvement in the control of the industry. Such data should be readily available to police and vehicle examiners, as well as the Licensing Authority.

An additional approach would to make shippers jointly liable for offences, where it can be shown that they are knowingly using an operator who is a persistent offender because they obtain low rates. There is a precedent for this in that if a vehicle is weighed before leaving a shippers premises and it is overweight, then it should be corrected before despatch. If it is not, the shipper is jointly liable for the overloading.

Some categories of vehicles were originally exempted from Operator Licensing. These included those under 3.5 tonnes GVW and certain prescribed vehicles, farm and emergency vehicles. However, given that the legislation is mainly to encourage safety there is no reason why many aspects should not apply to other heavy vehicles such as those used by the utilities or mobile cranes.

8. Conclusion

Though the UK system for regulating road freight transport has some weaknesses, it has allowed operators to provide the country with a high quality service at competitive rates. By minimising restrictions on the number and use of vehicles, operators have the flexibility to make most effective use of them, and maximise their productivity.

The main objective of the Operator Licensing system is to promote public safety and environmental quality and most firms comply with these objectives. Weaknesses can be found in controlling a small but persistent number of operators who flout the system, and it is important to control them, otherwise the general standard will fall as other operators attempt to compete.

The original purposes of road transport regulations related to the efficiency of the industry, public safety, and protection of the railways. Our judgement is that deregulation has enhanced the efficiency of the industry. In relation to public safety, the majority of the industry acts responsibly, though a higher level of enforcement activity and penalties for offenders might be justified. Whether in a regulated or a deregulated market, this will always be an issue. In relation to the railways, the economic structure and geography of Britain mean that road/rail freight competition is relatively marginal compared with large European countries such as France, Germany and perhaps Spain. In conclusion, therefore, it can be said that deregulation of the road transport industry has worked well and that a return to quantity or price regulation in Britain is at present inconceivable.

References

Armitage, Sir A. (1980). Report of the Inquiry into Lorries, People and the Environment, HMSO, London.

Bayliss, B.T. (1988). The Measurement of Supply and Demand in Freight Transport. Gower, Aldershot.

Beesley, M.E. (1992). Privatisation, Regulation and Deregulation. Routledge, London, pp. 375.

Button, K.J. and Pearman, A.D. (1982). Regulation of Road Haulage in United Kingdom: A Critical review. Transportation Research Record, 851, pp 16-23.

1. Davies, M. (1988). Top 50. Motor Transport, 17.2.1988, pp 14-19.

Distribution Business (1993). Unattributed article, Distribution Business, Issue six/93, p6, Landor Publications, London.

DoT (1993). Operators and vehicles by fleet size. Private correspondence with the Department of Transport, London (unpublished).

DTp (1991a). The Allocation of Road track Costs 1991/92, Department of Transport, London.

1. DTp (1991b). The Transport of Goods by Road in Great Britain 1990. Department of Transport, London.

ECMT (1993). Possibilities and Limitations of Combined Transport. Round Table 91, ECMT, Paris.

1. Eurostat (1991). Carriage of Goods 1989 Road. ECC, Luxembourg.
2. Fowkes, A.S., Nash, C.A., Tweddle, G. and Whiteing, A.E. (1988). Forecasting Freight Mode Choice in G.B. Proceedings of the 15th PTRC Summer Annual Meeting, Seminar G Freight, held at the University of Bath, England, 7-11 September 1987.
3. Fowkes, A.S., Nash, C.A., Toner, J.P. and Tweddle, G. (1993). Disaggregated Approaches to Freight Analysis: A Feasibility Study. ITS Working Paper 399, University of Leeds.

Fowkes, A.S., Nash, C.A., and Tweddle, G. (1991). Investigating the Market for Inter-modal Freight Technologies. Transportation Research-A, Vol 25A, nO 4, pp 161-172.

Geddes, (1965). Report of the Committee on Carriers Licensing. Ministry of Transport, HMSO, London.

1. Foster, C.D. (1978). Road Haulage Operators' Licensing, HMSO, London.
2. Ogden, K.W. (1980). Licensing and environmental controls on freight transport. TORG Research Report No. 32, University of Newcastle upon Tyne.
3. Price Commission (1978). The Road Haulage Industry. HMSO, London.
4. Railway Gazette Intl. April 1993, p. 212.
5. Whalley, F. (1992). Annual Reports of the Licensing Authorities 1st April 1991 to 31st March 1992. D'Tp, London.

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