LEIDEN UNIVERSITY Faculty of Governance and Global Affairs M.A. in Public Administration
MASTER THESIS
Independent regulators in the railways and their effects on the performance of the sector
Comparative case study on South-Eastern Europe
Thesis supervisor: Prof. Peter van Wijck
Student: Monika Kalinova Tsvetkova [email protected]
Date: 13.01.2016
Table of contents
1 Introduction ...... 5 1.1 Research question ...... 7 1.2 Structure of the research ...... 8 2 Literature review ...... 10 2.1 Independent regulatory agencies ...... 10 2.2 Level of independence in IRAs ...... 12 2.3 Independence and efficiency ...... 13 2.4 Efficiency in the railway sector ...... 15 2.5 Summary ...... 17 3 Theory ...... 18 3.1 Arguments for delegation ...... 18 3.1.1 Credibility ...... 18 3.1.2 Political uncertainty ...... 19 3.1.3 Number of veto players ...... 19 3.1.4 Summary ...... 20 3.2 Hypotheses ...... 20 4 Research design ...... 25 4.1 Case selection ...... 25 4.2 Research steps and selection of indicators ...... 26 4.2.1 Independence indicator ...... 26 4.2.2 Indicators for behaviour of regulators (regulatory policy) ...... 27 4.2.3 Efficiency indicators ...... 28 4.2.4 Summary ...... 30 4.4 Control variables ...... 31 5 Background of the countries and presentation of the cases ...... 33 5.1 Common characteristics and description ...... 33 5.2 Bulgaria ...... 35 5.2.1 Main characteristics ...... 35 5.2.2 Bulgarian railway sector ...... 36 5.3 Serbia ...... 38 5.3.1 Main characteristics ...... 38 5.3.2 Serbian railway sector ...... 39 5.4 FYROM ...... 42 5.4.1 Main Characteristics ...... 42 5.4.2 Macedonian railway sector ...... 43 5.5 Conclusion ...... 45 6 Independence of regulatory intuitions in the railways ...... 47 6.1 Independence indicators ...... 47 6.2 Description of the results ...... 48 6.2.1 Bulgaria ...... 48 6.2.2 Serbia...... 49 6.2.3 FYROM ...... 52 6.2.4 Conclusion ...... 53 7 Findings and analysis of the results ...... 54 7.1 Behaviour of regulators ...... 54 7.1.1 Bulgaria ...... 54 7.1.2 Serbia...... 58 7.1.3 FYROM ...... 59 7.1.4 Summary of the results ...... 61 7.2 Railway efficiency and productivity ...... 63 7.2.1 Introduction ...... 63 7.2.2 Freight productivity ...... 64 7.2.3 Labour productivity ...... 67 7.2.4 Productivity of wagons ...... 70 8 Conclusions ...... 73 8.1 Main findings ...... 73 8.2 Limitations of the research and future research opportunities ...... 75 8.3 Further implications of the results and policy recommendations ...... 76 9 References ...... 79 Appendix 1 ...... 87
List of graphs
Graph 1 Levels of analysis and research outcomes ...... 21 Graph 2 Freight transport (thousands of tonnes) ...... 35 Graph 3 Difference in difference, freight productivity ...... 66 Graph 4 Difference in difference – labour productivity in freight, thousands ...... 69 Graph 5 Difference in difference, wagon productivity ...... 71
List of Tables
Table 1 Variables and indicators for measurement ...... 30 Table 2 Freight operators in Bulgaria ...... 37 Table 3 Independence indicator per country ...... 47 Table 4 Inspections and sanctions of the RAEA, 2008-2014...... 57 Table 5 Issue of safety certificates by the RAEA, 2008-2014 ...... 57 Table 6 Issue of licenses for the use of railway vehicles, parts and equipment for railway rolling stock and devices, parts and equipment for railway infrastructure ...... 59 Table 7 Issue of safety certificates by the Directorate for Railways ...... 59 Table 8 Summary of the results on activities of regulators ...... 62 Table 9 Productivity of freight transport (Tkm/km), thousands ...... 65 Table 10 Difference in difference – freight productivity ...... 66 Table 11 Labour productivity in freight transport (Tkm/employee), thousands ...... 68 Table 12 Difference in difference, labour productivity in freight ...... 68 Table 13 Productivity of wagons ...... 70 Table 14 Difference in difference, wagon productivity ...... 71
1 Introduction
1 Introduction Transport and infrastructure are key priorities for the economic development. According to Aschauer (1990: 21), there is a significant relation between the investment in infrastructure and the economic performance of a nation.
Transport and especially railways are a strategic sector for development for the European Union (EU). The efficient development of the railway sector promotes mobility in the EU, boosts economic growth and the integration of the national transport systems. It is also in line with the environmental objectives set in the Treaty of Amsterdam in order to achieve sustainable development of the EU economy (European Commission 1996: 22).
However, since the end of the World War II, the sector has been experiencing a decline in terms of profitability and efficiency. Although in the last three decades of the XX century both passenger and freight markets expanded significantly (by 25% and by around 70%), it should be taken into account that the overall market size has more than doubled for the same period (Ibid: 8). New transport means have developed fast and have gained advantage among passengers’ preferences. Raising customers’ dissatisfaction with the price and quality of services has further decreased the workload of railway operators and thereby they have continuously failed to face their costs and to improve efficiency.
The decline of the railways in Europe is a concerning issue for all member states. On one hand, it raises the risk of congestion, and overload of the roads, which is the main prerequisite for pollution. On the other hand, roads are not an adequate alternative for transportation of highly dangerous goods, due to the possible increase of accidents (Ibid).
In order to respond to the challenges the sector is facing, and to improve quality, efficiency and integration of the railway market in Europe, the EU has adopted a series of reforms. The process started in 1991 with the First Railway Directive (91/440/EC). A broad and long discussion followed in the late 1990s and, after a proposal by the Commission, the European Parliament and the Council adopted the First Railway Package in February 2001. It contained three directives, one of them aiming directly at the relationship between the state and the infrastructure manager, respectively between the infrastructure manager and the railway companies (Dehousse / Benedetta 2015: 11). For the purpose of clarification of the relationship between the different actors, Directive 2001/12/EC obliged every member state of the European Union to establish a regulatory body, independent from stakeholders. It has
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1 Introduction the competences to act as a mediator in case railway companies appealed against decisions of the track provider (Knieps: 2013: 161).
The First Railway Package was followed by a Second (2004) and Third (2007). The Fourth Railway Reform Package is currently in process of adoption. It was proposed by the EC in December 2015 and an approval by the Parliament is expected.
The railway reform “packages” aim at opening the rail markets, promoting competition in the sector, reducing the market entry barriers, promoting harmonisation of the technical specifications in different countries and harmonization of safety requirements. All these requirements are obligations of member states to implement.
The Directives on contain various steps that EU states have to perform in order to reform their railway sectors. One of the key requirements is introduction of competition in the sector though liberalization both in passenger and freight. Competition is preserved and assured by the sector regulators. Apart from the establishment of the Regulatory Body (RB), there are requirements for other institutions to be set: Safety Authority (SA), Investigation Body (IB), Licensing Body (LB), Notifying Body (NB) and Designated Body (DB). In some countries, these institutions are integrated within one body and have different degrees of independence (Bošković, Bugarinović 2015: 52).
The establishment of the RB and its competences are regulated in the Directive 2001/14/EC (Article 30). The main functions of the regulator are control and implementation of the relevant regulations; monitoring of the sector; monitoring on competition and enforcement of rules and violations of safety standards. The institution shall also adopt appropriate measures to correct undesirable developments on the railway market and shall cooperate with national regulatory bodies of the member states (EC 2001). In the fulfilment of its responsibilities, the institution shall be fully independent from the infrastructure managers (Article 30).
The importance of this institution is widely discussed by the World Bank and the EU in their progress reports on different countries. Although in the text of the Directive there are no specific requirements on the independence of the regulator from the government, in its report from 2011, the World Bank emphasizes on that. According to the document, autonomy of the institution from other governmental structures is a significantly important factor for the better performance of the sector (World Bank 2011: 53).
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1 Introduction
For the purposes of this research, I will study the possible relationship between the independence of the regulatory institutions and the efficiency of the railways. To do that, I will focus on the region of South-Eastern Europe (SEE) and compare three neighbouring countries – Bulgaria, Serbia and the former Yugoslavic Republic of Macedonia (FYROM) and the regulatory institutions they have established.
The selected cases are countries with comparable railway size, structure and historical development and similar problems that the sector is facing.
The regulatory framework for them is also similar, as all the three countries are implementing the EU Directives on railways (Bulgaria being a member state and FYROM and Serbia – candidate countries in the process of harmonization their national legislations with the EU acquis). However, the countries are progressing in different speeds, with various time frames for implementation of the requirements (Wetzel 2008: 2). Within the present research, I will analyse the regulatory bodies on railways each of the countries have established and evaluate their level of independence. Analysing the performance of the national railway sectors will answer the question whether the higher level of independence is significantly beneficial for the industry.
1.1 Research question For this purpose, the master thesis aims at answering the following research question: Do national railway sectors regulated by an independent agency perform better than railways with government-dependent regulators?
Social and academic relevance of the research question:
The proposed research question in noteworthy both on social and academic basis.
The topic is significant for the society, especially in the SEE region. The railway sector in the Balkans is not only underdeveloped, but on top of that it is experiencing a constant decline. Railways are a priority for economically advanced countries; the salvation of the sector is also a priority for the SEE states. However, since 2001, when the first reform package was introduced, progress is not observed, or it is rather moderate. Certainly, this is not the manner to achieve the sustainable development for the EU, and for economic growth for Balkan countries, which economic indicators’ values are still far behind the EU-28 average.
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1 Introduction
The main advantage of the present study is the search for possible explanations for the better functioning of the sector in one country, than in another. If an independent regulator is the answer, then an improvement in the institutional design could improve the performance of the industry, which is an optimist perspective for any European government.
The proposed research question and the present study contribute to the literature in several ways. First, similar researches are relatively new for the region of SEE, as usually the countries that are analysed in most of the academic work are classic cases for railways (as Germany, Britain, USA, Japan, etc.) (Beck et al 2013; Nash 2008; Wetzel 2008; Oum, Yu 1994; Friebel 2010; Larouche 2012). Second, studies on independent regulatory agencies are abundant, but they usually focus on other sectors (as telecommunications, electricity, financial services, etc.) (Gilardi 2008; Gülen et al 2014; Oliveira et al 2005; Decker 2015). The concept of independent regulatory body for the railway sector is relatively new and has risen with the reforms in the sector initiated by the EC. It is true that in some countries, independent regulators in the railway sector have some history already (UK, Germany, the Netherlands), however, for the SEE states this is a rather innovative development and it is interesting to see how do these regulators work in the specific environment and what are the implications for the sector.
Moreover, this research aims at discovering whether there is an actual relationship between levels of independence of the regulators and the current performance of the sector. Until now, scholars disagree that the regulatory independence itself has a great impact on the industry (see Chapter 2 – Literature review). Nevertheless, if all other relevant factors are equal, it will be possible to isolate the independence factor as influential and to indicate whether the hypothesis is verified. If an actual causal connection between independence and efficiency is discovered, this will be a positive contribution to the research in the field.
1.2 Structure of the research Thus, in order to connect independence of the regulatory agencies and efficiency of the railway sector, first an overview of the literature on IRAs and railway efficiency is presented (Chapter 2).
The master thesis afterwards is structured as follows: Chapter 3 outlines the theoretical argument and presents the hypotheses that are going to be tested as well as expectations for the results. Chapter 4 draws the research design as a comparative case study of the type most similar case design. The research steps are explained and the indicators for measurement are
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1 Introduction selected. Afterwards, Chapter 5 presents the cases and describes the background of the SEE countries and their national railway sectors in the context of the Balkan region. The comparison of cases starts in Chapter 6 where independence of national regulatory bodies for the railways is measured for each country in order to come up with a scale positioning the countries from the least independent to the most independent.
The following Chapter 7 aims at answering the question whether the most independent regulator also performs in the most active manner in terms of institution’s actions. Furthermore, an analysis of the performance of the national railway sectors of the countries is conducted in order to find or deny a causal relation between independence of the regulatory agency and the efficiency of the railways.
The last chapter draws the conclusions of the study and seeks the implications of the results in the context of the contemporary state of the railway sectors in Europe.
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2 Literature review
2 Literature review The purpose of the literature review is to introduce the main concepts and to comment on them according to what has been said on the topic by the academia. In its first part, the argument focuses on the independent regulatory agencies and their spread in different sectors and different countries. After that the concept independence of regulators is explained and its measurement strategies by different authors are sketched. The literature review proceeds with the relevant studies on railway efficiency in order to establish a connection between the performance of a sector and its management by an independent regulator.
2.1 Independent regulatory agencies With the shift from positive to regulatory state (Majone 1996: 287), independent regulatory agencies (IRAs) gained significant importance and became central focus of the scholars in the field of regulation. IRAs are the main institutional element within the regulatory state (Gilardi 2008: 13). They can be defined as public organisations with regulatory power whose members are not elected, but their competences are delegated by the government. Elected officials do not directly manage IRAs (Ibid: 8). Since the 1970s, the number of IRAs has significantly increased in industrialised countries (Scott 2014: 472), and since the end of the 1980s they have expanded and “have become a common institutional model in all European countries” (Gilardi 2008: 2).
Independent regulatory agencies are widely spread in some sectors as the financial services and utilities, which have been “highly interventionist” (Gilardi 2002: 873) in the past. The tendency of governments to delegate regulatory powers to independent institutions which are not democratically accountable is a core element of the rising of the regulatory state, discussed by La Spina and Majone (2000).
IRAs in different sectors
The history of the introduction of independent regulators can be followed in various fields in the Western world. During the XX century, network industries were subject of delegation of powers to independent regulatory agencies in the United States (Trillas 2010: 1). Due to the reforms, introduced in the United Kingdom by Margaret Thatcher, this IRAs became the main actor in the field of regulation of the privatised industries (Ibid). The milestones of these agencies are the higher degree of independence and delegation (Scott 2014: 474). Studies have shown that in the 90’s, the proliferation of independent regulators has significantly risen,
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2 Literature review notably in OECD member countries (Ibid). This can be explained with the striving of legitimacy by countries by the means of adoption of an internationally recognised institutional model (Ibid).
Moreover, the establishment of separate and autonomous agencies governing different sectors has been a key element in the recommendations of the World Bank and the IMF in developing countries for their overall economic reforms (Trillas 2010: 1). For sectors as electricity and telecommunications, the EU has also been working for the promotion of the creation of independent national authorities. The number of sectors is increasing (Ibid: 6).
European sectoral regulation is a subject of a wide range of studies. The areas that have been the focus of interest by many authors are usually telecoms, energy, competition authorities and central banks. Larouche et al (2012) study regulators from different sectors in several countries – Germany, France, the UK, the Netherlands and Belgium and they discus two basic impendence differentiations – from other political institutions and for market players.
Central banks have been a focus on independence studies for a long time now. On one hand, their area of competence is of crucial importance of the countries, and its policy affects all the national citizens. On the other, in the context of globalized economy and the close ties between players in the international market, the central bank stability and reliability has far more than just local significance. Some authors disagree on the good measures that should be taken by governments regarding central banks. Establishment of regulators in this sector and their institution design is therefore a controversial issue and a potential conflict point (Quintyn and Taylor 2003, Debelle and Fischer 1994).
IRAs on supranational level
Independent regulatory agencies are spread not only on national level, but also on supranational. Several European Union agencies enjoy limited regulatory competences in various fields as control on food safety, and pharmaceuticals. Apart from that, in many sectors, including railways, there are international agencies that aim at establishing a network for cooperation between national industry regulators. The European Railway Agency for instance monitors national regulators’ activities and reinforces safety and interoperability (ERA official website 2015).
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2 Literature review
2.2 Level of independence in IRAs There is a significant amount of research done in the field of independence of regulators. For decades, the focus was on central banks and limited commodity industries. However, the number of industries governed by an independent regulatory body is increasing.
There is no generally accepted approach for the measurement of regulatory independence. Authors usually distinguish between formal (de jure) and informal (de facto) independence of institutions (Maggetti 2012; Gilardi 2002, 2008).
While the formal independence is what it is set in the constitutional framework of the institution, the de facto independence indicates other relevant factors as, for instance, whether IRAs fulfil their mandates, what kind of informal relationships do they develop in their political environment, etc. (Maggetti 2012: 387). Formal independence is measurable in a simpler manner, because requirements are stated in the laws, while informal independence is a more complex issue and its analysis and measurement are challenging for scholars.
In his dissertation from 2008, Gilardi builds on his 2002 study and develops an indicator based mainly on formal independence. He focuses on regulatory agencies in Western Europe in the field of utilities, economic and social regulation. The author studies regulators and compares their results based on various elements: financial and organisational independence; regulatory competences of the agency; status of the agency’s head, conditions for hiring and dismissal; status and conditions for the management board; and formal relationship of the agency with the government and the parliament. His indicator is easily computable, because Gilardi has assigned concrete values for every question asked and since it comes to formal independence, the data sources are legislative documents and variations in the interpretation and dynamic changes are less likely to exist. The indicator developed by Gilardi is explained in detail in Chapter 4.2 (Research phases and selection of indicators).
In their work, Oliveira et al (2005) summarise different approaches of the authors for measurement of independence of institutions. Their approach towards sectoral regulators comprises a review of authors’ accomplishments in the field and a proposal of a new methodology for measurement. The indicator they have developed also includes appointment process, term of office of the manager; budgetary autonomy; and appeal of the decisions of the agency, but also decision making process, transparency and one qualitative question regarding the interaction between the agency and the national competition authority. Moreover, the data is collected via questionnaires sent out to these national competition
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2 Literature review regulators, so although the last question does not take part of the indicator, the main focus of the authors is the relationship between the regulatory body and the competition agency of the countries.
Apart from the discussed methods to evaluate the level of independence of the regulators, there are of course other interpretations of the topic by scholars.
A general approach for evaluation is developed by the authors Hanretty, Larouche and Reindl (2012). Although they base the research on competition authorities, the index developed can be used for further research in other sectors as well, according to the authors. While their study is centred on both measuring formal and informal independence, other scholars prefer to concentrate their attention on the formal criteria – mainly concrete legal provisions.
Johannsen, Pedersen and Sorensen (2004) are interested in the gas and oil industry and consider independence as organizational autonomy, on one hand, decision-making independence, on the other, and independence from both the government and stakeholders. Nevertheless, they state that the existence of formal independence itself does not necessarily mean lack of political interference.
Most of the authors (Hanretty et al 2012; Gilardi 2008; Maggetti 2012; Oliveira et al 2005) agree that in order to evaluate independence of the regulatory body, it is important to take into account not only de jure independence, but also de facto independence. Nevertheless, although there is not a common approach to measure formal independence, the different methodologies developed have some similarities and share part of their elements. Measuring informal independence is much more challenging and controversial; therefore, for the purposes of the present thesis, I will focus on measuring of the formal independence of regulators.
2.3 Independence and efficiency Most of the authors dealing with measurement of regulatory independence also recognise the benefits of establishment of an independent sector regulator (Decker 2015; Trillas 2010; Genoud: 2003; Oliveira et al 2005; Wetzel 2008; Hanretty et al 2012, Gilardi 2002, 2003, 2008). The most common arguments, supported by the majority of scholars are the advantages of the IRAs, for example, the better transparency, accountability, higher level of expertise (Scott 2014; Oliveira et al 2005; Gilardi 2008). Moreover, the introduction of independent regulators addresses the issues of time inconsistency and credibility (Gilardi 2002, 2008).
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2 Literature review
Genoud (2003: 1) argues that delegation to an independent regulator is expected to have a positive impact on both policies and politics.
Discussing efficiency, one of the most obvious arguments directly relating autonomous regulators to efficient outcomes are the decision transaction costs (Gilardi: 2003). In situations where the political costs and benefits of the process are not entirely visible, delegation of the decision making to a regulatory agency is efficient, because the time spent in debated and ideological discussions is reduced (Ibid.).
In his paper, Trillas (2010) argues that efficiency of the industry is expected to be achieved by the independent sector regulators. He focuses on the theory of strategic delegation, as an ability to achieve cooperation without the time constraints the political life cycle suggest. The author states that delegating has its costs, however the benefits from delegation are evident in a wide range of industries, emphasising on network industries. According to the author, delegation in monetary policy and central bank supervision is generally perceived as a successful approach, although empirical results are ambiguous. Nevertheless, the empirical evidence in network industries shows positive results deriving from the introduction of independent regulators, although the impact is likely to be modest. For this reason the author proposes a set of recommendations for political and institutional reforms to make regulators more effective.
It is difficult to attribute to results on sector performance exclusively on the characteristics of the regulator and the levels of independence. According to Gilardi (2008), other relevant factors should be taken into account when evaluating the performance of the regulated sector. The author argues that these factors explain why regulatory agencies with similar level of independence sometimes have different outcomes in terms of sector performance.
In this sense, if the real impact of the IRA can only be studied if the other influencing factors are eliminated. If the analysed cases are similar in terms of other relevant factors, the influence of the level of independence of the regulator can be tested and a possible relationship between the regulator’s independence and the performance of the sector could be proven. In this context, a most similar case design is an appropriate approach for the purposes of the present master thesis.
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2 Literature review
2.4 Efficiency in the railway sector Efficiency in terms of railways is on one hand technical (operational) efficiency, and on the other hand – cost (financial) efficiency. There are many external factors influencing efficiency of the railways. When selecting the case studies, points that should be taken into consideration are historical development; subsidies; topography and population density (Beck, Bente, Schilling 2013).
Independent regulators were introduced widely in the railway sector of the EU countries after the reforms proposed by the EU. A significant number of scholars discuss the effects of the implementation of the four packages of directives and test empirically changes in efficiency.
In their study, Friebel, Ivaldi and Vibes (2010), use data from a period of 20 years in the majority of the EU countries to prove that reforms as opening the access to the network, vertical separation and introduction of an independent regulator increase efficiency of the railways. Their findings suggest that sequent reforms have a better impact on the sector while multiple measures usually do not have positive effect. The authors conclude that the EU reforms increase efficiency together with deregulation of the sector because of the increased autonomy of managers and the introduction of competition. Competition is the strongest argument in favour of reforms. Wetzel (2008: 23) defines the main function of the independent regulatory body enforcement of reforms aiming to assure competition.
Furthermore, the European Commission follows the progress of implementation of the directives and their impact by elaborating reports, very detailed especially for candidate countries as the complete adoption of EU legislation is a requirement for membership. The World Bank is also interested in the advancement of countries and the impact of the reforms on their national railway sectors, as the institution is a donor for various states and the railways is a strategic and problematic sector.
It is interesting to follow the changes occurred between the WB reports from 2005 and 2011. The reports (WB 2005; WB 2011) focus on the South-eastern European region that is also my area of interest. Although in the text of the Directives requirements for independence include mainly independence of the regulator from the infrastructure managers, the WB reports give recommendations of establishment of regulatory institutions with a higher degree of autonomy from the government (WB 2011: 32). The definition the World Bank gives is financial and organizational independence from the national transport ministries and autonomous personnel policy and decision-making.
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2 Literature review
Bošković and Bugarinović (2015) use the data gathered by the WB in a recent research to evaluate the level of implementation of the reforms the current developments of the sector in different countries from South-Eastern Europe. The authors also give recommendations for improvement of the sectors. Regarding independence of the regulator and its effects on efficiency, Bošković and Bugarinović argue that the degree of independence of the agency is an important indicator for the government commitment to open market. They relate the enhanced performance of the sector to the application of the principles of fairness and non- discrimination in the work of the agency.
The OECD has another interpretation on the relation between independent agencies and better performance of the sector, published in one of its conference papers in 2003. The organisation identifies the more independent the regulator, the better the chances for opening the market in the field (Gilardi 2003: 68). Furthermore, independent regulatory agencies have other benefits – they are assumed less likely to use regulatory policy to benefit one specific actor in the market (GTZ: 2003).
Besides the various suggestions and theories on relations between sector performance and IRAs, there are manifold studies on how to measure efficiency in the railway sector, which propose a wide set of indicators.
Beck, Bente and Schilling (2013) conduct a profound study on railway efficiency. They identify several external factors that can influence productivity of the sector – historical context, topography of the country, population density and levels of subsidies the sector is entitled to. The authors define efficiency in the railways from a financial perspective. It is a function of cost reduction and public funding on one hand, and output and public benefits, on the other. In other words, the approach is based on the value for money philosophy. The indicators they present comprise several element of expenses the railway face and different type of revenues (from passengers, freight, infrastructure, utilization, etc.). Although, focusing exclusively on the financial part has its benefits in terms of measurement, the methodology of the authors proposed lacks some elements other scholars take into consideration.
Smith and Nash (2014), for instance, view efficiency as a combination of technical efficiency and cost efficiency. In their definition, technical efficiency means the degree to which the output is maximised for a given level of output, while cost efficiency is the extent to which expenses are minimised for the given level of output.
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2 Literature review
Thompson and Bente (2014) offer the use of more complex key performance indicators (KPIs) from used data. In their methodology, financial performance is only one of the elements evaluated. The authors also take into account factors as system scope, utilization of assets and human resources, operational performance and customer-centric service quality (Makovsek, Benezech and Perkins 2015: 5).
The simplest approach for benchmarking however is creation of basic simple indicators, preferably to those that are already used by the railway operators (Ibid). Furthermore, the authors suggest that cross-sectional benchmarking is challenging and requires serious previous preparation, so the most adequate and simple option to compare would be comparison over time. Even when dealing with the operator’s own performance, it is important to consider also external influencing factors.
2.5 Summary The chapter presents the numerous researches on independent regulatory agencies and their benefits for the regulated sector. Although some authors give definitions on what exactly an independent regulator is, the interpretations may significantly vary.
In their paper on the management of the liberalization process in the railways, Bošković and Bugarinović present three types of regulatory bodies, established in the SEE region according to their level of independence – ministry-dependent, government-dependent and parliamentary accountable (Bošković, Bugarinović 2015: 53). Contrariwise, in their 2010 paper Friebel et al argue that separate divisions within transport ministries, should not be considered IRAs (Friebel at al 2010: 81). This is a significant controversy in the literature, thus it will be interesting to estimate whether ministry-dependent agencies could in some cases enjoy significant levels of de jure independence and could they be comparable to the more independent regulatory institutions active in the same sector.
Apart from the concrete definition of the concept of IRA, some controversy in the literature may be found in the area on whether there is an actual causal relation between the level of independence of the regulator and the performance of the sector. Although most of the authors agree on the statement that independent regulation is beneficial, there is a little empirical prove that connects directly the level of independence of the regulatory body with the performance of the industry. This is the aim of the present thesis – to see whether there is a correlation between the level of independence of the regulator in the field of railways and the development of the sector itself.
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3 Theory
3 Theory In general, most of the authors agree that independence of the regulator brings benefits to the sector (Decker 2015; Trillas 2010; Gilardi 2008; Genoud: 2003; Oliveira et al 2005; Wetzel 2008; Hanretty et al 2012). There are several arguments used by the academia to explain why independent regulators are beneficial. The arguments are listed below.
3.1 Arguments for delegation 3.1.1 Credibility The credibility argument for delegation to independent actors is widely discussed in the literature and commonly accepted (Gilardi: 2002: 874). The main issue is time inconsistency in the decision-making process. Time inconsistent policies can be defined as policies that change over time; in this sense, decision-makers have more incentives to adapt their policies to the new context, instead of sticking to an established long-term strategy (Ibid: 875). This is what makes policies lack of credibility, because preferences of elected officials tend to be time inconsistent (Ibid: 876).
Another condition that affects the time inconsistency problem is the fact that the present governing actors and the future policy makers are accountable to different majorities (Majone 2002: 106). Two main problems arise. First, policy-makers have the propensity to revoke from their long-term commitments in favour of short-term decisions. This is due to the short- term time horizons of the elected politicians which is normally the next elections (Pierson 2000: 475). Second, preferences of the majority may change. The legitimate change in policies by the new majority is a key characteristic of the democratic process. However, it presents a problem for long-term commitments, as governments are not bound with obligations to follow a certain path (Ibid). Of course, there is a significant exception in areas where obligations by international organisations or agreements are premises for the development of the policy and the measures taken by the decision-makers. The higher level of international interdependence may reduce the options for flexible policies (Gilardi: 2002: 875).
In this sense, delegation of competences to an independent authority is an adequate solution, because it eliminates the discretion of policy-makers in the given area and supposes subjection to fixed rules (Ibid: 876). As independent agencies are not composed by elected officials and they are not democratically accountable, the problem of the short-term horizon and inconsistency is addressed.
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3 Theory
Furthermore, Majone (1996) adds another argument for delegation of powers – in his claim, there is a distinct correlation between the problem of credibility and the level of openness of the economy. Gilardi builds on that and argues that the more the economy is subject to international interdependence, the more delegation there should be and that delegation is a typical approach for sectors that have been subject of recent market opening (Gilardi 2002: 877). The link between openness of the economy and the delegation of powers is explained by the necessity of governments go gain international recognition andcredibility of their policies, as a mean to attract investors.
In this sense the establishment of independent regulatory institutions in the railway sector seems justified being part of the reform packages, as it is accompanied by liberalization of the market, openness of the sector and assurance of equal access to infrastructure to operators.
3.1.2 Political uncertainty Another issue that delegation of competences addresses is political uncertainty. The concepts of credibility and political uncertainty are close and some authors perceive them as similar, while others treat them as separate concepts (Pierson 2000: 475). In any case, the two terms are related as political uncertainty leads to time inconsistent preferences for the government and affects its credible commitment (Gilardi 2008: 49).
The essence of the political uncertainty problem lies in the periodic reallocation of political property rights, without compensation for the losers (Ibid: p. 46). This leads to the likelihood of the governing majority to redesign political institutions in order to reduce the spending capacity of the following government. In this context, independent delegation serves to restrict the opposition in the future, but also is a self-binding act (Ibid). (1991)Cukierman (1994) and Goodman (1991) also make this argument in the financial regulation area for establishment of independent central banks.
3.1.3 Number of veto players Furthermore, the number of veto players in the political system also plays a key role in the justification of the delegation to IRAs. It is also related to the concept of political uncertainty in a way. The argument was developed by Tsebelis (2002: 312). The author states that the number of veto players directly related to policy stability in the political system. As veto players are the actors whose agreement is needed to change the status quo, the higher number of players supposes more difficult change and therefore a more stable system. In this sense, if the higher number of veto players reduces time inconsistency problem, it can be expected that
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3 Theory there is a negative relationship between the multiple veto players and delegation (Gilardi 2008: 50). However, the author also argues that delegation in some areas, as monetary policy, for instance, has better effect on credibility when a larger number of veto players is present. The benefits of central bank independence depend on the costs of reducing the independence and as benefits are greater, the incentives to politicians to delegate increase (Gilardi 2002: 876). This argument is antipodal to the above discussed argument on the negative relationship between veto players and delegation. Nevertheless, in both cases the significance of veto players in the process of delegation is stated. According to Gilardi (Ibid), the significance is present; however, the direction of the relationship is a subject of empirical studies.
3.1.4 Summary To sum up, delegation of competences to independent institutions is desirable as it addresses issues as time inconsistency and policy uncertainty. The credibility argument is widely accepted by scholars. The decision for delegation is seen as a self-binding and restricting act.
Regarding veto players in the political system, there is a consensus on the argument that the political context matters for delegation to independent regulatory agencies. However, while some authors state that institutions that preserve policy stability suggest also preservation of the status quo, others perceive this context as favourable for delegation of competences.
There are also other relevant arguments to delegate powers to IRAs that serve in favour of the statement that independence of the regulator brings. Larouche et al (2012) for instance argue that the level of independence has implications on the quality of work of the regulator. A widely accepted benefit is that, apart from the reduced political inference with the work of the regulator, the requirements for transparency and accountability are strong for IRAs and this is a recognized advantage by academics (Irion, Ledger 2013: 4).
3.2 Hypotheses To sum up, according to the literature, there is a strong theoretical basis justifying the introduction of IRAs and suggesting that they have a positive impact on the regulated sector. Nevertheless, within the EU Directives reforming the railways, there are no specific provisions to delegate the regulatory competences to an independent agency:
“This body, which can be the Ministry responsible for transport matters or any other body, shall be independent in its organisation, funding decisions, legal structure and decision-making from any infrastructure manager, charging body, allocation body or applicant.” Article 30, Directive 2001/14/EC
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The states have the freedom to design the regulatory institution according to their preferences. The decision to establish a public agency within the institutional framework of the responsible ministry is not in violation of the EU provisions. Nonetheless, in the scope of interest of some scholars is to evaluate which countries have delegated regulatory activities in the railway to an actual independent institution and this is assumed to be a positive achievement (Bošković and Bugarinović 2015; WB 2011).
In support of that, my main assumption is that the independence of the regulatory institution has positive impact on the functioning of the railway sector and its development. My hypotheses derive from this assumption in the evaluation of the performance of the sector, related to regulatory policy (behaviour of regulator) and productivity of the railways (output).
Relying on the OECD framework for evaluation of regulatory performance (Coglianese 2012), the analysis will be performed on three levels – regulatory administration, behavioural compliance and outcome performance. On the first level (regulatory administration), I will be looking for an answer on the question, how regulation is administrated, i.e. how were regulators in the selected countries designed and measure the level of independence of each regulatory agency (Gilardi 2008; Oliveira et al 2005). Based on the results obtained, a comparison between countries will be made on the second and third level of analysis (behaviour and outcome). These phases are illustrated in the following graph.
Graph 1 Levels of analysis and research outcomes
Source: Adaptation from Coglianese (2012) for the purposes of the present research
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The calculation of the independence level is the necessary preparatory stage and first step for the testing of the following hypotheses.
H1: The more independent the railway regulatory institution, the more active the regulator within its competences.
Regulatory institutions are established with a particular objective (sector regulation) and regulation aims at addressing certain problems, as market failures - public goods, externalities, incomplete information, incomplete markets, and monopolies (OECD 2005).
The railway sector has its peculiarities – it is usually defined as a text book example of natural monopoly (Foreman-Peck 1987: 699), as it has significant sunk costs in the form of infrastructure, and high fixed infrastructure costs (OECD 2005: 158). Economic regulation in a sector with natural monopoly aims at correcting these market failures and at protecting consumers from monopoly prices, poor quality services and cartel behaviour (Ibid.). Reflection of the purpose of regulation is the regulatory policy designed and implemented, because it aims at changing behaviour and to generate positive outcomes, which are the main objectives of regulation (Coglianese 2012: 7). Regulatory policy of institutions will be subject of analysis in the present research, which is an equivalent to behaviour of the regulator, in line with Coglianese’s framework. I will evaluate the institutions’ activities in order to conclude whether an agency with a higher level of independence is also more “busy”. I will focus my analysis on the intensity of activities of the agency in the fields of its competences – enforcement (fines, penalties); licenses given to operators, and signed contracts.
Based on the literature, one would expect that a higher level of independence of the institution results in a more active behaviour by it, because as an autonomous body, accountability and transparency requirements are higher. IRAs are assumed beneficial precisely because they are credible, transparent and accountable (Gilardi 2008; Oliveira et al 2005; Scott 2014). As they publish yearly activity reports, my assumption is that the more independent regulators have more incentives to work efficiently and to prove a satisfactory level of work to the entities to which they are accountable. This is also logical in case the head of the agency or the management board are appointed with a fixed term of office, but dismissal is possible (Gilardi 2008: 56).
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After that, I will focus on the policy outcomes, which are in the case of railways better performance of the sector. The third level of analysis is the efficiency of the railways in the selected countries. Therefore, my second hypothesis is:
H2: The more independent the agency, the more efficient the railway sector.
There are various approaches for benchmarking of railway sector, the simplest of which to compare the sector results to its past performance. Cross-sectional benchmarking is more challenging as it requires bigger amount of data that needs to be standardised and normalised (Makovsek et al 2015: 7). Given that, the approach I am using in this study is selection of simple indicators that are commonly used by authors to assess efficiency and productivity levels of the railways, data that is accessible and collected on frequent basis.
In my analysis, I will focus mainly on freight transport, not because I do not consider passengers important, but because I assume that, the results will have a higher level of significance. In the passengers area there is still monopoly of operators, because of national regulation specifics (sunk costs, regulated ticket prices, etc.) (WB 2011). For the selected cases, freight is actually the only area where competition was formally introduced and there are several operators with access to the infrastructure in most of the countries. As one of the main purposes of the regulatory agency is to assure fair competition and it was successful in freight only, I consider it an adequate focus for the work. Furthermore, after introduction of competition under the supervision of the regulator, the freight sector has become more dynamic and changes there are easily traceable.
Efficiency and productivity
For the purposes of this master thesis, outcomes of the policy will be analysed, which in this case is efficiency of the railway sector. However, efficiency is a concept that also relates to another concept – railway productivity.
According to the OECD, productivity can be defined as the ratio of the measurement of input and output. One of the main objectives to measure productivity in the economy is to estimate the efficiency of particular sectors (OECD 2001: 11). For that purposes the indicators for railway efficiency are in their major part productivity indicators. If the broad definition of efficiency is “not wasting resources” and achieve better results with the same input in terms of production (Diewert and Lawrence 1999, OECD 2001), then productivity indicators are
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3 Theory suitable for the assessment of the performance of the railway sector, apart from the financial performance.
Looking at productivity in the railways, my basic assumption is that in countries where the railway sector is regulated by an independent regulatory institution, there will be an improvement in the levels of productivity after the regulator is established. Indicators for measurement of the hypothesis are defined in the following chapter – Research design.
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4 Research design This chapter presents the case selection, establishes the research phases, sets indicators for measurement, identifies variables and their operationalization.
4.1 Case selection For the purposes of the present study, I will focus on the railways South-Eastern Europe region. Bošković and Bugarinović (2015) explore the current developments of the railways in SEE and the implementation of reforms in these countries. Regarding the introduction of regulatory institutions, the authors identify three main strategies for establishment of a regulatory body – as a part of the ministry of transport (1); as a government agency (2) and a public agency, directly controlled by the parliament (3). They argue that some countries (Albania, Bulgaria, Bosnia and Herzegovina and Montenegro) have set the regulator within the ministry of transport, while others (Greece, Romania and Serbia) have established a separate governmental agency to deal with sector regulation. The only two countries with an actual independent regulatory authority are Croatia and the Former Yugoslavic Republic of Macedonia (FYROM).
Deriving from this classification, I have chosen one country of each “type” in order to analyse their regulatory institutions. The representative of the ministry-dependent institution is Bulgaria; of the government-dependent – Serbia; and FYROM as a country with the expected higher level of independence.
An important remark should be made here. As already mentioned in the literature review, some authors do not consider ministry-dependent institutions as actually independent agencies (Friebel / Ivaldi / Vibes 2010: 81). However, the ministry dependent representative selected (Bulgaria) is a member of the Independent Regulators’ Group (IRG-rail network), which serves as a proof that the Bulgarian regulatory agency has independent characteristics and it is perceived as independent by its partners since 2011, when the network was founded.
Apart from the theoretical background, established by the authors, another motivation for the case selection is the fact that the three neighbouring countries are close in terms of their common historical development, geography, demographics, structure and size of the railway sector and current trends in its development. These conditions serve in favour of the aim of the research – to focus on a most similar case design, in order to avoid influence of external factors. In this manner, internal validity of the research is assured. In chapter 5, I will describe
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4 Research design countries’ background and emphasize on the common characteristics the cases share in order to prove that the research is effectively a most similar case design.
4.2 Research steps and selection of indicators The present research comprises three main phases.
(1) First, I will study the regulatory institutions of the selected countries in order to evaluate their level of independence. (2) Second, a comparison between countries will be made on the basis of their regulatory policy. I will evaluate institutions will according to the extent to which they perform actively within the limitations of their competences. (3) Third, I will compare between countries as per their railway sectors and measure productivity in the field of freight transport.
4.2.1 Independence indicator As already mentioned, there is no commonly accepted indicator to measure formal independence of institutions and different authors suggest various approaches. I have preferred to use the proposition of Gilardi, on one hand, because it builds on previous studies (Gilardi: 2002, 2005, 2007, 2008). His indicator was originally used to evaluate independence of central banks, and afterwards adapted for the context of different types of IRAs. Central banks are institutions whose independence is of crucial importance for the proper functioning of the economy; therefore measuring their formal independence is a responsible task and needs a reliable method. Furthermore, Gilardi uses the indicator to perform the first empirical assessment on credibility, evaluating a wide set of regulatory institutions (2002).
On the other hand, I have chosen Gilardi’s indicator over several more available, because it is composed by a wide range of elements and offers a broad overview of the institution from different perspectives. In the same time, the index consists of elements, information about which is usually public and easily accessible. This is a clear advantage for my research considering the time and scope limitations of a master thesis. Last, but not least, the indicator suggests a simple numerical measurement, which eases comparison between countries and reduces levels of subjectivism.
The indicator comprises five elements, every one of which having a weight of 20 % in the total value. The elements are the following:
- Status of the agency head;
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- Status of the members of the management board; - Relationship with government and parliament; - Financial and organizational autonomy; - Regulatory competences.
Each of these elements contains different number of questions with different weigh and values which vary from zero to one (0 meaning not independent at all and 1 - fully independent). The higher the number obtained, the higher the level of independence of the institution.
To be able to answer the questions for all countries, I will gather primary qualitative data from various legal sources, mainly national legislation (laws on railways) as well as regulations on the status of the regulatory institutions. After applying the Gilardi indicator, I will calculate and compare the level of formal independence of the railway regulators in Bulgaria, FYROM and Serbia. The results will demonstrate whether the assessment of the authors Bošković and Bugarinović (2015) was accurate and whether actually FYROM is the country with the most independent regulatory institution while Bulgaria has the less independent regulator.
The level of independence of the regulator is my independent variable.
4.2.2 Indicators for behaviour of regulators (regulatory policy) After that, using the classification obtained, I will compare independence levels with the performance of the railway sector in each country. As railway regulators aim at successful implementation of the reforms and regulations in order to achieve better performance of the sector, the study will focus on outcomes and regulatory policy in accordance with the OECD framework for evaluation of regulations (Coglianese: 2012) – an ex post analysis on the regulatory activities of the institution and the results of the regulatory policy (measured in railway efficiency).
My first step is to focus on the behaviour of regulators, which in the particular case is equal to the regulatory policy of the institutions – their activities in terms of enforcement, contracts and licences. For this purpose, the indicators for measurement activity are the following:
- Number of inspections and penal provisions arising from them (average per year); - Number of licences issued (average per year); - Number of certificates issued on average per year.
The sources available for this evaluation are the annual activity reports of the institutions.
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In this sense, behaviour is one of the dependent variables.
4.2.3 Efficiency indicators The other one is the policy outcome, or in this case, efficiency of the railways. I will analyse the influence of the type of regulatory institution on the performance of the sector, with attention to freight. I have chosen several indicators to compare two time periods – before and after the establishment of the institution. The main objective is to see whether in countries with more independent regulators (where it is expected competition in the sector is introduced and monitored effectively), the sector performs better in terms of productivity.
A great variety of authors explores efficiency and productivity levels in the railway companies. They define inefficiency as the difference between the observed level of variables and the maximum level achievable (Cantos Sánchez / Villarroya 2000: 8). The most used variables in the efficiency and productivity models are the Passenger-kilometres (for passenger transport) and Ton-kilometres (for freight transport). However, these indicators have some disadvantages, as they can be influenced by the regulatory system of the country (Ibid). Furthermore, productivity is strongly dependent on exogenous factors as economies of scale, differences in network characteristics, market size, quality of service, weather and terrain conditions (Oum / Waters / Yu 1999: 26). Therefore, to get clear and credible conclusions from the analysis of different countries, it is of crucial importance to establish a most similar case design study.
As I am going analyse sector performance over time, the comparison between countries will be made on the basis changes in this performance. My basic assumption is that in countries where an independent regulator is established, there should be a positive change in the performance of the sector. As the literature states, the IRA is efficient, because it is based on expertise, transparency and accountability (...), the establishment of this type of institution should bring benefits to the industry. To sum up, I expect that the country with has the higher independence indicator to have significant improvement of the sector performance after the creation of the institution.
In this sense, the hypothesis on sector performance could be measured using three basic productivity indicators – labour productivity, freight productivity and wagon productivity.
The abovementioned indicators were discussed and developed by the UN Economic and Social Council. Following a decision of the fifty-fourth session of the Working Party of the
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Council (document: TRANS/SC.2/194), the secretariat in cooperation with various organisations (The International Union of Railways – UIC and the Organisation for Co- operation between Railways – OSJD) collect data for productivity of all the UNECE member countries.
The result is a developing of a set of indicators, described below:
Labour productivity indicator for freight (1)
For the purpose of the present study, I will focus on labour productivity in freight. It is defined as freight output per unit of labour working in the freight area. The unit of labour may be number of employees or labour hours. Its unit of measurement is Net tonne-km/employee and it is measured in thousands1.
The measurement on the UNECE distinguishes between labour productivity in passenger and in freight transport, which is important for the purposes of the present research.
Freight productivity (2)
It is defined as an output per unit of network lines. It is calculated by dividing net tonne kilometres transported by freight trains by the total number of the kilometres of network in use (net tonne-km/ km of network). The unit of measurement is thousands t-km. This indicator, together with the measurement for labour productivity in freight is the main focus of the analysis and will be considered when comparing the cases.
Productivity of wagons (3)
In the area of freight, productivity of wagons is also an important indicator for measurement. It shows the relationship between the output produced by the wagons and the number of wagons used for the production of this output. Formulation of the unit of measure is similar to the locomotive productivity indicator. It is measure in net tonne-km/wagon, measured in thousands t-km.
1The measurement in thousands for all the indicators set by the UNECE was recently changed and for the next round of data interpretation and publication, the measurement will be in millions. (UNECE: 2012). 29
4 Research design
Other indicators
A substantial part form the set of indicators developed by UNECE is ignored here. All indicators calculated in relation to passengers are not relevant, as the research focuses on implications on freight. Furthermore, productivity of locomotives is a freight indicator, part of the 2012 round of research by the UNECE; however, data on that for previous periods is missing. This is the reason productivity of locomotives is not taken into consideration in the analysis of results and comparison of the cases.
There is also another indicator, the UNECE uses for evaluation of rail productivity - Energy consumption. However, the data for calculation of this element is limited and most of the countries do not keep consistent record of that (UNECE 2012: 4).
4.2.4 Summary The following table summarizes the first part of this Chapter and presents concisely the independent and dependent variables, as well as the indicators selected for their measurement.
Table 1 Variables and indicators for measurement
Variables Indicators for measurement Independent Level of independence of Gilardi’s Index for Independence variable regulators
Dependent variables Behaviour of regulator Number of inspections and penal (regulatory policy) provisions per year (on average) Number of licences per year (on average) Number of certificates per year (on average)
Railway productivity Freight productivity Labour productivity in freight transport Productivity of wagons
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4.3 Operationalization and causal mechanism
Causal mechanism
Change in Regulatory Regulatory behaviour and institutions policy generation of outcomes
Change Establishment Instituiton's railway of IRA actions productivity
Source – scheme adapted from Coglianese (2012: 10).
The causal mechanism is established according the following logic: the regulatory institutions implement their regulatory policy which produces certain outcomes. For the purposes of the present research, the emphasis is put on the annual activities of regulators and the results on productivity of the railway sector. The main assumption is that the level of independence of the regulator has significant implications on the intensity of the institution’s activities and further, on the productivity of the railway sector.
4.4 Control variables The control variables serve as an alternative explanation for the results. These are other factors that could have influence on the researched sector. In this case the focus is on the international influence and the subsidies for the sector.
4.4.1 Historical development
The historical context of the railways is a key factor that implies the main characteristics of the sector and its current development, because it shapes the infrastructure and organisational structure. Moreover, wars and local conflicts can impact negatively the infrastructure condition (Beck et al 2013: 6). Therefore, adopting the historical perspective is essential for the good understanding of the characteristics of railways (Marti-Henneberg 2012: 126).
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4.4.2 Geography and topography
The geographical location and topography of the country are related concepts. Topography is a significant factor in analysing the trends for development of the railways. In countries with mainly mountainous terrain construction and maintenance of infrastructure is more expensive and resource-intensive, while in lowland areas is the opposite.
4.4.3 International influence
The EU is a key factor for the development of national railway sectors, as it sets the rules and the guidelines for the reforms. Member States are obliged to comply with the directives on railway reform, and candidate countries also have to harmonize their national legislation with the EU law eventually if they want to progress with the negotiation process. Therefore, the EU influence is actually a factor reducing the differences in the development paths of countries. Affiliation to the EU in this sense implies a common and balanced evolution of the railway sector’s performance, if the legislation is transposed correctly and on schedule.
4.4.4 State aid
As discussed above, countries affiliated with the EU follow the same rules in strategic areas. One of these areas is subsidising national industries, which is subject of control by the EU competition policy. Being one of the areas of the areas of exclusive competences of the EU (Article 3 (b), TFEU), this is an area where member states have limited decision-making powers. It is of crucial importance for candidate countries also to comply with the present obligations, as they have direct implications on the proper functioning of the Internal Market.
To sum up, countries follow the same regulations and comply with the same constraints in the field of state aid for the railways. State aid is generally forbidden unless for certain exceptions, related to justified cases (Art. 107, TFEU).
Conclusion
To conclude, the external factors that affect the efficiency of the railway sector are important and should be taken into account when analysing the performance of the industry, on one hand because they have strong influence, and, on the other hand, because they are constant characteristics of a country and are impossible to alter (Beck et al 2013: 7).
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5 Background of the countries and presentation of the cases
In order to perform a research with internal validity of arguments, it is important to take into consideration the abovementioned external factors and be careful with the case selection, because these factors determine whether the countries meet the requirements for a most similar case study design. In the following chapter, background information on the cases follows and presentation of the countries studied.
5 Background of the countries and presentation of the cases This chapter is organised as follows: first, an introduction on the similarities of the countries with the main elements of importance for the study; afterwards a subchapter for every country containing main characteristics and a short description of the national railway sector.
5.1 Common characteristics and description The case selection includes three countries from the SEE region namely Bulgaria, the former Yugoslavic Republic of Macedonia (FYROM) and Serbia. While they are on different stage in their EU integration process, the states have considerable similarities in terms of history, geography, railway structure, economic and political background, etc.
The countries share a common Balkan history, being at first part of the Ottoman Empire and later in the area of influence of the Soviet Union. They have faced similar economic and political challenges related to the transition to market economy and democratic governance.
As most of the SEE countries, the three analysed ones do not only have common history and culture, but also many similarities regarding the socio-economic characteristics of the society (Bošković, Bugarinović 2015: 52).
An important factor regarding the railway infrastructure building and development of the sector is the landscape of the country. The Transport Infrastructure Regional Study, conducted by the French consulting firm Louis Berger S.A. (Berger: 2002) analyses seven Balkan countries in order to identify the situation, trends and opportunities for development in the Balkan transport sector. It also reviews the conditions and influencing factors on the transport sector. In its country description section (Appendix 2) it evaluates the relief of Bulgaria, FYROM and Serbia as “hilly and mountainous”. The significance of this estimation is the topographical similarity between countries. In this sense, nature conditions like geography and topography could not serve as an explanation for differences in efficiency in the railways of the three neighbouring countries.
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5 Background of the countries and presentation of the cases
Furthermore, Serbia and FYROM have had a common integrated railway structure (as both current states have been part of the former Yugoslavia). They had harmonised railway sector in terms of technology and regulations (Bošković, Bugarinović 2015: 52).
As for the similarity of cases between Bulgaria and Serbia, according to the World Bank report (2011: 60), they have a similar structure in term of size and traffic. The network size of Bulgaria is 4 150 km while the size of Serbia is 3 809 km. The two countries are comparable also in terms of railway traffic – 5 296 million traffic units for Bulgaria and 3 305 for Serbia. Although the indicators for FYROM have a significantly lower value (699 km network size and 652 million traffic units), the country is comparable to the other cases, as by logic, as explained later on in Chapter 5.2
The graph on the following page (Graph 2) presents the data for traffic volume of the countries and indicates their common paths of development. The effects of the economic crisis from 2008 had a considerable influence also the rail sector and the growth until 2007 stopped to be substituted by a decline. Nevertheless, the three countries selected share common trends in their development in terms of volume of the freight transport. In the case of FYROM, the changes are less substantial, as on average, the volume of freight transport is more limited in the country.
The academia states that overall the countries from SEE region are similar and homogenous. The common characteristics, combined with the shared challenges make the three selected countries similar with regard to conditions having influence on the future development of the sector. The countries have the same problems related to outdated infrastructure and poor operational and financial performance. In the context of introduction of reforms, Bulgaria, FYROM and Serbia have the same starting point (Bošković, Bugarinović 2015: 52). Therefore, it can be concluded that the selection of states corresponds to the logic of most similar case design.
A detailed description of the countries including analysis of their railway sectors (historical development, current situation and challenges) is presented in the following sections.
2 All these statistics were taken from the World Bank report 2011, but originally published by the 9 Union des Chemins de Fer (UIC) in 2009. However, the original document by the UIC was not accessible anymore, and thereby the statistical data was taken from the report by the World Bank. 34
5 Background of the countries and presentation of the cases
Graph 2 Freight transport (thousands of tonnes)
35000
30000
25000
20000 Bulgaria
15000 FYROM Serbia 10000
5000
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Sources: National Statistical Institute, Bulgaria; State Statistical Office, Macedonia; Statistical Office of the Republic of Serbia
5.2 Bulgaria 5.2.1 Main characteristics The Republic of Bulgaria is a parliamentary republic with a size of approximately 111 000 square kilometres and population of 7.2 million people (WB: 2014). As most of the countries in the South-Eastern European region, it has been under the Soviet Union zone of influence. After the dramatic changes in the autumn of 1989, the country started it transition from planned economy and authoritarian governance to market economy and democracy. Bulgaria applied for membership in the European Union in 1995 and negotiations started in 2000. After completing the requirements of adoption of the EU acquis, the country became an EU member at the beginning of 2007, part of the fourth and biggest enlargement of the Union.
In order to be eligible for membership, the country had to fully adopt all the EU legislation in different areas, including transport. Hence, it had to reform its transport sector and to implement the directives of the so called EU railway packages.
Nowadays, Bulgaria has generally overcome political and economic transformation that followed the events of 1989. This is also reflected by various indices, above all the Bertelsmann Transformation Index, where Bulgaria is listed on the fifteenth place out of 129 from a political perspective, and on the seventeenth place out of 129 from an economic perspective (BTI 2015).
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5 Background of the countries and presentation of the cases
5.2.2 Bulgarian railway sector History
The railways in Bulgaria officially exist since 1866 when the first line linking the cities of Ruse and Varna was open. During this time, however, the Bulgarian lands where part of the Ottoman Empire, so the decision for building the line was made by the Turkish government which assigned the construction to an English company managed by William Gladstone (BDZ 2015). After the Russo-Turkish War of 1877–1878 and the creation of the new Bulgarian state, the railways, which remained in the territories of the new-founded country, became property of the state3. This was officialised in 1885 with the Railway Act, adopted by the National Assembly. The ministry of railways dates from the year of 1912 and also comprised the sectors of Post Offices and Telegraphs.
Competition
Contemporary the most significant reform in Bulgaria entered into force in 2002 when, in accordance with the EU requirements, the National Company Bulgarian State Railways was divided into two separate companies - Bulgarian State Railways EAD (BDZ) and the National Railway Infrastructure Company (NRIC), an infrastructure manager. This is also the year when the regulatory body in the field of railways was established.
In 2007, a reform in BDZ EAD transformed the company into a holding structure with three legally independent companies focused on freight, passenger, and traction, still fully owned by the Bulgarian state. The changes reduce the possibility of cross-subsidies between the sectors and increase transparency in terms of accounting (WB: 2011). Both freight and passenger sectors were liberalized, however only in freight external operating companies were able to enter the market. BDZ Passengers is the only company licensed for railway passenger transport. The reason no other enterprises operate in the passenger market despite liberalisation, is hidden in the national regulations of the country. According to the WB report (2011), state regulated ticket prices do not allow companies to make profit or even to face their costs therefore no international operators have benefit to enter the market.
In freight however, competition was introduced and currently there are 11 operators in the Bulgarian freight railway market. They are presented in the table below:
3After the end of the war and the signing of the Treaty of Berlin in 1878, the state was officially called Principality of Bulgaria and was de-facto independent, but de jure vassal the suzerainty of the Ottoman Empire until 1908, when Bulgaria became officially independent. 36
5 Background of the countries and presentation of the cases
Table 2 Freight operators in Bulgaria
Name of the Operator Date of License Issue License number
Bulgarian Railway Company JSC 15.04.2005 BG 201 16.03.2011 EU Bulmarket Rail CargoLTD 14.05.2015 EU 212
BDZ - Freight Services LTD 16.10.2013 EU 203
GastradeJSC 19.12.2013 EU 204
Unitranscom JSC 01.10.2008 EU, Revoked by 205 order № RD -08- 240/19.05.2014 DB Schenker Rail Bulgaria LTD 13.05.2010 г. EU 206
Express Service LTD 12.06.2010 г. EU 207
State Enterprise "Transport Construction 28.04.2011 г. EU 208 and Rehabilitation"
Cargo Trans Wagon Bulgaria 11.05.2011 г. EU 209
Port Rail LTD 11.04.2012 г. EU 210
Rail Cargo Carrier BulgariaLTD 21.01.2015 г. EU 211
TBD FreightJSC 16.06.2015 г. EU 213
Source: Ministry of Transport of the Republic of Bulgaria, 2015
General characteristics of Bulgarian railway infrastructure
According to the National Statistics Institute (NSI), the length of railway lines in Bulgaria for 2014 was 4023 km in total. Due to topography and demographic characteristics, the distribution of railway lines is highly unbalanced, with highest density in the South-West Region (44.8 km/1000 sq. km) and lowest than the average density in the Southeast, Northeast and South-Central Region (OP Transport and Transport Infrastructure: 2014).
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5 Background of the countries and presentation of the cases
Regarding the different transport mediums to move goods and freight from A to B (the so- called “modal split”), the importance of Bulgaria’s railways system has highly diminished during the last few decades. Looking at the modal split of freight transport between roads, railways and waterways, it is clearly visible that the Bulgarian railway system was since always of minor importance for the country’s modal split and has even been reduced during the last years. Transportation on railway tracks in 2004 accounted still for nearly 29% of total transported goods in the country; meanwhile in 2014 it diminished to an ever low of only 9% (Eurostat 2015a). During this time, road transportation of freight gained more importance, from nearly 67% in 2004 to nearly 75% in 2014. An even bigger growth was noted in the country’s waterway transportation of freight. In 2004, it accounted for nearly 4% of Bulgaria’s freight transportation and constantly grew to 16%. The rising significance of the Danube River for shipping goods is – among others – explained by the rising interest of the European Union to improve shipping conditions on the river in order to establish an inland waterway corridor and to develop it to the “main east–west link between continental European countries” (European Commission 2015).
The fall in the modal split is also reflected by the infrastructure network provided in the Republic of Bulgaria. One the one hand, new motorways were built to move goods via streets from A to B, enlarging the existing motorways from 331km in 2004 to 541km in 2012. This is an increase of nearly two thirds. On the same time – on the other hand – railway tracks did not extend. Old tracks were even closed and dismantled, so that the Bulgarian railway tracks lost a total length of 580km. This corresponds to a relative decrease of 9% of all the Bulgarian rail tracks (Eurostat 2015a).
5.3 Serbia 5.3.1 Main characteristics The Republic of Serbia is a parliamentary republic with a territory of about 77 500 sq.km. and a population of approximately 7.1 million people (WB: 2014). A significant part of the Serbian territories was also part of the Ottoman Empire until the 1867, when, as a result of the Revolution and the Independence movement, the Turkish soldiers left. The formal independence and international recognition of the country came into force after the Congress of Berlin in 1878. After its liberation and until the Second World War, Serbia was a Monarchy, as was also Bulgaria.
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5 Background of the countries and presentation of the cases
The changes in the post-war period converted the country in one of the communist countries in Europe. It comprised the territories of the actual Serbia, Slovenia, Croatia, Macedonia, Kosovo and Bosnia and Herzegovina and was known as Yugoslavia. Although its regime was authoritarian and geographically the state was in the Eastern part of the Iron Curtain, Yugoslavia was not one of the satellite countries of the Soviet Union, but pursued a neutral policy and became one of the founding members of the Non-Aligned Movement (Belgrade Declaration of Non-Aligned Countries: 1961).
The fall of the Berlin Wall and the transition for the Eastern-European countries towards democracy and market economy was also accompanied by other dramatic events in the Balkans – the disintegration of Yugoslavia. Montenegro was the last Yugoslavian republic to terminate its union with Serbia in 2006, after a referendum. Shortly after that, the Serbian National Assembly declared the country the official successor of the former Republic of Yugoslavia in legal terms. In 2008, the autonomous province of Kosovo declared its independence from Serbia. This is still a sensitive issue, because of the past military conflicts in 1998-1999 and the intervention of NATO. Furthermore, Serbia (and many other countries among which Russia, China, Argentina, Brazil, Mexico and India) does not recognize this independence and Kosovo as a sovereign state.
The country applied for EU membership in 2009 and was entitled to a candidate status in 2012. The negotiations officially started in January 2014. Anyhow, reflecting its past characterized by the discomposure of a nation and the following war, Serbia had not the same preconditions as Bulgaria, which also reflects its position in the Bertelsmann Transformation Index. From a political perspective, Serbia has made serious efforts and is found on the 21st place out of 129 from a political perspective, but only on place 29 out of 129 from an economic perspective.
5.3.2 Serbian railway sector History
The first line opened in Serbian territory was the Skopje-Kosovska-Mitrovica in 1874. After the independence of the state from the Ottoman Empire, Serbia had the obligation to construct the railway line from Belgrade to Vranje and to the Turkish and Bulgarian boarders. Due to the economic recession however, the country could not comply with the 3-year deadline established and the lines were finished in 1884. After the World War I, the Kingdom of Serbs,
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5 Background of the countries and presentation of the cases
Croats and Slovenians was established and the railway network of the three states was integrated (Zeleznice Srbije: 2006).
The joint development of the railway network continues during the years of the Republic of Yugoslavia. The military operation of NATO in 1999 substantially damaged a large number of lines and network installations and the modernization process of the railways started in the 90s was interrupted and delayed (Ibid).
Despite of the vast destruction in the 1990s, Serbia and its national railway company Serbian Railways (Železnice Srbije) began soon after the ending of the war with the renewal and repair of its railway infrastructure, in order to avoid a greater interruption of its railway traffic (Mandic et al, 2014: 88). With financial help of international donors like the World Bank and the European Bank for Reconstruction and Development (EBRD), the worst damages of the Serbian railway infrastructure were repaired quickly. Later on, Serbian railways identified a list of priority projects in order to restore development in this sector and therefore financed projects from different areas, such as general infrastructure, transport, environmental issues and multimodal transport (Ibid.: 89).
With the reconstruction of the country in general and its railway and transportation infrastructure in special, Serbia directed its policies more and more towards the European Union: talks for joining the Stabilisation and Association Agreement (SAA) began in 2007 and were subsequently completed in 2008, followed by the official application for European Union membership in 2009. This shift towards the EU had also effects on the Serbian railway sector: on one hand, Serbian railway infrastructure played an important role as corridors in the Trans-European Transport Network (TEN-T), and on the other hand, Serbia was under certain pressure to harmonise its railway sector to a certain point with EU-regulations (Popovic 2013: 14).
This provoked in the first place the adoption of the Railway Act in 2005, establishing, among others, a Railway Directorate to act as an independent regulator. However, many of the reforms introduced in 2005 did not prove sufficiently successful, so that a new law was introduced eight years later, in 2013. This new law principally served two main goals: firstly, pushing forward the harmonisation with the European directives concerning the railway sector from the 1990s and from the First Railway Package (Stefanovic 2012: 1), and secondly, “opening competition into this sector, [and] improving effectiveness of the country’s railway system” (Kinstellar 2013).
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5 Background of the countries and presentation of the cases
Competition
However, competition still seems far away. Serbian Railways, the national railway company founded in 2005, is to 100% owned by the state. After the introduction of the Railway Act in 2005, Serbian Railways was entitled to serve as the future infrastructure manager, and therefore to be in charge of the maintenance and extension of the tracks, as well as to give licences of use to other railway operators (WB 2011: 216). Serbian railways with its subsidiary the Freight Service Company is still the biggest and most important operator for freight services in the Serbian railway market. Only two minor competitors, Kombinovani Prevoz and ŽT TENT, serve as contestants for the Freight Service Company of Serbian Railways (Bošković, Bugarinović: 2015, Medar 2012: 400).
Taking all this in mind, Serbia nonetheless intends to open its railway market gradually. In compliance with EU agreements, Western Balkan countries (and thus including Serbia) should open their markets in three stages. The first includes the opening for private railway competitors from the concerned country, the second one the opening for railway operators from throughout the region, and the third and las one the opening to competitors from all over the European Union (Ibid.).
General characteristics of Serbian railway infrastructure
Missing competition is to some extent also apparent when looking at Serbia’s general statistics of its railway sector. A closer look at the country’s modal split for example show that the unusual high importance of rail transportation is more and more reducing.4 As competition is weak, Serbian Railways can charge high fees to transport goods on rail tracks through Serbian territory, which might explain why the Serbian railway sector is constantly losing its importance. In 2004 the total share of goods transported on rail tracks comprised the impressive 84% and it has diminished in the following years to a mere, but according to international standards still high 72% in 2012. At the same time, road transportation became more and more important, raising its share from 16% in 2004 to 28% in 2012 (Statistical Yearbook of Republika Srpska 2013, 4).
This also reflects the closer observation of the length of the transport ways. Meanwhile the motorways were extended to nearly 40% (from 370km in 2004 to 607km in 2014), railways
4 Statistics about Serbia’s modal split in freight transportation were not complete and thus include not freight transported on inland waterways. 41
5 Background of the countries and presentation of the cases were nearly not extended in the same period of time and stayed at a total length of roundabout 3,800km.
However, things might change in the near future. As Chinese investment grows in the Western Balkans, the construction of a new rail track between the Serbian capital Belgrade and the Hungarian capital Budapest was announced in late 2014 (Vasovic 2014). With this modern railway link to Central Europe, the significance of the Serbian railway system might grow again.
5.4 FYROM 5.4.1 Main Characteristics As well as the Republics of Bulgaria and Serbia, also the Former Yugoslavia Republic of Macedonia (FYROM) is a parliamentarian republic. With roundabout 2.1 million inhabitants and a size of approximately 14.000 sq.km, it is the less populated and smallest country portrayed in this study (WB: 2014). Nonetheless, with a population density of 80 people per sq.km its density is higher than that of Bulgaria (66 people per sq.km).
The FYROM has a long and complicated history, making it somehow the game point of the surrounding regional powers as Bulgaria, Greece, and Serbia. Macedonian territories were also part of the Ottoman Empire, and stayed within its borders for the longest period – until the beginning of XX century.
After the First Balkan War in 1912, in which the Ottoman Empire was finally forced out of the Balkan region, Macedonia was split between Bulgaria, Greece and Serbia. In the following years, it found itself ruled by different nations, after being incorporated as an Autonomous region by the Federal Republic of Yugoslavia in 1944.
The country in its today’s shape was established only after the discomposure of the Republic of Yugoslavia in the early 1990s, declaring its independence the 8 of September 1991. Although the FYROM remained a peaceful place after the belligerent incidents in its north during the early 1990s, it was nonetheless shaken by the outbreak of the Kosovo war in 1999. With thousands of migrants of Albanian ethnicity entering the country, Albanian nationalists used this in order to fight for more autonomy – or even independence – of the Macedonian areas mainly inhabited by Albanians. The following, three weeks lasting insurgency in 2001 left 150-250 people dead and was only stopped by the diplomatic intervention of the NATO
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5 Background of the countries and presentation of the cases that not only led to a temporary ceasefire, but also to the elaboration of the Ohrid Framework Agreement (International Crisis Group, 2011: 1).
With the signing of the SAA in early 2001, the FYROM was the first country of the Western Balkan region to seek closer ties with the European Union. Being nominated as a candidate for accession to the EU in 2005, negations were somehow stuck by the Greek rejection of a Macedonian membership due to the name dispute of the FYROM that lasts until today (EC).
The FYROM stays until today a nation that finds itself still in a political as well as economic transformation, which is also reflected in the Bertelsmann Transformation Index (BTI). On the one side, it finds itself in a better economic situation than Serbia (mainly due to be not shaken by bigger war activities), namely it is listed on the 27th place of 129 from an economic perspective. However, its political situation is worse than in Serbia and Bulgaria, where the FYROM finds itself only on place 32 out of 129.
5.4.2 Macedonian railway sector History
The first railway track on Macedonian grounds was built in 1873, leading from today’s capital Skopje to the Greece harbour city of Thessaloniki. In the following decades, the Macedonian railway system was slowly extended and has nowadays a total length of 925km. Although geographic conditions for the construction of an extended track network are rather favourable, not much happens so far, as funding for infrastructure financing is difficult due to the FYROM’s bad economic outlook (Sector Operational Programme 2014, 12).
Despite of missing funding, the FYROM’s railway infrastructure is of central importance to the country’s economy, or as Kartalov states, it’s “the ‘blood circulation’ of its economy” (2006: 72). As a landlocked country, FYROM relies heavily on its railways, even more than on its road system (Ibid.).
Because of this, incentives to strengthen the importance of the Macedonian railway and infrastructure system somehow exist. So, for example, in 2004 the regional transportation organization SEETO (South East Europe Transport Observatory) was founded by various Western Balkan countries in order to assist the EU-led initiative of Trans-European Transport Network (TEN-T) and in order to harmonise the different railway system in the Western Balkan region (SEETO 2015). In order to serve as an integral part of the TEN-T the incentives pushed ahead by the SEETO also affect the FYROM. SEETO sees two important
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5 Background of the countries and presentation of the cases transnational corridors passing through the FYROM. One leading from the Albanian coast into the interior of the FYROM, another one from the Macedonian interior to the Greek border town of Kremenica (and thus reducing the pressure on the only other existing track leading to Greece, Gevgelija, which became internationally known after the exorbitant rise of refugee numbers, crossing the Greek-Macedonian border by the thousands in 2015).
Beside the existing infrastructure, the FYROM’s only railway operator are the Macedonian Railways (Makedonski Železnici).
Competition
Being the only operator in the FYROM, the Macedonian Railways do not face any competition inside the country. Unfortunately, this also reflects the poor state of the railway operator: technically and technologically, the Macedonian Railways are overcome and its rolling stock is a constant danger for public safety (Kartalov 2006: 72).
Beside its poor condition, the Macedonian Railways are also a constant burden for the FYROM’s budget. As an enterprise fully owned by the state, Macedonian Railways have accumulated a debt of about 160 million euros (Ibid.).
Therefore, competition is seen as a main driver to revive the poor condition of the Macedonian Railways. With the help of the World Bank, a new law was introduced in 2010, making the proposal to split up Macedonian Railways into three operators and thus “facilitating the privatization process” (Ibid: 73). Meanwhile the law proposes to leave the infrastructure in public hands, the former state-owned railway operator should be transformed into shareholder-companies and the market should gradually open for private operators (Ibid.).
The proposed steps in the law text so far have been partially realized. Since 2007, the former enterprise of Macedonian Railways is now split into two separate stock companies. On one hand, there is the Macedonian Railway Infrastructure (MŽ-I), on the other hand the Macedonian Railway Transport (MŽ-T). This can be seen as a first, deep and important step towards more competition in the FYORM’s railway sector, which may be pushed even more forward in the next years by splitting up MŽ-T into two parts, one responsible for passengers, the other one for freight. Then competitors would be able to enter the market and to really boost competition and improve quality of service (WB 2011, 177).
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5 Background of the countries and presentation of the cases
General characteristics of Macedonian railway infrastructure
Although plans and incentives to extend and improve the FYROM’s railway infrastructure, not much has happened so far. Within ten years – from 2004 to 2014 – railway tracks were not extended at all and remained at a total length of 925km (Eurostat 20155). At the same time, investment in motorways was a lot higher and extension of this transport way increased by one quarter, from 196km in 2004 to 259 km in 2014.
Not only missing extension, but also low significance for the transportation of goods are characteristic for the FYROM’s railway system. Nearly all goods were transported on streets (94.7% in 2014), the rest on railway tracks. This number impressively underlines that the earlier mentioned importance of FYROM’s railways, as the country’s “blood circulation” made by Kartalov (see chapter 5.4.2) is evidently not true and must be rejected.
Overall, it is not clear if the Macedonian railway system will somehow gain importance in the country’s freight transportation. Although the European Union has made various efforts to outline its desire to strengthen railway corridors also in FYROM in order to integrate it into the TEN-T, it remains doubtful if this will ever take place – considering the today’s poor state of the railway system in the FYROM.
5.5 Conclusion After an in-depth analysis of the selected case, the drawn conclusion is the establishment of a most similar case design. This is due to mainly three reasons:
(1) The analysed countries share a common history in the same geographical region, with the same political system and with an equal development of its political and economic transformation. Apart from being for a long time under Ottoman rule, the three states presented have also established a Communist style of rule in the 20th century. All of them share today the same political system, a parliamentary democracy, which might also have consequences for their establishment of an independent agency in the railway sector. Finally yet importantly, all countries shared somehow same experiences in transforming their economies and political systems after 1989, making similar steps forwards during the last years and decades.
5http://ec.europa.eu/eurostat/statistics-explained/index.php/Enlargement_countries_- _transport_statistics
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5 Background of the countries and presentation of the cases
(2) The three presented countries have established deeper connections with the European Union. Bulgaria joined the Union in 2007; meanwhile Serbia and the FYROM remain candidates for accession. Nonetheless, this process towards the acquis of the EU as well as better economic performance, Serbia and the FYROM play an important regional role in the European Union’s transportation policies. One one hand, the two non-members try to comply with EU legislation in transport policy in order to improve their chances to push forward integration talks. On the other hand, the European Union seeks to integrate also non-member states into its Trans-European Networks (TEN), especially in the Transportation Network (TEN-T). Bulgaria, as a member state, is affected by the inclusion into TEN-T anyway and is still catching up with the harmonisation of the EU legislation in the transport sector. (3) Furthermore, the railway sector in all countries is in a poor state. Competition is rare, infrastructure lacks up-to-date technical and technological knowhow and is somehow underdeveloped, and in the modal split of freight goods all the country’s railway systems are losing importance.
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6 Independence of regulatory intuitions in the railways
6 Independence of regulatory intuitions in the railways In the present chapter, I will apply the indicator, developed by Fabrizio Gilardi, in order to measure the level of independence of the railway regulatory institutions. In Appendix 1, a copy of the questionnaire with the results of the countries is attached.
6.1 Independence indicators The sources used for data collection are texts of national laws on railways in the countries. Additionally, regulations on the status of the agency (in the case of Bulgaria) or law on the public servants (Serbia) were also used.
Based on the bellow discussed characteristics of national regulatory bodies of Bulgaria, Serbia and FYROM, the information required for calculation of the indicator for formal independence was collected. The results follow in the table below.
Table 3 Independence indicator per country
Country Bulgaria FYROM Serbia Year
(from) 2002 2008 2005
Indicator 1.616 3.228 1.742*6 Source: personal calculations
It is difficult to estimate with accuracy the level of independence of the regulatory institutions before the legislative changes that have established sector reforms, because archive of laws is not easily accessible. Furthermore, as in all cases, railways were state-owned and regulation of the sector was full responsibility of the state, it is not adequate to speak about level of independence by the government bodies, because regulation of railways was completely dependent by the governments. In this sense, it can be assumed that independence in the pre- reform period was equal to zero.
The results show that the three countries indeed have established regulatory institutions with different levels of independence. This confirms the classification made by Bošković and
6 As the Law on Railways in Serbia was changed in 2013, and more powers were given to the Directorate for Railways, the indicator changes. For the purposes of the present research and the period of interest, the Old legislation is relevant. However, to be accurate, I will present the actual value of the indicator, if calculations were made based on the new Law on Railways. The new value of the indicator in this case would be 1.942. 47
6 Independence of regulatory intuitions in the railways
Bugarinović (2015). However, results indicate that levels of independence of Bulgaria and Serbia do not differ radically. After the changes in the Law in Serbia in 2013, the indicator of the country increases by 0.2 points, due the regulatory powers attributed to the agency, which then increases the variation between the two cases. Thus, it can be concluded, that the distinction made by the authors is accurate.
In the next three sections follows a detailed description of the legal texts that have served as reference for the identification of the independence indicator. The commented sections are used to answer the questions on independence; to determine to value for each element and to calculate the final result. At the end of the chapter a conclusion section is included to summarize the results and to comment on their significance.
6.2 Description of the results 6.2.1 Bulgaria The Bulgarian regulatory institution relevant for the purposes of analysis is the Railway Administration Executive Agency/ RAEA (In Bulgarian: Изпълнителна Агенция Железопътна Администрация). Its status is regulated within two legal documents that are subject to analysis - The Railway Transport Act and the Structural Regulation of the Agency, which is a bylaw.
The Railway Transport Act (RTA) was adopted on 28.11.2000 and it defines terms and conditions for construction, maintenance, development and use of railway infrastructure. It also regulates the basic rules for the movement of trains, as well as the relationship between carriers and customers in the provision of transport services (Article 1). It determines the creation of the regulatory body for the railway transport in Bulgaria (Article 7). The composition, structure and work organisation are regulated in a separate act, adopted by the cabinet of the Minister of Transport and Telecommunications (Ibid.).
The structural regulation of the Railway Administration Executive Agency was adopted on 10.07.2001 and amended several times after that, the most recent, on the 22.01.2013. It establishes the agency as a legal entity based in Sofia. It is managed by an Executive Director, nominated by the Minister of Transport and Telecommunications with no fixed term of office. There are no specific provisions for his dismissal.
Independence of the Agency is not formally stated in the regulation; on the contrary its relations with the government are explicitly underlined. The Director is part of the Executive
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Authority of the Republic of Bulgaria and he act in cooperation with the Executive Authorities of the country for the implementation of a coherent state policy.
The management board consist of a General Secretary and three Director Generals – Administrative-legal and financial-economic management; Regulation; and Railway Inspectorate. They are appointed by the head of the agency with no fixed term of office and provisions of dismissal.
The General Secretary elaborates the Annual Activity Report of the Agency. For its approval by the Government or the Parliament, there are no formal provisions within the regulation.
The Agency is relatively independent in terms of organisational structure and budget management. The institution is in charge of its own personnel policy and the Director decides on the Agency internal organisation, work distribution and job descriptions of the staff, with some limitations related to the number of employees. The budget spending is also controlled by the Agency; however the main source of financing is the state budget (under the jurisdiction of the Ministry of Transport and Telecommunications). Other funding sources for the Agency are administrative fees, fines arising from the Law on Railway Transport; interests; and own revenues (Article 15).
Regarding the last element forming the independence index, regulatory competences, the Executive Agency enjoys some regulatory competences. Nevertheless, the main institution, responsible for adoption of legislation regulation the transport industry, is the Ministry of Transport and Telecommunications. The Executive Director of the Agency issues individual administrative acts (Article 4). Furthermore, within his competences is also giving proposals to the Minister about synchronization of national legislation with the EU regulations; about signing, accession, ratification, denunciation and amendment of international treaties in the field of railways; and about the adoption of regulations in the field of railway transport (Articles 31-33).
As most of the Regulatory bodies established as a consequence of the EU railway packages, the Railway Administration Executive Agency combines the functions of not only a regulatory body, but also a safety authority.
6.2.2 Serbia The Serbian Railway regulator, which is subject of analysis within this analysis, is the Directorate of Railways (In Serbian: Дирекција за железнице). Its legal status is defined
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6 Independence of regulatory intuitions in the railways within the Law on Railways; however, some provisions relevant for its civil servants are regulated within the Law on the State Administration.
6.2.2.1 New Law on Railways and its influence on the Independence Indicator
The Serbian legal act that regulates railway transport is the Law on Railway. The Directorate for Railways started its work in 2005, after the adoption of the Law. In 2013 however, Serbia adopted a new law on railways in order to fulfil its obligations for harmonizing the national legislation with the EU requirements arising from the Reform Railway Packages. One of the main accomplishments is the separation of infrastructure from operations in accounting and management (Marić; Vlatković: 2013). Apart from the formal separation, railway infrastructure is assumed to be a “public good” and property of the state, while the management of the infrastructure can be executed by private actors, which is a major change, as it introduces competition in the Serbian railway market (Ibid).
Regarding the regulatory body, the new law gives more competences to act as a regulator of the market and provides the institution with legislative competences. This change alters the Indicator, because it concerns one its main components – the regulatory competences. For the purposes of this research, I have calculated both values of the indicator (before and after the adoption of the new law). However, in order to obtain credible results further with the study, I will use the old Law as a comparing point, as during the period I am interested in this was the current legislation. Furthermore, the change is recent and data on the performance of the Directorate and the sector is only available for 1 year after that, which is not credible enough in order to draw conclusions out of it.
Moreover, the information required for the calculations of the indicator is obtained not only from the Law of Railways, but also from the Law on the State Administration (In Serbian: Zakon o Državnoj Upravi), as the Directorate has the status of a Separate Organization (In Serbian: Posebna Organizacija) (Article 78, Law on Railways), which is regulated by this law. The Law on the State Administration was adopted in 2005 (Official Gazette, 79/2005) and has been amended three times after that in 2007 (101/2007), 2010 (95/2010) and 2014 (99/2014) and the provisions related to the status of the Directorate have not changed substantially. The relevant articles the law for calculation of the indicator (Articles 7, 43, 50, 57 and 60), have preserved their original texts (Law on the State Administration; Official Gazette of the Republic of Serbia, issues 70/2005; 101/2007; 95/2010 and 99/2014).
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6.2.2.2 Results
The Directorate for railways first started work in 05.05.2005 after the Law on Railways came into force. It is formally stated in the law that the institutions conducts as a separate organisation with own legal status. Moreover, the independence of all separate agencies is underlined in the law (Art. 7, Law on the State Administration).
According to the Law from 2005, the Directorate has mainly consultative competences in terms legislation. It participates in the preparation of regulations for the sector, but does not issue legislative acts itself. The Directorate issues safety certificates and licences for transportation and for management of the infrastructure; gives its expert opinion on different issues related to the railway sector. Furthermore, the institution elaborates standards and technical norms for the railways and acts as an arbitrary in case of appeals related to the access to infrastructure. It also represents the Serbian railway sector in the field of international cooperation and popularisation of the railway transport.
The Directorate is managed by a Director, appointed by the government for a term of five years (Art. 35, Law on the State Administration). In case his actions are not in accordance with the country’s legislation or the Constitution of the Republic of Serbia, the Director can be dismissed by the government. The same provisions are valid also for the management board (Art. 60; Ibid).
The organisation reports all the data on its activities annually within the annual reports or upon request of the government (Art. 7, Ibid). If the government considers some of the actions of the institution violate the national laws or the Constitution, it can overturn them (Art. 57; Ibid).
The Directorate is financed by both the national budget and own revenues: fines and fees on providing of expert services (the new Law on Railways, 2013 also assumes the possibility of donations to fund the Directorate budget – Art. 97; Law on Railways).
In the Articles 43 and 60 of the Law on the State Administration, it is regulated how the regulator and the government share competences regarding the setting of the internal organisation of the Directorate.
Within the 2005 version of the Law on Railways, the regulatory competences of the institution were limited to consultation and proposals for legal acts; however, with the new
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6 Independence of regulatory intuitions in the railways
Law from 2013, the competences of the regulator were extended. This is the only difference between the status from 2005 and 2013 regarding the independence indicator. If we calculate it again taking into account the recent changes in the law, its value would increase by 0.2, because of the regulatory powers of the Directorate.
6.2.3 FYROM The Macedonian railway regulator is the Railway Regulatory Agency (In Macedonian: Агенција за регулирање на пазарот на железнички услуги). It is a legally independent body, accountable to the Parliament of the FYROM. The main responsibilities of the agency include measures to prevent unfair and discriminatory behaviour between railway operators; to assure fair and open access to railway infrastructure and control access to infrastructure; to serve as an arbitrary in case of conflicts between rail operators; to monitor the railway market and to make sure competition is not distorted (Law on Railway System).
The status and establishment of the institution are regulated within two separate legal acts – Law on Railway Market Regulatory Agency (Official Journal of the Republic of Macedonia, 7/2008) and the Law on Railway System (Official Journal of the Republic of Macedonia, 48/2010). Some of the texts regulating the status of the Agency can be found in both laws.
Out of the three selected case studies, the Railway Regulatory Agency of the FYROM is the most independent one, showing the highest values on the formal independence index of Gilardi (2002; 2008). The laws set an institution that is strictly independent from the government and other stakeholders. In every section of the Formal Independence of Regulators Index, the Macedonian agency shows impressive results. The only “shortcoming” area in terms of independence is the regulatory competences requirement (section E, see Appendix 1).
The Railway Regulatory Agency is managed by a Management Board, which has a president and a Director. The Management Board is appointed by the parliament for a fixed term of four years and a possibility for a second mandate (Art.12, Law on Railway Market Regulatory Agency/LRMRA). The Management Board appoints the Director of the Agency via public contest procedure. His mandate is also for four years and also renewable once (Art.16, Ibid.). The Director, as well as the Management Board can be dismissed under specific conditions stated in the law (Articles 15 and 18, Ibid.). Formal relationships with the government are not discussed in the laws, as the Agency is establish as an independent body, but relationships with the parliament are part of the regulations. The institution is accountable to the
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6 Independence of regulatory intuitions in the railways
Macedonian National Assembly. The annual activity report of the Agency is presented to the parliament for approval, as well as the annual financial plan for the upcoming year.
Nevertheless, the regulator is independent financially from the state. It has own funding sources (Art. 19, LRMRA and Art.108, LRS). Funding from the national budget is agreed only for the start of the functioning of the Agency, but maximum one year after it starts its work (Art. 19, LRMRA).
In terms of organisational structure, the agency is free to decide on its personnel policy, as the only requirements for the selection via a special procedure concern the selection of a Director and Board members.
6.2.4 Conclusion The analysis of the level of independence of regulatory institutions in the railways shows that, in line with Bošković and Bugarinović’s (2015) classification, FYROM is the country with the most independent regulator – Railway Regulatory Agency. Serbia has established a Directorate of Railways with special status, within the government, but not ministry- dependent. The least independent national railway regulator is the Bulgarian Railway Administration Executive Agency. Based on the hypotheses developed, one would expect that Bulgaria would have the least active railway regulator, followed by Serbia and with FYROM leading with the most active institution. Also, it may be assumed that FYROM would show best outcomes in terms of railway productivity while Bulgaria would have the lowest results.
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7 Findings and analysis of the results
7 Findings and analysis of the results 7.1 Behaviour of regulators This chapter analyses the regulatory policy of the three national regulatory institutions. Independent regulatory institutions have obligations to publish reports on their annual activity in order to be transparent and accountable. The main hypothesis tested in the present section in H1: The more independent the regulator, the more active within its competences. In order to assure that the different degree of competences delegated of the three regulators do not affect the results, I will only evaluate activities related to the institution’s responsibilities. In other words, if, for instance, one of the regulators has regulatory powers, but other does not, lack of regulatory activities of the later is not an indicator for a lower activity. The institutions are delegated with competences within the framework of the current legislation and I will analyse how active the agencies are, given the limitations by the law.
Furthermore, in case data is missing (report for certain year or information on specific measures) this is already an indicator for lack of activity itself.
In order to compare the activities of the three regulators, I will focus on several areas, relevant for all the studies institutions. These are: issue of licenses and certificates and inspections and sanctions (indicators). The regulatory activities remain outside of the focus of analysis, as the regulator of the Republic of Serbia lacks regulatory competences until 2013. In order to be consistent with the analysis of the performance of the sector (in the following chapter), I will focus on the activities, relevant for the law in force during this period.
For that purpose, a comparative analysis of the available annual reports of the institutions follows in the sections 7.1-7.3/.
7.1.1 Bulgaria Overall analysis of the activities
The Bulgarian RAEA publishes an annual report on its activities on a regular basis. The analysed documents are the reports from the period 2008 – 2014. They are complete and contain information on all operational activities of the Agency. The institution combines the activities of a market regulatory body, a supervising authority on the compliance with the EU Regulation 1371/2007 (On on rail passengers’ rights and obligations) and it is also the Safety Authority in the Bulgarian Railway sector. The agency controls the construction, repair,
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7 Findings and analysis of the results maintenance and operation of the railway infrastructure, traffic safety and technical condition of the rolling stock. RAEA is also the regulatory authority that monitors the way railway operators are treated by the infrastructure manager in order to assure non-discriminatory access of the railway infrastructure.
The main areas of activity of the agency are:
(1) Programme and policy implementation (including here three programmes – “Railway Infrastructure Development”, “Control and Standardization in the Railway Transport” and “Administration”)
Under the programme “Railway Infrastructure Development, the Agency provides its expertise by consulting institutions, analysing data and advising government in the process of preparation of the Annual Strategy for Development of Railway Transport.
The “Control and Standardization in the Railway Transport” programme includes inspections on the technical conditions of the railway infrastructure and safety provisions. Moreover, the Agency conducts qualification examinations for employees and examinations for the knowledge and application of safety of transportation regulations. Annually, RAEA conducts over one thousand examinations of employees. Under the listed programme, the Agency decides on complaints by passengers and by rail operators.
The activities under the “Administration” programme are related to the internal organisation of the institutions, its staffing policy and the relations with other public bodies.
(2) Regulatory base
Under this field of activities, the Agency performs its regulatory competences. It adopts and amends bylaws, regulating the sector, and proposes drafts for laws in the sector. Moreover, the agency prepares the official positions of the Republic of Bulgaria on draft EU legislative acts.
(3) Market regulation and monitoring of the activities of the infrastructure manager and railway operators
The institution processes complaints by passengers and railway operators, related to the quality of the service provided and the conditions set by the infrastructure manager, respectively. It also monitors on its own initiative the amount of fees, requested by the
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7 Findings and analysis of the results infrastructure manager on one hand, and, the compliance of railway operators with the obligations deriving from the licenses they have received.
(4) Certificates and licences (for transport operators and for infrastructure management) (5) Control, Safety and Interoperability
The Agency investigates railway accidents and imposes sanctions to the guilty. It participates in the process of adoption of interoperability strategies for the country sector.
(6) Databases and informational systems
RAEA collects data from railway operators in accordance with the obligations for reporting to national and international authorities. It maintains a complete database which serves also for the purposes of the annual reports of the Agency.
(7) International action
The Railway Executive Agency represents the country in various international forums. It participates in the committee meetings and working groups of the EC; participates in plenary sessions of the IRG-rail network; etc. The Agency cooperates with national regulatory bodies of various countries as China, Denmark, Greece, Croatia, Hungary, Macedonia, Romania, Russia, Serbia, Turkey, Ukraine, and others.
Following the overall analysis of the activity of RAEA, I will focus on data on inspections, sanctions, issue of licenses and certificates.
The following table (Table 4, next page) shows the activities of the Agency regarding conducted inspections and given sanctions.
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Table 4 Inspections and sanctions of the RAEA, 2008-2014
Control Penal provisions
year Access to Compliance with Analysis of Total infrastructu safety regulations causes for re accidents
2008 334 1102 1897 3333 56 2009 231 693 1772 2969 122 2010 95 402 1888 2385 40 2011 124 633 1604 2361 21 2012 131 514 362 1007 219 2013 142 589 313 1044 17 2014 103 603 345 1051 329
On 2021 115 average Source: Annual Reports RAEA (2008-2014)
The results indicate an overall high activity of the Agency in terms of inspections and sanctions. On one hand, the regulator performs inspections on its own initiative, on the other hand, it responds to complaints by citizens and/or railway operators in relation to various issues (Art. 7, RTA).
Table 5 Issue of safety certificates by the RAEA, 2008-2014 Year Total 2008 3 2009 5 2010 2 2011 2 2012 2 2013 0 2014 3 On average ~ 2.4 Source: Annual Reports RAEA, 2008 - 2014
As the Agency is also responsible for issuing of the safety certificates (Ordinance 59: 2006), this activity is also reflected in the annual reports. For the studied period, the agency has issued 17 safety certificates to rail operators (see Table 5, above). Yet, the level of liberalization of freight market, of course, influences this indicator. Being relatively the most
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7 Findings and analysis of the results open case, with 11 competitors on the market, the issuing and renewal of certificates, as well as licenses is dependent on that. Furthermore, the agency also revises the documentation of operators in relation with expiration of their licenses or changes in the company information.
7.1.2 Serbia Unlike the Bulgarian railway regulator, the Directorate for railways does not publish regularly annual report. Nevertheless, in 2014, the institution has published a report on its activities for the period 2008-2014.
The institution is active in several fields, as already discussed in the previous chapters. The distinction made is similar to the Bulgarian one. The agency officials differentiate between:
(8) Sector for regulation of the railway market
The agency receives complaints related to unfair treatment by the infrastructure manager on which it decides. It aims at taking the necessary measures to avoid unfair treatment and distortion of competition, although competition itself is not substantially strong on the Serbian market. Thus, all the provisions regarding to measures to assure non-discriminatory access to infrastructure for different operators sound very well on paper, and for sure will be useful once the market is liberalised. However, for now they do not reflect the annual activities of the institution. They are explicitly listed not only within the texts of the laws, but also again described in the text of the report. In order to be concise, I will focus on the reported activities, less on the competences stated on paper, but not actually relevant in the current context of the Serbian railway market.
Within the competences actually performed, the Directorate has provided stakeholders with its expert opinion on matters related to the railway market, and interpretations on the implementation of rail regulations and requirements.
Furthermore, the Directorate is active in the field of international cooperation in the railway sector. It is not the exclusive representative of the Republic of Serbia internationally, but it collaborates with various institutions as the Ministry of Transport, the Ministry of Foreign Affairs and the European Integration Office. The state is member of the Intergovernmental Organisation for International Carriage by Rail (OTIF), together with Bulgaria and FYROM. It also cooperates with the European Railway Agency (ERA) in the process of harmonization of the Serbian National Law with the EU acquis.
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For the indicated period, Serbia has been active in the field of issue of licences. The table below represents the results.
Table 6 Issue of licenses for the use of railway vehicles, parts and equipment for railway rolling stock and devices, parts and equipment for railway infrastructure Year Total 2009 485 2010 180 2011 182 2012 89 2013 181 2014 88 On average 200 Source: Report on the Activities of the Directorate for Railways 2009-2014
The following table indicates the number of safety certificates, issued per year by the Directorate.
Table 7 Issue of safety certificates by the Directorate for Railways
Year Safety certificates For railway For management of Total operations infrastructure 2009 3 1 4 2010 3 1 4 2011 4 1 5 2012 5 1 6 2013 7 1 8 2014 5 2 7 On average ~5.6 Source: Report on the Activities of the Directorate for Railways 2009-2014
These two tables represent the limited quantitative data, provided by the Report. Unfortunately, information on inspections or on sanctions imposed is not available.
7.1.3 FYROM The data on the activities of the Macedonian regulator is poorest of all. For the period after its establishment in 2008, until the present date, there are only three public annual reports, available on the website – for 2009, 2011 and 2012. The report on 2010 is inaccessible and later data is also missing.
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Although the agency is the one with the highest degree of independence among the studied cases, the market lacks on competitors, including the freight market. Thus, there is not a lot to regulate for the institution.
The reported activities are ongoing in most of the cases. From the information obtained by these annual reports one could conclude that decisions on the cases take a considerable amount of time and resolutions of the cases are not very likely to be published.
The main areas where the regulator is active, are monitoring of the market and market operators (the rail operator and the infrastructure manager, formally part of MZ, the state- owned company); investigation of complaints and respond to applicants; and international cooperation.
One characteristic that distinguishes the Railway Regulatory Agency from its colleagues in Bulgaria and Serbia is the personal monitoring of the quality of passenger service by developing questionnaires for the service consumers. It has been a large part of the annual activity report.
The chapter proceeds with a brief analysis of the activities by year for the limited information available.
2009 is a starting point for the Agency; therefore, the work done was mainly research activities, establishment of a database and initiation of market regulation. The agency was supervising the quality of service provided by MZ.
No licenses or safety certificates were issued during this year. One complaint was received, and after inspection by the agency, it was decided that there were no grounds for sanctions.
The Agency works in close terms with the ERA and several national railway operators. It is explicitly stated that cooperation with the Bulgarian Regulatory Agency was established for exchange of best practices and know-how. Within the SEETO project, FYROM is collaborating with Serbia, Montenegro and Kosovo to foster the development of the sector in the region of the Western Balkans.
As information on 2010 is missing, I will proceed to 2011. According to the Report, no complaints were received during this year and therefore, no sanctions were imposed.
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Nevertheless, on the basis of the Law on the Railway System which recognizes foreign licenses, two operators have applied for safety certificates in order to be able to operate on the Macedonian market.
Furthermore, cooperation meetings between infrastructure manager, rail operator and agency were held with the purpose to establish effective collaboration. In 2011, the first questionnaire on quality of the service was created aiming at collect passenger’s feedback on the transportation. From regulatory perspective, the Agency has made proposals for amendment of the majority of the current legislation on railways: the Law on Railway Safety and the Law on the Railway System; Law on Railway System; and the Law on Carriage of Goods. In the field of international cooperation, FYROM has worked with the EU and Croatia on the effective introduction of the 1st railway package of reforms. Apart from its SEETO cooperation, during 2011, FYROM acquires also a membership in IRG-Rail.
In 2012, the regulator received two applications for licenses - for infrastructure management and for public transportation. Following the assessment of the institution however, both of them were denied. There was one complaint received by an operator regarding the access to infrastructure, but investigation is in process and decision has not been made (as for the end of 2012).
The Agency has published a series of methodological documents on the assessment of transport quality, market monitoring, etc. It has also issued 4 bylaws and has participated in the drafting of law reforms.
In the international scene, the regulator has kept its good cooperation within the international organisations where it participates and furthermore has deepen its relations to other SEE countries, especially Croatia, Serbia and Bulgaria.
7.1.4 Summary of the results To sum up, the results of this qualitative analysis of regulatory activity (behaviour of regulators) have not confirmed the initial expectations and H1. The country with the most active regulatory institution and the most vivid railway sector is not the one with the higher degree of independence of the regulatory institution. Moreover, it turns out to be exactly the opposite – the less independent regulatory institution (Bulgaria) is the most effective in its activities. The reason is not that this particular regulator has more powers delegated by the
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7 Findings and analysis of the results government; the rest of the countries (Serbia and FYROM) have also a wide range of competences on paper, but just do not perform many of them.
A table with summary of the results is presented below:
Table 8 Summary of the results on activities of regulators
Country Number of Number of licences Safety certificates inspections/ issued issued sanctions (on average per year) (on average per year) (on average per year) Bulgaria 2021 / 115 9 ~ 2.4 Serbia (9) 200 ~ 5.6 FYROM 1 - - Source: Annual reports on the activities (Bulgaria, Serbia and FYROM)
The table above shows that it is extremely difficult to compare cases on a quantitative basis for several reasons. First, data available publicly by the Macedonian Railway Agency is so scarce that it only reports one inspection and almost no other regulatory activities. Probably this is not correct. Licences at least for the operating company have to be present, regardless the lack of published information on that. Second, the number of licences issued by Serbia (1205 in total for a six-year period) attracts the attention, especially compared to Bulgaria. The extreme differences are due to the differences in the approaches of formulation of the final reports in the different countries. There are no indicators for performance that are commonly established; therefore, countries measure whatever they decide to measure. The other issue is the different interpretation of documents.
In the particular case, for instance, licences in Bulgaria are documents issued to a railway company giving him the right to operate in the market. They are usually equal to the number of the competitors; some of them need to be reissued, but some of them are permanent. In Serbia however, the understanding is different and licences are issued for the use of every vehicle, equipment part and device, which explains the higher number.
An interesting fact is that both Serbia and FYROM fill the largest part of their annual reports with identical information, related to their organisational structure, management function and agency’s powers, information that is also available in the relevant laws and on their websites. At the same time, actual information on their activities is scarce, mainly because in markets
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7 Findings and analysis of the results with very few actors and lack of regular complaints on which decisions should be made, the actions of institutions depend particularly on their personal initiative.
Yet, a positive trend observed during the analysis is the strengthened cooperation between the three countries and between their regulatory institutions. This is an opportunity for introduction of best practices, exchange of know-how and cooperation on regional and international projects for the mutual benefit.
7.2 Railway efficiency and productivity 7.2.1 Introduction Although the countries are quite similar in their trends of development, the productivity indicator has shown alarming results questioning the similarity of the cases. The countries have similar size and traffic (Bulgaria and Serbia) and common historical development (FYROM and Serbia), share the same region and topographical characteristics. Yet, data on productivity has demonstrated that, for the chosen period, one of the countries has extremely distant results from the other two. Unfortunately, due to lack of coherent data for the period 2000 – 2007 for Serbia, I have decided to include earlier data. What should be taken into account are the events in Serbia in 1998-1999. The war has had severe impact on the economy of the country and has significantly damaged rail infrastructure, as already mentioned in Chapter 5. The differences are shown in the table bellow and indicate a disturbing tendency – very low value for 1999 and an extreme growth five times the value for the period 1999 - 2007 (while in Bulgaria and Macedonia the growth observed for the same period is much more moderate). Furthermore, the starting value in 1999 is artificially low and it is a consequence of circumstances. The incredibly fast growth in the following years may be due to many different reasons. Among my assumptions are the separation of the country and elimination of inefficient railway networks of other former republics, post-war investment in infrastructure, or many other influencing factors, typical for these kinds of force majeure circumstances.
The war related events and the separation of the country have obviously seriously distorted the results of Serbia, and for this reason, unfortunately I am obliged to ignore Serbia’s results in the analysis of the cases. In this context, the remaining countries are the two extreme cases – the very independent Macedonian Railway Agency, accountable to the parliament, and the ministry-based Bulgarian Railway Administration Executive Agency.
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In order to compare FYROM and Bulgaria, I will use the difference in difference model. In this sense, FYROM is a treatment case, as at a specific moment (2008) the country has experienced a legislative and institutional change which established an independent regulatory institution. Bulgaria then, is the control case, as regulation of the railway sector has been part of the responsibilities of the transport ministry since the establishment of the Bulgarian railways and a substantial institutional change for the observed period is not present. The comparison aims at evaluating the effect of the treatment on the outcomes of the sector (productivity). The treatment effect therefore is calculated as the difference between the results of both countries in the final stage – having the key assumption that the control case identifies the path development of outcomes in absence of intervention. This is also known as the parallel trend assumption (Li, Graham, Majumdar, 2012: 368).
It is important to take into consideration that Bulgaria is perceived as the control case, identifying the path of development in case without treatment for two main reasons:
(1) Looking at the data in Table 8, 9 and 10 (see below), it can be observed that the two countries follow the same trends for development at least up to the legislative changes. When there is a decline in one of the cases, usually, there is a decline in the other as well. The same is applicable for periods of growth. (2) Changes in FYROM were drastic in comparison with the previous periods as the IRA was created, while in Bulgaria railway transport has always been regulated by the transport ministry (Birdanov 2007).
The moment of change is 2008 when in January the Law on Railway Market Regulatory Agency entered into force. As data on freight transport volumes is only available at the end of the year, the “before change” moment is defined to be 2007.
The three indicators applied are freight productivity, labour productivity (in freight) and wagons productivity.
7.2.2 Freight productivity Table 9 (next page) reveals the results on sector performance for Bulgaria and FYROM. The yearly changes in both countries show common trends.
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Table 9 Productivity of freight transport (Tkm/km), thousands
Bulgaria FYROM Serbia
1985 4 229 1 437 3094 1990 3 289 1 105 2439 1995 2 002 241 362 1999 1 214 544 312 2003 1 221 538 - 2006 1 301 878 1 112 2007* 1302 1113 2008* 1124 1063 2009* 796 711 2010** 727 751 848.25 2011 833 685 2012 714 605 2013 805 602 Source: UNECE, WB, personal calculations
*Official data for 2007 is missing for FYROM, and for the period 2008-2009 there is no available data for the countries. The presented numbers are results of personal calculations of freight productivity. Data for freight traffic by year is available by the World Bank, as well as length of railway lines per year per country. The calculations were made following the methodology developed by the UNECE.
**The 2010 Data was published by the UNECE in 2012. More recent data calculating the productivity index is not available at the moment.
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Review of the cases according to the Difference in difference model
Table 10 Difference in difference – freight productivity
Before change After change Difference Δ FYROM (treat) 1113 602 -511 -45.9% Bulgaria (control) 1302 805 -497 -38.2%
Difference Δ ΔY = -14 Δ ΔY = -7.7% Source: personal calculations
As the calculations show, for the period 2008 – 2013, FYROM has not shown stunning results. Contrary to expectations, the treatment (legislative change – establishment of an independent institution) has not affected significantly the outcome. The graph bellow shows the change in freight productivity from the time perspective. The grey vertical line indicates the moment of the introduction of reforms.
Graph 3 Difference in difference, freight productivity
4.500 4.000 3.500 3.000 2.500 2.000 1.500 1.000 500 0
Bulgaria FYROM
Sources: Source: UNECE, WB, personal calculations
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7 Findings and analysis of the results
As it can be observed, the two countries follow a common pattern of development. Although they start from very different points, their values gradually get closer over time.
The fall in productivity is a common issue in the beginning of the nineties of the past century in Eastern Europe and it is related to the fall of communist regimes and the transition to democracy and market economy. The process was harder for some countries than others, but both Bulgaria and FYROM have experienced serious challenges.
Afterwards, a slow growth is observed, followed by a rather stable period, but neither of the countries achieves its values from the previous century.
The main conclusion from Graph 2 is that the treatment imposed does not seem to have significant implications on the productivity outcomes. The treated case (FYROM) and the control case (Bulgaria) have very similar values and apparently, the introduction of an independent regulator in FYROM does not have the positive effects expected. For the observed period (2008 – 2013) FYROM even underperforms in comparison with Bulgaria, whose productivity decreases less than the Macedonian – with 38.2 %, while the treated country decreases with almost 46% (Table 9).
7.2.3 Labour productivity Labour productivity in the freight sector is the next point of analysis. Unfortunately, the data available for this indicator is much more limited than for freight productivity. The UNECE has published data on labour productivity in freight for the last time in 2012, based on the with the UIC data from 2010. Therefore, 2010 is the only available year of analysis after the changes in FYROM of 2008. The results in this sense may not show the path of development needed for an in-debt analysis.
Regrettably, it was not possible for me to calculate by myself the values on labour productivity for the missing years. This is due to the fact that information on number of workers that are employed in freight is not available for the public. The same applies for productivity of wagons (number of wagons in different countries is not information on my disposal).
The following table presents the data on labour productivity for the countries. Again, Serbia is excluded from the analysis, as its results are disturbingly low in the nineties (due to the separation of the country and the war-time period). Therefore, the fast growth observed afterwards is artificial and should not be taken into account.
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Table 11 Labour productivity in freight transport (Tkm/employee), thousands
Bulgaria FYROM Serbia 1985 244 177 185 1990 173 128 165 1996 154 62 - 1997 135 64 - 1999 112 90 36 2000 142 127 - 2003 153 103 - 2005 153 151 - 2006 130 213 - 2007 153 - 202 2010 101 350 170
Source: UNECE
In order to observe whether the introduction of an independent regulator in FYROM has affected labour productivity, again the difference in difference model will be applied. As in the previous section, FYROM is the treated case (2008 is the year where change was introduced) and Bulgaria is the control case, as no change in independence has happened there. The treatment effect is presented in Table 12 and Graph 4.
Table 12 Difference in difference, labour productivity in freight
Before change After change Difference Δ FYROM (treat) 213 350 137 64.3% Bulgaria (control) 130 101 -29 -22.3%
Difference Δ ΔY = 166 Δ ΔY = 86.6% Source: personal calculations
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7 Findings and analysis of the results
Graph 4 Difference in difference – labour productivity in freight, thousands
400
350
300
250
200 Bulgaria 150 FYROM 100
50
0
Source: UNECE
In the case of labour productivity in freight, or the productivity of freight workers, a more positive conclusion could be made. If the case of Bulgaria is the control case, and similar development for FYROM would be expected without the intervention, then the results are surprising. While Bulgaria is experiencing decline, FYROM’s labour productivity is increasing. To be accurate, an important remark should be made here. The two countries’ paths take different directions shortly before the institutional changes. 2006 is the first year when the results of FYROM surpass the results of Bulgaria. Therefore, it is not impossible that other factors also have influenced this change. Nevertheless, after the introduction of the independent regulator, the Macedonian curve rapidly grows with rates that exceed the projected values for the country, based on the growth shown during previous years (the grey dotted line in Graph 3). The estimations were made on the basis of the development of FYROM for the period 1999 – 2006. It could be assumed that under the same conditions, until 2010, labour productivity would reach 281 thousands. Nevertheless, in 2010 FYROM shows labour productivity rates for freight transport of 350 thousands, which exceeds substantially not only the control case (with 86.6%), but also the projections for growth on the basis of the pre-reform period.
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7 Findings and analysis of the results
Of course, there are a lot of factors that influence labour productivity and institutional change is just one of them. However, in the present comparison, it can be observed that the countries follow common paths of development. The World economic crisis has influenced both cases and every country has its own ups and downs. Nevertheless, the attention is drawn by the fact that up until a certain point Bulgaria is the leader in values of labour productivity in freight. At a determined point it loses its position and FYROM grows unexpectedly fast. It may be happening a bit before the introduction of the independence regulator, however, the reforms have already started in both countries, and apparently in one of the cases they have a better impact. After the implementation of the regulator, the labour productivity indicator’s values increase in a rapid manner. 64.3 % of growth is an impressive result in any case.
7.2.4 Productivity of wagons The last productivity indicator relevant for freight in the railways is productivity of wagons. Here the two national sectors have a similar starting position. The data on productivity of wagons is presented in Table 13.
Table 13 Productivity of wagons
Bulgaria FYROM Serbia Tkm/wagon Tkm/wagon Tkm/wagon 1985 429 418 545 1990 333 316 445 1995 221 69 - 1999 166 156 77 2000 186 217 - 2003 378 155 - 2005 426 348 - 2006 440 395 - 2007 419 429* 507 2010 253.77 458.92 380.52 Source: UNECE
Again, unfortunately, data for the period 2007 – 2010 is not available, so the changes cannot be observed gradually; however the difference between the starting and the final position attracts the attention. The results are presented in Table 14 (see next page).
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Table 14 Difference in difference, wagon productivity
Before change After change Difference Δ FYROM (treat) 429 459 30 7% Bulgaria (control) 419 254 -165 -39.3%
Difference Δ ΔY = 195 Δ ΔY = 46.3%
Graph 5 Difference in difference, wagon productivity
500
450
400
350
300
250 Bulgaria FYROM 200
150
100
50
0 1985 1990 1995 1999 2000 2003 2005 2006 2007 2010
Source: UNECE
Wagon productivity is probably the most emphatic example on the influence of the institutional reform. Up until the moment of change and introduction of an IRA in FYROM (moment, indicated by the grey line in the graph), the countries show basically similar path with few exceptions (noted in the years 1995 and 2003 indicating more significant decline in FYROM compared to Bulgaria). After 2008 however, a decline probably related to the World Economic Crisis starts in Bulgaria, but not in FYROM. On the contrary, not only the
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7 Findings and analysis of the results country’s results do not fall down, but they experience growth. The difference between the rates of Bulgaria and FYROM in the period 2007 – 2010 indicates the treatment effect.
Summary of the results
The overall conclusion on the productivity in railways analysis is controversial. The three indicators selected do not show consistent results. On one hand, in the case of freight productivity, the introduction of an IRA in FYROM does not seem to have any implications on the results. After the moment of introduction of change, the results of both countries keep having similar and very close values. The treatment effect therefore is not only insignificant, but also negative.
On the other hand, in the case of labour and wagon productivity, there is a considerable difference and treatment effect. The establishment of the independent regulator proves to have a positive relation with the improvement of productivity of the sector and therefore, sector’s efficiency.
In freight productivity decline is present not only until 2010, but rates continuously decrease up until 2013 (freight productivity is the only indicator for which more recent data is available). Apart from that, the rest of the indicators show that the independent regulatory institution in the field of railways is beneficial for the sector. Therefore, H2 is partly confirmed.
The dropping out of the Serbian case for this Chapter is unfortunate; however, it does not threaten the research validity substantially. The independence indicator of the Serbian Directorate for Railways was the intermediate, compared with the other two cases and an analysis based on the two extreme cases – the most independent and the least independent agency still provides the study with internal validity of arguments.
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8 Conclusions 8.1 Main findings The conducted research aimed at answering the question whether independence of the regulatory institution means better performance of the regulator, better regulatory policy and better outcomes in terms of performance of the railway sector.
In order to answer the research question a comparative case study on the type of most similar case design was established. The compared countries are three neighbouring states from the Balkan Peninsula – Bulgaria, FYROM and Serbia. The cases have many common characteristics from political, geographical and historical developments and their railway sectors are in poor state. All the cases are affiliated to the EU, although they are in different stages of their integration process. Nevertheless, as most European countries, they are implementing the Directives of the EU reforming national railway sectors and introducing competition. In their process of harmonization of national legislations with EU law, the three countries have made different choices in terms of institution building – while Bulgaria has decided to delegate regulation of the railway sector to a ministry-dependent agency, FYROM has established an Independent Regulatory Agency. The case of Serbia is in-between: the railway sector is regulated by a semi-independent from the government Directorate.
Contrary to the expectations however, the most independent institution is not the one that has the most active regulatory policy. For most of the recent years, data on activities of the Macedonian railway agency lacks, while Serbia and Bulgaria show more significant levels of activities. Moreover, the Agency, with the larger number of inspections, sanctions, certificates and licenses issued is surprisingly the Bulgarian.
This can be explained probably with the fact that the Bulgarian freight market is so far the most open one with the highest number of operating companies. As the market is open and more actors interact, the regulator is obligated to perform more inspections in order to make sure that legal requirements and safety standards are met. Furthermore, in the presence of numerous companies, generation of conflicts is more likely to occur. In the cases where there is no competition and only one operator is subject of inspection, penal provisions and fines are not common phenomena.
Although according to the theory an independent regulatory agency is expected to be active and transparent in its policy, the case of FYROM proves this expectation wrong. This is
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8 Conclusions probably another argument that builds on the suggestion that when evaluating an IRA, it is extremely important to also take into account the informal independence of the institution.
In its report from 2011, the World Bank argues that countries from the region have failed to establish strong and pro-active regulatory institutions. They lack the staff and expertise to perform and in their majority the institutions are not independent which provides them with limited authority (WB 2011: 115-116). Therefore, although the regulators may enjoy independence on paper, it is possible that their informal independence levels are lower than the expected. This could explain the lack of considerable regulatory activities in FYROM and Serbia.
As regards the second point of analysis, the efficiency in the railway sector and its relation to the establishment of IRA, the research did not find a causal relation between the existence of an independent regulator and the improvement of freight efficiency. However, the results show a significant improvement in the labour productivity in freight transport indicator and in the wagon productivity.
This is not a very surprising finding, considering the constant decline in the freight volumes in the last years. Freight productivity is the relation between the volume of freight traffic in the country and the length of the railways. Therefore its values depend strongly on the importance that railway transportation of goods has in the country. In case other means of transport develop faster than railways; or in case the country makes strategic investments in other types of infrastructure in order to fulfil certain goals, then it is natural that the size of the freight in railways shrinks. In this case the capacity of freight transportation in the railways, including infrastructure, remains underused and levels of freight productivity decrease.
On the other hand, labour productivity (t-km per employee) improved significantly. This a very positive trend, because looking at the financial reports of most of the railway companies on a global scale, one can observe that costs for labour are the biggest expense for operators. Improvement of labour productivity in freight in relation with the introduction of IRA suggests that operation in the sector has become more efficient.
The three used indicators are formed on the basis of the tonne – kilometre measurement and data shows that the overall volume of freight traffic is decreasing in all Balkan countries, especially in comparison with road transportation of goods. Nevertheless, in two of the indicators (labour and wagons’ productivity) there is an actual growth in FYROM, which
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8 Conclusions shows that apart from the decline in rail transport, there is improvement in efficiency levels. This finding serves as a justification for the establishment of regulators that are independent not only from stakeholders, but also from government bodies in terms of decision-making and funding.
8.2 Limitations of the research and future research opportunities The conducted research has certainly some limitations. On one hand, there is not sufficient data available on the productivity indicators, especially in the early 2000’s. It is difficult to follow the development of Serbia, as data for the period 2000 – 2006 is missing. This is also valid for some years for FYROM; only for Bulgaria data is complete. Furthermore, the most recent data published are from 2010 which makes estimation of the results challenging.
Also, the period after the introduction of independent regulatory institutions is quite short from the actual perspective in order to make strong statements on the effect of IRAs on the performance of the railway sector.
In this context, it would be compelling to repeat the research or further develop it after a certain time. In 2018 the Economic and Social Council of the United Nations has planned to publish the next E-rail census with data from 2015 (Work plan for 2016–2020, UNECE). Then, a richer data set will be available and also a longer period could be covered for the study.
Furthermore, as already mentioned, analysing the countries of South-Eastern Europe, it would be an opportunity to also consider the informal independence of the institutions. As Maggetti (2012) states, formal independence is not sufficient to explain variations in de facto independence with can have even stronger implications on the regulator’s behaviour. Informal independence happens to be very important, especially for countries from the Balkan region. The three studied cases have negative fame as regards to clientelism and corruption. They score poorly in the Corruption Perception Index 2014, published by Transparency International (2015), furthermore Balkan states are often defined by various authors as “quasi- democracies”, that are characterized by corruptive patterns of patronage (Georgiev 2008: 131). This is another reason that analysis on institutions should be complex and include diverse features, as de facto independence, for instance.
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8 Conclusions
8.3 Further implications of the results and policy recommendations The research did not confirm the initial assumptions and the hypotheses set. At least not completely. It is not simple to give a clear answer to the research question posed – Do national railway sectors, regulated by an independent agency perform better than railways with government-dependent regulators. According to the results, the answer would be: partly.
Focusing mainly on freight, data has shown that the introduction of an IRA has not benefited freight productivity in general; however, it has favoured labour productivity and productivity of wagons. Nevertheless, the independent institution failed to prove itself as the pro-active regulator. It turned out that higher independence levels do not necessarily mean higher activity and causal relation between de facto independence and power and authority of the institution was not found.
The effect of the railway reforms is expected to be positive on the efficiency of the sector; however, the implementation of reforms in the studied region does not fulfil the expectations for development so far. One of the suggestions of the World Bank and of some scholars (Bošković / Bugarinović 2015) is that governments are not committed to restructuring the sector. The WB states that a common misstep was the delay of railway reforms in the context of stable economic times. The consequences of this decision have been severe as a financial downturn has occurred before the sectors have been restructured (WB 2011: 113).
Liberalization of rail services is long expected in SEE and it is an irreversible process for most of the countries as they aspire to join the EU. As in many other sectors, in the railways decision for introduction of competition has been made and it is about to happen. Nevertheless, it is very important for South-Eastern European countries, including the Balkan states, to reform the sector prior to the market opening. Restructuring of the rail operators, especially the state-owned ones is essential, because they suffer severe technical, operational and financial problems. The Bulgarian National Railway Company (BDZ) is not the only company facing liquidity problems, indebtedness and overstaffing issues. Being a national company makes it sometimes harder to reform, as restructuring is expected to be painful and unconditional. It is however of great importance to make changes leading to efficiency of the service, as with the liberalization and the entry of competitors, it would get only harder in the future.
Failure to reforming national rail operators will expose them to the risk of losing market shares, bare losses and even deeper indebtedness, which may lead to the need of further state
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8 Conclusions subsidies. This is actually not easy to do, as EU member states and candidates for accession have to follow strict anti state-aid competition rules.
To sum up, reforming national railway sectors is indeed supported by the EU and a basic requirement, but it is also a responsibility to states to do, because, having a whole sector in decline just means losses for the country. To assure that state-owned companies do not require state support and are able to compete equally with other market entrants is in line with the national interests.
The effectiveness in the reform introduction is, as the research has shown, controversial. Some academics and some governments argue that there are reform measures that should have priority over others. One of them is the vertical separation between infrastructure and operations that appears to have a strong impact on efficiency levels (Cantos et al 1999). Others estimate that deregulation is the answer, while for some privatization is a necessary step towards better development. Some studies have emphatically shown however, that of crucial importance is the way reforms are introduced. Sequent reforms have proved to have stronger impact than packages of reforms (Friebel et al 2010).
Although there are a lot of factors that influence the way reforms are introduced and their effectiveness, a main actor in this process is the regulatory institution of the sector. A strong and pro-active regulator, independent in its decisions and actions is the means to achieve a better functioning railway sector and a higher quality of the service offered. Regulatory institutions in SEE may not have the impact expected on the industry at the present moment; however, providing them with more autonomy and a broader field of action will eventually assure that they fulfil the purpose they were created with. Establishing strong and independent regulators will benefit the sector, as it will bring security, guaranteeing fair conditions to market entry, promotion of competition and assuring the market functions in a wholesome manner.
Moreover, properly designed regulators can cooperate efficiently, promoting the joint development of projects of mutual interest; the development of regional and international rail corridors, and also for an active exchange of best practices and know-how.
The step towards reforms in the national railway sectors comes together with reform of the regulators. However, this process requires a deeper and complex institutional change, because, as it appears to be, formal independence is not sufficient.
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8 Conclusions
Of course, based on the results of the present study that has not proved a strong causal relation between formal independence of the regulator and the sector performance, the idea that de facto independence would be the answer for efficient sector reforms is just an assumption. This assumption however is supported by the theory within numerous academic works focused on different sectors.
Railways in SEE are declining, while in other European countries this sector is the backbone of the economy. Rail freight services are of a substantial importance for a great variety of industries from the primary sector. Development of railways is a priority for the developed world, because it is efficient, usually faster than other means of transportation and it corresponds to the requirements for environmental protection and fighting the climate change. As Gustavo Petro, a Colombian politician has said: “A developed country is not a place where the poor have cars. It's where the rich use public transportation”.
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Appendix 1
Formal independence of regulatory agencies (Gilardi 2008) *Countries’ results are indicated in parentheses – Bulgaria (BG), FYROM (MK) and Serbia (SR); explanation and referencing to legal text for justification of the results in Chapter 6.
A) Agency head status 1) Term of office § over 8 years 1.00 § 6 to 8 years 0.80 § 5 years 0.60 (SR) § 4 years 0.40 (MK) § fixed term under 4 years or at the discretion of the appointer 0.20 § no fixed term 0.00 (BG)
2) Who appoints the agency head? § the management board members 1.00 (MK) § a complex mix of the executive and the legislature 0.75 § the legislature 0.50 § the executive collectively 0.25 (SR) § one or two ministers 0.00 (BG)
3) Dismissal § dismissal is impossible 1.00 § only for reasons not related to policy 0.67 (MK) (SR) § no specific provisions for dismissal 0.33 (BG) § at the appointer’s discretion 0.00
4) May the agency head hold other offices in government? § no 1.00 (MK) § only with permission of the executive 0.50 § no specific provisions 0.00 (BG) (SR)
5) Is the appointment renewable? § no 1.00 § yes, once 0.50 (MK) § yes, more than once 0.00 (BG) (SR)
6) Is independence a formal requirement for the appointment? § yes 1.00 (MK) § no 0.00 (BG) (SR)
B) Management board members’ status 7) Term of office § over 8 years 1.00 § 6 to 8 years 0.80 § 5 years 0.60 (SR) § 4 years 0.40 (MK) § fixed term under 4 years or at the discretion of the appointer 0.20 § no fixed term 0.00 (BG)
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8) Who appoints the management board members? § the agency head 1.00 (BG) § a complex mix of the executive and the legislature 0.75 § the legislature 0.50 (MK) § the executive collectively 0.25 (SR) § one or two ministers 0.00
9) Dismissal § dismissal is impossible 1.00 § only for reasons not related to policy 0.67 (MK) (SR) § no specific provisions for dismissal 0.33 (BG) § at the appointer’s discretion 0.00
10) May management board members hold other offices in government? § no 1.00 (MK) § only with permission of the executive 0.50 § no specific provisions 0.00 (BG) (SR)
11) Is the appointment renewable? § no 1.00 § yes, once 0.50 (MK) § yes, more than once 0.00 (BG) (SR)
12) Is independence a formal requirement for the appointment? § yes 1.00 (MK) § no 0.00 (BG) (SR)
C) Relationship with government and parliament 13) Is the independence of the agency formally stated? § yes 1.00 (MK) (SR) § no 0.00 (BG)
14) Which are the formal obligations of the agency vis-`a-vis the government? § none 1.00 (MK) § presentation of an annual report for information only 0.67 (BG) (SR) § presentation of an annual report that must be approved 0.33 § the agency is fully accountable 0.00
15) Which are the formal obligations of the agency vis-`a-vis the parliament? § none 1.00 (BG) (SR) § presentation of an annual report for information only 0.67 § presentation of an annual report that must be approved 0.33 (MK) § the agency is fully accountable 0.00
16) Who, other than a court, can overturn the agency’s decision where it has exclusive competency? § none 1.00 (BG) (MK) § a specialized body 0.67 § the government, with qualifications 0.33 (SR)
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§ the government, unconditionally 0.00
D) Financial and organizational autonomy 17) Which is the source of the agency’s budget? § external funding 1.00 (MK) § government and external funding 0.50 (BG) (SR) § government 0.00
18) How is the budget controlled? § by the agency 1.00 (BG) § by the accounting office or court 0.67 (MK) (SR) § by both the government and the agency 0.33 § by the government 0.00
19) Who decides on the agency’s internal organization? § the agency 1.00 (BG) (MK) § both the agency and the government 0.50 (SR) § the government 0.00
20) Who is in charge of the agency’s personnel policy? § the agency 1.00 (BG) (MK) (SR) § both the agency and the government 0.50 § the government 0.00
E) Regulatory competencies 21) Who is competent for regulation in the sector? § the agency only 1.00 § the agency and another independent authority 0.75 § the agency and the parliament 0.50 (MK) § the agency and the government 0.25 (BG) § the agency has only consultative Competencies 0.00 (SR)
Note: The higher the code, the more independent the agency. For the cumulated index, each dimension counts for 1/ 5.
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