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Jarzembowski, Georg

Article — Published Version European framework for the internal market in the railway sector

Intereconomics

Suggested Citation: Jarzembowski, Georg (2006) : European framework for the internal market in the railway sector, Intereconomics, ISSN 0020-5346, Springer, Heidelberg, Vol. 41, Iss. 6, pp. 299-303, http://dx.doi.org/10.1007/s10272-006-0200-9

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The Liberalisation of Rail Transport in the EU

On 1 January 2007 the European rail freight market, which has long suffered from fragmentation and a declining share of total transport services, will be fully opened to competition. What will be the consequences for the transport sector and the economy as a whole? What further measures are needed to stabilise or increase the railways’ share in the freight market?

Alexander Eisenkopf*

Opening the Rail Freight Market in Europe – an Economic Assessment

n 1 January 2007 we shall see the full opening of lative initiatives to liberalise the rail service markets in Othe European rail freight market – a crucial mile- Europe and to develop a common European railway stone in the history of railway transport in Europe at area. The “First Railway Package” was released in least in the perception of offi cial observers. For many 2001. It consisted of three Directives regarding infra- decades national railway markets have been closed structure access (2001/12/EC on the development of monopolies – served by stated-owned companies European railways amending Directive 91/440/EEC, which were unable to respond adequately to the 2001/13/EC on railway licensing amending Directive challenges of the market. The rail freight sector was 95/18/EC and Directive 2001/14/EC on capacity al- therefore unable to participate in the strong growth of location, railway infrastructure charging and safety the freight markets and to defend its market position certifi cation) and the directive 2001/16/EC on the in- in the passenger market. In consequence the market teroperability of rail systems. share of rail transport fell with regard to both passen- ger and freight transport. The fi nancial performance of The Directives providing access rights to the infra- railway fi rms also declined signifi cantly and EU Mem- structure (2001/12-2001/14) require the separation and ber States had to subsidise their national railways with independence of functions that are essential for ensur- considerable payments to keep them viable. ing non-discriminatory access, especially track ca- pacity allocation and setting of track access charges. Since the end of the 1980s the European Commu- They also include the various conditions to be fulfi lled nity and the Member States have launched initiatives by the railway fi rms to make use of the access rights to stop the decline of the railway sector. The fi rst es- for international freight services on the TERN network sential initiative of the European Commission was the and cover the principles of slot allocation and infra- White Paper on “a Strategy for Revitalising the Com- structure charging. Directive 2001/16/EC is dedicated munity’s Railways” in 1996. It was followed by the to the implementation of common technical specifi ca- White Paper on Transport Policy for 2010 released in tions to achieve the interoperability of rail services in 2001. This White Paper included ambitious political Europe. targets for the development of the European railway sector. Railway fi rms should compete successfully in In May 2006 the European Commission adopted the growing European transport markets and reach a report on the implementation of the First Railway their former market (modal) share of 1998 by the year Package. The report concludes that the legal imple- 2010. To reach the goals defi ned in the 2001 White Pa- mentation of the First Railway Package is completed per the European Commission launched several legis- – three years after the deadline to transpose the Euro- pean Directives into national law (!) – but efforts have

* Professor of Economics, Zeppelin University, Friedrichshafen, Ger- to be increased in some Member States to ensure an many. effective regulatory framework and the satisfactory 292 Intereconomics, November/December 2006 FORUM functioning of the rail service markets. The assess- term review of the 2001 White Paper on Transport in ment of the “Second Railway Package” adopted in 2006 the European Commission was forced to con- April 2004 has to be done against this background. cede that until now the targets of its transportation The “Second Railway Package” provides instructions policy have not been met. Especially rail freight traffi c on rail safety, an amendment of the interoperability Di- only stabilised at a lower level. On the other hand, rail rectives 96/46/EC and 2001/16/EC in order to gradu- freight transport in those Member States that opened ally extend the scope of interoperability to cover the up the rail market early shows a bigger increase com- entire rail network and the setting up of a European pared to the other countries. The (partial) opening of Railway Agency (ERA). The ERA is supposed to pro- rail freight markets led to increased market entry in vide technical support for the work on interoperability recent years. Entry of new rail freight fi rms was espe- and safety of the European railway sector. More im- cially strong in countries with liberalised markets like portant in the context of this paper is the extension the United Kingdom, Germany, Sweden and the Neth- of the access rights for freight services to the whole erlands. infrastructure. The core message of the “Second Rail- It can be observed that new entrants are relatively way Package” is the free access to infrastructure for small compared to the existing railway fi rms but work international rail freight services by January 2006 and more effi ciently and provide attractive services for the liberalisation of cabotage by 2007. Apart from the their customers – especially in the block train market. fact that the “Second Railway Package” has not been In the past, this market has been quite profi table for transposed into national law in every Member State railway operators because there was little competition until now, it shall provide the full opening of the Euro- by trucks. Open access to infrastructure has changed pean rail freight market. Every European railway fi rm this situation for the incumbent railway fi rms because will be able to offer freight services around Europe the entrance of new competitors has driven down without legislative or institutional barriers. prices. Meanwhile, a “Third Railway Package” has been On the other hand, we have seen a slight general presented by the European Commission and dis- upwards trend in rail traffi c for two or three years now cussed intensively. The proposal would allow open – especially in countries with open rail freight mar- competition in cross-border passenger rail transport by 2010. Additionally, it covers the issue of passenger kets. But we have also to accept that some national rights and the certifi cation of railway staff. An agree- rail freight markets are still closed shops with a market ment on the “Third Railway Package” is expected in share of the dominating railway fi rm of up to 100%. the course of the year 2007. If we look at France, Denmark or Spain, we see that the incumbent rail freight operators reach a market An economic assessment of the opening of the rail share of 100%. But also in markets with a higher de- freight market has to answer the question of the con- gree of liberalisation the market share of the dominant sequences of the liberalisation of the rail freight market operator reaches at least 70% (e.g. United Kingdom). for the rail freight sector and the economy as a whole. Some observers of the market take the relatively large The main topics to be addressed are the effi ciency and number of (new) operators in the European market competitiveness of the future rail freight sector and the as an indicator of an increased intensity of competi- question whether liberalisation will be able to stabilise tion. This observation, however, may be misleading or increase the market share of railways in the freight because we have to bear in mind the distribution of market. A better market performance of rail freight market shares between incumbents and entrants. The should give the Member States an additional chance market share of the new entrants is much more impor- to cope with the future growth of the transport markets tant for the assessment of the balance of power and in Europe. The future of rail freight is also a key factor the competitive strength of the new entrants than the for the sustainability of the transport markets and the number of operators itself. As a conclusion we should effectiveness of public funding for rail infrastructure. not look primarily at the “law in books” but at the “law Steps to Liberalisation and Development of in action”, that means at the markets themselves and Markets the entry options and obstacles that exist in reality. When we try to make up our minds about the eco- This is particularly important with regard to the pur- nomic impact of rail liberalisation in Europe, we have pose of this paper – an economic assessment of the to assert fi rst that the trends in the transport markets opening of the rail freight market in Europe. If we con- have not changed fundamentally since the beginning sider that the rules of the “First Railway Package” have of regulatory reform in the European Union. In its mid- been adopted into national law in all Member Coun- Intereconomics, November/December 2006 293 FORUM tries but additional efforts of the Member States are tion of the European rail freight market is the key to necessary to ensure the satisfactory functioning of the make use of these chances. Within a regulatory frame- rail service market, as the European Commission as- work that allows everyone to offer rail freight services serts, and if we look furthermore at the markets them- everywhere in Europe, rail operators should be able to selves, we have to be careful with our assessment of provide the services needed on their own or in coop- the degree of competition. A European Directive itself eration with other operators. asking for open access does not mean that all Member On the other hand, open access will boost com- States will automatically guarantee free and open mar- petition for incumbent railway fi rms. New rail freight kets after January 2007. Furthermore, if free market operators will enter the market. Market entrance will access including cabotage is part of national law, this lead to intensifi ed intramodal competition, especially does not mean that there are no additional entry barri- in the block train market. One competitive scenario is ers confronting newcomers such as national approval that the single block train business of the dominating procedures for rolling stock or protective measures operators is undergoing a price erosion with the emer- taken by established carriers. Time-lags of political gence of free market access. The consequence of this and regulatory measures to open the markets seem to “cherry picking” could be additional losses in the sin- be a signifi cant attribute of railway markets. gle wagon load markets because profi ts from block The Future of the European Rail Freight Market trains can no longer cross-subsidise single wagon load traffi c. But this argument does not pass a critical The full opening of the European rail freight market economic assessment. If single wagon load transport on 1 January 2007 can be perceived as a dramatic cannot be run competitively at the moment, the con- threat or an outstanding opportunity. Incumbent op- sequence must be to increase the productivity of this erators will mainly fear declining profi t margins due to production method and its acceptance by customers the market entry of new competitors and the possibility and not to raise barriers against open access. of losing market shares. On the other hand former na- tional railway operators get the chance to expand their There is also the threat of the big state-owned rail- activities to other Member States and to form interna- ways that could enter the adjacent markets and push tional cooperations and alliances in rail freight traffi c. out smaller private rail operators. Markets will be in This is especially important because rail freight trans- motion anyway: besides the market entry of additional port is shifting from a national to a European business. competitors we shall observe a trend to higher con- At the moment, about 50 per cent of rail freight serv- centration because of mergers and acquisitions. The ices in the European Union are international (imports, economic assessment of this trend is ambivalent. exports or transit) and international traffi c is expand- Mergers and acquisitions may lead to higher effi ciency. ing with growth rates much above the market average. But they can also strengthen the market dominance of The general slight upward trend of rail freight traffi c in the big incumbent rail freight operators, which simply some countries relies to some remarkable extent on buy weaker competitors and thereby reduce the inten- the growth of international freight traffi c in Europe, es- sity of competition. pecially on the north-south corridor. As a net effect one should expect that open access Because one of the main strengths of the rail freight provides an opportunity for improving the effi ciency of system is the safe, scheduled and cost-effective trans- the railway markets by strengthening intramodal com- port of large quantities of goods over long distances, petition. To sum up, strengthened intramodal compe- the internationalisation of rail freight traffi c is one of tition implies several positive developments for the the main challenges of the market. The growth of bor- European railways, such as: der-crossing, long-distance traffi c will be the chance • rail services will presumably become more attrac- for the rail freight operators to take advantage of the tive, especially due to more effi cient organisational dynamics of the transportation market in Europe and structures of railway fi rms; at least stabilise their market (modal) share. However, • an important economic pattern prediction is that to benefi t from the development of markets railways cost savings and productivity improvements will be have to improve their performance signifi cantly to bet- detected and exploited because of intramodal com- ter satisfy the logistical requirements of their (potential) petition; customers, especially in the single wagon load market. Additionally, innovative private operators will increas- • innovative, customer-oriented services should be ingly offer more complex products like multiple block developed to come up with the service quality of the trains and intermodal traffi c solutions. The liberalisa- intermodal competitors; 294 Intereconomics, November/December 2006 FORUM

•incumbent railways can no longer excuse perform- sure the independency of infrastructure managers from ance weaknesses by distortions of the intermodal railway operators. This is especially important with re- competition. gard to international freight transport. If there are entry Consequently, intensifi ed intramodal competition is barriers for railway operators planning to serve inter- the key to increasing the intermodal competitiveness national markets in business reality, a solution can be of European railways. Intramodal competition has to horizontal cooperations with partners active in their be judged as an effective measure to achieve a sus- targeted market. In general, a higher degree of hori- tainable improvement in cost and service structures of zontal integration of European rail freight operators railways and thereby increase their modal share in the can be seen as a chance for overcoming international international transport market. rail freight’s weaknesses in logistical services. But this Open Access – Is Competition Automatically seems not to be true in the case of cooperation be- Guaranteed? tween vertically integrated railway fi rms. Alliances of vertically integrated railways today represent alliances There is widespread consensus among transport economists on the positive effects of intramodal com- of the state-owned incumbent railway giants. Such petition in the rail freight market. The crucial question cooperations will serve to push only the interests of is, however, whether there will be a higher degree of these dominant, state-owned railways, also with re- competition on the tracks after the full opening of gard to infrastructure policy. In a worst case scenario the market by January 2007. As already mentioned alliances or joint ventures of integrated railway fi rms there are barriers to entry further on, not only with could be a useful instrument to exclude independent regard to economic factors like fi nancial strength or operators from the market. economies of scale. You have also to consider the Altogether, open access without additional regula- continuing reluctance of some European states and state-owned railways respectively to open up their tory and/or structural reforms does not automatically national infrastructure or at least to hamper market mean more competition on the tracks and a higher access. European-wide open access requires at least competitiveness of the railway sector itself. Besides a fully independent infrastructure and service facility the problems of market access and competition ad- management. There is also a need for powerful and in- dressed in this paper European railway policy has to dependent regulatory institutions. Without the enforce- reach interoperability by technical and organisational ment of non-discriminatory market access in business harmonisation and to promote a higher effectiveness reality, open access enabled by law cannot generate of the infrastructure management. Therefore, the full the positive effects of intramodal competition. opening of the European rail freight market means in- Another question to be discussed is the separation deed an important step toward revitalising the Euro- of infrastructure and operations as a measure to en- pean railways, but represents only a fi rst step.

Christian Kirchner*

Legal Instruments for Liberalising European Rail Freight Markets from 2007

uropean rail freight markets have long been opened up as part of the European integration proc- Efragmented. On national markets monopolistic ess, rail markets have remained closed. In 1991, the structures have prevailed. Thus, rail-bound freight fi rst step in the direction of opening up and liberalising transport has lost ground to road transport dramati- such markets was Directive 91/440/EEC. The Directive cally. Whereas in road transport markets have been had the (long-term) goal of increasing the effi ciency of European railways and of facilitating the integration of * Professor of German, European and International Civil and Business national railway markets. The decisive legal tool for at- Law and New Institutional Economics, School of Law / School of Busi- ness and Economics, Humboldt Universität Berlin, Germany. taining these goals was ensuring network access. In Intereconomics, November/December 2006 295 FORUM

2004 Directive 2004/51/EC stipulated that railway un- transport markets. The new legal instrument to cope dertakings shall be granted, on equitable conditions, with network monopolies has been developed as a tool access to the infrastructure in all Member States for of competition law. In order to deal with the problem of the purpose of operating all types of rail freight serv- abuse of dominant market position (Art. 92 EC Treaty) ices at the latest by 1 January 2007. This means in access to “essential facilities” has been granted (es- essence that from January 2007 on national borders sential facilities doctrine). In network industries such should no longer be an obstacle to the development of “essential facilities” may be defi ned as the bottlenecks European rail freight markets. In inter-modal competi- controlled by network owners. Competitors on down- tion, rail-bound freight transport services get a chance stream markets need access to these bottlenecks in to bring into play their comparative cost advantage on order to be able to compete. long distances vis-à-vis road transport. New forms of The legal problem of opening up and liberalising combined road and rail freight services are expected rail markets in Europe may then be defi ned as follows: to develop. the integration goal of the EC Treaty in the fi eld of rail Rail Market Liberalisation as Part of the European markets cannot be achieved by the four freedoms as Integration Process such. National monopolies in the rail sector have to be confi ned to the network level and have to be modifi ed In order to integrate the national markets of Member by granting access rights to undertakings which need States of the European Union and to create a Single these rights in order to compete on rail transport mar- European Market legal instruments have been used kets. to facilitate the free fl ow of goods, services, persons and capital including the right of establishment. The Creation of Access Rights as Instruments to Open legal cornerstone is the four freedoms of the Treaty up and Liberalise Rail Transport Markets Establishing the European Community. They are di- In the fi eld of rail markets the existing infrastructure rectly applicable law. But the free fl ow of goods and has to be opened up to enterprises which compete services is not feasible if markets are closed due to on rail transport markets. Such a competition-creat- national monopolies. In order to allow the free fl ow of ing device serves two purposes simultaneously: com- goods and services such national monopolies have petition in rail transport markets and the integration of either to be abolished or to be modifi ed. But such na- formerly separated and closed national markets. It is tional monopolies may be justifi ed in the light of the the integration goal which brings the European Com- effi ciencies of “natural” monopolies (examples are: munity as lawmaker into play. Community law has to telecommunications, electricity, natural gas, rail trans- defi ne access rights on the level of directives. Direc- port). From a (static) effi ciency perspective it does not tives are addressed to Member States, which have to make sense to duplicate networks in the light of the transform them into their national law. The legal proc- declining costs of an existing network (subadditivity of ess takes place on three levels: creation of Community networks). If national monopolies are being justifi ed on law, transformation of directives into national law and these grounds this will lead to a dilemma. The integra- implementation of national law. tion goal of the Treaty Establishing the European Com- From an economic perspective the picture seems munity (EC Treaty) confl icts with economically justifi ed to be simple: legal instruments are utilised to accom- national monopolies. The only escape from this di- plish economic goals (means-and-ends paradigm). lemma seems to be the formation of a Europe-wide But whether such goals are accomplished in practice monopoly. But since the European Community does depends on a variety of legal and non-legal factors. not possess the corresponding competences vis-à-vis Legal instruments often work differently than expected the Member States this is not a solution. (non-intended consequences of intentional activities). The other way out of the dilemma starts with a dis- They produce side-effects. Necessary preconditions tinction between the network level (where competition for achieving the defi ned goals are sometimes over- in the railway sectors seems not be feasible) and the looked. Non-legal factors may play a decisive role. downstream level, where competition within a given Economists perceive the creation of access rights network appears to be possible. The legal solution of to existing networks as an attempt to reduce existing the dilemma is a modifi cation of the property rights entrance barriers. As far as such entry barriers are of of network owners by granting access rights to those a legal nature – e.g. ownership of a network, existing undertakings which need network access in order to monopoly rights – the modifi cation or dilution of such be able to compete on downstream markets, i.e. rail rights appear to be suitable instruments to reduce en- 296 Intereconomics, November/December 2006 FORUM try barriers. But in the case of non-legal entry barriers strategy to revitalise Europe’s railways, pointing to the the task becomes much more diffi cult. Nevertheless, fact that railways have been insulated from the effects the liberalisation goal can only be attained if the differ- of market forces. The Commission suggested govern- ent kinds of entry barriers are successfully tackled. ment support to relieve the railways of their debts. The effective opening up and liberalising of Euro- Access rights in freight transport play an important pean rail freight markets from 2007 thus turns out be a role in this strategy [paragraphs 34 – 40]. The White complex problem. In order to analyse the existing legal Paper stated in par. 35 that open access represents tool box which ought to attain the – legally – defi ned the application of the principle of freedom to provide goals it is necessary to have a closer look into the vari- services to the railway sector. According to par. 37 ous legal tools and to take into consideration non-le- the Commission is committed to rapidly achieving gal factors of market foreclosure. completely open access for freight services. To make rights of access effective matters of licensing, capac- The Legal Tool Box ity allocation and charging have to be tackled (par. 45). Directive 2004/51/EC provides in Art. 1 par. 2 sen- Beyond these issues the following points have to be tence 2 that railway undertakings within the scope covered (par. 46): infrastructure charges, allocation of of Art. 2 of Council Directive 91/440/EEC (i.e. railway train paths, safety certifi cates for specifi c services, in- undertakings established or to be established in a teroperability, technical standards, conformity assess- Member State of the European Union, providing rail ment, working conditions etc. It had become clear that transport services for goods and/or passengers) shall provision of access rights as such could not solve the be granted, on equitable conditions, access to the in- problem. In order to bring down existing market entry frastructure in all Member States for the purpose of barriers a complex approach with a tool box of legal operating all types of rail freight services at the latest instruments was necessary. This tool box had to be by 1 January 2007. Article 2 stipulates that Member developed and the tools to be sharpened in the three States shall bring into force the laws, regulations and railway packages to come. administrative provisions necessary to comply with this Directive by 31 December 2005 at the latest. The First Railway Package contained three direc- tives that: separate the railways from the state; divide These provisions of Directive 2004/51/EC – open- ing rail freight markets within the European Union the railway activities between the network and train from 2007 – are the decisive step in a process which operators; and regulate the network and licensing was started – as mentioned above – in 1991 by Direc- of train operators. [Directives 2001/12, 2001/13 and tive 91/440/EEC. Article 1 of the Directive defi nes its 2001/14)] aims: to facilitate the integration process of European The decisive steps for reducing existing market en- railway markets, and to increase their effi ciency. The try barriers have been the following ones. toolbox contained – amongst others – the following in- struments: • Directive 2001/12 amends and restates Directive 91/440 on the development of the Community’s rail- • ensuring management independence of railway un- ways. It is this Directive that contains the key provi- dertakings, sions on the separation of railways from the state, • separating the management of railway operation and the division of national railways into the functions of infrastructure from the provision of railway transport railway undertaking and infrastructure manager, and services, the general components of regulation of the infra- • ensuring access to the networks of Member States structure manager’s monopoly assets. for international groupings of railway undertakings • Directive 2001/13 provides for the licensing regime and for railway undertakings in the international that applies to railway undertakings wishing to enter combined transport of goods. the rail market. It supersedes and replaces an earlier Directive 91/440 has since been amended in 1995 Directive (95/18) on the licensing of railway under- several times in order to sharpen the above-mentioned takings. tools. [Directive 95/18/EC and Directive 95/19/EC]. • Directive 2001/14 provides much of the detail needed Supplementing the directives, the European Com- to fi ll out the general character of monopoly regula- mission in 1996 issued a White Paper on a “Strategy tion of the infrastructure manager that is outlined in for Revitalising the Community’s Railways” outlining a Directive 2001/12. Intereconomics, November/December 2006 297 FORUM

The Second Railway Package aimed to create a le- by means of transformation into national law or not, gally and technically integrated European railway. The access problems are not eliminated totally. This has to following four proposals are of utmost importance: do with the fact that absolute entry barriers have to be • developing a common approach to rail safety (Direc- distinguished from relative entry barriers. Whereas ab- tive 2004/49); solute entry barriers are essential facilities in the legal sense – and regulated access can be managed – the • bolstering the fundamental principles of interoper- question is much more complex with relative barriers, ability (Directive 2004/50); e.g. the access to repair facilities. If there are differ- • setting up an effective steering body: the European ent types of repair facilities which a new entrant can Railway Agency (Regulation 881/2004); use, existing repair facilities of incumbents are not an • completing the internal market in rail freight services essential facility. Nevertheless the new entrant may (Directive 2004/51). face some cost disadvantages compared to the in- cumbent. What turns out to constitute a legal problem, The Third Railway Package is important for: namely the correct defi nition of an essential facility, is • opening up international passenger services to com- an economic problem as well: the defi nition of market petition including cabotage; entry barriers. Granting access to new entrants does not mean that all relative cost disadvantages have to • regulating the quality requirements for rail freight services; be eliminated. If this were the case new entrants could easily engage in free-riding. Instead of individual cost- • regulating international rail passengers’ rights and cutting endeavours they could hope to profi t from the obligations. low costs of incumbents’ facilities. The breakthrough for liberalisation for rail freight What was clear in the simple model of access rights markets occurred in 2001 as part of the second rail for new entrants as an instrument to create compe- package. tition on downstream markets turns out to be a very Practical Impact of Legal Instruments and Open delicate issue in real markets. This insight has a dis- Questions enchanting consequence: the fact that from 1 January The above-mentioned legal instruments aimed at 2007 on access to rail networks of the Member States opening up and liberalising rail freight markets in Eu- of the European Union is being granted for entering rail rope are part of secondary European Community law. freight markets does not mean that from that date on As far as regulations are concerned – e.g. Regulation full competition will fl ourish in these markets. The em- 881/2004 setting up the European Railway Agency pirical study of the relative openness of European rail – they are directly applicable. But directives have to be markets in 2002 and 20041 has made clear that open- transformed into the national law of Member States. ness of such markets is a very complex matter. It is Despite the fact that directives contain fi xed dates for the result of how Member States, their bureaucracies, the transformation process Member States are often regulatory agencies and law courts handle not only the unable or unwilling to transform a Directive in due time. hard market entry barriers but the soft ones as well. This poses the following problem: only national law The legal instrument – access right – is a necessary is then applicable and binding. In the case of access but not a suffi cient condition in order to achieve the rights the question arises whether they only come into goal of open and liberalised rail freight markets. What being after the corresponding directive – i.e. Directive will be necessary in the future is the empirical study 2004/51 – has been transformed in a Member State of the actual weight of the different remaining obsta- or whether they are then directly applicable. Accord- cles to market entry into rail freight markets in Europe ing to the jurisdiction of the European Court of Justice and the exertion of pressure on those Member States such directives become directly applicable without which are slow to effectively open up their markets. transformation into the national law of the respective January 1, 2007, is a good moment for starting a pro- Member State, if they defi ne the legal positions of the gramme for continuously watching the development addressee in a manner that technically direct applica- of market openness in the various national European bility is feasible. In the case of access rights this is the markets. From here to a state of open and competitive case. markets is still a long way to go.

But even if all the provisions of EC Directives and EC 1 IBM Business Consulting Services in conjunction with Christian Regulations are applicable in a Member State, whether Kirchner: Rail Liberalisation Index 2002 and 2004. 298 Intereconomics, November/December 2006 FORUM

Georg Jarzembowski*

European Framework for the Internal Market in the Railway Sector

t the time when the European Community was railway companies have an autonomous management Aabout to complete the internal market by 31 De- and separate accounting from the government budget. cember 1992, the EC launched its fi rst initiatives to Furthermore the companies have to have separate ac- open up the railway sector to competition and liber- counting for the network infrastructure from account- alisation. This was not primarily caused by the wish ing for the operational services, and for the latter they to apply EC principles such as the freedom to provide have to separate accounting for passenger and for services but by the observation that the railway sec- freight services. Yet this legislation does not oblige the tor, especially freight service, was dramatically losing Member States to separate the networks and the op- more and more market share to other modes of trans- erations into different companies. port, especially road transportation. By the Council Directive 95/18/EC of 19 June 1995 At that time, and partly up to today, the railway sec- on the licensing of railway undertakings3 – amended tor has been organised at the national level.1 Typically, by the Directive 2001/13/EC of the European Parlia- the national governments were, and partly still are, the ment and of the Council of 26 February 2001 amend- owners of national railway companies that control the ing Council Directive 95/18/EC on the licensing of national railway networks and that at the same time railway undertakings4 – the European Community has run the operating services. For that reason the Mem- set refi ned common criteria for the licensing of railway ber States were, and partly still are, reluctant to ac- companies by the Member States. cept the principle of the single internal market for the By Directive 91/440/EEC and by Directive 2001/14/ railway sector. EC of the European Parliament and of the Council of Nevertheless in 1989 the European Commission 26 February 2001 on the allocation of railway infra- launched its fi rst major initiative on the development structure capacity and the levying of charges for the of the Community’s railways followed by the First Rail- use of railway infrastructure and safety certifi cation5 way Package in 1998, the Second Railway Package in the Communities’ railway companies – state-owned 2002 and the Third Railway Package in 2004. All these or private – acquired the right to obtain access to initiatives were, and are, aimed at establishing the le- the train paths of the national networks under certain gal framework for an internal market in the railway sec- conditions. This was the fi rst step to overcoming the tor and thus to revitalise this generally environmentally national train systems and to starting the European di- friendly mode of transport. In the European Parliament mension in the railway sector. the Commission has always found a competent and Furthermore, the European Community set the fi rst committed partner for establishing an internal market rules in which way the national network organisations in this sector. can charge the railway companies for their usage of This article shall explain the evolution of European the train paths. railway legislation up to now. At last the Member States were obliged to estab- European Legislation lish regulatory bodies that might be part of the national Ministries but must be independent of the national European railway legislation will fi rst be described railway companies. These authorities are the appeal according to the various subjects of the legislation. institutions, especially for complaints about the appli- The fi rst and basic Directive – the Council Directive 91/440/EEC of 29 July 1991 on the development of 1 There are no railway systems in Malta and Cyprus. the Community’s railways2 – required that the Member 2 Offi cial Journal of the European Communities or of the European States reorganise the railway companies so that the Union respectively (OJ) 1991 L 237, pp. 25-28.

3 * Member of the European Parliament for Hamburg, Germany; mem- OJ 1995 L 143, pp. 70-74. ber and speaker of the EPP-ED Group (Christian Democrats) in the 4 OJ 2001 L 75, pp. 26-28. Committee on Transport and Tourism; rapporteur of the European Parliament responsible for railway issues. 5 OJ 2001 L 75, pp. 29-46. Intereconomics, November/December 2006 299 FORUM cation of the rules on access to the networks and on port the development of the technical specifi cations the charging of the infrastructure fees. for interoperability as well as of the European railway safety standards. The development of an internal market for the rail- way sector is in reality often hindered by different na- The European Railway Agency started its work in tional standards, especially concerning locomotives Brussels and has now taken up its offi cial headquar- and rolling stocks. To overcome these different stand- ter in Valenciennes with conference facilities in Lille, ards the railway companies, the railway industries and France. the European Commission have started to defi ne com- In order to enable cross-border services without the mon technical specifi cations for interoperability (TSI). necessity of changing the engine driver, on 3 March Especially by Directive 2004/50/EC of the Euro- 2004 the European Commission submitted – within pean Parliament and of the Council of 29 April 2004 the framework of the Third Railway Package9 – a Pro- amending Council Directive 96/48/EC on the interop- posal for a Directive of the European Parliament and erability of the trans-European high-speed rail system, of the Council on the certifi cation of train crews op- and Directive 2001/16/EC of the European Parliament erating locomotives and trains on the Community’s and of the Council on the interoperability of the trans- rail network.10 On 28 September 2005 the European European conventional rail system,6 a clear system of Parliament adopted in fi rst reading its position11 calling responsibilities and objectives has been established for the extension to further train crew members and to develop technical specifi cations that will – unfortu- for some additional changes. On 18 September 2006 12 nately only in the mid and long term – allow the pro- the Council adopted its common position, prima- duction and use of, especially, common rolling stocks. rily restricting the proposal to the engine drivers. This Commission proposal is now in second reading at the In line with the different national traditions the regu- European Parliament. lations on the safety standards are also quite different, which hinders the cross-border train services. Fur- Within the framework of the Third Railway Package, thermore, the regulations were quite often set by the on 3 March 2004 the European Commission submitted national railway companies themselves. Yet today in a Proposal for a Directive of the European Parliament some countries there are already private railway com- and of the Council on International Rail Passengers’ Rights and Obligations13 that mainly set rules for the panies besides the national ones, so that there is a compensation of passengers in the case of train de- further reason to set European safety standards for all lays. On 28 September 2005 the European Parliament companies – whether they are state-owned or private adopted in fi rst reading its position14 extending the and from whichever Member State. scope of the directive to the passengers on national By Directive 2004/49/EC of the European Parliament train services. On 18 September 2006 the Council and of the Council of 29 April 2004 on safety on the adopted its common position,15 generally going back Community‘s railways, and amending Council Direc- to the Commission’s proposal – thus limiting the com- tive 95/18/EC on the licensing of railway undertakings pensation rules only to cross-border passengers. This and Directive 2001/14/EC on the allocation of railway part of the Third Railway Package is also presently in infrastructure capacity and the levying of charges for second reading in the European Parliament. the use of railway infrastructure and safety certifi cation The Opening of the National Railway Networks (Railway Safety Directive),7 the European Community has set out a system to develop common standards In order to enable railway companies – whether for the railway safety rules in the European Union. state-owned or private and from whichever Member The European Railway Agency 9 Note that the Third Railway Package also included a Commission By Regulation (EC) No 881/2004 of the European Proposal for a Regulation of the European Parliament and of the Parliament and of the Council of 29 April 2004 es- Council on compensation in cases of non-compliance with contrac- tual quality requirements for rail freight services – COM (2004) 144 tablishing a European Railway Agency (Agency Reg- – that was already rejected by the European Parliament in fi rst reading ulation)8 the European Community has set up the (T6-394/2005 of 25/10/2005 – not yet published in OJ). European Railway Agency that has been established 10 COM (2004) 142. under the authority of the European Commission. So 11 OJ 2006 C 227, pp. 464-490. far the main task of this agency is to organise and sup- 12 CSL 05893/5/2006 of 14.09.2006 – not yet published in OJ. 6 OJ 2004 L 164, pp. 114-163. 13 COM (2004) 143. 7 OJ 2004 L 164, pp. 44-113. 14 OJ 2006 C 227, pp. 490-508. 8 OJ 2004 L 164, pp. 1-43. 15 CSL 05892/1/2006 of 24.07.2006 – not yet published in OJ. 300 Intereconomics, November/December 2006 FORUM

State – to use the complete European railway network economic equilibrium of an existing public regional effi ciently it is necessary to lift all national restrictions and urban system. on the usage of the national rail network by railway The European legislation on public passenger companies from other Member States. The railway services is still regulated by the Regulation (EEC) No companies must be granted the right of access to the 1191/69 of the Council of 26 June 1969 on action by networks without any national restrictions. Member States concerning the obligations inherent in As a fi rst step the European Parliament and the the concept of a public service in transport by rail, road Council have already agreed to open the networks for and inland waterway.20 The provisions of this regula- freight services. By Directive 2004/51/EC of the Euro- tion spell out the conditions under which the Member pean Parliament and of the Council of 29 April 2004 States can grant exclusive rights to an operator – thus amending Council Directive 91/440/EEC on the de- limiting the basic EU freedom for companies to render velopment of the Community’s railways16 the Member services in that area – and allocate public funds to the States were obliged to open the networks for cross- operator for the public service obligations. border freight services by 1 January 2006 and for all Yet Regulation No 1191/69 has been under revision other freight services by 1 January 2007. This means since the year 2000. On the original Commission’s that from the year 2007 on any railway company can proposal for a Regulation of the European Parliament operate cross-border or national freight services in the and of the Council on action by Member States con- entire European Union. cerning public service requirements and the award of public service contracts in passenger transport by rail, For passenger services, on 3 March 2004 within the road and inland waterway21 the European Parliament framework of the Third Railway Package the European already adopted its position22 in fi rst reading on 14 Commission submitted a Proposal for a Directive of November 2001 but the Council did not take up this the European Parliament and of the Council amend- Commission proposal. Only after the Commission pre- ing Council Directive 91/440/EEC on the development sented a revised proposal in the year 2005 for a Regu- of the Community‘s railways17 according to which the lation of the European Parliament and of the Council national networks should under certain conditions be on public passenger transport services by rail and opened by 1 January 2010, but only for cross-border by road,23 and the European Parliament insisted that passenger services. On 28 September 2005 the Euro- it would only act on the Third Railway Package if the pean Parliament adopted in fi rst reading its position18 Council came to a common position on the regulation that calls for the opening of the networks for cross- on public passenger services, did the Council fi nally border passenger services by 1 January 2008 and for act. On 8-9 June 2006 the Council agreed on a com- all other passenger services by 1 January 2012. On 18 mon position that has yet not arrived at the European September 2006 the Council adopted its common po- Parliament. As soon as the offi cial common position is 19 sition on this proposal denying any opening for na- presented – probably in January 2007 – the European tional passenger services and proposing the opening Parliament will start its second reading on the basis for cross-border services by 1 January 2010, and even of the common position and the Commission’s 2005 that under very restrictive conditions. At present this proposal. Commission proposal is being discussed in second Failure to Implement the European Legislation reading in the European Parliament. Although in the now applicable co-decision proce- Public Passenger Services dure of the European railway legislation the Member The proposed opening of the national railway net- States decide all directives together with the European works for passenger services – as explained above Parliament, some Member States are slow to trans- – has a direct link to the European legislation on the pose the European law into their respective national public service obligations for regional and urban trans- laws. The failure to implement European law both port, since the Member States shall be authorised to within the required timeframe and, occasionally, also limit the opening if such opening would endanger the in substance might also be considered as intent to

16 OJ 2004 L 164, pp. 164-172. 20 OJ 1991 L 169, pp. 1-3. 17 COM (2004) 139. 21 COM (2000) 7. 18 OJ 2006 C 227, pp. 460-464. 22 OJ 2001 C 140, pp. 164-282. 19 CSL 05892/1/2006 of 24.07.2006 – not yet published in OJ. 23 COM (2005) 319. Intereconomics, November/December 2006 301 FORUM dodge the new European provisions and thereby to enough time to prepare themselves for more competi- prolong unfair competition positions for the national tion in the national passenger services. railway companies. New Opportunities As the guardian of the European Treaties, the Euro- The new European legislative framework – as de- pean Commission has to watch over the implemen- scribed above – presents new opportunities, espe- tation of European law by the Member States and, if cially for the traditional national railway companies, necessary, take action. In line with this responsibility to overcome the old national borders of action and on 3 May 2006 the Commission presented a report to horizons and to develop into European players. Some the European Parliament, the Council, the European companies have already used the new opportunities Economic and Social Committee and the Committee but some are still hesitating and trying instead to de- of the Regions on the implementation of the fi rst rail- fend their old territories against competition from rail- way package.24 In this report, that is presently being way companies from other Member States. reviewed in the European Parliament, the Commis- sion points out that some Member States have not As the liberalisation in the aviation sector in recent – either punctually and/or correctly – completed the years has proved, those companies that have seized implementation e.g. on the restructuring of their na- the European opportunities have become very suc- tional railway companies, on the establishing of the cessful in growth and employment. At the same time independent regulatory bodies or on the conditions new companies have emerged and added services for for infrastructure access. On the other hand, the Eu- the customers. Almost all companies in aviation have ropean Commission clearly states that in those coun- become more cost-oriented, more customer-oriented tries that have implemented the legislative steps the and more effi cient, and the fares for the customers railway sector has become more effi cient. Further- have been going down, thus also increasing the usage more on 12 October 2006 the Commission started of this mode of transport. infringement proceedings against 13 Member States In this sense I believe that especially in the long-dis- for failing to notify the transposition of two key direc- tance cross-border freight services the active railway tives of the second railway package, namely the direc- companies have great chances to gain more custom- tives on safety standards and on interoperability. The ers and more transport volume. Thereby they will also European Parliament strongly supports these actions become more competitive compared to road transport. by the Commission and also insists that the Member In that way the railway companies can also change the States complete the implementation of the First and modal split again in favour of the railway sector. Second Railway Package immediately. Need for the Reorganisation of Railway Finalising of the Legislative Framework Companies To complete the European legislative framework for In order to be able to seize the new European op- the internal market in the railway sector it is vital that portunities at least some railway companies need to the Council and the Commission accept Parliament‘s restructure their patterns of investment and employ- position that the national railway networks should also ment. They should clearly decide in which way they be opened for national passenger services. If this can- want to offer services in the freight, long-distance not be agreed on within the legislative procedure of passenger and regional passenger services in their the Third Railway Package, there would be a need for Member State and in the European Union. Those a “Fourth Railway Package” to regulate this last sub- Member States that are owners of railway companies ject of the European framework. But such a legislative will – according to the private investor principle – have project would then not come within the term of offi ce to supply their companies with the necessary capital of this Commission and this Parliament, that runs until for new investments and for the restructuring process. 2009. If they do not want to spend the taxpayers‘ money In my opinion it is not only generally time to com- they should partly or totally privatise the companies. plete the internal market in the railway sector – more Furthermore, the management and the trade unions than 14 years after the general completion of the in- should jointly shoulder their responsibilities for the ad- ternal market – but it is also very important for the rail- justment processes. way companies and the infrastructure management Finally, the railway companies have to make up their organisations in the European Union in order to have minds whether they want to achieve the necessary Eu- 24 COM (2006) 189. ropean dimension by growing on their own, by buying 302 Intereconomics, November/December 2006 FORUM up or merging with other companies and/or by estab- in the Council have been, and are, trying to slow down lishing alliances with other companies either gener- the process. In the European Parliament especially the ally or on certain European corridors. The fi rst railway Christian-Democratic EPP-ED Group and the Liberal companies have already decided which way to go. ALDE Group strongly believe that the completion of Final Remark the internal railway market is the only chance to revi- Over recent years the European Parliament has talise the railway sector and to give the railway com- acted in the forefront of establishing an internal mar- panies a last chance to regain a larger share in the ket in the railway sector whereas the Member States transport market.

Johannes Ludewig*

Market Liberalisation Alone Is Not Enough

he development of the single European market ing and fair intramodal competition. It also demon- Thas radically altered the pattern of economic pro- strates, not surprisingly, that in a number of countries duction and distribution activities between Member the implementation process is still under way. States. Opening the European freight market allows For freight transport, the benefi ts of liberalisation operators to better meet their customers’ needs. It already became evident in the last years. The report also improves the position of rail freight in its competi- clearly states that rail freight market shares have stabi- tion against trucks, which have been freely crossing lised since 2001. For the fi rst time ever, the decline of borders in Europe for nearly a decade. the share of the railways in the total market of freight However, market liberalisation alone is not enough. transport was stopped. Over thirty years, the railways The introduction of intramodal competition (i.e. com- constantly lost market shares: from 32% in Western petition within the railway mode) is an essential ingre- Europe and 51% in Central and Eastern Europe in 1970 dient for successfully revitalising the railway sector, it went down to respectively 15% and 35%. Today, the but this alone will not suffi ce. In order to achieve the market share of rail freight has stabilised and traffi cs long called-for modal shift from road transport to the are increasing again in absolute terms. In some coun- cleaner and safer rail transport, the implementation tries, rail freight market share has even increased. of two other vital policy instruments is indispensable: This encouraging development is the result of huge creating a level playing fi eld between modes through restructuring efforts of the companies. Impressive fi g- fair infrastructure pricing, and investments in new in- ures on productivity gains speak for themselves – in frastructure. some cases a productivity gain of 170% was achieved The remainder of this paper will, with a focus on in a period of ten years. The European railways know freight, clarify CER’s vision on the current evolutions that they need to go further and that more needs to be relating to intramodal competition, fair infrastructure done to improve their competitive situation – among pricing, and infrastructure investments. Given the themselves and against the competition on the roads. mainly academic audience of this Forum, I will con- While the picture is clear for freight, the future of clude this contribution with some suggestions for fu- liberalisation in the passenger sector is less so. Com- ture scientifi c research. petition in the passenger transport market follows dif- Intramodal Competition ferent and much more complicated rules. Discussions on the degree of liberalisation of the passenger mar- The recent European Commission report on the Im- ket, on passenger rights, and on train crew certifi ca- plementation of the First Railway Package1 shows that tion are currently underway,2 and some elements of signifi cant progress has been made by EU members States in creating a legal framework for market open- 1 European Commission, COM(2006) 189. 2 These three elements together make up the “Third Railway Pack- * Executive Director of the Community of European Railway and Infra- age” .The second reading of this “package” by the European Parlia- structure Companies (CER), Brussels, Belgium. ment is foreseen for January 2007. Intereconomics, November/December 2006 303 FORUM these discussions are closely related to the debate on dors make such little sense. The level of track access Public Service contracts. In addition, practice shows charges faced by rail freight operators along many in- that even before Europe is taking legislative measures, ternational corridors, particularly in Central and East- competition has already been set up in several Mem- ern Europe, means that they simply cannot compete ber States (such as Great Britain, Germany, or Swe- with road transport.5 den), sometimes already more then 10 years ago. As observed in Switzerland, a fair pricing policy can However, the most important message I want to have a radical impact on the ability of rail to compete convey with this paper is that creating the neces- with road along international corridors, as well as on sary conditions for market competition is on itself not the fi nancing of transport infrastructure. A CER study enough for revitalising the railway sector. It is CER’s from 20056 demonstrated that applying the Swiss fi rm belief that intramodal competition is an essential level road charge across Europe (EU-15) would have ingredient contributing to the development of the rail a signifi cant impact on rail freight share (an increase freight market, but it should be implemented in com- to 17%.) bination with two other vital policy instruments for fair The subject of Eurovignette will be back on the intermodal competition, i.e. fair infrastructure pricing agenda of the European institutions in 2008. The Eu- and investments in new infrastructure. ropean Commission has already started a study in Fair Transport Infrastructure Pricing: Creating a preparation of this work. This study will consider all Level Playing Field between Modes modes of transport and will establish a model for as- sessing external costs, reducing the wide range of ex- With regard to transport infrastructure pricing, es- isting cost estimations made by previous external cost tablishing fair and effi cient charges for all transport studies. modes is an absolute necessity for the success of Europe’s transport policy. In this debate, the external In passenger traffi c, initiatives to counter conges- costs of transport (costs for congestion, pollution, tion problems in urban areas seem to emerge gradu- climate change, accidents, noise, etc.) play a crucial ally. Outside Europe, the successful implementation of role. Infrastructure charges should include these ex- congestion charging in the densely populated cities of ternal costs, in order to ensure fair intermodal com- Singapore and Hong Kong (accompanied by substan- petition between road and rail, and eventually lead to tial investments in public transport) could serve as a an optimal use of Europe’s transport modes. Unfor- best practice model. A European example of “smart tunately, the principle of “getting the prices right” for charging” is the congestion charge applied in the capi- all transport modes has remained a dead letter so far. tal city of London. These examples are in line with the Prices still do not refl ect the real economic, social and recent mid-term review of the European Commission’s environmental costs of products and services. White Paper on Transport Policy which aims for a mo- dal shift, and this “especially on long distance, urban Europe should provide the framework conditions fur areas, and congested corridors”.7 such a pricing system, allowing for actions which are harmonised across the different transport modes. The Finally, given the strategic issue of “fi nding the recent revision of the Eurovignette Directive,3 which funds” for investments in new rail infrastructure, lays down common rules for on how Members States which I will discuss further on in this text, the revenues may charge heavy goods vehicles for using the road in- generated by the road charges should be used as a frastructure, can therefore clearly be seen as a missed source for cross-modal fi nancing of new railway infra- opportunity. Although this Directive allows road tolls structure. These new rail infrastructures are, together to be based on infrastructure costs (the “user pays” with the fair pricing for the use of infrastructure, a pre- principle), tolls based on external costs (the “polluter condition for unleashing the full potential of the market pays“ principle) remain forbidden. liberalisation. The modal shift from road to rail will only be possible if the previous investment policy, refl ected Conversely, the level of charges for rail infrastruc- in decades of underinvestment in rail, is reversed. ture must be based on marginal social cost, with the possibility to charge mark-ups to allow cost recovery.4 5 Charges per train kilometer can be 5 or 6 times higher in these coun- Against such a confused legislative framework, it is tries. See the European Commission report on the Implementation of perhaps not surprising that, in practice, infrastruc- the First Railway Package, COM(2006) 189. ture charges along many international freight corri- 6 The Future of the European Rail Freight Market, McKinsey study, 2005, www.cer.be. 3 Directive 2006/38/EC. 7 European Commission, COM(2006) 314, Mid-term review of the 4 First Railway Package, Directive 2001/14/EC. White Paper on Transport Policy, “Keep Europe Moving”. 304 Intereconomics, November/December 2006 FORUM

Creating the Necessary Infrastructure These Coordinators10 were nominated in the summer of 2005 by the European Union. These high-profi le in- Today, the fi nancing of rail infrastructure is under dividuals can help to generate political support from threat. Public budgets in all Member States are more the relevant national Ministers. Indeed, there is even a and more solicited by increasing political demands case for a permanent management structure to steer notably on welfare (pension, healthcare, housing, se- the development of each corridor. The organisation curity, education, etc); these new demands limit the models for the ERTMS corridors Rotterdam-Genoa public funds available for investments in transport in- and Antwerp-Basel- Lyon, agreed upon in the Letters frastructure.8 of Intent signed by the transport Ministers, create im- The European Union can help to coordinate Member portant and highly visible precedents. States’ investments decisions. The fi rst important step Nevertheless, the estimated funding requirements was a discussion in the early 1990s on developing a raised by all Coordinator activity reports once more commonly defi ned Trans-European Transport Network raise the question of infrastructure fi nancing. The (TEN-T). In particular, the European Commission was aforementioned “user pays” and “polluter pays” tolls, given specifi c resources to provide fi nancial incentives and the reuse of these tolling revenues for investing in for the development of the network. Fourteen priority the rail infrastructure, remain the crucial instruments in projects were approved in 1994 (the so-called “Essen solving the infrastructure funding issue. list”). The aim was to complete them by 2010. Also, starting from the message in the Commis- By 2003, it was clear that only three of the projects sion’s 2001 White Paper on Transport Policy which an- had been completed and the remainder had little or no nounced the concept of a Dedicated Freight Network chance of being completed on time. Hence in 2004, with railway lines dedicated to freight trains, CER de- a second attempt was made. The European Union, veloped with its members the more pragmatic concept now also facing the prospect of eastern enlargement, of a “Primary European Rail Freight Network”. The extended the list of priority projects to 30, with 22 of “Primary European Rail Freight Network” (PERFN) is these projects related to rail.9 The date for completion a network made partly of dedicated lines and partly of of these projects was revised to 2020, even for the mixed traffi c lines providing suffi cient capacity to ac- original Essen projects. commodate the future demand for rail freight services. However, the recent reduction in the European The idea here is to identify infrastructure investments budget for 2007-2013 has led to a substantial cut- targeted in such a way that rail freight productivity back in the TEN-T budget, in favour of other short term can be boosted. The question whether infrastructure budget commitments. The TEN-T budget of € 20.35 investing should be targeted for longer, heavier, or billion (in 2004) was cut by two thirds to € 7.2 billion. higher trains can only be solved by looking at the mar- It is clear that, given this budget reduction, the Euro- ket demands. Current market trends indicate that light pean Commission cannot fund all 30 priority projects. goods will take an increasing share in the European Rather, it is inevitable that hard choices have to be transport mix and CER believes that this will plead for made between TEN-T projects, either explicitly or im- the development of a rail infrastructure destined to ac- plicitly. It is likely that European funding will be focused commodate longer trains. to an even greater extent on cross-border sections of To have a precise view on the market needs and the projects that Member States on both sides are pre- subsequent targeted infrastructure investments, CER pared to fi nance. The challenge for the rail sector and intends to carry out several corridors studies in 2007. for the Commission is to convince the relevant Mem- The aim of these studies is to defi ne for each major ber States to make fi rm fi nancial commitments. freight corridor which infrastructure investments will That is why CER particulary welcomes a recent allow the future Primary European Rail Freight Net- positive evolution in this area. The fi rst annual activ- work (PERFN) to divert more road traffi c and absorb ity report by the six high level European Coordinators future transport growth. on the progress of fi ve TEN-T corridors and the im- Suggestions for Academic Research plementation of the European Rail Traffi c Management System (ERTMS), clearly shows a positive evolution. I would like to conclude this paper with some ideas for future academic research. Researchers should 8 The Member States, which invested on average 1.5% of the Gross urge policymakers to provide more tailored statistics Domestic Product in transport infrastructure during the 1980s, now for analysing market developments and productiv- invest less than 1% (cf. the Report by the High-Level Group on the TEN-T network, chaired by Karel Van Miert, 2003). 10 Pavel Telicka, Péter Balász, Etienne Davignon, Loyola de Palacio, 9 Decision 884/2204. Karel Van Miert, Karel Vinck. Intereconomics, November/December 2006 305 FORUM ity improvements. The availability of “more and bet- els that developed across Europe, for more then 10 ter data” could open up the path for a wide range of years. Some recent empirical research papers (e.g. socially relevant research projects. A fi rst important Friebel et al13, Growitsch and Wetzel14) have already example is the need for more disaggregated data on investigated this issue, but this area remains severely the market development of freight traffi c. As railways underresearched, and more data and analyses would are primarily competing with the road transports over be more than welcome. For other examples of studies longer distances, statistical monitoring of market de- examining the organisation models, I refer to the CER velopments should be possible for the segment of book “Reforming Europe’s railways: an assessment of intercity statistics.11 Currently all distance classes for progress” (Eurailpress, Hamburg 2005). rail freight transport are aggregated into one over- Summary all statistic, which leads to a biased view on market shares and modal shifts. A second important shortage Since the liberalisation of European rail freight, the of data (and research) is on the levels of investment market share of rail freight has stabilised and traffi cs in road and rail infrastructure, and the impact of these are increasing again. However, European transport levels on the modal split. Here, more detailed cross- policy needs more measures than market liberalisation sectional and panel data sets are needed. alone. Fair pricing for the use of infrastructure, refl ect- ing infrastructure costs as well as external costs, has Also, as political fear for negative public perception to be implemented for all modes of transport. Moreo- is clearly one of the main obstacles for introducing new ver, to fully unleash the benefi ts of market opening, road pricing schemes, I plead for more research on the the necessary infrastructure has to be put in place. evolving attitudes of citizens towards these charges. Although the recent pragmatic approaches introduced A recent survey by the University of Dresden already by the six European Coordinators make CER cau- provides some evidence on the positive changes in tiously optimistic for future developments in this area, public perception on road charges, once the charging the crucial issue of fi nancing these new infrastruc- system is decided or is likely to happen, and citizens tures remains mainly unsolved. European policymak- can no longer avoid it.12 ers should address the issues mentioned in this paper As a fi nal example, I would like to mention research without further delay, and move forward in creating a on the effi ciency of the different organisation mod- truly competitive market for rail transport.

11 In the USA, for instance, the much-quoted 40% share of rail in the 13 G. Friebel, M. Ivaldi, C. Vibes: Railway (de) regulation: a Euro- freight market refers to the so-called “intercity market” (that is, over pean effi ciency comparison, IDEI report no. 3 on passenger rail trans- long distances). port, University of Toulouse 2003. 12 See Transport & Environment Bulletin, September 2006, and J. 14 Ch. Gr o w itsch, H. Wetzel: Economies of Scope in European Schade: Akzeptanz von Straßenbenutzungsgebühren: Entwicklung Railways: An Effi ciency Analysis, Working Paper Series in Economics, und Überprüfung eines Modells, 2005, Pabst Science Publishers. No. 29, University of Lüneburg 2006.

Werner Rothengatter*

Issues of Interoperability in the European Railway System

uropean trucks and passenger cars are moving within a country, safety regulation is different and often Ewithout stops at the borders, they can fi ll their requires time-consuming safety controls at the bor- tanks everywhere and are controlled by widely stand- ders, and organisation rules and communication lan- ardised signs, signals and regulations. In air traffi c guages vary from country to country. The main roots of there are common rules for piloting and traffi c control this heterogeneity are historical. as well as a common communication language for in- ternational understanding. In contrast to these trans- Railways: A History of Heterogeneity port modes the reality of railway systems is completely There were no standards set at the beginning of different. Technical systems such as gauges, control the railway era, neither in Britain nor in Germany. The systems or electrical power supply may change even fi rst railway lines (Stockton-Darlington in the UK 1825 and Nürnberg-Fürth 1835) were completely privately * Professor of Economics, Head of the Institute of Economic Policy Research, University of Karlsruhe, Germany. planned and designed, and the same holds for the new 306 Intereconomics, November/December 2006 FORUM lines added until the middle of the nineteenth century of Justice in 1985, which implied that the transport when some of the private railway undertakings went sector could no longer be protected by the state in the bankrupt and the states came in. Unfortunately, state EU member countries. The liberalisation process was involvement did not lead to a standardisation, on the completed in 1998 by granting cabotage (transport contrary: every state planned only for its own territory services of foreign companies in domestic areas) to and because of the hostile relationships between vari- the road haulage companies of the European Union. In ous countries different technologies were consciously reality the road haulage companies and the forwarders installed to prevent a neighbouring country from using had already begun this process years in advance and the domestic rail network for its military forces. The re- won big market shares through better logistic quality sult was a fragmentation of the European railway sys- at lower prices, in particular on the rapidly growing tem according to national fl ags. international transport market. At the same time the National fl ags were naturally bound to the domestic railways stagnated, lost market shares and increased railway industry. In general the components of infra- their defi cits as well as the corresponding subsidies structure and rolling stock were designed by national provided by the state. central offi ces for railway technology in detail accord- Even after 1995, when railway reforms had been ing to the country-specifi c requirements and con- started and policy was taking action to stop the vi- structed by the industry according to plan. This was certain business for the suppliers, who had no prob- cious circle, the railways lost market shares: in freight lem with quality and price competition and made safe they dropped from 19.6 to 16.4% (without coastal profi ts under the state-controlled regime. But the price shipping) and in passenger transport they declined for this convenience was high. Technical incompatibil- from 6.3 to 5.9%, and were even bypassed by the rap- ity and different regulations forced the railway under- idly upcoming air transport which gained more than takings to change engines and crews at every border, 7.5%.2 Despite this dramatic market decline of railway incurring time losses, higher operation costs, poor use development the European Union tried to revitalise the of capacities and considerable over-manning.1 Fur- railways because it was found that the railways could thermore, the advantage of higher production scales again become the backbone of European transport could not be used, so that railway technology became under the condition that they became competitive. extremely expensive. A series of Directives were decided, beginning with When the railways were the superior mode of trans- Directive 1990/41, and in 2001 the White Paper on a port, being much faster than the horse cab and capable common transport policy, entitled “Time to Decide” of serving a wider area than a ship on inland water- was published by the Commission, which included a ways, there was little economic pressure for change. number of measures in favour of the railways, includ- But when competition by road vehicles began the rail- ing infrastructure, liberalisation and re-regulation. The ways lost market shares and the state budgets lost the major policy actions following the White Paper were profi ts from the state railway monopolies, which were the revision of the Trans-European Networks (with their former cash cows. The fi rst reaction of the states a focus on rail investments), the rail re-organisation, towards this threat was to introduce a rigid regulation capacity allocation, track pricing rules, interoperabil- for the trucking industry, which happened between the ity issues, European locomotive driver’s licenses and late 1920s and the early 1930s. After World War II the improvements of customers’ rights. The aspect of en- market situation of the railways got even worse and vironmental friendliness might be considered at a later the states reacted by paying high subsidies to the rail- stage of developing the Directive 1999/62 for motor- way companies. These subsidies were argued to be way tolling, after the European Parliament had taken necessary because of the accessibility benefi ts and strong initiatives in this direction in the last phase of the lower external costs produced by railway serv- revising this Directive in early 2006. ices compared to other transport modes. But despite heavy subsidisation the railway lost market shares at a The aspect of interoperability seems, at a fi rst dramatic speed. The last shock came after the market glance, to be a technical side-topic of the common liberalisation for the competing road freight transport, railway development. A closer look at railway tech- beginning with the judgement by the European Court nology and the associated rules of control and man- agement will reveal, however, that interoperability is a 1 Over-manning through ineffi cient operation planning is indicated most important cornerstone on the way to revitalising by a fi gure which was published in the Commission’s White Paper of 2001: while driving time for truck drivers is harmonised at a maximum 2 The European fi gures for passenger transport are given until the year of 48 hours per week the train drivers of main railway undertakings 2003. See European Statistical Pocket Book for Energy and Transport, were actually driving between 22 and 30 hours per week. 2005. Intereconomics, November/December 2006 307 FORUM the European railways, so that it is worthwhile to focus • a regulation of the rights and obligations for passen- on this issue. gers in international rail traffi c Cornerstones of European Railway Policy • a regulation on rail freight quality The relevant European legislation is documented • a Directive for train driver’s licenses. through the Directives 1990/440 and 2001/12-14. Di- Setting up a common framework for the railway rective 1990/440 initiated the common European rail- markets in the European Union comes about one dec- way policy and stated the following principles: ade after the full market liberalisation of road freight • clear separation of public and commercial parts transport, for which cabotage was granted in 1998. In • freeing the commercial companies from old publicly contrast to the road transport markets, the rail com- induced debt panies are not eager to make use of the new degrees of commercial freedom. On the contrary: there are • separating infrastructure from operation companies, a number of companies which have infl uenced the at least separate bookkeeping, accounting and bal- corresponding governments to make the process of ance sheets transposing the packages as slow as possible. • giving third parties open access to the networks in This underlines that the Commission is determined the EU. to provide a competitive level playing fi eld for rail This framework Directive was supplemented in the across the single market. The cornerstones of the po- year 2001 by Directives 2001/12-14, which specifi ed litical concept are: the steps of market opening and the associated regu- • interoperable networks lations for the companies. These Directives were the base of the so-called railway packages which were is- • harmonised regulations and licensing sued to specify the general legal framework. • harmonised slot pricing and customer rights First railway package (2001): • common organisational structure (separation of in- • specifi cation of open access, procedures in case of frastructure management) essential facilities • priority for railways. • specifi cation of regulatory requirements in case that Technical Interoperability Initiatives infrastructure and operating companies are gov- erned by a holding Today big freight companies like Railion make more than 50% of their turnover from international transport. • obligation for member states to establish fully inde- This is because bundled transport on long distances is pendent regulatory bodies with the necessary re- the natural market segment for the railways. Although sources, competences and expertise this fi gure looks rather high the railways do not by far • common principles for charging railway track use on exploit their market potential. Two examples, taken the basis of marginal costs plus mark-ups from the White Paper from 2001, shall underline the reasons. • no cross-subsidisation between freight and passen- ger services. • Louis Gallois, the former chairman of SNCF, said when addressing a meeting at the French National Second railway package (2002): Assembly on June 2000, “I think the Charleroi-Paris • creation of a European Railway Agency in Valenci- route needs fi ve driving crew members: two in Bel- ennes, France, planned for 2006 gium and three in France.” The distance is less than • opening of the market for international freight trans- 300 km, which is driven on road by one truck driver. port to the entire European rail network as of 1 Janu- • With all the various delays, the average speed of ary 2006 international rail haulage is only 18 km/hour, which • opening of the market for national freight transport is slower than an ice breaker opening up a shipping (“cabotage”) as of 1 January 2007 route through the Baltic Sea. • adoption of a Directive on railway safety. The reason for such ineffi ciencies, which can be extended to become a long list, is the lack of willing- Third railway package (2004): ness to cooperate internationally paired with the lack • a further opening of the market for international pas- of interoperability. Crossing borders is only possible senger transport by rail with rolling stock which is licensed by the countries 308 Intereconomics, November/December 2006 FORUM concerned. While the UIC3 has achieved a widely ing stock with the standardised technology. The com- common licensing of wagons (for about 80% of freight panies would hardly break even for these investments wagons) it is still a matter of years and of complex ne- in the next decades. However, a staged approach, gotiations to license a locomotive. The most tedious starting with a backbone network, on which trans-Eu- but most important negotiations on standards relate to ropean rail operations would be bundled, is expected the train control systems. About 20 different systems to be profi table for the companies subject to the an- are presently applied in the member countries, which nounced co-sponsoring of 50% by the Commission.6 are more or less incompatible with each other (some Last but not least, safety regulations play an impor- countries even have more than one system). The EU tant role for getting access to the networks. In this fi eld Commission has – together with the UIC – defi ned the the national rail companies still preserve their old tra- elements of a common standard, called ETCS (Euro- ditions and try to protect their territory by making the pean Train Control System). Three different levels are process of safety certifi cation for foreign rolling stock suggested: as long and complicated as possible. Usually a mix • level 1: conventional block control of safety and interoperability arguments are brought forward by national railway safety authorities (which • level 2: advanced block control (as applied with high in most cases are not independent of the incumbent speed technology) railway company) to refuse certifi cation. Recent rail- • level 3: fl exible control with distance sensors and au- way history is full of examples of this strategy. For tomatic distance control. instance, Austrian authorities refused certifi cation of It is the aim to implement level 2 on the main Euro- new German locomotives (old ones are certifi ed) al- pean rail axes. This would allow the application of a though technical standards in both countries are iden- common signalling system and a common education tical. The reason given was that the electronics would for engine drivers according to a European driver’s disturb signalling. The French and Belgian authorities license. Progress with achieving this goal is hamper- refused to certify the German ICE 3 for the high-speed ing because the big companies argue that they have networks because it was argued that the engines inte- already invested in control systems which have a grated in the bogies would cause air depression and performance comparable to ETCS level 2. As a con- lift the gravel alongside the tracks. The second railway sequence, they are only willing to introduce ETCS if package includes two key Directives to break these they get massive subsidisation. The EU Commission national barriers. Directive 2004/49 defi nes new rules has recently decided to co-sponsor the installation of for an accelerated procedure for safety certifi cation ETCS with a share of 50%. Furthermore, the co-spon- while Directive 2004/50 specifi es the interoperability soring of new railway projects presupposes that ETCS rules for border-crossing operations of high-speed is installed to foster migration to the standard technol- trains. The majority of member states have not ful- ogy. fi lled the obligation to transpose these Directives by 30 April 2006. Therefore, the Commission sent a rea- The European Commission and the UIC (together soned opinion in October 2006 to 13 member states with other associations) have founded the Associa- for failing to notify the Commission of the transposing 4 tion of European Interoperability (AEIF), which has of these key Directives of the second railway package prepared the ground for a package of interoperable into national legislation.7 technology including technical specifi cations for in- teroperability (TSI) for train control (ETCS), telemat- Tariff Harmonisation ics applications, freight wagons technology and noise Directive 2001/14 defi nes the rules for pricing the protection installations. It has been shown in a com- railway infrastructure. In principle prices should be set prehensive report5 that a considerable social benefi t at marginal costs while add-ups to marginal costs are would arise. Working groups of the AEIF found out, allowed. This means in practice that the tariffs may however, that costly investments are necessary to vary between the marginal infrastructure costs and full equip the complete European rail networks and roll- average costs including interest on capital invested. In case of linear marginal cost charging the revenues 3 Union International des Chemins de Fer. 4 AEIF will be wound up after the establishment of the European Rail- 6 A. Ott, A. Ricci, W. Rothengatter: Report to the AEIF Board on way Agency which will take over the associated responsibility for in- Technical Instruments to Foster Interoperability, Karlsruhe and Rome teroperability. 2004. 5 ECORYS Transport, VTT Building and Transport and SCI Verkehr: 7 The 13 member states are: Belgium, Germany, Estonia, Greece, Benefi ts of Interoperability. Study for the European Commission, Rot- Spain, France, Italy, Luxembourg, The Netherlands, Portugal, Swe- terdam 2004. den, Slovenia and the Slovak Republic. Intereconomics, November/December 2006 309 FORUM

Table 1 Comparable to other sectors competition will lead to Comparison of Track Charges and Competitive higher productivity, lower prices and better quality. The Situation US railway reform of 1980 has shown for the rail freight Country Organi- Charging Tariff Cost Number of sector that a competitive environment and a suffi cient sation Principle Recovery Operators entrepreneurial degree of freedom are more success- Ratio ful than permanent subsidisation, which was the Euro- Belgium I FC linear 20% 3 Denmark D MC linear 20% 10 pean solution. Privatised companies will fi nd the best Germany I FC linear 60% 307 adjustments to the changing market conditions – as France D* MC two part 63% 2 the US rail freight companies showed for instance by Italy I FC two part 16% 14 employing double stock container wagons and ad- Netherlands D MC linear 12% 7 Poland I FC linear 91% 32 vanced processing techniques at terminals, while they Spain* D FC linear did not focus on higher speeds, which would require Sweden D MC linear 5% 12 costly infrastructure. Switzerland I MC linear 30% 31 United Kingdom D MC two part 50% 31 It is well known that the US regime of private freight companies which own their network and allow only lit- MC: Marginal cost, possibly plus mark-ups. FC: Fully distributed costs, possibly reduced by state contributions. tle competition on the respective networks does not fi t I: Integrated company. the European market structure. The European model D: Disintegrated companies (D*: still under control of the incumbent). implies intra-modal competition on the rail networks to *: No further information available. foster productivity and innovation. This is impossible Source: P. F. Texeira, A. Lopez-Pita, M. Sanchez, P. Fer- without interoperable networks. Interoperable systems r e i r a : Heterogeneity of the Infrastructure Pricing System: A New make it possible to operate on an international corridor Barrier to Overcome on the European Railway Network, 2006, Paper submitted to the TRB Conference, Madrid 2007. with the same technology, with a harmonised control/ organisation system, and with personnel educated for are in general modest which relates to the fact that working on the whole process line. This will not only the share of marginal costs in the total costs is very lead to better capacity use on the tracks and to lower low, estimated between 5 and 10% (see the Swed- transport costs, but it will furthermore increase the reli- ish case). Combined with mark-ups or with two-part ability of the logistic chain substantially. Today and in tariffi ng the revenues grow (see the UK example). the future it is most important to provide scheduled The different ratios of cost recovery indicate that the transport services such that the world-wide produc- magnitudes and structures of rail track charges show tion process can be supplied with exactly timed de- a high variance for the member states. Table 1 gives liveries. an overview on the tariff components in some selected countries. Although the EU Commission has invested Deutsche Bahn AG has shown that the freight divi- a lot of effort in the harmonisation of tariff structures sion can be organised effi ciently by integrated trans- and magnitudes there is a very heterogeneous picture port and logistics services. The transport company in Europe. Again, one can draw the conclusion that Railion has grown more dynamically than the market in the incumbent companies are not highly interested in the last year and in 2006 a growth of about 13% is ex- coordinating their tariff structures because they follow pected, in terms of ton km. This success is mainly due different goals with tariffi ng. to the construction of a widely integrated North-South corridor from Scandinavia and the Benelux to Italy. In The high variance of tariffs hinders the interoperabil- the coming years limits to growth alongside this cor- ity of networks insofar as it creates different conditions ridor show up because of capacity bottlenecks. Imple- for infrastructure use. Information costs have to be menting the interoperability measures mentioned can invested to construct optimal routes on the European rail network – a precondition for competitiveness and help to remove the bottlenecks associated with cross- reliability in the transport market. Paired with other in- ing borders. According to recent estimates a common compatibilities the heterogeneous pricing system dis- control system would increase capacity by about 15% courages smaller operators from entering the market and compatible telematics or freight wagons would and providing special services. add to this. In the case of dedicated freight lines the progress would be even greater. The construction of Interoperability as a Pre-condition for Intra-modal rail wagons for double stock container transport would Competition be a breakthrough for capacity extension because in Intramodal competition can be regarded as a most this case technical and organisational optimisation important element of restructuring the railway sector. would coincide. 310 Intereconomics, November/December 2006 FORUM

To keep the main player busy, competitors are nec- surprising that the Commission is apparently about essary, operating with the same railway technique but to change its own paradigms in the mid-term review with a different market approach. This is presently the to the White Paper, which was issued in June 2006.8 case for the Swiss SBB and the Rail4Chem company The expectations concerning the development of the on the North-South corridor. Regarding the rapid in- railways, documented in the forecast fi gures 2000 to crease of container shipping, boosted by the new 2020 are so pessimistic (e.g. dropping of the railway mega-container liners, which in the future will serve share for freight, including coastal shipping from 11 Hamburg, Wilhelmshaven, Rotterdam or Antwerp, one to 8%; decline of passenger transport from 6 to 5%) can identify a big chance for the railways to organise that the whole strategy has to be questioned. Putting and carry out the seaport hinterland transport. It would in huge investment costs for the Transeuropean Net- be an illusion to postulate that the railway system can work, with an 80% share of railway projects, and become as interoperable as the roads in the next two investing tremendous political efforts for the continu- decades. But it is realistic to expect that the main cor- ation of the railway reform appear highly irrational if no ridors in Europe can be prepared for standardised major change of transport patterns can be achieved. technology and control systems. Therefore the Commission should remove uncertainty about the continuity of their common transport policy Future Strategy of the EU Commission of investing in the future of interoperable and competi- The Commission can foster this process by fi scal tive railway undertakings. The trends of the past have and regulation policy, as has been pointed out above. to be broken and turned to a more sustainable path of The success of this policy has been modest until now, transport development. but the fi rst positive indications can be observed in- sofar as in some countries the growth of railway traf- 8 European Commission: Keep Europe Moving – Sustainable Mobility for Our Continent. Mid-Term Review of the European Commission’s fi c is signifi cantly above average. Therefore it is most 2001 White Paper, Brussels 2006.

Gerard McCullough*

The Liberalization of European Rail Transport: An American View

t is customary for a US participant in a forum such as • First, the European system is predominantly public Ithis to begin by pointing to the differences between (i.e. government-owned), while the US system is the European and US rail systems. I would like to be- predominantly private. gin here by pointing to an important parallel. The major • Second, there is a signifi cant emphasis in Europe on rail systems in Europe and North America are both in passenger traffi c, while the current emphasis in the processes of transformation which could facilitate sig- US is mostly on freight. nifi cant increases in the roles they play on their respec- tive continents. Full realization of the transportation • Third, political authority over the European system potential of these systems will require concerted ef- is shared between the European Union and member forts by railroad system managers, users, and policy- states, while in the US political authority over the rail makers. Even this will not be enough. The fate of both system lies almost exclusively with the federal gov- railway systems is ultimately in the hands of those who ernment. decide general transportation policy. The traffi c differences between the European and European and US Rail Systems Compared US systems are worth emphasizing. In 2003 the EU-25 There are at least three major differences between railways provided 364 billion ton-kilometres of freight the European and US rail systems. service and 345 billion passenger-kilometres of pas- senger service.1 Their modal shares in these markets * Professor of Economics, National Defense University (NDU), Wash- ington, D.C., and University of Minnesota, USA. Views expressed here were 10.1% and 5.8%. In the same year, US railroads are not those of NDU or Minnesota. provided 2,341 billion ton-kilometres of freight serv- Intereconomics, November/December 2006 311 FORUM ice and 22 billion passenger-kilometres of passenger service.2 Their modal shares were 42.4% and 0.3%. I Railroads has been reduced from 38 to seven. The European railways provided nearly 16 times as much amount of rail traffi c moving under long term contracts 6 passenger service as US railroads, while US railroads has grown to almost 70%. Price fl exibility actually led provided more than six times as much freight service to a reduction in real rates on most commodities, but as European railways. concurrent cost reductions improved net railroad op- erating incomes. These grew from $1.3 billion in 1980 Transformation of the US Rail System to $4.1 billion in 2004.7 It is important not to exaggerate the role that rail- Liberalization of the European Rail System roads play in the US freight market. Long distance coal movements by rail account for a signifi cant por- In the second half of the 20th Century Europe’s tion of the ton-kilometres in North America. The US public railways also experienced a signifi cant decline Department of Transportation estimates that railroads in their major market – passenger services. This did account for ten percent of freight movements on a not precipitate an immediate fi nancial crisis, as it did tonnage basis and only three percent on a value ba- on private US railroads, but it did subject railways to sis.3 Trucks dominate the freight markets in both Eu- the same economic scrutiny that has been directed to rope and the USA, and trucks have had a signifi cant other large European network utilities. On 26 February fi nancial impact on US railroads. 2001 the European Parliament approved the First Rail Infrastructure Package, a set of three directives aimed Transformation of the US system began in 1970 at converting the rail sector into a single, unifi ed, Eu- when Congress faced a national railroad fi nancial cri- ropean market. On 14 January 2003 the EU adopted sis. The huge Penn Central Railroad, which provided a Second Rail Infrastructure Package which moved rail service to the entire Northeastern USA, declared forward the date of market implementation and added bankruptcy and threatened to halt service. The fi rst several institutional provisions. On 29 April 2004 the response was the National Rail Passenger Act which EU adopted a Third Rail Infrastructure Package which lifted the industry’s passenger obligations and estab- opened international passenger services to Europe- lished a federally-subsidized AMTRAK to operate pas- wide competition. senger trains. This was not enough. Congress then responded by authorizing a federal buyout of the Penn Though the European Union’s rail packages were Central and ordering the executive branch to develop not developed as a direct response to a fi nancial cri- a longer term solution to the persistent fi nancial crises. sis, they did mirror one basic economic assumption To the surprise of some members of Congress, who in the Staggers Rail Act. This is the idea that in freight were expecting to provide larger subsidies, President markets it is competition among profi t-seeking oper- Jimmy Carter’s Administration identifi ed the nation’s ating entities that will provide the most effi cient lev- longstanding regulatory regime as the culprit and pro- els of pricing, service and investment. The European posed regulatory liberalization as the solution.4 This proposals also adopt the idea that open access to led to the Staggers Rail Act of 1980. network infrastructure is an essential component of competitive freight service. The Staggers Rail Act re- In addition to giving railroad managers pricing free- lies on the residual regulatory authority of the Surface dom, the Staggers Rail Act facilitated the process of Transportation Board (STB), successor agency to the rail-line abandonment, streamlined the merger proc- Interstate Commerce Commission (ICC), to control ex- ess, and (for the fi rst time in US history) allowed for cesses of market power. contract rate agreements between carriers and ship- pers. It retrospect, it is these latter three provisions Relevant Aspects of the US Experience which have probably had the most effect on the in- The STB has the authority to require a private US dustry. Between 1980 and 2004 the size of the U.S railroad to provide limited access to its infrastructure rail network has been rationalized from 285,806 kilo- to a competitor, and has done so fairly often in con- metres to 194,240 kilometres.5 The number of Class nection with large mergers. Nevertheless, the majority of rail operations in the US are on and by vertically in-

1 European Union: Energy and Transport in Figures 2005, Table 3.2.2 for freight, and Table 3.3.2 for passenger. 5 Association of American Railroads: Annual Analysis of Class I Rail- 2 Ibid., Table 3.4.15 for freight, and Table 3.4.16 for passenger. roads, Line 335 Miles of Road. 3 US Department of Transportation, Bureau of Transportation Statis- 6 See Government Accountability Offi ce: Current Issues Associated tics: Freight in America 2006, Table 1, p. 7. with the Rate Relief Process, GAO/RCED-99-46, pp. 3 and 16. 4 See US Department of Transportation: A Prospectus for Change in 7 Association of American Railroads: Annual Analysis of Class I Rail- the Freight Railroad Industry, Washington, D.C., October 1978. roads, Line 5 Net Railroad Operating Income. 312 Intereconomics, November/December 2006 FORUM tegrated carriers. What relevance then does the Amer- emerge may become quite large. Vertical separation ican experience present for Europe? I would identify alone may not guarantee effective competition. fi ve possible items. • Fifth is the fact that a signifi cant portion of the eco- • First is the role that shippers played in the develop- nomic gains attributed to the Staggers Rail Act were ment and passage of the Staggers Rail Act and its at the expense of rail labor. Between 1980 and 2004 subsequent implementation. In the US, as in Europe, the average employment level on US freight railroads rail policymakers (especially economists) were sup- dropped from 458,332 to 157,699.9 The share of portive of regulatory liberalizations. Railroad manag- freight service expenses allocated to labor dropped ers were ambivalent. A group of infl uential shippers from 49% to 36%.10 It is remarkable that while the from Dupont, General Motors, General Mills, and Staggers Rail Act worked its way into law the US rail other large fi rms, organized themselves into a Com- unions remained focused on their traditional issues mittee of Railroad Shippers. This group convinced of safety and work rules. It is still diffi cult to under- Congress that their fi rms would be better off dealing stand why these unions would gradually accede to directly with the railroads than they would be using a 65% reduction in their workforce. One wonders the political mediation of the ICC. Shippers might whether this could happen in Europe. play a similar role in Europe. Relevant Aspects of European Liberalization • Second is the role that contracts have had in fa- cilitating improving the overall effi ciency of freight In recent years a number of US shipper groups have movements in the USA. A distinctive characteristic called for a reevaluation of the regulatory regime that of the demand for rail shipments is that they are usu- has emerged in the 25 years since the Staggers Rail ally justifi ed by large shipment sizes. This means that Act. In October 2006 the Government Accountability rail freight customers are often large fi rms that are Offi ce – an investigative arm of Congress – endorsed capable of well-informed, bilateral negotiations with this idea.11 Much of the focus of this reevaluation will railroads. More than half of US rail shipments are be a technical analysis by the Surface Transporta- now made under contract and rail managers claim tion Board of the stand-alone cost test which it has that contracts have exercised a downward pressure adopted as a means of evaluating rates in cases where on rates. Contracts might also be a potential key to railroads have demonstrable “market dominance”. the success of rail freight in Europe. GAO also recommended, however, that the US • Third is the degree to which US freight railroads Department of Transportation consider strategies to have merged into large, vertically integrated regional “level the playing fi eld” for all freight modes. The GAO systems. In an econometric study of US freight rail- implicitly recognizes here that the price mechanism roads Professor Marc Ivaldi of Toulouse and I found alone may not guarantee optimal outcomes in the US economies of scope between infrastructure-related freight market. In fact, there is little reason to expect 8 activities and train operations. This does not invali- that myopically regulated rail rates will lead to effi - date the requirement in Directive 2001/12/EC that cient prices, service levels and investment in a market the body which determines access not be the same characterized by interactions between rail natural mo- body that provides rail transport services. It does put nopolies and highway carriers whose infrastructure is a burden of proof, though, on those who argue a pri- subsidized. In this respect US rail policymakers could ori that infrastructure provision and train operations learn from the European Commission’s decision to must be provided by separate fi rms. adopt a quantity goal as the basis for rail policy. The • Fourth is the role that diversifi ed freight outputs play EU has adopted a goal of nearly doubling rail’s freight in accounting for the effi ciency of large US carriers. share from eight percent to 15% and passenger share In our econometric studies Ivaldi and I also found from six percent to 10% by 2010.12 Americans should signifi cant economies of scope among the various pay attention to such targets. types of freight outputs – bulk, intermodal, and gen- eral freight. This suggests that even if there is vertical 9 separation between infrastructure and operations, Association of American Railroads: Annual Analysis of Class I Rail- roads, Line 14 Average Railroad Employment. the trans-European operating companies that 10 Ibid., Lines 250 and 251 Labor Expenses, Line 260 Total Expenses. 11 Government Accountability Offi ce: Freight Railroads, GAO-07-94, October 2006. 8 M. Ivaldi, G. McCullough: Subadditivity Tests for Network Sep- aration with an Application to U.S. Railroads, CEPR Working Paper 12 European Commission: White Paper, European Transport Policy for No. 4392, Centre for Economic Policy Research, London 2005. 2010: Time to Decide, p. 26. Intereconomics, November/December 2006 313