Leasing of rolling stock for franchised passenger services

26 April 2007
ORR/11/07

The Office of Rail Regulation (ORR) today announced its decision to refer the leasing of rolling stock for franchised passenger services to the Competition Commission (CC) for further investigation.

The decision follows a full public consultation on ORR’s competition assessment and the draft market reference. Following careful consideration of consultation responses, ORR remains of the view 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.

ORR believes that a reference to the CC is an appropriate and proportionate response in the light of the competition concerns it has identified, especially given the size and importance of these markets to the UK rail industry and the powers available to the CC to effect any remedy.

Chris Bolt, Chairman of ORR, said:

"Rolling stock leasing is a significant part of train operating costs – around £1billion a year.  Our review of these markets has identified features that appear to us to prevent, restrict or distort competition – the test for a reference to the Competition Commission.  This means that train operating companies may be paying higher prices and/or receiving a poorer quality of service than if competition was more effective.

"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."

Notes for editors

  1. The decision,  ‘The Leasing of Rolling Stock for Franchised Passenger Services’  is available from the ORR website at http://www.rail-reg.gov.uk/upload/pdf/325.pdf. 
  2. The minded to refer decision is also available from the ORR website at http://www.rail-reg.gov.uk/upload/pdf/308.pdf
  3. ORR received a submission from DfT on 28 June 2006 requesting ORR to make a market investigation reference to the Competition Commission under section 131 of the Enterprise Act 2002 (EA02). ORR commenced this market study on 7 July 2006. 
  4. Under section 131 of the EA02, ORR may make a market investigation reference to the CC where it has reasonable grounds for suspecting that any feature, or combination of features, of a market in the United Kingdom for goods or services, prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom. 
  5. The three principal passenger rolling stock leasing companies are:
              i) Angel Trains Limited;
              ii) HSBC (Rail) UK Limited;
              iii) Porterbrook Leasing Company Limited.
  6. Based on evidence from key stakeholders during our study, we suspect that there are features of the markets which are preventing, restricting or distorting competition. The key issue is a lack of liquidity in the market. This arises from features that are both inherent and as a result of the way in which the franchising process impacts on the market, including the following:
    • technical and operational characteristics of rolling stock;
    • limited availability of a pool of surplus stock of viable existing vehicles;
    • the limited incidence of coterminous franchises;
    • the switching costs of transferring stock between franchises;
    • the specificity of invitations to tender;
    • the commercial case for introducing new-build stock;
    • the time-limited nature of railway franchises relative to new-build lead times;
    • franchise focus on deliverability and security of supply;
    • the higher rental cost of short-term leases and uncertainty over the value of call options and the precise circumstances in which they can be exercised;
    • limited new build activity in the absence of Government support; and
    • limited buyer incentives.

Press enquiries

ORR Press Office – 020 7282 2188/2007

Glossary