Select Committee on European Union Fortieth Report


Letter from Derek Twigg MP, Parliamentary Under Secretary of State, Department for Transport to the Chairman

  I am writing further to my letter of 24 November 2005[38] on the above European Commission proposal.

  Sub-Committee B considered the EM on 17 October, and the letter on 12 December 2005. Your letters of 19 October and 14 December commented that the Sub-Committee should like to see the results of the public consultation and the full Regulatory Impact Assessment (RIA).

  The Department launched a full public consultation exercise on 21 October 2005, accompanied by a partial RIA, to gauge the views of key stakeholders on the impact of the revised proposal (which I copied to you for your early consideration). The consultation period ended on 13 January 2006, the results of which have been amalgamated into a Summary document and used to help my officials to update and revise the RIA. Both these documents are attached for your further consideration.

  The headline message from the consultation is that stakeholders appear to be realistic that the draft proposal would provide some increase in legal certainty and would not require drastic changes to existing operations. Whilst the proposal would not require competitive tendering of services, stakeholders appear to be content that it might make a modest contribution to market opening in some Member States where the public transport market is currently closed.

  Overall, respondents strongly reinforced the Department's position set out in the partial RIA.  A number of respondents expressed concern at the potentially significant public sector costs, particularly if the early termination of light rail schemes proved necessary which could lead to compensatory claims. We continue to believe there are reasonable prospects of success in securing acceptable changes to the proposal, particularly following the recent Transport Council Working Group discussion on this dossier where a number of Member States expressed similar concerns on this issue.

  Respondents also supported the Department's concern that the emergency provisions (allowing a one year extension to a contract or direct award) maybe insufficient for heavy rail services. There was some concern that the need to put in place a contract between a competent authority and a transport operator should not be overly prescriptive or burdensome. And some doubt was raised as to whether GB commercial (deregulated) bus services would be compatible with the regulation as proposed. We have reflected these concerns in the summary and RIA and also taken them into consideration when forming our negotiating position for discussions on this dossier.

  It is expected that the proposal will be the subject of a policy debate at the Transport Council on 27 March, and that following this the Presidency will reflect on whether to attempt to achieve a political agreement at the June Council. I shall, of course, continue to keep you informed of the progress of negotiations.

16 March 2006

Letter from the Chairman to Derek Twigg MP

  Thank you for your letter of 16 March 2006, which Sub-Committee B considered at its meeting on 27 March 2006.

  We note that your consultation uncovered a number of concerns amongst UK stakeholders, notably over the potential public sector costs; over the emergency provisions being insufficient for heavy rail services; over the potential for unnecessary red tape as well as doubts over the compatibility of commercial bus services in the UK with the Regulation. Please inform us whether a full Regulatory Impact Assessment will be produced.

  We hope that you will be able to resolve these matters in forthcoming negotiations, and would be grateful if you could keep us informed of any progress on this dossier. We will maintain the scrutiny reserve at this stage.

29 March 2006

Letter from Rt Hon Douglas Alexander MP, Secretary of State, Department for Transport to the Chairman

  Derek Twigg wrote to you about the above European Commission proposal on 16 March reporting on the outcome of our consultation exercise and enclosing an updated and revised Regulatory Impact Assessment (RIA). Sub-Committee B considered the letter on 27 March and you wrote on 29 March, noting that there were remaining concerns to be addressed in negotiations, asking to be kept informed of progress and whether a full Regulatory Impact Assessment will be produced.

  There have been a number of Working Group discussions on this proposal since March, most recently on 4 and 12 May, and although some issues remain to be resolved at the Transport Council on 9 June, a great deal of progress has been made. I am writing to update you on these developments and to let you know that the Austrian Presidency has now confirmed that it will seek a political agreement at the Council.

  Following the publication of the Commission's proposals in July 2005 and in the light of responses to our consultation, we established a UK negotiating strategy which had two main objectives:

    —  first, and foremost, to secure changes to the proposal to ameliorate potentially significant adverse effects on UK public transport arrangements; and

    —  second, to seek to amend the proposal in such a way as to create a more level playing field for public passenger transport operators and to create an environment for further opening of the passenger transport market.

  In official-level negotiations in the EU Transport Council Working Group since January, we have largely secured the first objective. In particular, the latest text would:

    —  allow all existing UK light rail contracts to remain in place and would provide a satisfactory framework for taking forward any new light rail schemes;

    —  allow authorities, such as Transport for London, to operate services outside the jurisdiction of their authority;

    —  safeguard the continuation of GB commercial (deregulated) bus services outside London; and

    —  offer a satisfactory period of time for a new contract to be put in place following an emergency.

  We have also had some success in securing changes towards the second objective; which has been increasingly important since ministers agreed at the December 2005 Transport Council that Member States should be free directly to award long-distance and regional rail contracts. In particular, the latest text would:

    —  strengthen the rules designed to ensure that operators which benefit from contracts awarded directly without competition are not over-compensated;

    —  require authorities which directly award rail contracts to publish detailed information about those contracts to allow proper public scrutiny; and, to tell operators which unsuccessfully challenge a direct award why they failed; and

    —  require the Commission to publish a post-implementation report which, among other things, would contain an assessment of the effects of direct awards.

  We have also been pursuing a provision which would allow authorities that award contracts competitively to exclude from tendering exercises any operator which obtains more than 50 per cent of its overall revenues from directly awarded contracts (a so-called "reciprocity" clause). Only four other Member States support this, so it cannot be secured. But we have been using it as a lever to try to limit further extension of the scope in the. regulation for directly awarding contracts and to further strengthen safeguards to limit the potential for beneficiaries of direct awards to compete unfairly in the market.

  On the degree of direct award allowed, three major issues remain to be resolved:

    —  first, whether the possibility of direct award for long-distance and regional heavy rail contracts which ministers agreed to in December 2005 should be extended to suburban and urban services;

    —  second, the de minimis value of contracts which may be directly awarded. Here, the Commission proposed an annual financial value of less than €1 million or, alternatively, the provision annually of less than 300,000 km of services. But a small group of Member States is insisting on a single value of 1 million km ostensibly to protect small and medium sized enterprises (SMEs); and

    —  third, the extent to which provisions relating to awards to "in-house" operators should be relaxed.

  While we have largely met our key negotiating objectives, it is important we maintain pressure to limit the further extension of the potential for direct award. It seems we would not have sufficient support to block direct award for all rail services and this point was effectively lost at the March Council (although it might well be opened-up again when the regulation goes to the European Parliament for Second Reading). But we are in a much stronger position to fight a significant increase in the de minimis direct award level, because the group lobbying for a value of 1 million km appears to have very little support. We have had discussions with representatives of UK public transport operators who have indicated that they could live with the de minimis level set at about 500,000 km per annum, which would represent a service operation with an average of six or seven buses. And, informal contacts suggest this would be acceptable to many Member States and to the Commission. On the third issue, we will continue to monitor developments closely and will seek to ensure that the constraints on in-house operators proposed by the Commission are not unduly watered down.

  Looking forward to the Council, our proposed strategy is to:

    —  continue to seek further safeguards against direct award including shorter maximum lengths for such contracts vis-a"-vis competitively awarded contracts;

    —  consider with like-minded Member States the possibility of seeking to trade (a) conceding of direct award for all rail contracts and without a reciprocity clause for (b) a Council declaration which makes clear that agreement of the PSO dossier does not close the door to further liberalisation in the rail sector through other mechanisms eg through the opening-up of access to the track as has recently been agreed for international services;

    —  seek to limit the de minimis provision to a maximum of 500,000 km; but be prepared to move to 600,000 km should that prove impossible; and

    —  ultimately, be prepared to support a deal at the Council if the final text on the table appears to offer a satisfactory balance.

  In my view, this is a pragmatic approach which recognises that:

    —  the majority of Member States are unwilling at this time to open up their public transport markets to competition;

    —  the changes to the Commission's proposal which we have secured offer substantial safeguards against beneficiaries of direct awards competing unfairly in open markets;

    —  the proposed publicity requirements may well lead to citizens demanding to know why their authorities favour direct award over competitive tendering;

    —  a new regulation would provide much greater legal certainty for operators and authorities in the future.

  While it has not been possible to secure everything we might have wished for during the negotiations, I feel that the proposal, as revised, now goes a long way to reaching a satisfactory balance although we shall, as outlined, still try to obtain further improvements at the Council. On this basis, I hope that the Committee can agree to lift its scrutiny reserve. I will, of course, write to your Committee again after the Council and will keep you informed of the progress of this dossier throughout the remainder of the European legislative process. You will also wish to know that my officials will update the RIA in the light of any agreement in the Council and we shall of course let you have sight of this when it is ready.

  You will appreciate the sensitivity of our proposed negotiating strategy in the run-up to the Council, and I should therefore be grateful if you would treat it in confidence until 9 June at the earliest.

18 May 2006

Letter from the Chairman to Rt Hon Douglas Alexander MP

  Thank you for your letter of 18 May, which Sub-Committee B considered at its meeting on 5 June.

  We are very grateful to you for the fullness of your explanation of negotiations ahead of the June Transport Council, and are satisfied that, with the exception of the proposed direct awards system, satisfactory progress has been achieved.

  We are content to lift scrutiny on this proposal at this stage, and would be grateful for a report on the outcome of negotiations in the Transport Council.

6 June 2006

Letter from Stephen Ladyman MP, Minister of State for Transport, Department for Transport to the Chairman

  Douglas Alexander wrote to you about the above proposal on 18 May 2006 outlining our proposed negotiating strategy for the Transport Council on 9 June. I am now writing to inform you of the outcome of the Council, at which I represented the UK.

  As set out in Douglas Alexander's letter, the key issues that remained to be settled were:

    —  the proposal to extend the possibility of direct award for long-distance and regional heavy rail services to suburban and urban services, which we opposed but with very little support;

    —  the maximum size of small contracts that could be directly awarded. The UK preferred a maximum of 500,000 vehicle-kilometre. Others were arguing for 1,000,000 vehicle-kilometres;

    —  the extent to which provisions relating to awards to "in-house" operators should be relaxed.

  We also proposed to:

    —  continue to press for further "reciprocity" arrangements (eg any operator receiving more than 50 per cent of its revenues from directly awarded contracts to be excluded from competitive tenders). The aim was to limit demands for further extension of the scope for direct award, as we did not expect that additional reciprocity provisions could be agreed;

    —  seek safeguards against abuse of directly awarded contracts, such as shorter contract lengths compared with competitively tendered contracts;

    —  consider with like-minded states the possibility of seeking a Council declaration making it clear that the PSO regulation does not close the door to rail liberalisation through other mechanisms.

  After initial negotiations in the morning, the Presidency proposed a compromise text which:

    —  provided for direct award for all rail contracts;

    —  set a 500,000 vehicle-kilometre limit for directly awarding small contracts;

    —  included satisfactory provisions relating to awards to "in-house" operators;

    —  retained unchanged the measures on transparency that the UK had supported;

    —  reduced the contract length for directly awarded rail contracts to 10 years, compared to 15 years for competitively tendered contracts;

    —  included reciprocity provisions only for operators for whom 50 per cent of their business is not compliant with the regulation;

    —  extended the period before the Regulation would come fully into force from 2 years for the first provisions and an additional 8 years for the provisions concerning direct award, to 3 years and 12 years respectively.

  It was also clear that there was insufficient support for anything other than a very weak Council Statement on rail liberalisation. We are therefore considering with some other Member States the potential for a more strongly-worded minutes statement.

  This compromise was a long way short of the demands of some other Member States, which wanted significantly greater scope for direct awards. From a UK perspective the compromise met nearly all of our objectives. Although direct award was extended to suburban rail, this was counterbalanced by transparency measures introduced during earlier negotiations, and by reducing the maximum length of directly awarded rail contracts to 10 years—which will ensure that such contracts come under regular scrutiny and increase the likelihood that the benefits of competition are recognised in such cases. And the maximum size of small contracts for which direct award would be permitted was kept down to 500,000km. In addition, in earlier negotiations we had secured a strengthening of the rules designed to ensure that operators are not over-compensated for directly awarded contracts. This contrasts with the existing situation where Member States are effectively permitted to award any contract directly, regardless of modality or size, with no transparency or limit on contract length.

  As noted in Douglas Alexander's letter, we had already succeeded during earlier negotiations in removing most provisions that could cause problems for the UK. Existing contracts which would have needed to be renegotiated under the early drafts of the regulation, potentially triggering large compensation payments, will now be able to remain in place. Authorities, such as Transport for London, will be able to continue to operate services extending outside their geographical jurisdiction. Existing UK commercial (deregulated) bus arrangements will not have to be changed. Emergency contracts will be able to have a satisfactory length to enable a new contract to be put in place.

  The compromise package therefore improves upon the current situation, and avoids negative impact on existing UK public transport arrangements, while achieving the goal of increasing legal certainty. Although only very modest market opening would be likely to be achieved, this recognises the fact that the majority of Member States are unwilling at this time to open their public transport markets to competition; and a range of safeguards and transparency arrangements are included to mitigate the effects of direct award. In view of this, I supported the compromise package. A final Council common position is likely to be agreed under the Finnish Presidency, and will then go to the European Parliament for their consideration. I will, of course, keep your Committee informed of the outcome.

29 June 2006

Letter from the Chairman to Stephen Ladyman MP

  Thank you for your letter of 29 June, which Sub-Committee B considered at its meeting on 10 July.

  We were grateful to you for the fullness of your report on the outcome of the Transport Council negotiations on this important dossier and welcome the Government's efforts to secure compromise over the potentially anti-competitive direct award system.

  We regret that "only very modest market opening" is likely to be achieved, but understand that the majority of Member States were reluctant to support greater liberalisation and trust that the Government will continue to press for greater progress. We would of course be grateful for any further updates as the Finnish Presidency takes the proposal forward. We are reassured that the Finnish Presidency appears to have similar priorities for transport policy to those of the United Kingdom.

12 July 2006

38   Correspondence with Ministers 45th Report of Session 2005-06, HL Paper 243, pp 163-178. Back

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