Workshop on Rail Transport Regulation

Aims, models and powers of rail regulators The view of

Deutsche Bahn AG Joachim Fried Director. Economics, Policy and Regulation Florence, 15 November 2010 Agenda

Market development

Discussing the new legal framework

Limits of regulation

2 Development in shows: Liberalisation and its regulatory protection are crucial for competition – not structural questions

Aims of the rail reform Instruments of the rail reform

More traffic Implementing a to the rails holding company structure – Merger of Bundesbahn and Reichsbahn – founding Deutsche Bahn AG – Separating commercial (transport, track infrastructure, related business activites) and '94 '96 '98 '00 '02 '04 '06 '08 public sectors (sovereign tasks, dept management, human resources management)

Lower the burden for the public purse Rail competition

Creating a level playing field with other transport modes ’94 ’96 ’98 ’00 ’02 ’04 ’06 ’09 (Investments in infrastructure, taxes, external costs)

3 The framework conditions for competition in Germany have produced good results

IBM Rail Liberalisation Index 2007 Working Competition

Great Britain Germany Advanced Operating performance of non-Group companies (Million -path km) 800 – 1.000 Punkte Netherlands 20% 17,2% Poland 15% Czech Republic Romania Portugal Slovakia 10% Norway Estonia On Schedule 600 – 799 Punkte Lithuania 5% Italy 2,3% Slovenia Bulgaria 0% Latvia 1999 2001 2003 2005 2007 2009 Belgium Hungary  Increasing number of competitive tenders for long-term regional passenger services Luxembourg  Market share of non-DB Group railways is growing rapidly Delayed  As of Dec 31, 2009 323 non-DB Group railways operated on the Greece 300 – 599 Punkte rail infrastructure of DB Netz AG Ireland  There are no comparable levels of competition in the origin 0 100 200 300 400 500 600 700 800 900 countries of our main competitors

4 After a drastic slump across all transport modes in 2009, the German freight market recovers

Freight transport in Germany (year-on-year change in per cent; basis: traffic performance)

2007 2008 2009 2010 (as at April)

Total market 1) 5,7% 0,9% -11,2% 4,4%

Total Rail 7,1% 0,9% -17,1% 13,8% (as at June)

14,6% (as at June) DB 2,9% -1,0% -20,8%

non-DB 28,7% 8,6% 11,4% (as at June) Railways -3,7%

Road 2) 6,2% 1,2% -9,9% 3,5%

Inland Shipping 1,2% -1,0% -13,4% 2,9%

1) Total market: rail, road, inland shipping and long-distance pipelines 2) Road: incl. regional transport by German trucks, excl. cabotage transports by foreign trucks in Germany 3) 2009 = provisional figures

Source: Federal Statistical Office and DB AG

5 2009 rail lost the market shares it had gained in the freight market in previous years

Modal split trend for freight transport in Germany (in per cent, basis billion t-km)

Rail

Inland shipping

Long-distance pipelines

Road *

1) Forecast Source: Federal Statistical Office,, BVU and DB AG

6 In the rail freight market, DB’s competitors raised their market share by more than three percentage points in 2009

Rail freight traffic performance (billion t-km) 114.6 115.7 107.0 107.0 22,5 24,5 95,8 91.9 95.4 17,5 85.1 26,4 8,8 13,7 5,9 23,6

89,5 92,1 91,2 79,2 83,1 81,7 80,6 72,3

9.6% 6.9% 24,6% 21,2% 16.4% 19.7% 14.4%

2003 2004 2005 2006 2007 2008 2009 2010

Deutsche Bahn non-DB freight operators market share of non-DB operators Source: DB AG * Figure for 2010: forecast

7 Downturn in passenger transport market – increase of demand only in rail and air traffic

Passenger transport in Germany (year-on-year change in per cent; basis: traffic performance)

2007 2008 2009 2010 (August)

TotalPersonenverkehr passenger transport gesamt -0,3% -0,7% -0,2% -0,9%

SchieneTotal rail gesamt 0,4% 4,4% -1,5% 1,7%

DB 0,0% 3,0% -1,6% 1,6%

Non-DB railways Andere Bahnen 8,2% 27,0% 0,3% 3,1%

PublicÖffentlicher road passengerStraßenpersonenverkehr transport 0,0% -0,5% -0,5% -0,5%

PrivateMotorisierter motorized trafficIndividualverkehr -0,5% -1,4% 0,0% -1,3%

Air traffic Luftverkehr (innerdeutsch) 0,5% (as at July) (domestic) 7,7% 3,0% -3,6%

1) Figure for 2009 provisional 2) 2010 forecast correct at 3 September 2010

8 For rail a trend above average is expected

Passenger transport in Germany 2009 (market shares in per cent; basis: traffic performance)

Rail

Public road transport

Air

Private motorised traffic

* Figure for 2009 provisional/estimate (Figures are rounded and may therefore not add up to exactly 100) 1) Forecast

Source: Federal Statistical Office, BVU and DB AG

9 Long-distance traffic performance by rail declined in 2009 as a result of the economic crisis

Traffic performance by DB Long-Distance (billion pkm)  Long-distance traffic performance by DB was down by 2.3%. 35.5 34.7 33.6 34.5 34.1 32.3  There are still hardly any competitiors active in the market for regular long-distance services.  Announcements by and locomore rail that they planned to enter the German long-distance rail market were retracted in April 2010. 2004 2005 2006 2007 2008 2009  Prospects 2010: (as at Traffic performance by DB Long-Distance (inclusive of night and ) August: DB Long- Distance = +3.0%

10 Competitors in the regional market raised their share of ordered train services to 20.3 per cent

Ordered train services in the regional market (million train-km)  In 2009, the share of competitor railways in 619 628 632 637 633 655 629 terms of operated train-kilometres rose 61 75 84 97 103 120 128 by 10.4% owing to contracts won in competitive proced- ures in previous years  DB Regio was 558 553 549 540 535 530 501 successful in contract award procedures in 2009 and won 71% of 18.4% 20.3% 15.2% 16.3% the total 63 million 11.9% 13.2% 9.9% train-kilometre order

2003 2004 2005 2006 2007 2008 2009 volume.

Deutsche Bahn competitors market share of competitors Source: DB AG

11 Foreign transport undertakings in the German rail passenger market (as at: 2010 timetable)

Successful tenders

Source: Federal Office for Freight Traffic – traffic, cartographic presentation: regional rail passenger market SPNV in Germany, 5.5.2010 12 Unchecked growth for the more than 320 competitor railways

170 Operating performance by non-DB railways 161 (million train-path km) +6% 146 +10% 128  Operating +14% performance by non- 110 DB railways was up 6 +17% per cent year-on-year 88 to 170 million train- +25% path kilometres. 70 +25%  Competitors account 50 for a share of approx. 39 +40% 17 per cent of total +29% 26 operating performance 20 +50% by DB Netz AG +28% (2008: 16%)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

year-on-year change Source: DB AG

13 National regulatory authorities are acting independently

German regulatory authorities in the rail sector

FederalFederal RailwayRailway OfficeOffice (EBA)(EBA) GermanGerman FederalFederal InIn authorityauthority forfor questionsquestions ofof unbundling,unbundling, -- GovernmentGovernment securitysecurity andand environmentalenvironmental issues,issues, etc.etc. Guarantee FederalFederal MinistryMinistry of of of access ChancellorChancellor TransportTransport for every FederalFederal NetworkNetwork Agency Agency (BNetzA)(BNetzA) interested InIn authorityauthority toto promotepromote competitioncompetition MinistryMinistry forfor in so called network markets railway MinistryMinistry ofof in so called network markets TradeTrade andand undertaking FinanceFinance IndustryIndustry FederalFederal CartelCartel Office Office In authority for cartel law, merger control Ministry…Ministry… In authority for cartel law, merger control andand limitinglimiting thethe powerpower ofof marketmarket dominantdominant companies

Degree of independence of Degree companies

14 Agenda

Market development

Discussing the new legal framework

Limits of regulation

15 Despite market opening, the access for DB in European markets is confronted with substantial competition barriers

Problems that have continued without Barriers occurring in 2009 improvement since 2008

 Prevention of one-man  SNCF blocks capacities for operations by trade unions or train path applications public authorities  Allocation of train paths:  Time-consuming approval only at short notice and in poor procedures for technical quality locomotive equipment  Lengthy procedures for the  Infrastructure connection for approval of new locomotives DUSS terminal is refused  5 months after the law was adopted, the regulatory  Use of Alessandria marshalling authority has still not yard is not permitted commenced work

16 The Commission's initiative to further standardise European railway law is on the whole to be welcomed

Opinion DB for the Recast Subjects to debate concerning the Recast

 The promotion of railway traffic in Europe  regulation of service facilities calls for harmonised framework conditions  detailed requirements for infrastructure costs and  Therefore DB welcomes the initiative on the access charges whole  provisions on noise-differentiated infrastructure  DB calls for a complete liberalisation of the rail charges passenger market as well  demands for performance schemes  The Commission has emphasised the  extended powers for market observation for importance of this issue in the accompanying regulatory bodies notification  requirements for the „regulatory accounts“  Also decisive for DB: the integrated structure  legislative technique has to stay possible under European law  mandatory discout schemes for trains equipped with ETCS

17 Agenda

Market development

Discussing the new legal framework

Limits of regulation

18 Regulation has to be reasonable – interference only if necessary

Legally different interests TheoreticalTheoretical foundationsfoundations have to be balanced AcceptedAccepted inin economiceconomic andand legallegal theory:theory: OnlyOnly „Essential„Essential Facilities“Facilities“ have have toto bebe regulated!regulated! Is regulatory interference TwoTwo prerequisites prerequisites 1)1):: reasonable?  TheThe facilityfacility hashas toto bebe vitalvital toto operateoperate onon thethe downdownstreamstream marketmarket  TheThe competitorcompetitor cannotcannot buildbuild upup thethe facilityfacility onon hishis ownown withwith § adequateadequate meansmeans § protection of fair competition

InstanceInstance property  ClearlyClearly compliantcompliant withwith prerequisitesprerequisites rights –– TrainTrain pathspaths –– StationsStations etc.etc.  ComplianceCompliance withwith prerequisitesprerequisites inin disputedispute –– MaintenanceMaintenance facilitiesfacilities etc.etc.  ClearlyClearly notnot compliantcompliant withwith prerequisitesprerequisites –– TicketTicket distributiondistribution

1) Source: Wettbewerbsökonomie: Regulierungstheorie, –– EnergyEnergy distributiondistribution etc.etc. Industrieökonomie, Wettbewerbspolitik, Günter Knieps, S. 103

19 The integrated structure means a significantly lower burden for the public purse – performance by countries with other models is not so good

Germany France

+28% 83 Rail traffic performance +44% 85 59 Rail passenger traffic 65 +63% (billion p-km) 116 +76% -16% 51 Rail freight traffic 71 49 41 29 +62% (billion t-km) 13 21 1994 2008 1994 2008 1994 2008

+181% 10,1 +3% Burden on the budget per rail 8,0 -38% 7,8 traffic performance unit 6,1 eurocents per passenger/ tonne-kilometre at 2001 prices* 3,8 3,6

2000 2008 2000 2008 2000 2008

 DB with integrated structure  Formal separation, SNCF  Separation and privatisation,  Rail transport markets are responsible for network infrastructure under state fully liberalised operation management again since 2002  Strong regulatory influence  No more than minimum  Rail transport markets fully * State funding contributions include payments  Growth for rail and financial requirements of liberalisation liberalised to ordering authorities, RUs and IMs; relief for Federal implemented  Sources: Statistiques equipement Strong regulatory influence  No independent regulatory gouvernement francais, Department for government  High growth at low level, costs Transport, Office of Rail Regulation, Eurostat authority until 2010 have multiplied and DB data  Drastic slump in rail freight, 20 high costs for taxpayer Investment activities in Germany are below average on an international comparison

Per capita investments in rail infrastructure in Public investments in rail infrastructure per euro of gross domestic selected European countries in 2008 product in 2008 (at current prices - EUR) (EUR)

284 0,0125

205

0,0064 136 0,0060 104 105 0,0047 0,0046 0,0035 80 84 0,0030 60 0,0029 0,0028 0,0026 47 0,0023 0,0015 0,0002

d n a y y ly e n n s a d a ia ia in s i e ly y i d i n r e c n n a c a e m r n n t d m a d s a e a t n o t i a n d n t a k I n p d la l s n o p s I r a e a d s h r I a e a m l u r u d S l u r m u r r S r g e e r r w C A g w R F T e F e n A z z n e e S i t it i S h i h G G t K w K t e w e d S d N S N te e i it n n U China: U  Central policy decision in the current five-year plan (2006–2010): focus on investments in rail, target: more market shares for rail  2009: investments in rail infrastructure have overtaken road (Jan–Sep): rail approx. EUR 79 bn; road approx. EUR 78 bn  Increase in investments in 2009: rail +87.5%, road +50.7% Source: 1: BMVBS (Germany), VöV (Switzerland), BMVIT (Austria); SCI Verkehr GmbH “Worldwide Finance and Investment Budgets of the Railways 2009" (Source: Institute for Railway Technology, Prof. Dr.-Ing. P. Mnich)

21 DB welcomes the Commission's proposal for mandatory introduction of multi-annual contracts (MAC)

Commission's proposal on MAC Opinion DB Mandatory introduction of a contractual agreement between the competent authority and the infrastructure manager for a period not less than five years . Key elements are: Sustainable financing of  Determination of State funding for + infrastructure (MC-pricing vs. full-cost infrastructure recovery requirement)

 Definition of performance targets Quality standards for infrastructure + subject to public funds

 Giving incentives to reduce the costs of Ensures that railway undertaking providing infrastructure and the level of + benefit from cost reductions and access charges increases in efficiency

MAC allow integration of all these aspects under one roof

22 Technical harmonisation is as well a crucial issue – DB has seen that recently in the debate about the Eurotunnel

The European Railway Agency‘s control function has to be strengthened  Recommendation  Technical consulting  NSA network

NSAs

…

EU Commission

Sector  Directives Member States  Regulations (TSIs)

Notified bodies*

* Instituted appointed by the state to draw up the conformity declarations pursuant to the TSI (whether the vehicles‘ technology conforms to the interoperability requirements. In Germany (in contrast to other Member States) there is only one body, the EBCert, i.e. the Railway Certification Body. 23 Thank you for your attention!

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