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Action 'needed now' to move into competitive TOC licensing model

Increased competition in railway franchising, potentially including a licensing system in the future, could deliver significant benefits for passengers, according to the results of a Competition and Markets Authority (CMA) consultation.

The non-ministerial body published an interim report from the consultation last summer, setting out its radical proposals for franchise reform, which included allowing a significantly increased role for open access operations (OAOs), allowing for two successful bidders for each franchise, allowing more overlapping franchises, and licensing multiple operators.

In the final results of the consultation, it recommends introducing option 1 – a greater role for open access on intercity routes, which it said could next be implemented when the East Coast Main Line franchise is next renewed in 2023.

In parallel, it suggested introducing option 2 (two successful bidders for each franchise) where it has the potential to deliver benefits on the networks.

The preferred model for this option would be to have an ‘anchor franchisee’ responsible for the vast majority of obligations, running unprofitable but ultimately “socially valuable services and some other services which together would make for a feasible operation”. A second franchisee would run alongside it, operating profitable services to maintain a degree of competition.

In the long term, however, the review suggested a complete overhaul of the system to allow for option 4, a licensing system: “This would enable a move to operation of rail services by companies that were similar to OAOs, but subject to a licensing regime which would place some restrictions and obligations on their activities”.

This is largely in line with what Virgin and Stagecoach Group were pressing for last year, when they argued, in a joint statement, that the CMA should favour a licensing system to allow TOCs to compete directly on inter-city routes.

The operators’ joint response came just a few days after the Rail Delivery Group formally asked the CMA to look again at all the four proposed options, questioning how they would deliver wider benefits to communities and economies.

But today’s report argued that the proposed options would increase on-rail competition and offer greater passenger benefits, such as lower fares, greater incentives for operators to improve service and innovate, greater efficiency and more effective use of network capacity.

“Although these proposals will not affect current franchises and imminent franchise awards, action is needed now given the steps required to implement the options for reform,” the CMA’s statement said.

It also stood by the benefits OAOs can offer, including improved service with innovations such as more free wi-fi and growth in the market for rail travel. Because of this, it argued that open access TOCs should be able to make “more of a contribution” than at present – especially in terms of track access charges and through a Public Service Obligation levy to contribute to the funding of “important but unprofitable services” (such as those in rural areas).

“This would help cover any fall in the premiums paid to government that might result from increased competition,” it said.

‘Strong evidence’ of intercity competition benefits

Alex Chisholm, CMA chief executive, commented: “We’ve found that there is strong evidence, both here and abroad, of the benefits that the introduction of competition on mainline intercity routes can bring.

“Where competing operators have been given the opportunity, the need to attract passengers who have a choice can mean lower fares, new routes and destinations, more innovations and flexible ticketing. Not only does this offer a better deal for existing travellers but it can increase overall passenger numbers by attracting new customers to the railways.”

He added that in a more competitive environment companies will push to be more efficient and for there to be better use of existing capacity – so there are benefits for both the network and the taxpayer who helps subsidise the railways.

“There are legitimate concerns about the impact that greater competition might have on the income received by government from franchise operators but so far that concern has been tackled in a way that hinders new entrants,” said Chisholm. “We think a better way would be to have a level playing field – where competing operators are able to make more of a contribution to network costs and to funding unprofitable services. In return they would get more freedom to compete for business against the franchise operator.”

A Department for Transport spokesman said: “As the CMA recognises, any reforms to the industry must protect taxpayers’ interests and future investment in the railways, which is critical to delivering the best services for passengers.

“We will now consider the CMA’s report and respond shortly.”

Paul Plummer, chief executive of the Rail Delivery Group, said: “We will continue to work with governments and the regulator to balance the opportunities for more competition in rail with the wider complexities and practical challenges of running this vital public service.”

He added that a joined-up approach to factors including competition, freight, franchising, Network Rail and funding was needed.