News

The CC imposes a fine on two public transportation service providers for coordination of fares

(20.03.2017.)

On February 27, the Competition Council of Latvia (the CC) adopted a decision to impose fine on two public transport service providers of the capital of Latvia – SIA Rīgas satiksme (RS) and PS Rīgas mikroautobusu satiksme (RMS) – for concluding a prohibited agreement, that RMS fare shall not be lower than the tariff (fare) of RS. The CC imposed a fine in total of almost 2.3 million euros on both companies and a legal obligation to end the prohibited activities, and for RMS to determine fares independently, based on objective, verifiable and substantiated calculations.

Until 2012, public transport services in Riga were mainly provided by the Riga City Council (the RCC) owned RS, although passengers could also use services of eight independent companies at the same time – minibus transport. At the end of 2011, the RCC granted exclusive rights to RS to provide all types of public transport services in the capital city, including transport with increased comfort or minibuses. In 2012, RS announced an open tender selection procedure to attract sub-contractors that could provide public transport services by minibuses.

The tender of RMS conformed the requirements of RS; therefore, at the beginning of 2013, RMS obtained rights to provide public transport services with increased comfort in Riga as a result of concluded sub-contract. The CC assessed the contract, under which RS transferred a part of its exclusive rights to RMS, as a vertical agreement. The CC also determined that competition on horizontal level was restricted during execution of the contract due to the terms and conditions included in contract and fact that both RS and RMS provide competing services and therefore they operate as competitors in relevant market.

The CC detected, that the contract provided provisions on how initial RMS fare is formed – RS tariff as principal tariff plus addition charge for increased comfort if RMS considers it as necessary, as well as the rights for RMS to align fares to the tariff of RS (if RS tariff changes) during the contract period. Later, the contract was supplemented with an agreement, which determined further alignment of RMS fares to RS tariff, i.e., an obligation to increase the principal tariff of RMS if RS tariff has changed. The Commercial Passenger Transport Licensing Commission of the RCC regularly approved the tariff increases submitted by both providers of transport services. In January 2015, tariffs became completely equal of both transport service providers, increasing from 0.70 euros to 1.15 euros. Whereas in the case of buying a ticket from the driver, the fare of 2 euros was determined, disregarding the service provider.

The CC indicates, that price changes is a normal practice in business. Such changes are permissible also in public transport, provided that one passenger trip cost is based on substantiated costs and independent calculations of each transport provider separately, notably if each public transport provider charge a fare directly from passengers and they mutually compete. The CC draws attention to the fact, that the approach for determination of costs-based price is clearly stipulated in the regulatory framework of Latvia and legislation of the European Union in the area of transport.

However, during investigation of the case, the CC did not receive objectively verifiable calculations from RMS, which would substantiate RMS fare alignment to RS tariff. From the CC point of view, it is economically questionable, that costs of both companies could be equal and, consequently, the prime cost for one passenger trip could be equal. Moreover, comparison of financial indicators of RS and RMS confirms – subsidies granted by RCC to RS have significantly increased during contract period compared to the period before the contract. In addition RMS has been able to operate even with profit.

This restriction causes significant harm to consumers and prevents passengers from receiving a service that corresponds to the quality and price. At the same time RS protects himself from competition pressure and, consequently, from the necessity to optimise its operation. RMS is not motivated to make its operation more efficient also, because it has guaranteed concrete level income from provision of services. By agreeing on the minimum tariff of RMS, users of public transport in Riga are prevented from choosing the most favourable provider of public transport services in terms of price.

At the same time, the CC assumes, that the state might have suffered loss due to this contract, because the state compensates costs arising from free transport of different passenger groups, based on economically unsubstantiated tariffs, which are determined as a result of competition restriction.

For the forbidden vertical agreement the CC has imposed a fine on RS equal to 2 163 046.63 euros and on RMS – equal to 87 948.40 euros. The CC has also imposed a legal obligation on both companies to end competition infringement and within three months from coming into force of the CC decision amend the conditions of the contract and the additional agreement stipulating, that RMS fare shall not be lower than RS tariff. RMS is also obliged to determine their fares independently, objectively and reasonably.

For media inquiries

Paula Vilsone
Communications Officer of the
Competition Council of Latvia
E-mail: paula.vilsone@kp.gov.lv