Return to Archive -by date - by topic.
Now that ORR has referred the train leasing market to the Competition Commission and the mood in the ROSCOs is ‘bring it on.
On April 26 ORR confirmed its ‘minded to' decision to refer the leasing of rolling stock for franchised passenger services to the Competition Commission for further investigation. Not surprisingly DfT Rail was cock-a-hoop that the complaint it had submitted by in June last year had been upheld, but that may be premature..
ORR published its initial competition assessment for consultation on 29 November. Despite Angel's Managing Director Haydn Abbott being regarded as the ‘big clunking fist' of the ROSCOs, the toughest response came for Porterbrook.
Their lawyers claimed that there was no credible evidence of excess profits earned by the ROSCOs, that ORR had accepted DfT Rail's profitability calculations, which were ‘ so seriously flawed as to have no evidentiary value', without detailed scrutiny and that Porterbrook data which showed that effective rentals for its ex-British Rail had fallen in real terms since privatisation.
Porterbrook argued that in the absence of any credible evidence of ‘excess profits or consumer detriment' it would be disproportionate to make a reference which will cost both the taxpayer and the ROSCOs. As remarked in previous columns, the reference, expected to last for up to two years will cause considerable uncertainty – which is something the banks which own the ROSCOs won't like.
Even more disturbing to the financiers is ORR's decision to bring the leasing of new trains within the reference. Echoing the views of all three companies, Porterbrook warned that the reference ‘makes it extremely difficult…to justify its ongoing programme of investment in additional rolling stock'.
This threat is water of a duck's back at DfT Rail where they seem determined to expunge the excesses of privatisation, of which the ROSCOs are the most egregious example of capitalism red in tooth and braces. The Treasury, the City and the then Department of Transport may have created the ROSCOs but, I suspect the millions made by the original Management Buy Outs, when the perceived risk fell to levels attractive to the banks which now own the leasing companies, still rankles.
‘Carthago delenda est' seems to be the mood at DfT Rail. And now Railtrack is entering someone else's fight. In newspaper reports it offered to fund new trains, claiming that it can borrow money more cheaply than the ROSCOs.
This is undeniable. its first tranche of an index linked bond issue will be ‘directly and unconditionally guaranteed by a financial indemnity from the UK Government'. No bank could compete on funding costs.
But, despite DfT Rail's crowing and the ROSCOs defiance, all might not be as it seems. Having considered the consultation responses, ORR continues to blame the structure of the market. It believes that ‘certain market features are limiting competition and have the potential to lead to higher prices and a poorer quality of service than would otherwise be the case in a more competitive environment'.
A thorough review of the issues by the CC is likely to result in more certainty and stability for all parties in the future, allowing them to plan their businesses with a greater degree of assurance than currently. It is important, going forwards, that the relationship between all stakeholders is built on a foundation of confidence that each party to the arrangements is securing value out of that relationship. It is clear to us that confidence is currently lacking.” Chris Bolt, Chairman ORR
‘ORR has supported our view that there are strong grounds to suspect an inadequate degree of competition in the market. We believe the current market does not ensure best value for taxpayers and fare payers. We estimate that the excess profit being made by the ROSCOs could be as much as £175m a year. This is money that could be far better invested in delivering further improvements for rail passengers. DfT Rail spokesperson
‘As the ORR has stated in its conclusions, this reference has implications for the willingness of firms to supply new rolling stock. As such, we are concerned that essential investment in additional capacity to solve the evident overcrowding problems in Britain 's railways might be at risk.” Haydn Abbott , Managing Director, Angel Trains |
This difference of opinion is highlighted by ORR's list of features inhibiting competition (see box). O nly a few of these can be attributed to the Rolling Stock Companies. In several cases remedies would require changes to the structure of franchises and the franchising process.
From the start, DfT Rail has been after simple rental price cuts across fleets covered by the Master Operating Lease Agreement (MOLA). According to Informed Sources, as ORR neared its decision, the original demand for £100 million a year was reduced to £50 million and, finally £35 million for the complaint to be called off.
ORR's list a suggests that financial remedies to create what DfT Rail calls ‘proxy market forces' could be difficult to apply. But financial remedies are what DfT Rail wants.
It made this clear in its response to consultation which was a scathing critique of ORR's initial conclusions. At one point civil service exasperation boiled over: ‘The ORR needs to understand… one passage began.' With DfT reportedly regarding ORR as now ‘nothing more than the external economics consultancy of the Department for Transport' the frustration with the referral is understandable.
A flawed marketORR believes that the ‘key issue' preventing, restricting or distorting competition is a lack of liquidity in the rolling stock market. This results from inherent features of the market and the way in which it is affected by the franchising process. Features quoted specifically by ORR are:
DfT Rail will have none of this. In its response to ORR's consultation claims that ‘restructuring the rail industry in order to try to create competition in relation to the supply of rolling stock (and so reduce capital rentals) would either be of only marginal impact in promoting competition or would impose costs on government and on consumers which could not be regarded as delivering value for money'. It believes that tackling the way charges are set would would be ‘the most appropriate means by which to improve the operation of the market'. DfT Rail is very keen on financial remedies as a ‘proxy' for failed market forces. It would expect that such a remedy would result in a ‘significant reduction' in lease charges from their current levels. |
When I spoke to ORR Chairman Chris Bolt he emphasised that ORR was not endorsing ‘DfT Rail's numbers' in making the reference. But hadn't ORR ‘ducked' the issue by passing the decision on to the Competition commission? No, the onward referral was in line with ORR's duties.
Indeed, not to have made the referral could have been difficult to justify. ORR's duties under Section 4 of the Railways Act meant that ‘the hurdle for not making a reference was high' Mr Bolt explained.
He also argued that as a specialist second-stage investigatory body the Competition Commission is best placed to carry out such a detailed investigation. Hang on, I challenged, ORR are the railway experts, your number crunching on things like Periodic Reviews is legendary while the Competition Commission are railway virgins.
Mr Bolt demurred. The Commission will be able to call on ORR's expertise during the investigation. Maybe so, but expect another consultants' bonanza.
I suspect that there is also an element of ‘realpolitik' in the decision to refer. DfT Rail wants financial remedies: ORR is seeking structural reform, particularly franchising policy. The ability to implement the Competition Commission's conclusions will be vital.
Chris Bolt points out that only the Competition Commission has the powers to impose remedies. Had ORR kept the investigation in house, it would have been limited to accepting undertakings that had been offered voluntarily.
Ironically DfT Rail is of a similar mind. It urges that a price remedy would need to be ‘implemented, monitored and enforced' by the Competition Commission, since the ORR ‘is not in a position to comment on such factors'.
Despite the uncertainty during the investigation, it is unlikely to affect funding of the electric and diesel multiple unit fleets within the ‘1000 vehicles' expected to be acquired in the five year Control Period starting April 2009. However, a resolution to the impasse between DfT Rail and Angel over the additional cars to lengthen Pendolino seems further away.