Competition in passenger rail services in Great Britain A discussion document for consultation 17 July 2015 © Crown copyright 2015 You may reuse this information (not including logos or the map of train operators in Appendix A) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit www.nationalarchives.gov.uk/doc/open-government- licence/ or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: [email protected]. Contents Page 1. Introduction ........................................................................................................... 4 Our goals .............................................................................................................. 5 Competition in passenger rail services in Great Britain ......................................... 6 Putting the passenger first .................................................................................... 8 Funding Great Britain’s passenger rail services – a complex private/state mix .. 10 The purpose of this discussion document ........................................................... 11 Protecting investment in the network and socially valuable services ............. 12 A ‘level playing field’ ...................................................................................... 13 Viability .......................................................................................................... 14 Safeguarding existing franchisees’ rights ...................................................... 14 Timing and planning ...................................................................................... 14 Risks and benefits ......................................................................................... 14 Discussion and consultation ............................................................................... 15 2. Context: industry background ............................................................................. 16 Structure of the rail sector in Great Britain .......................................................... 16 The privatisation of British Rail ...................................................................... 16 Management of the network after privatisation .............................................. 18 The development of on-rail competition since privatisation ........................... 22 The franchisees’ finances .............................................................................. 29 Freight operating companies ......................................................................... 33 Rolling stock leasing companies .................................................................... 33 The role of government ................................................................................. 34 Funding of the rail industry .................................................................................. 37 The rail industry’s income and expenditure ................................................... 37 EU legislation ...................................................................................................... 45 Background ................................................................................................... 45 Proposed Fourth Railway Package ............................................................... 46 3. On-rail competition in the current framework ...................................................... 49 The current extent of on-rail competition ............................................................. 49 Potential for greater on-rail competition – network capacity and technology ...... 51 Enhancements in the 2014–2019 Control Period .......................................... 51 Longer-term enhancements........................................................................... 55 4. Evidence of potential passenger benefits from greater on-rail competition ......... 57 Introduction ......................................................................................................... 57 The Great Britain rail freight sector ..................................................................... 59 Competition between freight operators .......................................................... 60 The efficiency of the rail freight sector ........................................................... 60 The experience of EU airline deregulation .......................................................... 63 Dynamic competition: the Gatwick Airport example ....................................... 64 On-rail competition in Great Britain ..................................................................... 68 Competition between open access operators and franchisees ..................... 69 Overlapping and parallel franchises .................................................................... 76 Changes to the level of franchise overlap ...................................................... 78 On-rail competition in other European countries ................................................. 81 Introduction .................................................................................................... 81 Overview of open access competition and market structure in each country 83 Benefits of on-rail competition in Europe ....................................................... 88 1 Differences between open access competition in Great Britain and other European countries ...................................................................................... 91 On-rail competition from ‘no frills’ services .................................................... 95 5. Evidence of efficiency gains from greater on-rail competition ............................. 97 Efficiencies in train operations ............................................................................ 97 Introduction .................................................................................................... 97 Estimating efficiency ...................................................................................... 98 Efficiency of open access operators .............................................................. 99 Sources of efficiency at open access operators .......................................... 101 Upstream efficiencies ........................................................................................ 103 Evidence from open access operators and competing franchisees ............. 104 Evidence from the rail freight sector ............................................................ 105 Capacity expansion at Heathrow Airport ..................................................... 106 Airport management .................................................................................... 106 Scottish water sector ................................................................................... 107 6. The feasibility of greater on-rail competition: Obstacles and opportunities ....... 109 Introduction ....................................................................................................... 109 Scarcity problems and the vertical structure of the market: split between train and track .................................................................................................. 109 Access to network infrastructure .................................................................. 110 Access to rolling stock ................................................................................. 112 Network capacity and system operation activities ............................................. 114 Network capacity identification .................................................................... 114 Operational issues ....................................................................................... 117 Funding the network and unprofitable ‘public service’ operators ...................... 123 Introduction: loss-making services and their funding mechanism ................ 123 The impact of on-rail competition on government funds .............................. 125 Fixed access charges and the network grant .............................................. 129 Franchise scope and service specification .................................................. 131 Potential adverse effects of increased on-rail competition ................................ 133 Interavailability of tickets .............................................................................. 133 ‘Sunk costs’ ................................................................................................. 134 Possible obstacles identified from experience gained in other European countries .......................................................................................................... 136 Sustainability ............................................................................................... 136 Impact on public funds ................................................................................. 138 7. Conclusions: options for reform ........................................................................ 139 Option 1 – existing market structure, but significantly increased open access operations ........................................................................................................ 141 Advantages.................................................................................................. 144 Disadvantages ............................................................................................