What is the Economic Impact of Introducing Greater On-rail Competition?



What is the Economic Impact of Introducing Greater On-rail Competition?

Authors

Matthew Shepherd, Oxera Consulting LLP, Remi Martins-Tonks, Oxera Consulting LLP, Stephen Bussell, Ove Arup & Partners

Description

We examine the economic impact of four options proposed for increasing on-rail competition in Great Britain, with accompanying commentary on the level of on-rail competition in Great Britain compared to other European countries.

Abstract

What is the economic impact of introducing greater on-rail competition? In December 2015, Oxera, together with Arup, published an assessment for the UK Office of Rail and Road (ORR) of the expected impact of four options proposed by the UK Competition and Markets Authority (CMA) for increasing on-rail competition between passenger services in Great Britain. This paper summarises that analysis while also comparing rail competition in Great Britain with that in other European countries.

The current structure of the passenger rail industry in Great Britain can be described as competition ‘for the market’, with limited competition ‘in the market’. Competition among operators to secure a franchise is intense, with each procurement attracting a number of credible bidders. The franchising system has provided powerful incentives on bidders to maximise revenue and to reduce costs as far as possible, within the constraints of the franchise agreement and other features of the industry (such as revenue allocation).

However, between franchise bids, operators face very limited competition. Franchise operators in Great Britain rarely compete with one another, while the presence of open access operators has, to date, been restricted to particular parts of the network. Therefore, while the current system enables the government to contract long-term (across government spending cycles) for socially necessary and politically desirable services, the system is also set up to extract monopoly rents from operators—in effect, rail fares are higher than they would be if operators had to compete more with one another for passengers.

The paper will provide some context to the GB rail industry and the level of current competition. In addition, we will provide commentary on how competitive the GB rail market is in comparison to rail markets in other European countries, and the implications of the Fourth Railway Package for future competition in domestic passenger rail markets across member states. This will include reference to the European Commission’s impact assessment of the Fourth Railway Package. We will then describe the four options proposed for introducing greater on-rail competition in Great Britain, before outlining the conceptual framework that was adopted—which was introduced in a 2015 ETC paper (Meaney, A. and Martins-Tonks, R). The results of the analysis will then be discussed and followed by concluding remarks.

We believe that this paper offers a summary of an important and ongoing debate in both Great Britain and Europe relating to on-rail competition. Furthermore, accompanying quantitative analysis is provided that makes use of previous research on how competition impacts can be assessed within an appraisal framework.

Publisher

Association for European Transport