UK: Merger Control For Rail Franchises

Last Updated: 13 October 2015
Article by Rebecca Owen-Howes

In March 2013, the Department for Transport announced its new procurement programme for rail franchises. Since then, seven franchises have been awarded, including two by subsidiaries of Transport for London (TfL).

When do the merger rules apply?

The award of a rail franchise may be caught under either the EU or UK merger rules. The application of the EU rules depends on the size of the transaction, as measured by the turnover of both the bidder and the franchise business. If the transaction is sufficiently large, it will be reviewed by the European Commission. Otherwise, the award will be assessed under the UK regime by the Competition and Markets Authority (CMA) (the relevant jurisdictional thresholds are set out below). There is no risk of investigation by both authorities – if the EU merger regime applies, then the UK regime cannot.

At the UK level, the Railways Act 1993 provides that entering into a rail franchise agreement constitutes the acquisition of control of a business and is therefore subject to merger control. This does not extend, however, to the award of a franchise or a concession by TfL, and the CMA can review such awards only if they constitute a relevant merger situation (as defined in the Enterprise Act 2002).

For both of the TfL awards since 2013 (the Docklands Light Railway franchise and the Crossrail concession), the CMA found that the bidder was unable to exercise material influence over the franchise/concession and that therefore a "relevant merger situation" was not created. The European Commission took a similar view in respect of the Docklands Light Railway franchise (where the parties met the relevant EU turnover thresholds) and found that the EU merger rules did not apply.

What are the jurisdictional thresholds?

EU regime

The EU merger rules apply where the group turnover of the bidder and that of the franchise business satisfies either of the turnover tests, shown in the table below. Where the test is met, the bidder must notify the European Commission of the award and receive clearance before operating the franchise. The penalties for not doing so are severe – the parties risk fines of up to 10 per cent of their worldwide turnover.

EU Turnover
Test 1
EU Turnover
Test 2
Worldwide turnover threshold:
the combined aggregate worldwide turnover of the bidder and its corporate group and the franchise business must exceed:
€5,000 million €2,500 million
EU turnover threshold: the aggregate EU-wide turnover of each of at least two of the parties must exceed: €250 million €100 million AND the combined aggregate turnover of all the parties in at least three EU Member States must exceed €100 million AND in each of three of those same EU Member States, the aggregate turnover of each of at least two parties must exceed €25 million

The above turnover tests are subject to the "two-thirds rule": where all the parties achieve more than two-thirds of their EU-wide turnover in the UK (or another Member State), the UK merger regime will apply rather than the EU rules.

UK regime

The CMA may review the award of a franchise under the UK merger rules, provided that either:

  1. the UK turnover of the franchise business exceeds £70 million; or
  2. the award results in the bidder supplying at least 25 per cent of passenger rail services in the UK (or a substantial part of the UK – in practice, this can be a relatively small part of the rail network).

Unlike the EU regime, in the UK, parties are not required to notify transactions to the CMA where either (a) or (b) above is met. However, if they do not do so, the CMA can investigate the award on its own initiative and ultimately unwind a franchise agreement if it is found to result in a substantial lessening of competition (SLC) in the UK.

Competitive assessment

The European Commission can block the award of a franchise if it significantly impedes competition . The CMA can prohibit the award if it may result in an SLC within any market(s) in the UK. In both cases, it may be possible for the award to be cleared subject to the parties giving undertakings to mitigate the identified negative effects on competition.

In assessing whether a franchise may have a negative effect on competition, bidders will need to analyse the extent to which their activities overlap with those of the franchise business, including an individual assessment of competition on individual point-to-point flows ("competition in the market"). The focus of the assessment will be rail-on-rail overlaps, but it will also need to consider rail-on-bus overlaps and rail-on-coach overlaps if the bidder operates these (or other) modes of transport. Whether the overlapping services do in fact compete will depend on a detailed analysis of factors such as journey time and fares for each flow. Account will also need to be taken of third parties that may also compete on these flows (for example, underground, tram, aeroplane).

It should also be mentioned that the authorities' competitive assessment will also consider "competition for the market", that is competition for rail franchises in the UK.

Bidders will need to carry out their own competitive assessment at an early stage in the award process, given that the invitations to tender (and to pre-qualify) will require bidders to highlight any competition issues and demonstrate how these will be addressed to ensure there is no delay to the procurement process.

Impact on the timetable

Under the EU merger rules, Phase 1 clearance takes at least 25 working days from the date of notification. Generally speaking, the Commission will not enter into pre-notification discussions with the parties until the preferred bidder has been selected, although the Commission has been more flexible recently.

At the UK level, the CMA encourages bidders to enter into pre-notification discussions shortly after submitting their bids (four-six weeks prior to the expected award date). Ideally, at this time, bidders should also consider possible undertakings in lieu of a Phase 2 investigation. Although the CMA will formally investigate only the winning bid, pre-notification discussions with all bidders allow the investigation timetable to start as soon as the winning bidder is selected.

The CMA has 40 working days from acceptance of the winning bidder's notification to announce its Phase 1 decision. In the event the CMA identifies an SLC, there will be an additional period in which to agree undertakings with the parties to deal with the competition concerns. In the recent case of the InterCity East Coast franchise, the period between notification by the parties and acceptance of undertakings by the CMA was around 6.5 months.

As already mentioned, it is possible that bidders for rail franchises will also meet the EU jurisdictional thresholds. In such a case, it is likely that the matter will be referred back to the CMA for consideration under the UK merger rules (which happened with the Thameslink, Southern and Great Northern franchise award to Govia). The CMA is keen for this to happen since rail franchises concern only the UK, and the European Commission may not be able to impose remedies in the way that the CMA could. The referral-back process adds an additional period to the timetable for clearance.

The key message for all bidders is that merger control must form part of any initial assessment. The short timetable between announcing the winning bid and commencing operations means that bidders need to consider possible competition issues at the very beginning of the procurement process.

This article was originally published by Rail Professional.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions