State Aid
State Aid is an area of law peculiar to the EU and its trading partners. It is enforced by the Commission and prohibits unfair subsidies to businesses on the grounds that they distort trade between Member States. Most recently it has been in the news as the Commission’s tool for challenging (among others) Apple’s tax affairs in Ireland. Under a Partial Brexit, the State Aid restrictions would continue to bind the UK, although the enforcement authority is likely to be a domestic body instead of the Commission.
While a Full Brexit might give the UK greater flexibility in supporting domestic industry such as rolling stock manufacturers, as a party to the WTO treaties the UK would be subject to restrictions in those treaties (analogous to the State Aid regime), which would limit the UK’s ability to subsidise UK industry.
Competition Law
The impact of EU-inspired Competition law on the rail industry is seen most often in the context of rail franchise competitions.
For example, the Competition and Markets Authority (CMA) recently announced that it was carrying out an in-depth investigation into Arriva’s integration with Northern. A trade deal that did not tie the UK to the European competition regime would, in theory, give the UK the opportunity to make significant changes to domestic competition law. However, as we explain below, it seems unlikely that it would do so.
Competition law and its cousin (merger control) now exist in more than 100 countries, including all members of the Organisation for Economic Co-operation and Development (OECD).
It is unlikely that a post-Brexit UK would not have some form of competition law and merger control, and the competition law model of choice for international legislators has been that of the EU (rather than the US).
Further, the Commission is a highly respected competition authority and its views on behavioural competition law and merger control are taken into account by various foreign competition authorities. While the CMA may no longer be compelled to draw the same conclusions as the Commission in a post-Brexit scenario, in most cases it is likely to be persuaded by them.
Procurement
UK public procurement law is based on EU Directives, which give effect to the EU principles of freedom of movement of goods and the freedom to provide services. These requirements have not only opened the UK market to foreign competition, they have also presented significant opportunities for UK operators seeking to expand their operations in EU countries.
The requirements of EU procurement law are reflected not only in the UK’s general public procurement legislation, but also in rail- specific legislation such as the Railways Act 1993 and a swathe of subsequent rail regulations.
In a Full Brexit scenario, the UK would (subject to possible competition and state aid considerations) be able to decide what changes it wishes to make to its domestic procurement law, including its rail legislation. However, there is general (albeit not unanimous) political consensus around the need for competitive procurement, and with legislative resources stretched it is hard, at the moment, to envisage a strong desire to change the procurement regime significantly.
Furthermore, the ‘no regulation’ approach is unlikely to come to pass in relation to rail, not least due to the current Government’s desire to encourage foreign investment in the industry. The average number of bids the DfT receives for franchise competitions has reduced from four to three since 2013, and both the West Midlands and South Western franchises have only two bidders at the final stage.
A recent report by the Public Accounts Committee stated that there is a “real risk to value for money if market interest in operating rail franchises declines any further”, and retaining this openness to EU bidders is more likely to facilitate an agreement that enables UK bidders to compete for EU rail contracts. It seems unlikely, therefore, that the UK Government would opt to restrict or significantly alter the basis of competition for UK rail franchises.
It does not follow, however, that there will be no change - depending on the political will, there might be a desire to tinker with other current procurement restrictions. For example, a revision to restrictions on vertical integration is possible, and this could assist the creation of a vertically integrated rail infrastructure, building on the recent moves to regionalise Network Rail and its associated ORR regulation. Such a change would seem increasingly likely in the event of the Labour party winning the next General Election, with both Jeremy Corbyn and Owen Smith advocates for renationalising the railway.
