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21.07.15

Competition watchdog sets out radical options for franchise reform

The Competition and Markets Authority (CMA) has come up with four ideas for far-reaching reforms to increase competition between TOCs. 

The CMA’s plans includes options to retain the existing market structure, but with significantly increased open access operation (OAOs); two franchises for each franchise;  more overlapping franchises; and licensing multiple operators, subject to conditions – including public service obligations. 

This is “a project for the long term”, the CMA said, and would not envisage its proposals being implemented until 2023 at the earliest, so “as to protect the rights of current franchisees and current and imminent franchise tender processes”. 

Option 1, adapting the existing system by permitting a significantly increased role for OAOs, would mean that concerns about ‘free-riding’ and ‘cream-skimming’ would have to be addressed. It would do this by forcing OAOs to pay proportionately towards fixed track access charges and a universal service levy, to largely make up for any shortfall in government revenues from lower franchise premiums (after taking account of efficiencies). 

Option 2 would allow two successful bidders for each franchise – either symmetrically (each having 50% of services), asymmetrically (for example, with a 60:40 split in terms of service frequencies and unprofitable but socially valuable services) or with one ‘anchor franchisee’ being responsible for the unprofitable but socially valuable services and both franchisees responsible for more commercial services. 

CMA said: “The choice of specification within this option depends on achieving the right balance between the benefits of competition and the risk of operators engaging in tacit collusion on fare levels. Increasing the degree of asymmetry between operators reduces the risk of tacit collusion between operators.” 

Option 3 would involve “redesigning the franchise map over time to generate more overlapping franchises”, creating more flows on which there would be competition between franchisees. In practice, it said, this would reverse the conscious decision taken over the last 15 years to reduce substantially the number of overlapping franchises. 

CMA did note that the current system of competitive bidding for franchises has been a “largely successful” model and appears to have delivered real benefits – reversing the decline in passenger numbers and improving passenger satisfaction in the past decade. 

However, the discussion document’s objective seek improvements in the railways in Great Britain and benefits for passengers and taxpayers, including  better value for money, enhancing service quality and unlocking efficiencies. 

Option 4 would include multiple operators and the system of formal franchises would be replaced with a system closer to that of competition between OAOs, but with a licensing regime placing some restrictions and obligations on their activities. 

Since announcing its work on this in January 2015, the CMA has talked to everyone involved and believes that a “material increase in on-rail competition would result in benefits for passengers and taxpayers”, such as lower fares for passengers and lower costs for both train operators and the network operator. 

The CMA considers that its four options are most likely to deliver benefits on the three main intercity routes in Great Britain – namely the East and West Coast main lines and the Great Western route linking London with South West England and South Wales. However, the framework could be applied nationally to allow for open access growth elsewhere. 

Nick Ellins, director of policy for the Rail Delivery Group, which represents open access, franchise, freight and infrastructure operators, said: “Britain’s railway plays a crucial role in people’s daily lives and the wider economy, so it is important the industry continually considers how to harness the best aspects of competition to deliver even better services. 

“The CMA’s report rightly recognises the value delivered by the partnership between the public and private sectors in rail and suggests some alternative ways of structuring that successful formula. Alongside central and devolved governments and the regulator, this is a discussion in which the rail industry is actively engaged. We look forward to working with the CMA during the consultation on its report, as it seeks to balance the opportunities for more competition in rail with the wider complexities and challenges of running this vital public service.” 

Interested parties are invited to respond, in writing, to Rail@cma.gsi.gov.uk  by no later than Friday 16 October 2015.

Comments

John Grant   21/07/2015 at 11:51

How does option 2 work? If, say, there's 1tph for each operator will passengers really wait an extra 1/2 hour to go on the one they prefer? Will there be differential pricing, and if so how will the ticket gates handle it?

RTM   21/07/2015 at 11:57

Hi John, the full details can be found here, from p146 onwards: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/446255/Passenger_rail_services_in_Great_Britain.pdf

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