Technical regulation and its economic implications
Torben Holvad and Ernest Godward
European Railway Agency
Rue Marc Lefrancq 120, BP20392, F-59307 Valenciennes Cedex – France
Torben.holvad@era.europa.eu and Ernest.Godward@era.europa.eu
Abstract
Reforms of railways were initiated in many European countries over the past decades and since
1991 the reform process has in particular been taken forward through European legislation
aiming to enhance the competitiveness of rail. Key elements in the European railway reforms
have been promotion of a step-by-step market opening mainly in the case of freight transport
combined with (some degree of) vertical separation of infrastructure management and operation
of services, unbundling of other railway functions and introduction of infrastructure access
charging as well as independent regulation. These reforms involving a greater role for market
forces is aimed to result in improved cost performance and enhanced customer focus thereby
providing the basis for improvement in rail services such that the competitiveness of rail vis-àvis other modes is enhanced contributing to sustainable transport.
In addition several EU directives have been introduced to address the technical differences
between railways in Europe. As such railways had so far been developed and operated as
national specific systems limiting the possibility for running rail services across borders. These
differences concern a whole range of areas including track gauge, energy systems, control and
signalling systems and operational rules. A key aim behind these EU directives is to promote
interoperability (the ability of a rail system to allow the safe and uninterrupted movement of
trains) through technical harmonisation of key elements of the railway systems. This should be
seen as a way to support the market opening process, e.g. if locomotives approved and used in
one country are designed according to the same parameters used in other countries then these can
easier be transferred between countries. Subsequently, it has also been recognised that
harmonisation is required in the field of safety in order to prevent that this is used as a possible
barrier for entry for new railway operators.
This paper will examine the background to the initiatives for technical harmonisation and
provide an overview of what has been achieved so far in this field as well as future prospects.
Attention will be given to the possible economic implications of promotion of interoperability.
As part of this the importance of mutual recognition and cross-acceptance will be highlighted.
The views expressed in this paper are the author’s own and do not necessarily reflect the European Railway
Agency’s view on the subject.
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1.
Introduction
The main purpose of the EU’s Transport Policy is to facilitate the “free movement of persons and
goods through the removal of obstacles at borders” and “harmonisation of conditions for the
establishment of non-resident transport operators”. The objectives of the policy are to complete:
 the internal market for transport;
 prevent distortions of competition;
 ensure sustainable development;
 manage funding programmes and spatial development;
 improve transport safety, and
 develop international co-operation.
The railway sector in Europe has experienced substantial changes over the past two decades.
These changes concern both how the historic incumbent railway companies are organised as well
as the emergence of new players either as alternative transport service providers, entities
responsible for upstream services previously provided by former incumbents, regulatory
authorities and other institutions. As such these changes have been introduced in order to allow a
more customer oriented and cost efficient sector to develop that could contribute towards an
enhanced position of rail in the transport market. Railways across the World (e.g. US, Japan,
Australia, Latin America and to a lesser extent in other places) have undergone reforms in recent
years albeit not sharing all features of the European approach. Furthermore, this reform agenda is
not specific to the railway sector but has also been introduced for other network industries such
as aviation, electricity, telecommunications and postal sectors.
The aim of this paper is to consider how the railway sector has been influenced by the legislative
initiatives, and in particular the development of technical regulation and the economic impacts
that are arising from these changes. The question will be asked why this was necessary. The
problem arises through the failure of the railways in Europe to hold their own in a multi-modal
transport arena. Declining markets for rail transport and declining market share over a long
period coupled with the need to have sustainable transport systems gave the EU the locus to
intervene in the regulation of railways. This happened following a period where neither the
railways nor their Governments responded to the challenges of the market or their customers
(both passenger and freight) expectations. This begs the question of whether railways today are
in a better or worse position compared to 20 – 30 years ago, i.e. whether the reforms have in fact
worked.
The remainder of the paper is structured as follows. The rationale for railway reform is set out in
Section 2 distinguishing between market opening and interoperability. An overview of the (EU)
legislative initiatives is given in Section 3. Subsequently, the outcomes to date will be reviewed
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in Section 4 in terms of institutional patterns, interoperability and market changes. Section 5
concludes and highlights possible future prospects.
2.
Rationale for railway reform in Europe
Overall, railways across Europe were during the 70s, 80s and up until the mid-90s characterised
by:
 Falling demand for both freight and passenger services;
 Falling market share (see diagram 1 below), and
 Falling revenues, increasing costs leading to increases in subsidies required to maintain
services.
Diagram 1 Railway market share in the EU15.
% share of transport market by volume
25
20
15
Passenger
Freight
10
5
0
1970 1975 1980 1985 1990 1995 2000 2005 2010
This led national Governments as well as the Commission having to look for alternative
approaches to dealing with the railways problems. In the later 1980’s the only real example
came from the USA (Klein 2011) following the passing of the Staggers Act in 1980, although
Australia was to follow in the 1990’s (BTRE 2006) providing some comparators against which
reform of European railways could be assessed. While the USA provides a comparator for
market competition, the Australian experience provides a comparator model for interoperability
and harmonisation.
The results of the changes in the US rail freight market became very apparent very quickly. The
“Staggers Act” passed in 1980 deregulating the railways from contract, merger and rate
regulation had immediate observable effects in terms of rates, revenue and productivity. The
former two fell while the latter increased very significantly. Within 6 years productivity had
improved by 50% and within 12 years it had doubled. Productivity continued rising until 2004
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when it was 2,85 times higher than in 1980. It should be mentioned that prior to 1980
productivity had remained largely constant over the previous two decades.
Diagram 2 US Freight railway performance following the Staggers Act.
Volumes of freight carried also increased, but at a slower rate, nearly doubling to 2007.
2.1
Rationale for market opening
The rationale for opening the rail market was very simple – the railway market was dominated
by state monopolies which were slow to react to changes that had been taking place in the
transport market. Prior to 1991, the incumbent railway companies throughout Europe faced very
low risks of losing traffic to alternative railway providers with third party access rights largely
non-existing (either legally or commercially). Furthermore, railway transport and in particular
freight was particularly hampered at national borders where traction was normally changed and
cargo checked for customs purposes. The removal of customs checks, by introducing a single
market, enabled through running provided there were no technical differences between the
national systems.
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However, a quick glance at the railway technical systems maps of Europe revealed the many and
varied forms of:
 Energy traction supply;
 Pantograph types;
 Signalling and train protection systems;
 Train rear end signals;
 Left or Right hand running;
 Track gauge, and, most importantly,
 Kinematic gauge (the physical space through which a train may safely pass at line speed).
 Etc.
These aspects were examined in detail in several studies, e.g. Symonds (1998) and NERA
(2000). The studies examined the difficulties created and possible solutions that might exist for
their mitigation.
The differences highlighted here create technical barriers but there are solutions that can be used
to overcome these and allow interoperability. These solutions include changing the bogies on
vehicles or using variable gauge wheel-sets, using minimum sized vehicles and the use of multivoltage rolling stock. Manufacturing companies have been supplying rolling stock capable of
operating across a number of traction voltages and systems. Such an approach may be less cost
efficient than using the TSI and adopting Interoperability – it copes with the issue of
interoperability but it does not solve the issue of lack of interoperability.
This demonstrates the close linkage between market opening and interoperability. As such
interoperability can be seen as a necessary condition for achieving market entry for international
rail services – technical barriers would otherwise limit the scope for rail traffic between several
countries thereby limiting the market potential. This is of particular relevance for rail freight as
its main potential is the medium – long distances (500 km+) which in a European context means
that often country borders need to be crossed. Furthermore, technical barriers can also limit the
extent to which competition can occur in the domestic rail markets, where foreign rail operators
would find it difficult to start services (e.g. rolling stock to be used would need to be approved).
2.2
Rationale for interoperability
It became very obvious that in order to create a single market for high-speed railway services,
specifications would be needed to make the system inter-operable. If a single market were to be
achieved then the Technical Specifications for Interoperability (TSIs) would provide the
specification for that “target” system (further details about the TSIs are given in Section 3.2).
Back then (early 90s) there was not, with the exception of France, anything that could be called a
high-speed network. The high-speed passenger railways were a series of disparate national
projects which had not the Interoperability directive and TSI’s come along, could have resulted
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in a costly lack of interoperability. As it was, the high-speed routes linked into the classic
network at many places. Once you start down this road you also open up the possibility of
developing interoperability for the classic rail network. This is indeed what is happening.
The TSIs were first developed following directive 96/48/EC for the emerging European highspeed railway network. High-speed rail services in Europe were begun in France by SNCF in
1981, being followed by the Italians, Germans, Spanish, Belgians and British. In 1996 the HS
system in Europe had grown to just under 2500 route kilometres. Because the systems were
relatively new and the rolling stock types fairly limited, this slightly late start to the
harmonisation did not unduly impact on the sector. Indeed the harmonisation to the target
system has significantly assisted projects that were developed after 1996 and are starting to
create the in-fill from the disparate projects that will lead to the creation of a high-speed network.
Similar considerations would be relevant in the context of conventional rail. As such harmonised
(technical) requirements would then support rail in two ways:
1. contribution to establish a single European railway area, and
2. reduction in manufacturing costs for the various technical systems.
3.
Overview of EU legal initiatives
3.1
Measures towards market opening
Starting in 1991 (with the often mentioned 91/440/EEC Directive) a series of EC directives,
regulations and other legislative initiatives have been adopted to support the market opening
process, notably the three railway packages introduced in 2001, 2004 and 2007. In this paper we
will not provide an in-depth account of all the legislative initiatives but only give a brief
summary (details are available in Holvad, 2009). Key elements involved the following directives
or series of directives:






1
96/48
2001 series1
revisions
2004/49
2007/59
2008/57
2011/117
Interoperability for high-speed railways
Access to railway infrastructure, Interoperability for conventional rail and
Railway safety and revisions
Driver licensing
Interoperability and revisions
Interoperability cross acceptance
Directives 2001/(12,13,14 & 16)/EC
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The first major legislative step at EU level, to provide third party access rights, was taken by the
adoption of Directive 91/440/EEC in 1991. In particular, the Directive grants the right of access
to rail infrastructure for operators2 in other Member States wishing to provide international
combined services and associations of railway operators wishing to offer international services
between the countries in which they are established. In practice, these provisions did not change
the monopoly status of the railway sector.
More comprehensive access rights were provided for freight as part of the 1st Railway Package
(from 2001) where any railway operator licensed within the European Community had the right
to obtain access, on an equal and non-discriminatory basis, to the national sections of the socalled Trans European Rail Freight Network (TERFN) from March 2003. From 15 March 2008,
the entire European Rail Network would be opened-up to competition for international freight
services (though there was no provision for cabotage3). The TERFN comprised some 50,000 km
of the entire 150,000 km of rail network that existed in EU15.
From a legal perspective the market opening process for freight, in terms of access rights, was
completed through the 2nd Railway Package (2004). This was done by extending infrastructure
access rights to freight services within a Member State (domestic freight services) and open up
the international market more quickly than provided for in the 1st Railway Package. The market
opening for international rail freight services should have been completed by 1st January 2006.
The agreed date for the complete opening of all rail freight services, including cabotage, was set
for the 1st January 2007. This piece of legislation implies that since 2007 the entire rail freight
market in Europe is open for competition where any railway operator issued with a licence and
valid safety certificate can in principle start running freight services provided track access
agreement has been concluded with an infrastructure manager responsible for the infrastructure
concerned.
In contrast much less change has until very recently been introduced through EC legislation
regarding access rights for the passenger market. The most significant element to date was
included in the 3rd railway package from 2007 which provides for opening of the market for
international passenger rail services by 1 January 2010. Railway operators would have the right
to pick up passengers at any station located on the international route and set them down at
another, including stations located in the same Member State, thereby providing for cabotage.
2
In this paper we refer to railway operators as the entities responsible for providing rail services (passenger and
freight) which are more frequently used in practice rather than railway undertakings which is used in EU legislation.
3
Cabotage is the transport of goods or passengers between two points in the same country. Cabotage is commonly
used as part of the term "cabotage rights," the right of a company from one country to trade in another country.
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However, a number of exemptions to these access rights are also established, in particular it is
possible to limit access rights if routes concerned are covered by public service contracts.
The Commission are starting work on writing the Fourth Railway Package which will be
produced in 2012/3 and expected to come into force in 2015/6. The purpose of the new package
will be to further boost market opening (domestic passenger services), while clarifying and
strengthening the provisions covering railway safety and railway interoperability. In producing
the new package the aim will be to be at least cost-neutral and if possible be cost-beneficial to
the railway sector in order to further improve its competitive position vis-à-vis other transport
modes.
3.2
Measures towards interoperability
An initial measure towards ensuring interoperability of trans-European rail networks was taken
by the Council in 1996 when it adopted Council Directive 96/48/EC of 23 July 1996 on the
interoperability of the trans-European high-speed rail system. The aim of this Directive was to
achieve the interoperability of the European high-speed rail network at the various stages of its
design, construction, gradual introduction into service and operation. The core instrument for
achieving interoperability is preparation and adoption of Technical Specifications for
Interoperability (TSIs). Article 5 specifies what the TSIs should cover and Article 6 sets out the
procedures to develop and adopt the TSIs. TSI’s are now being elaborated by the European
Railway Agency (ERA), though its formal adoption is being done by the Commission, after
agreement in the Regulatory Committee foreseen by the interoperability Directive. Prior to the
creation of the ERA TSIs were prepared by the European Association for Railway
Interoperability (AEIF), a grouping where the various players in the sector were represented.
Another important instrument for achieving and maintaining interoperability is common rules for
assessing conformity to the TSIs. Similar arrangements have been put in place for the
conventional trans- European rail network, initially through Directive 2001/16/EC (see below)
and now according to Directive 2008/57/EC.
Directive 2004/49 created the new structures and methods of controlling railway safety and the
revised Interoperability directive 2008/57/EC strengthened the previous access directives and put
in place mechanisms that are more appropriate for open shared markets. Subsequent revisions
recommended by the European Railway Agency have brought and will bring further clarification
and allow for the development of a common understanding of how to authorise the placing in
service of railway vehicles and ensuring the safe compatibility with the network through crossacceptance. The current critical issue with the revised Interoperability Directive is that some
Member States are late in transposing the directive and its revisions. It is though commonplace
that Member States vary significantly regarding speed and correctness of adoption of EC
Directives.
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As such TSIs support interoperability over the long term as these relate to new (or upgraded /
renewed) systems, but will not be a short term solution since there will be systems which do not
conform to the requirements. For the short term Directive 2008/57/EC introduced provisions for
the simplification of certification of railway vehicles in different Member States utilising the
principle of mutual recognition under the concept of cross acceptance. The Agency is taking this
forward by establishing equivalence between national rules in different Member States thereby
contributing to avoid duplication in the authorisation process of vehicles and subsystems.
4.
Outcomes and results of the EU railway reform
4.1
Institutional changes
Prior to the onset of the reform process in the early 90s the railway sector in Europe was
predominantly organized in monolithic public-owned companies (such as NS, OBB, SNCB and
FS) responsible for almost all passenger and freight transport services along with other ancillary
services and management, development and maintenance of the railway infrastructure. Third
party access (TPA) possibilities were largely not available in practice. Often the railways were
subject to substantial political influence and independent regulation was non-existent, instead the
railway system was mainly managed through self-regulation. During the 70s and 80s many of
these railway companies encountered substantial difficulties in terms of preserving their position
in the transport market and this resulted in poor economic performance and accumulation of
debt.
In response to the reform process four models of governance have emerged. They can be
characterised under the following headings:
 Swedish model – the former state controlled railway is split into an Infrastructure
Manager (IM) and one or several Railway operators. New railway operators may also
emerge. There is an independent National Safety Authority and there is also an
independent economic regulator. In certain cases these may be combined into one
organisation. For meeting public service obligations passenger services may be
franchised or placed into a concession or into PPP (Public-Private Partnerships) type
contract arrangements. After a period where competition was moderated, forms of
competition are emerging, from direct on-track competition and competitions for
concessions or franchises through to modal competition.
 German model – the former state controlled railway becomes a separate holding
company. The various functions are controlled by separate companies within the holding
company, e.g. Passenger companies, Freight companies, Infrastructure Company, Access
Rights Company, etc. The DB holding company now has over 1000 subsidiary
companies and indicates that it is the second largest transport company in the world.
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

Safety regulation is in the hands of the Eisenbahn Bundesamt (EBA), established at the
same time as the new DB (established 1994). Economic regulation of the railways only
came after 2006 when the Bundesnetzagentur (Federal Network Agency looking after all
regulation of German networks – Posts, Telecommunications, Energy and Railways) took
on this responsibility regarding railways.
French model – the former state controlled railway while nominally independent is
subject only to “light-touch” regulation. Initially, in France, there was no Independent
Regulator. This is in contrast to the Swedish or German model where the regulators were
set up reasonably early in the reform process. The French economic regulator for
railways was only established in December 2009. The safety regulator had only been
established in 2006 following the entry into force of the Safety Directive 2004/49/EC
The Infrastructure Manager is also significantly limited in its control of the network –
much of the intellectual property still remains with SNCF which also carries out much of
the maintenance of the network.
Irish model – the 91/440/EC directive allowed for the existence of state controlled
integrated railway companies (RU and IM and Passenger and Freight) in the Island of
Ireland (Ireland and Northern Ireland). While there is a safety authority there is normally
no independent economic regulator. This role is handled by the Ministry having
oversight and governance of the railway. This model had also applied to Greece until
Bulgaria, Romania and Hungary acceded to membership of the EU. In early 2012 the
Irish Government stated that they would not seek to continue this approach in future. The
Government of Northern Ireland concur with the new approach. However, what has not
been determined is which model the railway companies in Ireland will follow in the
future. Initial indications suggest that Ireland they may follow, in the transition period at
least, the German model. Northern Ireland, it is assumed, will follow the Swedish model
as the UK does.
So the question must be asked – why did particular countries choose the particular model they
did? The above diagram shows that the “Swedish model” is followed by most member states 4,
with the “Irish model”, i.e. vertical integration, the least followed and about to disappear. In
some cases the choice was driven, in part, by ideology, e.g. an “anti-European” Member State
UK chose to implement a European Directive as it fitted into their “privatisation” agenda.
Twenty years later, with still a strong “anti-European” bias, the TSI’s are readily accepted as
they fit into the current “budget cutting” agenda adopted by the Conservative – Liberal Democrat
Government as these European regulations are expected and have delivered lower railway costs.
By contrast Sweden pre-empted the Directive 91/440 in order to reform its railway sector to
achieve a level “transport” playing field. It separated the operations from infrastructure and gave
4
EU27 + 1 = all EU member states with railways plus Northern Ireland. EU MS Cyprus and Malta do not have
railways.
10 | P a g e
the opportunity to the regional councils to tender for regional public service operations.
However, the incumbent SJ retained operation of profitable inter-regional services up until 2010.
Diagram 3 Models of the EU25 + 1 railway organisation5
14
12
10
8
6
4
2
0
Complete
Separation of key Holding company,
Vertical
separation, i.e. powers, i.e. the i.e. the German integration, i.e.
the Swedish
French model
model
the Irish model
model
The German approach was driven by the indebtedness of DB (arising from the merger of DB and
DR in the early 1990’s). The holding company structure allowed the setting up of separate
companies with “Chinese walls” to prevent unfair advantage being given to DB companies.
Perkins (2005) highlights that, in 1994, Germany had the second highest indebtedness if the 1993
re-capitalisation is included. Italy was first with France running a close third to Germany. In
1994 overall indebtedness of the EU 15 railways was estimated to be more than €150 Billion (see
Table 1)!
Drew (2006) notes that, while in principle Germany had open access from 1994 onwards,
barriers erected by DB Netz, in respect of track access charges, put this off for several years.
OECD (2005) reported in detail on the development of the train-path pricing system. In 1999
and 2000 the Federal Cartel Office (Bundeskartellamt) highlighted the fact that DB had access
charges that were 40% lower than competitors and that the system in place was discriminatory.
Further revisions of the system followed in 2001, 2003 and 2005 addressing further aspects.
5
EU27 + 1 = all EU member states with railways plus Northern Ireland. . EU MS Cyprus and Malta do not have
railways.
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The French model was again driven by the financial situation but the break-up being influenced
by the very strong incumbent SNCF who retained much of the capability for maintaining the
network. The French IM (RFF) was a relative small new organisation by contrast to other IMs,
taking account of the size of the network, which emerged from the re-organisations following the
implementation of the Access, Interoperability and Safety Directives. Much of the maintenance
carried out to the network is contracted from RFF to SNCF Infra – the infrastructure subsidiary
of SNCF. Stations are also still controlled by SNCF, as are many of the Freight yards. This has
created problems for new entrants to the freight market and was highlighted in a case where
SNCF Fret wished to withdraw from the use of particular yards which were accessed by other
operators. The problem was related to the signalling control and access and egress to the main
network which was in the hands of SNCF. The contracts for PSO supported services of the
French Regions remain broadly with SNCF. No independent safety and economic regulator were
in existence until January 2006 and December 2009 respectively. Being late entrants’ means
these regulators have a steep learning curve to become effective in their regulatory tasks.
Table 1.
Railway debts in 1994 for selected countries
The Irish model was a logical solution to networks not connected to the rest of Europe. This was
also the case in Greece until Romania and Bulgaria acceded to membership of the EU in 2007.
This “connect” type approach was written into the Directives. However, even the Island of
Ireland’s governments decided earlier in 2012 to move away from this model and will reform
their railway organisations accordingly.
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4.2
Interoperability
The development of the concept of interoperability along with the necessary technical regulation
in the form of Technical Specifications for Interoperability are meant to improve the functioning
of the market and restore the competitiveness of Europe’s rail system. However, it has not been
an easy journey.
The key obstacles to interoperability have been:
 The reluctance by some member states to break-up their previously state controlled
monopolies [Market opening];
 The existence of national Command and Control systems and other technical systems
where the incentive to harmonise could be limited in the short-term [Interoperability];
 Presence of economies of scale encouraging takeovers of new entrants In more open
markets larger players can restrict entrants through ownership of IPR and presence on
standard setting bodies. This has been an observed phenomena. [Market opening], and
 Certain barriers to entry (Safety certification, licensing) [Safety].
Interoperability has a multi-faceted nature, solving one issue does not necessarily solve all.
The concept of interoperability can be differentiated from that of inter-changeability. The
Interoperability directive Article 2 (b) defines interoperability as follows:
“…..interoperability’ means the ability of a rail system to allow the safe and uninterrupted
movement of trains which accomplish the required levels of performance for these lines. This
ability depends on all the regulatory, technical and operational conditions which must be met in
order to satisfy the essential requirements”.
By contrast inter-changeability, is where railway operators and keepers have come together to
allow wagons or coaches to be exchanged under certain agreed operational conditions (former
RIV regime for wagons and the still existing RIC regime for coaches). This situation, if
unregulated, leads down the road towards cartels or closed markets. Clearly, to create a single
European rail area, this would not deliver an open market.
Progress on interoperability through the definition of TSIs is being made, albeit relative slowly,
as the TSIs only have to be fulfilled for new and upgraded / renewed railway systems. From a
legal point of view the framework of TSIs for high speed and conventional was completed in
2011, but currently they remain narrower in scope than the whole railway and they also contain
the so-called open points6. As such for certain railway systems complete TSI compliance would
Open points’ are declared where the TSI should contain a requirement, but that requirement has not yet been
defined.
6
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only be achieved over a 30-40 year or maybe longer time horizon following the replacement of
existing systems with new or upgraded ones (even longer in the case of track and tunnel
infrastructure – perhaps 100 years). The European Railway Agency is working with the sector to
extend the scope of the TSIs from the TEN network to also include the off-TEN network as well
as closing the various open points. This would contribute to extend the coverage of the TSIs and
thereby limiting duplicative assessments due to national rules. Furthermore, the recast of the
Interoperability directive in 2008 introduced the concept of cross acceptance which can be seen
as a ‘bridge’ to interoperability as it can give the benefits whilst the TSIs remain narrower in
scope than the whole railway system. Cross acceptance will be required as long as TSIs contain
open points and until the entire European railway network conforms to a complete set of TSIs. A
key area here is the need for cross-acceptance of vehicles in the context of the authorisation
process in order to reduce the substantial cost of authorisation due to duplicate and unnecessary
checks in the different Member States. An Agency study has estimated the possible cost savings
for the sector through cross-acceptance could be more than €100 Million per annum (European
Railway Agency, 2011) whereby vehicles already authorised in one Member State would not
require the same (or equivalent) checks and assessments in other Member States (only those
relating to network compatibility would be required). The work on equivalence of rules between
Member States is then a key and significant progress has been achieved here over the past couple
of years.
A notable recent success of the European Railway Agency in the area of interoperability has
been the reductions of 27 different rear-end signals (RES) and their harmonisation into two main
zones – Lampia (those using lamps) and Plateia (those using plates). There are two other zones –
Nokia which covers only Finland. There is no rear end signal and any issues are dealt with
through radio communication (hence Nokia). A fourth zone exists in the Baltic States on the
1520mm systems where the Russian RES is used. As such this has ensured that the numbers of
train border stops have declined from 250,000 to 70,000 from 2011 onwards. Inside each of the
zones free movement of freight trains is facilitated.
Compared to a few years ago there is also progress in introducing interoperable constituents and
subsystems into the railway market. The markets of rolling stock, control-command and
signalling and infrastructure constituents are all expanding and authorisations for placing in
service of subsystems have also increased over time for most subsystems. Furthermore, a number
of interoperable train sets, wagons and infrastructures have been placed in service.
4.3
Market changes
As noted above, the freight market was gradually opened for competition until 2007, when the
entire market could in principle be accessed. EU legislation has so far been limited regarding
market opening for passenger services (although some countries have adopted measures here).
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Table 2 provides an overview of the situation in the European countries for 2009 regarding how
these access possibilities have been utilized in terms of number of external railway operators and
the market shares held my non-incumbent operators in the freight and passenger. Overall, the
Table indicates that there has been substantial market entry in the freight market, although there
are important variations with some countries (e.g. Finland, Luxembourg) without any entry
taking place and others where the non-incumbent market share is 100% (Great Britain). For
Denmark it is indicated that there is a 100% market share for new entrants, although this is due
to DB Schenker acquiring the freight operations from the former incumbent which though retains
a dominant market share. A similar case could be put forward for Hungary following the recent
acquisition of MAV by Rail Cargo Austria.
In comparison the non-incumbent market shares for passenger services are in general much
lower reflecting the focus on freight market opening for the EU reform process. Opening of
passenger markets for direct on-rail competition has been somewhat limited to date, however,
there examples in the UK (Hull Trains, Grand Central and WMSR), Italy (NTV), Austria
(WestBahn) and Czech Republic (Regiojet). Most market entry has occurred through nonincumbents being awarded public service contracts through competitive tendering. A number of
countries have since the mid-Nineties introduced this possibility going beyond current
requirements from EU Legislation and some (notably GB, SE, NL, DE and DK) have actively
used it for parts of the passenger market (typically regional services) (Nash, 2008). Only in Great
Britain almost all passenger services are allocated through competitive tendering, although
Sweden is also reaching high levels of market opening by a combination of tendering and open
access possibilities.
The opening of the freight market can be seen as a success but it has not been without its
problems, particularly at the operational level. With only a small number of exceptions there is
now more than the incumbent operator in most EU member states with railways. The exceptions
are Ireland; where there is only the incumbent, but as noted above, this may change and Northern
Ireland where there is no rail freight operation currently, as well as Finland, Greece, and
Lithuania. For the latter three member states in this category, it should be noted that although the
incumbent remains the sole operator, there is no legislation restricting the entry of other
operators onto their territories. It is simply that no competitors have yet emerged. Mäkitalo
(2011), using a Delphi panel comprising 52 members, suggests four factors that might account
for this situation in Finland:
1.
Influence of “national manoeuvres”
2.
Higher barriers to entry into market in Finland than elsewhere in Europe;
3.
Un-level playing field in Finland, and
4.
Competition interference by the Government to reduce the negative effects in imperfectly
competitive markets.
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Table 2. Market opening in the railway sector
Country
DE – Germany
DK – Denmark
EE – Estonia
ES – Spain
FI – Finland
FR – France
GB – Great Britain
GR – Greece
HU – Hungary
Number
of
external RUs
18
6
6
21
40 (freight)
6 (passenger)
247
7
6
5
0
15
Approx. 30
0
26
IE – Ireland
IT – Italy
LT – Lithuania
LU – Luxembourg
LV – Latvia
NL – Netherlands
NO – Norway
0
30
0
0
2
31
More than 8
PL – Poland
PT – Portugal
RO – Romania
SE – Sweden
40
2
24
More than 10
24,6%
100%
56,6%
5% (2008)
0%
16,6%
100%
0%
90% (MAV acquired by Rail
Cargo Austria)
0%
20%
0%
0%
22%
45%
10% (both CargoNet and
Malmtraffik AS)
30%
n.a
50%
56%
SI – Slovenia
SK – Slovakia
1-2
27
7%
4%
AT – Austria
BE – Belgium
BG – Bulgaria
CH – Switzerland
CZ – Czech Republic
Non-incumbent market share
freight (%) ton-km
17%
10%
29%
32%
18%
Non-incumbent market share
passenger (%) pkm
10%
0%
0%
n.a
1%
12,1%
9% (2008)
55,3%
0%
0%
0%
100%
0%
0%
0%
1%
0%
0%
Very low
12%
12,4%
5%
9.3%
Less than 2%
45% (public contracts)
10% (pure commercial)
0%
0%
Source: IBM (2011)
As such these factors would also be relevant for other EU member states where external railway
operators so far have only gained a marginal share of the rail market.
Analysis by the Economic Evaluation Unit of the European Railway Agency for five large EU
MS showed the market shares of the incumbent or largest operator for 2008 (Diagram 4 below).
Three of the Member States, Spain, Italy and France, had only opened their markets, as required,
in 2007 and their incumbents had around 90% market share. Germany and the UK, which had
opened their markets much earlier (mid-90s), their incumbent or largest operator, by contrast,
had much lower market shares, at 79% and 54% respectively. It should be noted that the largest
UK freight operator previously English Welsh and Scottish Railways (EWS) but from 2009 DB
Schenker (DBS), part of the German incumbent DB AG.
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The history of EWS, though short, is quite complex and provides an insight into how market
opening may lead to changes in the organisation of the railway sector. Therefore, the following
paragraph provides further details regarding this railway operator. The incumbent – British
Railways (BR) as part of the privatisation process split its freight operations into six separate
companies (Harris and Godward 1997). Between 1994 and the end of the privatisation process
in 1997 the Wisconsin Central Transportation Corporation (WCTC) had, along with Berkshire
Partners and Fay Richwhite, acquired five of the old BR companies (Godward, 1998).
Wisconsin Central in its EWS guise re-organised the five companies back into one, re-invested
in the locomotive fleet by buying 280 new locomotives and centralised its operational control.
Diagram 4 Examples of market share of the incumbent / largest operator passenger /
freight companies 2008
Market share of the incumbent or largest
operator 2008
100.0
90.0
80.0
70.0
60.0
50.0
Passenger
40.0
Freight
30.0
20.0
10.0
0.0
Spain
Italy
France
Germany
United
Kingdom
As part of market consolidation in North America, the Canadian National Railway (CN) acquired
WCTC in 2001. EWS had seen opportunities within an open European market and set up a
French subsidiary company - Euro Cargo Rail (ECR) in 2005. It was operating services in
France within three months of this. ECR grew quite quickly, leading to the export of 60 of its
Class 66 locomotives from the UK to handle the newly won French traffics. Having gained the
foothold it was subsequently able to optimise its handling of its UK import and export traffic in
France, by itself rather than handing over to SNCF Fret. Its success in both UK and France
brought it to the attention of DB – by far the biggest railway operator in Europe.
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DB had previously bought freight operations from former incumbent operators in the
Netherlands and Denmark. As the largest railway freight operator in Europe it is in a powerful
position to improve its dominant position in the market further. The European Commission
noted this trend in 2009 (EC 2009). Stehman and Zenger (2011) argue that mergers in the
context of European rail freight markets raise “…challenging competition questions.” The
questions concern:
 Issues of pre-emptive mergers – not simply replacing the incumbent with a merged
European main player;
 Extending zones of influence – through mergers of incumbents, e.g. DB Cargo/DB
Schenker mergers with NS Cargo, DSB Gods and EWS, and
 External competition and the development of the competitive “counterfactual”
Table 3 provides an overview of recent mergers and acquisitions where it is clear that DB has
been very active in this area.
Table 3. Main mergers in the railway sector 1999 - 2010
Year
1999
2002
2004
2004
2005
2005
2006
2007
2007
2007
2008
2008
2008
2008
2008
2008
2009
2008
2009
2009
2009
2009
2010
Company
Takes over
Company
DB Cargo (DE)
94,00% NS Cargo (NL)
DB Cargo (DE)
98,00% BSB Gods (DK)
DB Cargo (DE)
100,00% SFM (IT)
DB Cargo (DE)
100,00% Brunner RS (CH)
DB Schenker (DE)
98,00% RBH (DE)
Trenitalia (IT)
51,00% TX Logistik (DE)
Babcock & Brown (AUS)
100,00% Crossrail (CH)
DB Schenker (DE)
100,00% EWS (UK)
DB Schenker (DE)
55,10% Transfesa (ES)
DB Schenker (DE)
20,00% BLS Cargo (CH)
DB Schenker (DE)
20,00% BLS Cargo (CH)
DB Schenker (DE)
49,00% Nord Cargo (IT)
SNCF (FR)
75,00% ITL (DE)
OKD Doprava (CZ)
100,00% Viamont Cargo (CZ)
Rail Cargo Austria (AT)
55,00% Linea (IT)
Veolia (FR)
100,00% Rail4Chem (DE)
DB Schenker (DE)
100,00% PCC (PL)
Rail Cargo Austria (AT)
100,00% MAV Cargo
Europorte 2 (FR)
100,00% Veolia Cargo (FR)
SNCF (FR)
100,00% Veolia Cargo (DE)
Veolia (FR)
50,00% Transdev (FR)
DB Schenker (DE)
95,00% PTK Holdings (PL)
DB Regio (DE)
100,00% Arriva (UK)
Sources:
Mofair ('Wettbewerber -Report Eisenbahn 2008 -2009'); European Commission; Railway
Gazette International; International Railway Journal, and Today's Railways Europe.
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As for the passenger market, some EU countries opened their rail networks very quickly while
others still retain the national incumbent having the sole responsibility for passenger services,
e.g. Belgium, France. For some, the EU reforms served to back up political dogma of the day,
for others it was more about improving the cost efficiency and effectiveness in the provision of
Public Service Obligations. For some the process of market opening proved to be costly and the
subsequent results even costlier (Ford (1993 - 2012), Harris & Godward, 1997 and Godward
1998). Some recent research by VTI in Sweden (Nielson, Nash and Link, 2011) reviewed the
experiences in Germany, Great Britain and Sweden and concluded as follows about the outcome
of domestic passenger market opening:
•
The German system operates with the lowest level of subsidies and fares
•
In Britain both investment and operating costs have risen and
•
In Sweden taxpayers costs have increased, partly due to growth in infrastructure
investment.
Nilsson et al (2011) conclude that for the domestic passenger market the presence of a strong
incumbent in the system is not necessarily a bad thing for tax payers or travellers. However,
further research is needed to validate and provide robust conclusions on this and similar work. In
most EU MSs the domestic passenger market opening has not yet taken place. The limited
evidence so far reviewed is not conclusive, as yet.
5.
Further perspectives and conclusions
To conclude, we must ask ourselves several further questions, which we try to answer.
However, this is an on-going saga and we and others need to continue studying the changes to
come to some definitive view of interoperability, market opening and railway reform in Europe
in general in the future. The questions are set out below.
5.1
Are the railways better today than 20 years ago?
This is not or was not an easy question to answer. However, for our Impact Assessment studies
we needed to understand the Reference Scenario “do minimum” option. What would railways
have done if the Agency/EC had not intervened and told them to do something different? To
assess this point we undertook a benchmarking exercise to look at the changes in technical
efficiency(See Godward et al 2011). A bi-product of this study is that we now have a better
understanding of technical regulation. The analysis used in the study determined the Total
Factor Productivity (TFP) for European Member States. The analysis of the TFP change was
decomposed into:
 Technological change [TECHCH], i.e. frontier shift, and
 Efficiency change [EFFCH], i.e. catching up.
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The results, reported in Godward, Holvad and Antoniazzi (2011) suggest that:
 Annual technical change is on average positive (+3,6%);
 Annual efficiency change is on average negative (-2,1%), and
 Annual change in TFP is then on average positive (+1,5%).
Whilst this only covers productivity, and more precisely productivity changes when TSIs weren’t
really in place, it is in effect the background change. Our future hypotheses must therefore test
whether or not TSIs/Directive changes have a greater or lesser impact.
5.2
Have the reforms so far worked?
The reforms have worked to a certain extent. Market shares have been relatively stable over the
last decade. What has not been seen, however, are similar effects to what took place in the USA
railway freight market. The rate of productivity change is much slower. What can we conclude
from this?
There may be a number of factors at work here:
 The US system was broadly harmonised in terms of technical parameters well before the
market reforms took place;
 It was a “Big bang” reform rather that the “step by step” reform that has been seen within
Europe;
 As noted before, there is much stronger private sector involvement in railways than in
Europe. Private sector involvement in railways is only slowly emerging, e.g. leasing
banks / companies, private passenger and freight operators, and
 Strong anti-trust regulatory framework, which although amended by Staggers still
ensures a competitive approach.
5.3
What next?
Further reform is on the cards with the development of the fourth railway package. This is likely
to be adopted by the Commission in late 2012 or early 2013. In 2011 a White Paper was
produced on transport. A number of the options explored represent major challenges for the rail
sector. Making contrasts with the USA and Australia suggests these challenges should be
achievable but a whole raft of questions arise, not least:
 Ownership issues. In Europe many former incumbent railways are still publicaly owned
by the Member States, while in the USA they are owned by private investors. Some of
whom have been very quick in ensuring high performance and productivity of the
railways they control;
20 | P a g e



Infrastructure issues. In Europe, nominally and in many cases actually, operators have
rights of access to the shared infrastructure system, while in the USA there is vertical
integration with only limited shared access where monopoly for a market might prevail;
Safety issues. The rail sector is by far the safest land transport mode, but major accidents
can detract from the very significant improvements in railway safety performance, e.g.
Viareggio accident, and
Fair, efficient and transparent pricing issues. Having achieved harmonisation in the arena
of technical and operational rules authorities must ensure that there is fair, efficient, and
above all, transparency in pricing of rail transport. These price signals should, as
happened elsewhere, bring about a better understanding of the contribution that rail can
make in future transport in Europe.
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