Affected market: Passenger transport services
The OFT’s decision on reference under section 33(1) given on 7 December 2006. Full text of decision published on 18 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.
MTR Laing Metro Limited (MTR Laing) is a joint venture company between MTR Corporation (Silverlink) Limited and Laing Rail Limited which was established to prepare and submit a tender for the London Rail Concession. Laing Rail Limited's ultimate parent company is John Laing plc.
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.
MTR Laing is one of four short-listed bidders for the LRC. If successful, MTR Corporation (Silverlink) Limited and Laing Rail Limited will acquire joint ownership over the new LRC business through MTR Laing.
MTR Laing notified the OFT of its bid by Merger Notice effective from 31 October 2006. The OFT's (extended) statutory deadline is 12 December 2006.
If MTR Laing’s bid for the LRC is successful, MTR Laing 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 Enterprise Act 2002 (the Act) is satisfied [Note 1]. 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
MTR Laing has identified only one possible area of overlap on passenger rail services between central London and Harrow. Through Chiltern Railways, John Laing plc operates a passenger rail service with two flows per hour between London Marylebone station and Harrow-on-the-Hill station. The LRC will operate a service with up to three flows per hour from London Euston station to a different station in Harrow - Harrow and Wealdstone. Neither party operates any other transport services such as bus or coach.
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 2] of a journey which passengers try to minimise when travelling [Note 3].
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.
Geographic frame of reference
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 4]. 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 MTR Laing and/or John Laing plc the ability and incentive to raise fares or reduce service levels on the LRC and/or Chiltern Railway services respectively.
In this case, the service provided by Chiltern Railways 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 5].
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 MTR Laing. 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 and determines the range of tickets sold. [Endnote 1]
Under the LRC agreement, all revenue from fares accrues to TfL. MTR Laing’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 MTR Laing to accrue revenue however, none of these link performance payments with passenger numbers.
Therefore, if successful in obtaining the LRC, MTR Laing 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 which are regulated by the DfT. 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.
MTR Laing is one of four short-listed bidders for the award of the LRC by TfL. 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.
- 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.
- TfL wishes to clarify that it does not directly determine the range of tickets sold but MTR Laing is obliged, by agreement, to provide a certain range of tickets.