Creating Competition in Freight Railways
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What Do We Know about the Impact of Unbundling in the Freight Railway Sector? Russell Pittman Antitrust Division, U.S. Department of Justice, and New Economic School, Moscow Presentation at the World Bank, 10 April 2007 The views expressed are not those of the U.S. Department of Justice. Options for creating freight rail competition • Motor and water (“Intermodal”). Sometimes enough. • Competition among vertically integrated railway companies versus competition among train companies over a single track. • If competition among train companies, vertical integration or separation? 2 Competition among vertically integrated railway companies • United States and Canada: mostly “parallel” competition • Argentina and Mexico (and to some degree Brazil): mostly “geographic” competition – Great success in attracting private investment, replacing subsidies with tax payments • This is a “large country” or “cross border” option. 3 The Mexican Example M anzanillo M exico City N o rtheastern railro ad N o rth-P acific railro ad Lázaro Cárdenas Southeartern railroad M ultimodal Trans-Isrhmian railroad 4 Competition among train companies: “Unbundling” • Complete vertical separation: the “default” option – Newbery, Laffont, Brussels. U.S. v. AT&T as template. – Sweden, UK, now CEE – No incentive to discriminate, but lose vertical economies • Maintain vertical integration (“third party access”): the “gradual” option – Germany, Italy, now Russia, Ukraine – Maintain vertical economies, but incentives to discriminate 5 CEE railways: following Brussels • Poland, Czech Republic, Slovak Republic, Hungary, Romania, Bulgaria: vertical separation • Creating competition? Mixed results so far. • Other SE Europe: little movement. Issues: – Small size, light densities: Is vertical separation worth the trouble? – Importance of transit traffic in future 6 CEE Countries: Some Surprising Restructuring Results Estimated Share of Private TOCs in Total Rail Freight 30 25 20 15 % of Total Ton-Km % Total of 10 5 0 Bulgaria Hungary Russia Slovakia Czech Republic Poland Romania7 Who entered the market in Poland? • CTL Logistics: largest? Began as a freight forwarder, moved into train operations. • Lotos Kolej: backward vertical integration by Refineria Gdanska. Now private customers as well. • PTKiGK Rybnik and PTKiGK Zabrze: largest? Coal railway in socialist times. • PCC Szazakowa: Sand railway in socialist times. 8 Who entered the market in Romania? • Grup Feroviar Roman: largest. Started up in 2001 specializing in oil. Oil, stone, and cement products. • Unifertrans: began in 1994 as freight forwarder and logistics company, specializing in oil. Moved into train operations around 2001. • Rompetrol Logistics: backward vertical integration by Rompetrol. Now private customers as well. • Mittal: backward vertical integration by Mittal Steel. Mostly for own account, both inputs and outputs. 9 “One more such victory and we are lost.” • Romania and Poland: Entrants have the profitable “train-load” (unit train) business. Cream skimming? • Incumbents left with less profitable “mixed trains”. • Will CFR Marfă survive? • (Source: Plutarch, Pyrrhus. After defeating the Romans at Asculum, 279 B.C.E.) 10 Access Pricing: Challenge for Both Vertical Separation and Third-Party Access • Goals: – Encourage efficient infrastructure use – Eliminate government subsidies •Unreliable • Deadweight loss – Encourage investment in infrastructure – Promote competition through non-discriminatory access • Dilemma: Can=t achieve all 4 with a single policy. •Note: Horizontal separation largely avoids this issue.11 Imperfect Options: • Marginal Cost Pricing - Encourages efficient use, but requires government subsidies • Average Cost Pricing - Eliminates subsidies, but discourages efficient use • Discriminatory Schemes (e.g. 2-part tariffs, Ramsey pricing) - May harm competition - Counter to policy goal of non-discriminatory access (obviously) In railways, large gap between MC and AC: MC usually < .25 AC for infrastructure, so a lot of money is at stake here. 12 CEE Infrastructure Access Charges for Rail freight 100 9 90 8 80 7 70 6 60 5 50 4 40 3 30 Average Freight Train Access Fee Train Average Freight 2 20 % Infrastructure of Total by Access CostsFees Paid 1 10 0 0 Czech Republic Bulgaria Romania Hungary Poland Slovakia 13 Russian railways: 3 steps to restructuring • Step 1: Split operations from government. Completed. • Step 2: Allow participation by private freight forwarders and owners of rolling stock; eliminate cross subsidies from freight to passenger operations. Incomplete. • Step 3: Create competition. There’s the rub. 14 Russian railways: creating freight competition (1) • Basic plan: Access by independent train operating companies, gradually increasing market share – Experience so far: Very small shares and discriminatory access. World’s highest access charges. • Will this lead to vertical separation? It depends on who you ask. 15 Russian railways: creating freight competition (2) • The Achilles heel of RZhD: tariff inflexibility • The cure: Daughter companies. – Transcontainer, Refservice, Russkaya Troika, “New Cargo Company”, Rail Trans Auto – Announced plans for timber hauler – These will apparently have no tariff regulation. • Removed last incentive for RZhD to support competition? 16 Russian railways: creating freight competition (3) • Alternative listed in government’s plan: competition among vertically integrated railways. • There is historical precedent. • What might such a plan look like? 17 Principal lines of Russian railway system 18 One proposal: Parallel competition between Moscow and the Trans-Siberian at Omsk 19 These lines could be extended to reach traffic at western borders. 20 Broader restructuring: Moscow-Omsk competition combined with competition to and from Moscow more generally 21 And while we’re creating utopias: Could the BAM compete with the Trans-Siberian? 22 Footnote: Russian electricity restructuring • The plan here: vertical separation • Will this create competition? – International Energy Agency (2005): Doubtful. Concentrated regional wholesale markets. – Pittman (Energy Policy, 2007): Very doubtful. Reduced flexibility in peak winter season. – Most recent developments: Doesn’t look good. Restrictions on foreign investors, interest by Gazprom, SUEK (or Gazprom + SUEK), others. 23.