OFT closed case: Anticipated acquisition by Govia Limited (through its wholly owned subsidiary, North London Orbital Railway Limited) of the London Rail Concession.
Affected market: Rail
The OFT’s decision on reference under section 33(1) given on 13 December 2006. Full text of decision published on 20 December 2006.
Please note that square brackets indicate figures or text which have been deleted or replaced with a range at the request of the parties for reasons of commercial confidentiality.
Govia Limited (Govia) is a rail franchise holding company of which, North London Orbital Railway Limited (North London Orbital) is a wholly owned subsidiary. Govia is a joint venture between Keolis (UK) Limited (Keolis) and The Go-Ahead Group Plc (Go-Ahead), which have shareholdings in Govia of 35 per cent and 65 per cent respectively.
The London Rail Concession (LRC) is being created by Transport for London (TfL) under an agreement with the Department for Transport (DfT) to transfer responsibility for operating railway passenger services on the North London Line, West London Line, Watford Junction Euston Local Line and Gospel Oak Barking from November 2007 to the successful bidder. (These services are currently operated as part of the Silverlink franchise.) The LRC will also include an upgrade and extension to the East London Line which will be completed by 2009/10. TfL provided the Office of Fair Trading (OFT) with figures showing that the revenue of the businesses that will comprise the LRC for the 2005 financial year was in excess of £70 million.
Govia is one of four short-listed bidders for the LRC[endnote 1]. If successful, Keolis and Go-Ahead are proposing to acquire the LRC through North London Orbital.
This case qualifies for investigation under the EC Merger Regulation (ECMR) [Note 1], however, the parties requested the European Commission (the Commission) to refer the case to the OFT under Article 4(4) of the ECMR. This was granted by the Commission on 31 October 2006 on the basis that the concentration may significantly affect competition in markets in the UK which present all the characteristics of distinct markets. In particular, that point to point passenger transport services confined to London represent local markets and therefore, the principal impact of the concentration on competition is liable to take place on distinct markets in the UK. Govia notified the OFT of its bid by a satisfactory submission, which was considered to be complete as from 31 October 2006. Consequently, the OFT’s administrative deadline is 28 December 2006 and the statutory deadline pursuant to Article 9(6) ECMR and section 34A of the Enterprise Act 2002 (the Act) is 12 January 2007.
If the bid is successful, Govia (through North London Orbital) and the businesses that will comprise the LRC will cease to be distinct as a result of this transaction. The UK turnover of the businesses that will comprise the LRC exceeds £70 million, so the turnover test in section 23(1)(b) of the Act is satisfied [Note 2]. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.
RELEVANT FRAME OF REFERENCE
Govia has identified that upon the commencement of LRC in 2007, there will be two overlaps between rail services operated under Govia’s current Southern rail franchise and rail services provided on the LRC. In particular, Govia runs hourly services to Watford and Harrow on the Southern Watford to Brighton service which has occasional peak stops at Wembley [endnote 2]. This will overlap with the LRC services which include three stopping trains per hour along the corridor between Watford and Euston. The second overlap will be between Kensington Olympia - West Brompton - Clapham Junction on Govia’s Southern Watford to Brighton service and the LRC's services on that corridor between Willesden Junction and Clapham Junction.
Further overlaps may occur between Govia's current Southern rail franchise and services on the LRC’s East London Line once it commences in 2009/10. There may also be overlaps between Go-Ahead’s current bus services and rail services on the LRC's East London Line once it commences.
In travelling between two points, passengers generally have a number of alternative methods of transport, including car, rail, coach, bus and air. Passengers’ choice of transport on any journey depends on a number of differing factors including but not limited to, access to a particular means of transport (either at the boarding or disembarkation point), personal preference, value of time and relative costs of available alternatives. These factors are sometimes included in a wider measure of ‘generalised cost’ [Note 3] of a journey which passengers try to minimise when travelling [Note 4].
Given the conclusions below, that no competition concerns arise in this case on any reasonable frame of reference, it is not necessary for the OFT to conclude on the substitutability between different methods of transport, or indeed, the relevant product frame of reference in this instance.
The OFT and the CC have consistently considered point-to-point transport journeys and network markets as the relevant frame of reference for competition assessment in such cases [Note 5]. Again, however, in light of the conclusions drawn below, that no competition concerns arise in this case on any reasonable frame of reference, it is not necessary for the OFT to conclude on the relevant geographic frame of reference in this instance.
The OFT has considered whether competition concerns arise as a result of the common ownership of the services described above. In particular, whether this transaction would give the parties the ability and incentive to raise fares or reduce service levels on Govia’s current Southern rail franchise, the LRC or Go-Ahead’s current bus services.
In this case, Govia’s current Southern rail franchise is a train franchise subject to regulation by the DfT. The OFT has previously considered that train franchises limit the scope for train operators to increase fares or reduce service levels [Note 6].
The service provided under the LRC will be operated under a concession agreement with TfL (the LRC agreement). Through the LRC agreement, TfL will regulate the activities and operations of Govia. Detailed service requirements are set out in the LRC agreement as ‘Service Level Commitments’ which specify station stops; hours of operation; number of services per day; service intervals; journey times; and types of rolling stock to be used. TfL also specifies the level of all fares.
Under the LRC agreement, all revenue from fares accrues to TfL. Govia's main source of revenue will be via subsidy payments from TfL at levels agreed as part of the bidding process. The LRC agreement provides various incentive schemes which would allow Govia to accrue revenue however, none of these link performance payments with passenger numbers.
Finally, the current bus services identified by Govia as potential future overlaps with the LRC, occur in the London area and are all regulated by TfL in a similar fashion to rail franchises [Endnote 3].
Therefore, if successful in obtaining the LRC, the parties will have no ability or incentive to set or alter fares, and very little scope to alter service levels on services regulated by TfL under the LRC agreement. Nor will it have an incentive to raise fares or reduce service levels on the overlapping flows from Southern rail franchise which is regulated by the DfT or the London bus services regulated by TfL. On this basis, no competition concerns arise in respect of the proposed transaction.
THIRD PARTY VIEWS
None of the third parties contacted in this investigation raised any concerns.
Govia is one of four short-listed bidders for the award of the LRC by TfL. [See Endnote 1] The LRC agreement is highly prescriptive of fares and service levels and all revenue from fares accrues to TfL. Therefore, any incentive to raise fares or reduce service levels is removed.
Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.
- Council Regulation (EC) No 193/2004 of 20 January 2004 on the control of concentrations between undertakings, OJ  L24/1.
- The OFT understands that the DfT intends to classify the LRC (by statutory instrument prior to the commencement of the LRC in November 2007) as ineligible for franchising and therefore, it will not be a Franchise Agreement or constitute a relevant merger situation under the provisions of the Railways Act 1993.
- The generalised cost of a journey includes in-vehicle time; the time spent travelling between stations/stops at each end of the journey, and any additional cost in doing so (e.g. fares); any interchange penalty reflecting the need to change services or modes to complete a journey; the fare paid for the journey; and sometimes other aspects of the journey such as convenience, reliability or 'image' of the mode of transport used.
- Anticipated acquisition by National Express Group plc of the Thameslink/ Great Northern passenger rail franchise, OFT Decision 3 August 2005.
- See for example, FirstGroup plc and the Scottish Passenger Rail franchise, CC Report 28 June 2004 and Anticipated acquisition by London and South Eastern Railway, a wholly owned subsidiary of Govia Limited, of the Integrated Kent Rail Franchise, OFT Decision 28 March 2006.
- See for example, Anticipated acquisition by FirstGroup plc of the Intercity East Coast Franchise, OFT Decision 21 December 2004 and Anticipated acquisition by London and South Eastern Railway, a wholly owned subsidiary of Govia Limited, of the Integrated Kent Rail Franchise, OFT Decision 28 March 2006.
- Although Govia was one of four short-listed bidders at the date of this decision, TfL announced two final bidders on 15 December 2006 so it is now one of two short-listed bidders.
- Govia wishes to clarify that Southern runs hourly services to Watford and Harrow on the Southern Watford to Brighton service which has occasional peak stops at Wembley.
- Govia wishes to clarify that the current bus services identified as potential future overlaps are solely Go-Ahead services.