Institute for Transport Studies
FACULTY OF EARTH AND ENVIRONMENT
VERTICAL SEPARATION OF RAILWAY INFRASTRUCTURE DOES IT ALWAYS MAKE SENSE?
Jeremy Drew & Chris Nash
September 2011
Contents
• Objectives of vertical separation
• Literature on impact on costs
• Impact on competition and demand:
•
Freight – competition
•
Freight – rail growth
•
Freight – modal share
•
Passenger – rail growth
•
Passenger – modal share
• Other factors affecting growth
• Conclusions
The objective of reform is a more efficient
railway – not competition for its own sake
• Vertical separation often assumed necessary to eliminate discrimination
in gaining access to infrastructure - and therefore to develop competition.
Is this true?
• Competition is not, however, an objective in its own right –the objective
is a more efficient railway with better services and lower costs.
• Any efficiency advantages arising from competition must be compared
with possible reductions in efficiency
Vertical separation and costs
Vertical separation may raise costs by:
- Increasing transactions costs (track access contacts,
performance regimes, etc)
- Reducing pressure on infrastructure manager (publicly
owned monopoly at one remove from the ultimate customer)
- Leading to poorer decisions, for instance on investment,
due to asymmetry of information and misalignment of
incentives
- May vary with detail (e.g. track access charges,
performance regimes etc)
Evidence on costs
• US studies find economies of scope – but of doubtful
relevance as based only on vertically integrated railways
• Specific studies of transaction costs show them to be
higher with vertical separation but not a big share of total cost
• Many aggregate studies of European countries problematic
(inadequate consideration of external factors influencing
costs)
• Best recent study (Cantos et al, 2010) finds that railways
which combine vertical separation and competition are the
most efficient (but Mizutani, 2011, finds this only true for less
densely used networks)
Major questions not even addressed
• To what extent does vertical separation lead to greater
competition?
• To what extent does it lead to faster growth in traffic and/or
market share?
• This paper examines the evidence separately for EU15 (+
Norway) and EU12
There is more freight competition in
vertically separated railways
Average no of
freight licenses/
country
Market share non
incumbent freight
operators (%)
Rail market opening
score (HHI)
VS
12
15
0.72
VI
43
12
0.80
VI ex DB
15
11
0.82
EU15 VS
10
14
0.77
EU15 VI
85
8
0.87
EU15 VI ex DB
5
5
0.92
EU12 VS
16
16
0.55
EU12 V1
22
16
0.74
Structure/
region
Yellow indicates most competition.
Herfindahl-Hirschman Index is defined as the sum of squares of the market shares
of each individual firm.
For both EU15 and EU 12, rail freight growth has
been faster for vertically integrated railways than
for vertically separated ones.
Indices of tonne km: EU15 (1998=100)
160
150
140
Indices of tonne km: EU 12 (2002=100)
160
EU15 VS
EU15 VS ex France
130
150
140
VS 12
VI 12
130
EU 15 VI
120
120
110
110
100
100
90
90
80
80
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
2002
2003
2004
2005
2006
2007
2008
In EU15, highest growth was in Germany, Austria
(VI) and UK (VS) whereas France (VS) declined
rapidly. In EU12, Lithuania (VI) had most growth
Indices of tonne km: selected EU15
countries (1998=100)
•
180
Indices of tonne km: selected EU12
countries (2002=100)
180
SE
UK
IT
160
RO
CZ
LT
PL
LV
160
140
140
FR
DE
AT
120
120
100
100
80
80
60
60
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
2002
2003
2004
2005
2006
2007
2008
Findings are also similar when modal share is
analysed
Rail freight modal share: EU15
Rail freight modal share: EU 12
80%
80%
70%
70%
SE
UK
IT
60%
50%
60%
FR
DE
AT
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
RO
2002
2003
CZ
LV
LT
PL
2004
2005
2006
2007
2008
In contrast, for passengers in EU15, vertically
separated railways have grown faster than integrated
ones – for EU12, both groups have declined.
Indices of passenger km: EU15
(1998=100)
140
Indices of passenger km: EU 12
(2002=100)
140
EU15 VS
130
130
EU15 VI
120
120
110
110
100
100
90
90
EU12 VS
EY12 VI
2005
2007
80
80
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
2002
2003
2004
2006
2008
Rail’s share of passengers by country has grown
most with vertically separated railways in EU15
Indices of passenger km: EU15
(1998=100)
12%
Indices of passenger km: EU 12
(2002=100)
20%
18%
10%
16%
14%
8%
12%
6%
10%
8%
4%
UK
IT
FR
6%
4%
2%
DE
ES
NL
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
RO
CZ
PL
HU
2%
0%
2002
2003
2004
2005
2006
2007
2008
In EU15, fastest growing passenger railways are UK,
France and Spain ((VS). Lower growth was
experienced in Germany and Italy (VI) and the
Netherlands (VS)
Indices of passenger km: EU15
(1998=100)
Indices of passenger km: EU 12
(2002=100)
150
150
UK
IT
FR
140
140
130
DE
ES
NL
RO
130
CZ
PL
HU
120
120
110
110
100
100
90
90
80
80
70
70
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
2002
2003
2004
2005
2006
2007
2008
Causes of passenger growth
• The rapid growth of passenger traffic in France and Spain
cannot however be attributed to competition as there has
been none.
• Investment in high speed rail has clearly been the major
cause of growth in these countries
• In the UK, there is little open access operation - nearly all
traffic is carried by franchise operators which rarely compete
with each other on the tracks.
• Vertical separation is not essential for franchising (the
McNulty report has recently advocated a degree of vertical
integration for British franchises)
Other factors affecting growth include
government support and regulation
• Difficult to separate impact of VS from that of other
changes
• Government support may be key factor explaining rail
growth in Germany – and was made politically more
acceptable in Sweden
• Lack of government support may partly explain low growth
in EU12
• Regulation is also a major factor determining competition and hence presumably growth – strong regulation may partly
explain rapid growth in Germany
Conclusions
• The analysis shows no correlation between vertical
separation and the growth in rail freight traffic or rail’s share
of total freight traffic
• Despite the higher passenger growth in some countries
which have introduced vertical separation, this cannot be
attributed to vertical separation.
• The absence of definitive findings may be a result of the
small number of countries and the many other changes, often
part of the same package of reforms, which influence
competition and growth.
• More detailed research is needed - but in the meantime
there is no clearcut evidence to favour vertical separation