ScotRail deal might be first test for Labour

The acquisition by National Express, the coach and rail group, of ScotRail, the train operator, may prove to be the first test of competition policy for Labour if it wins the general election. No announcement was made on the deal by the Department of Trade and Industry before Parliament was dissolved yesterday, leaving the next government to decide its fate.

The situation could result in a Labour administration referring the deal to the Monopolies and Mergers Commission (MMC). It is likely that Margaret Beckett, the shadow president of the Board of Trade, would rule on the acquisition.

North of the border, ScotRail operates all local and commuter services, although not daytime InterCity trains, over a 1,880-mile network. It is also responsible for sleeper services from Euston to Glasgow, Edinburgh, Aberdeen and Inverness and the reprieved West Highland sleeper to Fort William.

National Express beat competition from Stagecoach, the Scottish-based bus company, and from a management buyout team. The bid from National Express, which has many coach services north of the border, is sure to face intense scrutiny from the competition authorities. The company has held detailed talks with the Office of Fair Trading (OFT) to head off a referral.

Labour has previously threatened to use the OFT and MMC to extract higher service levels from bus operators that ended up running train services in the newly privatised network.

In Scotland, National Express owns Scottish Citylink - one of the largest coach companies - and runs virtually all the trains. In many instances, both companies run rival services. For example, between Glasgow and Inverness Citylink runs eight coaches a day. ScotRail runs three trains on the same route.

Stagecoach, which has a 20 per cent share of the Scottish bus market, was told that it would face an automatic referral if it won the ScotRail franchise. The action irritated Brian Souter, the company's executive chairman, who said his company would not have bid if there had been insurmountable problems.

National Express's vast coach network and its large rail division - with revenues greater than pounds 350m - have seen the company already tangle with the OFT. Last year, the company's involvement in both coach and rail services on the London to East Midlands/South Yorkshire corridor would, according to the OFT, lead to "a significant loss of competition".

The competition authority sought onerous undertakings - including the withdrawal of coach services from London to Derby, Leicester, Sheffield, Chesterfield and Nottingham. The MMC disagreed and National Express was allowed to keep train operator Midland Main Line. However, there were many influential figures in the industry that disagreed.

In evidence to the MMC, the rail regulator, John Swift QC - a barrister specialising in competition law - said that there was a "significant potential public interest detriment" and "only a structural remedy provided an adequate solution. This could require divestment of either the coach or rail business".

Investors' fears about Labour blocking the deal, however, could be allayed by behind the scenes negotiations in the party. The Labour-controlled Strathclyde Passenger Transport Authority, which has a big say in how the service is run, was instructed by party officials not to delay the letting of the franchise.

ScotRail will prove a difficult railway to run. But National Express is unlikely to want to lose it, as it is the company's best buy from British Rail.