LIBERALISATION AND STRUCTURAL REFORM IN THE FREIGHT TRANSPORT SECTOR IN

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

Paris

Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format This paper is part of the OECD work programme on trade and environment. Presented to the OECD Joint Session of Trade and Environment Experts, it was prepared by Dr. Werner Rothengatter, a consultant, under the supervision of Dale Andrew of the Trade Directorate. It has been made available on Internet under the responsibility of the Secretary-General of the OECD with the aim of bringing information on this subject to the attention of a wider audience.

Copyright OECD, 1997

Applications for permission to reproduce or translate all or part of this material should be made to: Head of Publications Service, OECD, 2 rue André Pascal, 75775 Paris Cedex 16, TABLE OF CONTENTS

INTRODUCTION AND EXECUTIVE SUMMARY ...... 6 Introduction ...... 6 Executive summary...... 7 1. Regulation of the European transport market: 1950-1985...... 11 1.1 Historical roots of regulations and their development in selected countries ...... 11 1.2 Issues of the Rome Treaty and their reformulation in the Maastricht Treaty...... 12 1.3 Liberalisation and harmonisation...... 13 2. The liberalisation period: 1985-1994 ...... 15 2.1 Important steps in market liberalisation...... 15 2.2 Missing elements of a harmonisation policy...... 18 2.3 Deregulation in central European countries...... 20 3. Regulation and taxation in EU countries, 1995 ...... 22 3.1 Taxation and tolling in the road sector...... 23 3.2 Regulations concerning road traffic and combined transport...... 24 3.3 Licenses and quotas in international road transport and combined transport...... 26 3.4 Environmental regulations...... 26 3.5 The EUR+3 countries, Norway and Switzerland...... 27 4. Developments in road and rail transport and modal structure ...... 30 4.1 Road transport in EUR15 ...... 30 4.2 Rail transport in EUR15...... 33 4.3 Inland waterways and pipelines in EUR15...... 35 4.4 Combined transport in EUR15 ...... 35 4.5 Developments in modal split in EUR15...... 37 4.5 EUR12 versus EUR+3, Norway and Switzerland ...... 38 4.6 Developments in the modal split in selected CEC Countries...... 39 5. Conclusions...... 41 REFERENCES...... 44 Tables

Table 1.1 Common transport policy: the key events that followed the European Court of Justice judgement (road, rail and inland waterways)...... 14 Table 2.1 Examples of changes observed in the CEC transport sector since 1989...... 21 Table 3.1 Taxation and tolling in the EU member countries, 1995...... 24 Table 3.2 Truck and combined transport regulations in EU member countries ...... 25 Table 3.3 Truck exhaust emission standards, 1988 until after 1999...... 27 Table 3.4 Austrian regulations following entry into the EU ...... 27 Table 3.5 Heavy vehicle motorway tax in Switzerland...... 29 Table 3.6 Harmonization of road freight taxation in Sweden with EU fiscal conditions (ECU per year) ...... 30 Table 4.1 Road freight , 1985-1994...... 32 Table 4.2 Road freight transport in Europe, 1985-1994...... 32 Table 4.3 Rail freight transport in Europe, 1985-1994 ...... 34 Table 4.4 Rail freight transport in Europe, 1985-1994 ...... 34 Table 4.5 Freight transport in CEC countries...... 40

Figures

Figure 4.1 Road freight and total transport in EUR15, 1970-1994 (tonne-km) ...... 31 Figure 4.2 Rail freight and total transport in EUR15, 1970-1994 ...... 33 Figure 4.3 Inland waterway and pipeline transport in EUR15, 1970-1994 (in tonne-km)...... 35 Figure 4.4 Cross-border modal split for combined transport in selected countries, (based on tonne-km)...... 36 Figure 4.5 Market shares of freight transport by mode in EUR15, 1985-1994 (tonne-km)...... 37 Figure 4.6 Road freight market shares in EUR12 and EUR+3...... 39 Figure 4.7 Market shares for road and rail in CEC countries, 1990 - 1994 (tonne km)...... 41 The author gratefully acknowledges the assistance of

Richard Deiss, EU Commission, DG VII Gunther Ellwanger, UIC, Paris Carlos Fernandes, Technical University, Lisbon Tonney Fowkes, ITS, Leeds Lars Hansson, University of Lund Marco Ponti, University of Venice Farideh Ramjerdi, TOI, Oslo Stefan Suter, ECOPLAN, Bern Katalin Tanczos, Technical University, Budapest Stefan Winkelbauer, Technical University, Jaap-Jan Wondergem, NEA, Rijswijk Introduction and Executive summary

Introduction

The objective of this paper is to analyse the extent to which structural changes in the European freight transport market have been brought about by liberalisation and structural reform on the supply side, as advocated in (EU) common policy. The former market regulation approach had little chance of survival, not being based on valid economic foundations. But the implementation of deregulation policy in the EU has been criticised as having favoured the road sector. On one hand, the liberalisation process started with road haulage which helped make this sector strong and competitive. On the other, there has been no serious attempt across the EU to harmonise the fiscal, environmental and safety regimes of all the competing sectors by setting appropriate prices and environmental/safety standards.

In the United States the deregulation process started earlier, first in the airline industry (1978), then the railway industry (1980) and road haulage (1980). In contrast to European developments, the US railway industry has improved its market position: in terms of transport volume (tonne-km) and shares of the freight transport market. To explain this discrepancy, the national European railway companies have always referred to the structural differences in the European market, such as the long distances, spatially concentrated demand and concentration on profitable transport businesses. In a European context, however, some of these “natural” discrepancies between the US and the EU freight transport market disappear, and the question arises why the volume increases in international, long distance freight associated with the European single market have not benefited railways and inland waterways.

Analysis of this question requires an in-depth look at the deregulation process and market developments in Europe. Therefore, this paper will concentrate only on freight transport by road, rail and inland waterways in an attempt to define why the European single market has not led to increased market share for railways and inland waterways. In the first section of this paper an overview is given of the historical roots of transport market regulation in Europe and the development of regulation up to 1985. Since European liberalisation policy started with a 1985 judgement of the European Court of Justice, the time period between 1985 and 1994 is examined in the second section. The third section looks at the existing regulation and taxation situation in all 15 EU member countries. It will be shown that considerable country differences exist which induce market distortions. The fourth section will focus on the development of freight transport on road, rail and inland waterways in EU countries over a period of 25 years, with special attention to the period 1985-1994. Furthermore, this paper investigates whether countries which have not been members before 1994 and did not participate in the first phase of the common market transport policy show significantly different market developments. Finally, some figures for central European countries are added which indicate similar market trends even though their railway sector started from a much stronger position than that of west European countries.

Statistical support for the analysis is organised as follows: first, a complete picture is given for all EU countries (EUR15). At the outset, it is stressed that there are still substantial differences in national statistics which could not completely be eliminated, and as such, cross country comparisons are not always meaningful. Second, separate statistics are presented for a few EU countries which provide good examples of the phenomena under study. Third, examples from non-EU member countries that show similarities are added (e.g.: Switzerland and Norway). Finally, data are given for four central European countries in transition in order to compare basic trends. Executive summary

Historically, the freight transport market in Europe has been strictly regulated. The reasons for, and the methods of, regulation have differed by sector. In the case of railways, the main reasons for regulation were monopoly control and regional development policy. In most cases, the large railway companies operating on a country-wide level were established about 130 years ago as state-owned enterprises under public law (with some restructuring after World War I). Tariffs had to be agreed by either state authorities or haulage commissions, and the companies were expected to provide universal service. Road haulage was regulated between World War I and II to control the behaviour of the firms as well as protect the railways from fierce competition. Regulation consisted of fixing tariffs (fair and reasonable, defined by either public authorities or haulage committees), and setting quantity restrictions for market entry (licenses), quality requirements (capital, reputation), working conditions (driving time) and standards for vehicles and operation (weights, measures, speeds, access). In the case of inland waterways, transport on the river has been free of charges and quantity restrictions for about 130 years. Some regulated areas in Northern France/Benelux and the eastern part of western , however, have persisted up to the present day. Although there are strong similarities in the historical development of these different regions, diverse national regulation regimes arose, incorporating complicated rules which led to further barriers to entry.

From the very beginning of common market policy in the EU, it has been clear that a common system of strict market regulations could not be the crux of a single market. On the contrary, the common market principle could only consist of a liberalised market structure that allows for an unrestricted movement of people, goods, services and capital amongst all member countries. Because member states made little progress toward this principle during the 1960s and 1970s, particularly in the transport market, the European Parliament brought legal action against the European Council, and in 1985 the European Court of Justice decided in favour of the Parliament. This initiated a period of fast and occasionally hectic liberalisation which focused on the road haulage market. Tariff regulation was abandoned completely and, in succession: market access was extended to remove quantity limitations; driving/rest time, quality regulations and technical standards were harmonised (at a low level); and partial cabotage was introduced. Although full cabotage will not be possible before 1998, road hauliers already operate under these conditions because effective control of a partially restricted market is almost impossible. Since the supply side of the market has become highly competitive within a short amount of time, firms are highly motivated to circumvent or violate the few remaining restrictive regulations (maximum weight, driving times). The degree to which these regulations are enforced rules varies so greatly between the EU countries that it encourages firms to optimise their operations (routing, manning, subcontracting) with regard to the national differences.

In the railway sector, the basic principles for market oriented development were formulated in Directive 91/440 of the EU Commission. Member states are obliged to reduce state involvement and increase the competitive power of the railway companies by reducing accumulated debt, introducing commercial financial management, substituting flat rate subsidies by contracting out public services, separating the infrastructure accounts from the operating business and providing access to the infrastructure for third parties. Apart from payments for public service and specific funding for infrastructure provision, the railways are to finance their operations without state subsidisation. To create a basis for intra-modal competition (in contrast with the way the railway supply side is organised in the United States), the Commission has taken a first step to open access to the railway infrastructure for international groups of railway companies crossing national borders and for international combined transport. Inter-operable infrastructures have been suggested as a means of removing technical barriers to entry. Although some reforms have been undertaken (in Sweden, Germany and the ), these have not increased competition in international rail transport. The main reasons are threefold. First, the supplementary directives of the Commission, which are key to defining the conditions for free access to the infrastructure and the associated railway slot pricing, will not be put in place before mid-1997. Furthermore the conditions for alliances between railway companies are still not clear, one obstacle being the Commission’s interpretation of anti-trust issues. To prepare for these supplementary directives, the Commission plans to extend the scope of access rights which had been defined too narrowly in their 91/440 directive. Second, the relationships between the designated railway companies and governments are highly complex. For example, six member countries have still not implemented the 91/440 directive. In other countries, the implementation has only led to adjustments, not structural change. Third, management of the public railways is not intrinsically interested in this kind of change because they feel more comfortable in the current heavily regulated environment rather than in a free market one. In contrast to the road sector, the structural change of the railways is still in the “top-down” phase and not a self-sustaining or accelerating “bottom-up” process. A striking example of this is the work of the EU Commission Transport Division (DG VII) to define “freight-freeways” in the European railway network and the implementation of their ideas for competitive international freight transport on selected European railway routes. As neither member countries nor the railway companies themselves showed enough motivation to determine profitable freight-freeways, a high-level group of DG VII had to be established to do this.

Transport on inland waterways was widely liberalised after the Mannheim Agreement (Mannheimer Akte) of 1868, an accord that guaranteed free shipping on the river Rhine for companies from all neighbouring countries. Barriers to competition were only set for the waterways in Northern France and the Benelux where the tour-de-rôle system of allocating freight to French/Benelux carriers was established. And there is no plan to abandon these barriers before the year 2000. As transport on Europe’s busiest waterways was not regulated, the main public interventions consisted of subsidisation and infrastructure provision. The resulting subsidy-driven business cycles of capacity extensions have led temporarily to over capacity and lower prices, indicating an unstable market. Harmonisation of transport subsidisation policy, which began with Directive 70/1107, in the EU member countries has helped slow down the use of subsidies and stabilise the market for inland waterway shipping. A main market distortion often cited by competing sectors is that the navigation industry finances only a minor share of infrastructure costs which, depending on cost accounting methods, is estimated between 10 and 15 per cent.

The present regulatory situation in most EU member countries has resulted in a widely liberalised road transport market. But little has been done to increase the competitive efficiency of the railways and only minor progress has been made to create fair market conditions through harmonised taxation, environmental/safety regulations and enforcement of social regulations. Although member countries have agreed on a range of fuel taxes by fixing the lower and upper levels, there are still great differences in the levels of diesel taxation which ranges from 0.25 ECU (, and Luxembourg) to 0.44 ECU (Italy) per litre of diesel. Vehicle taxes vary between 340 ECU () and 2 800 ECU (Austria) per year for a 40-tonne truck. In six countries, a time-based motorway toll is levied, ranging from 1 250 ECU (for an annual “EURO Vignette” road tax disc in Benelux, Denmark, Germany) to 3 700 ECU (Austria) for a 40-tonne truck. Spain, Portugal, Italy, France, Greece and Austria apply motorway tolls based on usage. Austria is the only country that levies time-based, as well as usage-based tolls on their motorways. The problem of double payment is partly solved by rebates given on toll roads. The regulation of transport operations includes driving bans on Sundays and holiday weekends and permits for combined transport activities. The enforcement of the maximum driving/minimum rest times for drivers varies widely among the EU countries. As driver costs account for 50 per cent of total operating costs, there is a high incentive to violate the regulations, even though driving time limits for truck drivers do not seem very restrictive. The environmental standards set by the EURO norms only apply to new trucks. Since 1996, the EURO II norm restricts the maximum emission values of CO (4.0 g/kWh), HC (1.1 g/kWh), NOx (7.0 g/kWh) and particulates (0.15 g/kWh). These standards are not particularly stringent. Many truck manufacturers have already announced that they are able to meet the EURO III standards which will not be introduced before 1999. This indicates that environmental policy is lagging behind the technological progress which, in turn, is not strongly influenced by the announcement of future standard settings. The performance of railways and inland waterways exceeds these environmental standards. As regards safety regulation, the gap between rail and road standards is wide. The leading principle for rail safety standards is the absolute maximum which can be achieved by technical measures and operating control. For road transport the leading principle is a relatively safe operation, i.e. it is enough that road transport improves its safety performance in terms of accidents per tonne-km year-by-year. This means that railways have to invest about ten times as much as the road hauliers to save a human life in freight transport. The difference of treatment for each transport mode with respect to environmental and safety requirements implies that, compared with the road sector, railways and inland waterways bear about eight times higher costs to avoid the deterioration of environmental and safety standards. Although this discrepancy has been well known for more than a decade, neither the EU Commission nor the Council of Ministers have done much to harmonise these conditions while liberalising the transport market.

In the 15-member EU (EUR15), road transport has grown much more rapidly (3.7 per cent a year on average between 1970 and 1994) than total freight volume which has increased at a rate comparable to that of GDP (about 2 per cent per year on average). Between 1985 and 1990, the growth of road freight transport was at its highest with a rate of 4.5 per cent. During those years, there was a rapid decrease in tariffs and an increase in adjustments to market needs (e.g. just-in-time service), indicating quick progress towards higher efficiency. In part, this development was due to the highly competitive structure on the supply side of the road haulage market, characterised by a large number of small- and medium-sized companies. Between 1970 and 1994, the railways lost 22.3 per cent of the freight market which translates into a yearly growth rate of minus1.1 per cent. From 1985 to 1990, the loss rate was as high as 3 per cent per year, a peak value for those 25 years. The volume of inland waterway transport (in tonne-km) remained almost stable between 1970 and 1994, while pipeline transport increased slightly between 1970 and 1980 before stabilising at the 1980 position. As a result, the road transport mode has profited greatly and way out of proportion from the growing transport market in Europe, while the waterway and pipeline sectors have remained stable and railways have been the big losers. At one time it was thought that combined transport was catching up and would be able to compete with road haulage on longer distances, particularly with their border crossing transport capabilities. However, although the number of border crossings of combined transport (road/rail) more than doubled between 1985 and 1994, the market share remained almost unchanged. Combined transport, however, did stop the overall decline in the rail market share which fell from 31.7 per cent to 14.9 per cent during the last 25 years. Although two changes have inflated these figures (German unification caused a rapid restructuring of the East German freight market to resemble that of West Germany and modification of the statistical reporting system led to an increase of about 20 per cent in Germany’s road figures), it is obvious that the railways were not prepared to compete successfully in the growing market. The market shares of inland waterways/pipelines dropped from 12.3/7.4 per cent to 7.7/5.6 per cent. The biggest changes occurred again in the period 1985 to 1990 when the liberalisation process had begun following the judgement of the European Court of Justice.

As Sweden, Finland and Austria (EUR+3) joined the EU at the beginning of 1994 they were not integrated in the first phase of the EC-wide liberalisation policy which began in 1985. Austria has decided not to apply this liberalisation policy, which does not include harmonisation of environmental and safety standards, on the grounds that its high share of transit traffic disturbs the local population and poses environmental problems, particularly in its ecologically sensitive Alpine regions. Austria has taken measures against any undesired impact on its environmental goals from transport market liberalisation. These include the Eco-point transit system, a quota based system of emission controls which is designed to reduce leading emission indicators by 60 per cent between 1991 and 2003. In addition, Austria has continued bilateral quotas for international transport for the coming years and applies a rigid pricing policy comprising vehicle taxes, vignette tolls for the motorways and special user-tolls for parts of the motorways such as the Brenner transit. The share of road has only increased slightly since 1985, by 2 per cent in contrast to 14 per cent in West Germany. while the railways have participated in the growing freight market and only marginally lost market share to road haulage. The situation is similar in Switzerland, partly due to the strict weight regulation for trucks-which is still set at 28 tonnes. In Sweden, road haulage traditionally had a much stronger market position compared with Austria, due partly to the weight regulation which allowed for a maximum weight combination of 60 tonnes. Sweden, however, has applied a taxation system which was more closely oriented to environmental goals. One element of this system was a tax per kilometre for trucks which was abandoned in 1993 to prepare Sweden’s entry to the EU. This change in the taxation system has lead to a reduced tax burden for truck operations of up to 3 400 ECU per year. It is believed that this reduction, together with the change of the total weight limit to 60 tonnes-in increased the truck market share in Sweden , which after a long period of stability went up by 2 per cent in 1994 and 1995.

In the central and eastern European (CEC) countries the most significant developments in freight transport have been a drop in total traffic, the expanding role of road haulage, a dramatic increase in the number of companies, faster growth of international over domestic traffic and stiffer international competition. These structural changes for road haulage followed liberalisation, one of the first industrial reforms carried out in these countries which are undergoing economic transition. In contrast to the west European countries, the CEC neighbour countries (Czech and Slovak Republics, Poland, Hungary) started railway reforms shortly after road haulage liberalisation and they have taken the EU Directive 91/440 more seriously than most of their western European neighbours. The railway market share in the CEC countries dropped from 43-65 per cent to 28-53 per cent, while the road share rose from 23-39 per cent to 37-49 per cent. Although these figures indicate a rapid structural change in the freight transport market, the difference is much less marked than in East of Germany where five years after the political change the rail freight market share fell from 72 to 29 per cent, and road haulage rose from 22 to 63 per cent. In contrast to eastern Germany, the decline in rail market share has slowed down in 1993/94 in the CEC countries or even been reversed slightly in the case of Poland. This could be interpreted as a significant deviation from the trend observed in the EU countries over the past decades. But analysis of market forces behind these structural changes indicates this would probably be a misinterpretation. The example of eastern Germany shows that economic integration in a country where there is a highly competitive road haulage sector and an inefficient public rail system will result in a liberalised but unharmonised transport market and a dramatic rise in the competitiveness of road haulage. It is more probable that the CEC countries are following the German or Dutch rather than the Austrian example. This would mean that aside from publishing ambitious green policy programmes they will tend to let the market take its course.

There is enough statistical evidence to support the hypothesis that the way the liberalisation process has been organised in the EU has had a significant impact on the freight transport market structure. The process started in 1985 with the road sector and, except for some minor changes for inland waterways it has left the railway sector basically unchanged. The opening up of the road sector to competitive forces was not accompanied by any social, environmental and safety restrictions which could have harmonised intermodal competition. Therefore, there is much to support the argument that the absence of harmonisation has accelerated the modal shift from rail and waterways to the roads. However, as it seems impossible to stabilise an inefficient public sector rail system when there is strong market competition, we cannot conclude that the more environmentally-friendly modes would have stabilised or even increased their market position if the old regulatory regime had continued. In the United States, railways became stronger once they stopped being state-controlled. Therefore, it would appear important to free the railway companies and let them develop commercially and internationally in profitable market segments. They should be allowed to form alliances through joint ventures and mergers and with private shippers, forwarders and intermodal haulage companies as well as to compete intramodally on inter-operable networks. The traditional reasons for regulating railways are no longer valid as given their small market share, there is little risk the railways will be able to form monopolies on the freight market in the near future. Railway companies will be able to make use of a harmonised market only if they become strong enough to compete and attract customers by lowering prices and offering better services. However, although the principles for such a policy have been well defined in various EU Commission Green and White Papers including (the Green Paper on Fair and Efficient Pricing in Transport, there appears little hope these will be implemented as only two Member States have expressed their willingness to support these proposals and to prepare policy measures which would allow them to be introduced.

1. Regulation of the European transport market: 1950-1985

1.1 Historical roots of regulations and their development in selected countries

In this section, historical developments in the regulation of the European transport market are briefly reviewed. Examples in the UK and Germany are contrasted, the UK having taken the lead in market liberalisation, while Germany is representative of the large number of continental countries which only started the liberalisation process in the context of the EU common transport policy.

The first railway companies in the UK and Germany were private. But it became apparent after some decades that the railway market was developing towards an unstable oligopoly and that the public goal of using the infrastructure supply as an instrument for regional development was not being achieved by the private companies. Therefore the bankruptcies of some big railway companies between 1850 and 1870 led to close public control of the railway sector. Since then the main railway companies on have been publicly owned, while in the UK the railways were private and regulated until World War II before becoming state-owned. Despite the dense network and the universal services which the railway companies had to supply under public governance, most of them operated profitably as long as there was no competition and they contributed considerably to financing the public budget.

After the end of World War II, European road freight transport expanded rapidly. Purchasing a truck and entering the road haulage industry was a chance to solve the employment problem for many people and investment capital was low as army lorries could be used to begin business. The main consequences of this development were: fierce competition and frequent bankruptcies, unreliable service, road damage, accidents and disturbance to residents and; low tariffs and crowding out of the railways.

When road haulage tended not only to replace the horse and cart for local services but also compete with the profitable railway business on long distance routes, pressure increased to introduce transport regulations. The period between 1928 and 1938 was one of heavy regulatory activity in the road transport sector in all industrialised European countries. The official reasons given for these regulations were the need to stabilise the market and control the undesired effects of free competition while the unofficial reason was to protect the railway companies from competition and preserve their ability to transfer profits to the public budget.

In Germany, regulation of the road haulage industry was formally introduced in the mid-1930s. This included a restrictive licensing system to control the numbers of lorries, tariffs and proof of professional competence for entrepreneurs. The restriction on the number of lorries favoured existing operators over new ones because of “grandfather” rights. This system did not change to any degree until the end of the 1980s. A public control agency (which after World War II was called the Bundesanstalt für den Güterverkehr) carried out controls both on the road and in-house, checking the records of the road haulage companies.

In the UK, regulation was introduced with the 1933 Road and Rail Traffic Act. Hauliers were issued with one of five types of license. Unlike in other countries, no specific control of road transport rates or prices, such as a fixed or bracket rate tariffs, was introduced. The 1968 Transport Act, meant that the UK was the first European country to liberalise the licensing system introduced in the 1930s. After ten years, the new system was reviewed and it was concluded that the system had worked successfully and should continue. Thus, no major changes in UK regulation were needed during the European process of deregulating the freight transport market.

1.2 Issues of the Rome Treaty and their reformulation in the Maastricht Treaty

Article 74 of the Rome Treaty binds member countries to follow a common transport policy and Article 75 lays down the principles of free competition, non-discrimination and free movement of goods and services across the borders of member countries. In the Maastricht Treaty, the emphasis is on the removal of discrimination arising from differential tariffs on moving freight originating in different countries (Article 79). Furthermore, all national freight transport regulations which are aimed at protecting national companies or industries are forbidden under Article 80. Border crossing charges levied on international transport have to be based on actual costs incurred and the member countries are obliged to take action to lower these costs.

Thus, European legislation for the transport sector aims at implementing the general principle of free trade and competition as well as free movement of people, capital, goods and services without any barriers or discrimination. Traditionally the has fostered market liberalisation in all sectors. In the 1960s and 1970s the member countries on the continent (the UK and Denmark joined the EU in 1973) did little to change domestic transport market conditions. The companies on the continent felt comfortable with the system of national price and quantity regulations, and, in particular with the prohibition of cabotage. The reasons for this included that:

− the incumbent firms were operating under little economic risk because of the limited access to the market;

− transaction and information costs were low because of the fixed tariff system;

− under the umbrella of the regulations there was some flexibility to compete by providing better services (e.g. transport-related services that fell outside the regulations) and circumventing the regulations by providing incomplete documentation.

The effect of this last point became obvious in Germany in 1994 when the reporting system for road hauliers was changed. While previously the firms had to report all their long distance operations to the regulatory authority (the Bundesanstalt für den Güterverkehr), this reporting system was abandoned in 1993, together with the main components of the old regulatory regime. A new statistical information system, based on surveys and statistical samples, revealed rather surprisingly an annual increase of road freight transport of more than 20 per cent. In other words, firms had not been reporting about one-fifth of the freight they had been carrying during the period covered by the old regulations.

12 In the 1960s, 1970s and early 1980s, there was little national incentive to create a single transport market with free competition. After more than two decades of such a lack of action the European Parliament lost patience in 1983 and took the European Council of Ministers to the European Court of Justice over the absence of action to implement the transport principles in the Rome treaty. On 22 May 1985 the European Court decided in favour of the European Parliament. Its judgement stated that the Treaty provisions on the formation of a single market, and the guarantee of free movement of people, goods, capital and services which would be free of discrimination and national protectionism policy, were also applicable to the transport sector despite difficulties with national regulations and the complex relationships between the states and their railway companies. Although the European Court did not fix a timetable for the completion of the single market, the member states felt obliged to set a clear deadline of 1 January 1993 at their summit meeting on 30 June 1985 in Milan.

The European Court of Justice decision meant that progress towards liberalising the transport market could no longer be delayed. Consequently, the conditions of competition among transport modes or among transport companies of different member states had to be harmonised and the role of the European railways and the relationship between them and the national governments had to be redefined before substantial liberalisation steps could be undertaken.

1.3 Liberalisation and harmonisation

The Council of Transport Ministers decided on 14 November 1985 on the following guidelines for a common transport policy (Erdmenger, 1987):

− Establishment of a free transport market without quantity restrictions by the end of 1992;

− Step-by-step adjustment of bilateral transport quotas to minimise national discrimination and extension of a common international quota;

− Reduction of distortions in the transport market to promote Europe-wide competition.

The Council did not formally decide to abandon price regulation and cabotage. Price regulation was not so much a problem because the tariffs on international transport had already been liberalised. However, cabotage remained a problem with respect to national conditions on fiscal burdens, safety and environmental regulations, and enforcement. Common transport had been given the stimulus critical for overcoming the remaining barriers, although it could not maintain the pace with other sectors in every respect. For example, full cabotage will not be possible before the year 1998, and the inland waterway regulation in Northern France, and Holland (the old tour-de-rôle system) will not be abandoned before the year 2000. The following survey of important steps towards liberalisation in 1985 and 1986 shows that the basis for this policy was laid immediately after the decision of the European Court of Justice and that the steps taken afterwards were more or less administrative.

13 Table 1.1 Common transport policy: the key events that followed the European Court of Justice judgement (road, rail and inland waterways)

Date Event 1985 May 22 Judgement of the European Court of Justice June White Paper on the completion of the single market June 28/29 EU Summit in Milan; decision to complete the single market by the end of 1992 Aug. 8 Directive on facilitating control and formalities for border crossing transport Oct. 2 Directive on common international quotas for road freight transport Nov 14 Guidelines of the Council of Ministers of Transport for a free transport market Nov. 27 Directive on the conditions of access to the road freight market Dec. 20 Directive on social requirements (driving and resting times), road transport 1986 April 15 Directive on abolishing customs formalities at the borders April 22 Directive on harmonising technical supervision of road vehicles June 18 Introduction of a market survey system for road, rail and inland waterways July 24 Directive on harmonising weights and technical measures of road vehicles Nov. 13 Directive concerning access to the road freight market Dec. 10 Report on reducing distortion of competition in the road freight transport market Dec. 15/16 Ministers of Transport Council decision to increase and allocate quotas for common international road transport. 1987 March 24 Final decision (40% increase in quotas)

Steps taken after March 1987 to further liberalise the market were less spectacular but, nevertheless, some of them deserve to be mentioned:

− In January 1989 the tariff regulation for border-crossing road haulage was abandoned;

− In December 1989 the Transport Ministers Council set a first quota for cabotage in road freight transport, decided to extend these quotas year-by-year and to ask the Commission to present a proposal for a final solution by 1992;

− In 1991 the directive on the development of the railway companies was issued. This directive set up the basic principles for liberalising the railway sector.

This deregulation process was fostered by the international drive to deregulate natural monopolies. More and more countries had decided to substitute decentralised industrial structures for state monopolies and to liberalise sectors which were formerly regulated. Examples of this included the United States (Airline Deregulation Act, 1978; Staggers Act on the Deregulation of Railways, 1980; Motor Carrier Act, 1980) and Japan (Privatisation of the Japan National Railways, 1987).

Some countries such as France and Germany had reservations about the speed of market liberalisation and Germany, in particular, held that liberalisation should be accompanied by harmonisation

14 of markets. In the case of transport markets, harmonisation meant comparable fiscal treatment, social regulation, safety regulation, control of market access and enforcement of regulations. No progress was made on these issues. This was partly due to the voting mechanism within the European Council of Ministers which allowed the “transport export” countries such as the , Belgium or Denmark (allied with the UK and the “cohesion countries”, and supported by the EU Commission) to push the liberalisation process forward without considering the harmonisation requirements. Agreement on liberalisation issues required a qualified majority of votes while fiscal harmonisation required an unanimous decision. The result of this difference was that while there was steady progress towards liberalisation, the move towards fiscal and social harmonisation lagged behind. Indeed, as a result of EU regulations being agreed by the average value rule due to majority voting, social regulations (driving and resting times) became less severe than they had been before in those countries which had strict regulation of road transport.

2. The liberalisation period: 1985-1994

2.1 Important steps in market liberalisation

(a) Road sector

Many decision were taken following the initial stimulus given by the European Court of Justice in 1995. Some of the most important of these included:

− harmonisation of maximum weight (40 t) and axle loads /11.5 t); − agreement on upper and lower limits for fuel taxation; − abolishment of obligatory tariffs for national transport; − an increase in EU road haulage licenses; − easier access to the road freight transport market through an increase in the number of licenses awarded and less severe qualifications for entrepreneurs; and − agreement on extending quotas for the permission of cabotage in road freight transport, and free cabotage in the year 1998.

Although full cabotage will not be introduced before 1998, the market has anticipated this change and the regulatory authorities have ceased to strictly control the licensing regulations. This means that many of the most important impacts of liberalisation have already taken effect on the market. For example there has been a dramatic fall in freight transport tariffs. It is estimated that prices dropped between 30 and 40 per cent, although this can only be a rough estimate of the price effect of liberalisation as actual tariff levels are not reported. However, the regulatory regime has encouraged haulage firms to compete by providing supplementary services which has resulted in their carrying more goods and providing more services than have been priced and reported to the regulation authority. Balancing the price and the services effects, an estimate of a net price reduction of between 15 and 25 per cent would appear reasonable.

Under the pressure of competition, road haulage firms have adjusted well to the needs of their clients and have tried to reduce costs by adopting better logistics, lowering wages and improving load factors. In international transport, this competitive environment has led to mergers and strategic alliances

15 which try to make use of all existing wage, taxation and toll differentials, as well as differences in regulations between EU countries. Big players who are able to apply arbitrage throughout Europe have sprung up. Under the umbrella of these big enterprises with their international networks, many small road haulage companies and owner-operator firms have emerged, operating under poor social conditions and more or less dependent on powerful forwarding agents and their logistics services. From a client’s viewpoint, road transport has become cheaper and better than other forms of transport. Thus, not only is road transport participating in the growth of the transport market, but it is quickly extending its share of the market by attracting quality-of-service oriented customers who need transport for high-value consumption and investment goods.

(b) Railways

While the deregulation process in the road sector started immediately after the decision of the European Court of Justice in 1985, the first important EU Directive concerning the railways, Directive 91/440, was agreed in 1991 and implemented in 1993. This directive comprises some basic requirements for making the railway sector more competitive and market-oriented:

− relieving railways of old debt and establishing a commercially viable platform; − abolishing flat rate subsidisation and introducing service agreements for public services, including full compensations; − allowing third party access to the infrastructure and user charges; − concentrating public control on infrastructure, its interoperability and multiple use by international operators (international combined transport, multilateral agreements for rail transport on long haul international routes); − separating business accounts for infrastructure provision and work on the infrastructure; − commercial organisation of the operation businesses; and − self-financing except for infrastructure expenses.

In this directive, important elements are missing that have to be defined in future legislation. One such example is the setting of conditions for third party access to infrastructure. Obviously a slot allocation mechanism that is free of discrimination and a system of slot pricing must be established if capacity is to be allocated according to commercial principles. A second example is the limitation of railway access rights to combined transport and international groups of railway companies that belong to countries involved in international rail haulage. As a result, an individual railway enterprise cannot be licensed to develop a complete transport chain from origin to destination. From the commercial point of view, this limitation does not make sense. The Commission planned to improve Directive 91/440 before the end of 1997, 12 years after the most important steps were taken towards road haulage liberalisation. Meanwhile, a high-level group of DG VII is investigating the European rail network to define rail freight “freeways” and establish the first examples of good practice for commercial European railways.

By July 1996, only nine member states had transposed Directive 91/440 to national regulation. Five member states had partially implemented it, while one state (Greece) had not notified any national changes. Sweden, Germany and the UK have reported major structural reforms. The Swedish railway reform of 1988 has served as a prototype for structural railway reform in other European countries. These reforms include the separation of infrastructure from business operations by establishing a public agency (banverket) and a public company under private law (an SJ)); and the adoption of user charges for

16 railways, taxation and charges comparable to competing transport modes.(Rothengatter, 1991). In Germany, railway reforms started in January 1994 and include: the setting-up of a state-owned enterprise under private law (Deutsche Bahn AG,); separate organisation and business accounting for passenger transport, freight transport and infrastructure management; and the allocation of responsibility for all regional rail services to the states and their municipalities. The latter are free to open contracts with the DB AG or third suppliers, including private bus operators. In the UK, the most important elements of structural reform taken so far are: the separation of infrastructure management from operations; the possibility of licensing a large number of railway operating rail companies for a variety of regional or national services with an eye to fostering intramodal competition; and the tendering of major new international links to private bidders, such as the line from London to Folkestone.

In Austria and Switzerland some changes in the relationship between the State and railway companies have been implemented. In particular, contracts for public services are now treated individually and are compensated on a full cost basis. In Switzerland the State sets a target for the degree of infrastructure cost recovery of the Swiss railway, Schweizerischen Bundesbahnen (SBB), and revises this target annually. Although six of the EU member states have officially implemented the EU Directive, they still do not practice the principles. One such example is France where the French government and national railway company Société Nationale des Chemins de Fer (SNCF) are still looking for an appropriate structure for a reformed system. To date, there is no practical example of the Directive’s ruling on access of third parties or multinational joint ventures for freight border crossing. This is due in part to the lack of incentives for member countries and the fact that they mostly still have more or less publicly controlled railway companies. Also, international railway operators are faced with barriers to market access set in place by big players such as SNCF and DB AG. The EU itself has added to such barriers by basing anti-trust control rules on old concepts of indicators of monopoly power (restricted to the railway sector and to market segments), even though the rail markets are highly contestable. This leads to the paradox that some EU Directorate Generals (DGs) are blocking initiatives that other DGs are promoting.

(c) Inland waterways

Transport on inland waterways has been widely liberalised since the Mannheim Agreement (Mannheimer Akte) of the year 1868, an agreement that guaranteed free shipping on the river Rhine for companies from all neighbouring countries. Until 1994, cabotage prohibition existed on canals in Germany, the Netherlands and France. The tour-de-rôle system of allocating freight to French/Benelux carriers is an important barrier to competition that still exists on the waterways in Northern France/Benelux. According to this system, freight is allocated according to the order of registered notifications, and tariffs are fixed. As a consequence, price and quality competition is ruled out and there is no plan to abandon the tour-de-rôle system before the year 2000.

As transport on the busiest European waterways was not regulated, the main public interventions consisted of subsidisation and infrastructure provision. Heavy subsidisation has taken the form of tax reductions or investment aids for new vessels and premiums for the demolition of old vessels. In particular, the Netherlands and Germany have been caught in a push-and-pull competition on direct and indirect subsidies for their shipping industry, enforced by pressure on governments from domestic navigation industries. The resulting subsidy-driven business cycles of capacity extensions temporarily lead to over capacities and price drops, indicating an unstable market. Beginning with the Directive 70/1107, the harmonisation of subsidisation policy in member countries’ transport sectors has helped to calm the run on subsidisation and to stabilise the inland waterway shipping market.

17 A major market distortion which is often put forward by competing industries is the navigation industry’s coverage of only a minor share of the infrastructure costs, a share that depending on the method of cost accounting can be estimated between 10 and 15 per cent. This distortion also holds for new waterway lines, such as the Rhine-Main- canal, and the upgrade of the canal between Berlin and Magdeburg. As infrastructure costs are regarded as public, not commercial costs, politicians, backed by the shipper’s associations are lobbying heavily to extend Europe’s canal network, in projects like the construction of a new Rhine-Rhone canal. Such activities are naturally counterproductive to the Commission’s overall goal of establishing a free transport market in which all agents are responsible for the full costs of service, including infrastructure and external costs.

2.2 Missing elements of a harmonisation policy

While the idea of liberalisation had a strong foundation and appropriate political framework in which it could develop, this does not hold for harmonisation policy. In the following, the most important elements of a harmonisation policy are described and the existing situation is briefly commented on.

Taxation policy: Member countries apply very different systems of taxation and tolling. Although a range has been fixed for fuel tax rates with lower and upper levels, the differences are still high enough to encourage fuel arbitrage and to fill-up tanks (up to 600 l) in low-tax countries. The percentage difference between the lowest diesel tax countries (Luxembourg, Greece, Spain) and the highest (Italy) is 76 per cent, based on the lower value. However, the immediate concern for road haulage companies is of course the immediate difference in fuel prices between border countries. Diesel is taxed less than petrol in most countries which are historically motivated by the objective to keep the tax burden low for commercial transport. (Kerosene for air traffic is not taxed at all and international air traffic is free of value-added taxes). Environment-oriented taxation such as the kilometre-tax for trucks in Sweden has been abolished following the entry of Sweden into the EU. Sweden and Germany apply an ecologically- based vehicle tax for trucks. The ecological vehicle taxation system for cars planned in Germany -- based on noise and air pollution levels of the vehicle types and including a bonus for achieving the EURO IV standards -- has been delayed following the intervention of the European Commission and is expected to be introduced in April 1997.

Tolls and user charges: Six member countries apply toll systems on their motorways. Four countries which do not have such tolls have agreed to charge trucks of over 12 t with a vignette (or road tax disc) for the length of time of use (minimum 1 day/maximum 1 year). Sweden has announced it will follow this EURO vignette system as from spring 1997. Austria has decided to introduce a vignette for traffic using its motorway network, starting in January 1997 (in addition to tolls on parts of the motorways). Also, non-EU countries such as Switzerland apply a vignette system on their motorways and Hungary is expected to follow the Austrian example (tolls on selected motorway sections plus a general vignette). The incentives to road hauliers generated by tolls or vignettes are totally different. While a vignette is a fixed-charge cost which is paid once and encourages the user to maximise the road use after having paid the charge, a toll is a variable-cost component which is taken into account for every planned trip. As Austria also levies high tolls for international transit links (in particular for the Brenner Alpine transit of between 120 and 190 ECU per heavy vehicle), other EU countries are exerting heavy pressure on the country to reduce the burdens on international trucking.

Road freight regulation: There are driving bans imposed on trucks on Sundays and holiday weekends in six EU countries although exemptions are made for transport of fresh and frozen food. The EU adopted a common regulation of maximum driving and minimum resting times for truck drivers (Directive 3820/85). The maximum driving time set by this directive is nine hours per day and it can be

18 extended on two days per week to 10 hours per day. Total driving time in a two week period should not exceed 90 hours. After driving 4.5 hours, a rest of 45 minutes is obligatory. The minimum resting time for a 24-hour day is 11 hours. A rest time of at least 45 hours per week (e.g. at the weekend) is obligatory. Daily resting times can be spent in the cab. The speed limit for trucks is set at 80 km/h on motorways. This maximum speed can be exceeded by 5 km/h and automatic on-board speed control can be extended to this limit. The regulation of market entry has been reduced to some qualitative requirements (qualification, reputation, minimum capital) which are not particularly restrictive. As the quotas for licenses were extended considerably after 1985, there is almost no restriction on a firm to enter, or for an incumbent to extend, business. The length, width, gross mass and axle loads for trucks are standardised for international transport, while they vary widely among the countries for national transport. This is relevant for cabotage operations.

Railway regulation: The “social regulations” do not differ very much from the rules in the railway sector. The main difference is that there are strong incentives in the road haulage business to go to the minimum standards or to violate these standards if controls are not strict, while in the railway sector the rules of the public labour market govern practical implementation. This means that in the public domain the social regulations are at least fully respected. Railway operations on the network are governed by laws which, for the most part, have a long history and reflect the traditional way of operating. For instance speed limits have to be observed on links with level crossings. Standardisation of railway technology has progressed through the activities of the Union Internationale des Chemins de Fer (UIC), although major components are still not standardised (gauges, electrical power supply system, automatic coupling of cars, etc.). Internal company rules tend to tighten-up the restrictions imposed by legislation.

Environmental policy in transport: Environmental policy has made some progress in setting technical standards and target values for noise and pollutant emissions. The EURO II and EURO III norms however are not particularly challenging for the industry and do not require major changes in technology that would lead to considerable cost increases. The fact that most truck manufacturers are already able to supply EURO III vehicles underlines that the industry feels comfortable with this requirement. EURO IV will generate more stringent constraints on propulsion technology, but firms have more than sufficient time to adjust (until 2002). No action has been taken to provide the basis for a common internalisation policy for environmental externalities. The Commission’s Green Paper of December 1995 on Fair and Efficient Pricing in the Transport Sector will not generate any progress as it implicitly regards the problem of congestion to be much more important than the problem of environmental externalities. In the past and at present, European environmental policy has not been oriented to long-term sustainability goals, nor has it taken the form of a price/regulation policy driven by agreed goals.

Road and rail safety regulations: Safety regulations have been developed independently for road and rail. Rail safety regulations are based on the principle of absolute safety which means that the probability of an accident occurring is minimised. In addition, rail cars have to meet high standards in the case of a crash. These standards are extremely restrictive and hamper the railway industry’s development of low cost vehicles. In part they are even counter-productive with respect to passenger safety. For instance the requirements for weight and stability of rail locomotives and cars imply that in the case of a crash the vehicles remain intact at the cost of injuries to passengers. The differences in safety requirements between road and rail are reflected in the external cost of accidents. Roughly speaking, the cost of a person killed on the railway system is about 10 times the cost of a person killed on the roads. No attempt has been made to harmonise this discrepancy in safety requirements.

In light of this lack of harmonisation one can conclude that conditions in the freight market are still very heterogeneous, providing various incentives for road haulage to apply tax and external cost

19 arbitrage by choosing an appropriate location for a company’s base, suitable routes, the points for filling fuel tanks and the subcontractors for long haul trips. Obviously, environment-friendly modes of freight transport cannot make use of this advantage, because it does not pay in market terms.

In the Appendix further examples are given to show the complexity of the European freight transport market due to the different institutions, taxation/tolling principles and regulations.

2.3 Deregulation in central European countries

Until 1989, the transport markets in the central and states were governed by a rigid regime of central planning, including five year plans and large scale public ownership of the freight transport companies. Companies in the transport sector were focusing more on fulfilling the plans than profitability, and the whole sector was distorted by pervasive production, price and trade controls which in turn severely disrupted input and output prices and divorced resource use from resource costs (Tanczos, 1996). The absence of significant private sector activities inhibited the emergence of entrepreneurs and individual initiatives and market trends did not reflect the economic performance of the transport enterprises. In particular, the high market shares held by railways were a result of public planning and design rather than the economic efficiency of the railway companies. Figures for rail indicated high productivity in terms of tonne-kilometres per employee or per kilometre of tracks, and these were frequently interpreted by western European railway companies as an indication of the potential of railway transport when given sufficient public protection. The real situation, however, became apparent after the political changes.

Due to an inefficient industry structure and exchanges of goods and services, the number of tonne-km transported per $ of GDP was about five to eight times higher than in the industrialised West European countries. Because of the publicly fixed low tariff rates, there were enough incentives to maximise transport volumes, which for long distance transport were identical to maximising railway transport. Thus the railway companies showed remarkable capacity use, in terms of tonnes and trains per km of track. Allocating the value of the transported goods, however, revealed that the quantitative productivity measures had no economic underpinning.

The restructuring of the CEC economies between 1989 and 1993 was accompanied by a drastic decline in economic growth in most of these countries. The unemployment rates climbed to about 16.5 per cent in Poland and 11.5 per cent in Hungary, although it remained low in the Czech Republic. Low wages and real prices fostered trade with the EU countries resulting for Poland in 62 per cent of total exports going to the EU and 57 per cent of total imports originating in the EU. As the EU still imposes some restrictions on trade in agricultural or steel products to protect “vulnerable” EU industry in the medium term, the reorientation of trade flows is not yet complete.

The structural changes in the CEC countries’ transport sectors were mainly characterised by the following developments:

− Substitution of large state-owned enterprises in the road freight sector by small- and medium- sized enterprises (SME). In Hungary in 1993, 97 per cent of all firms in the road transport sector were SME (Burnewicz, 1996);

− Comparable to the deregulation of the road haulage market in other countries (e.g. UK), the first phase of the privatisation process was accompanied by heavy market perturbations, the private owner/operators fighting for economic survival in a shrinking market. Therefore

20 quality of service lagged behind and the production of externalities exceeded by far the comparable values in West Europe (e.g. in terms of accident rates and exhaust emissions due to use of old technology).

The railways suffered from loosing their formerly protected market status and reforms made slow progress mainly because of the social consequences of a drastic restructuring and uncertainty as how to succeed. As a “best practice” model in Europe for railway reform did not exist, the decision-making process took much more time than in the case of privatising the road haulage industry.

The types of changes observed in the CEC transport sector since 1989 are illustrated in Table 2.1.

Table 2.1 Examples of changes observed in the CEC transport sector since 1989

Types of change Field Before After

technical or all modes T1 conventional transport combined transport technology T2 standard equipment purpose-built equipment T3 dispersed traffic centralised traffic management road T4 separate services integrated services T5 conventional equipment environmentally-friendly equipment T6 ordinary roads motorways rail T7 non-electrified lines electrified lines T8 traditional services high speed services T9 basic transport services complex services waterway T10 cargo vessel + tug more motor barges + tugs economic all modes E1 subsidised firms self-financing firms predominant E2 publicly financed infrastructure public and private finance structural all modes R1 predominant public ownership predominant private ownership R2 rail predominant stiff competition rail/other modes. R3 monopolistic markets competitive markets freight R4 heavy bulk predominant more manufactured goods R5 mainly hire or reward own-account transport passenger R6 public transport predominant private car predominant R7 rail and bus evenly balanced more transport by bus spatial all modes S1 domestic transport predominant. more international transport S2 intra-CEC traffic predominant. international CEC-EU predominant. social all modes C1 over-staffing job cuts C2 jobs in transport only jobs in ancillary businesses Source: Burnewicz, 1996

The challenges for restructuring the railways in the CEC countries can be summarised as follows (Tanczos, 1995):

− establishment of the railway as an autonomous enterprise (either state-owned or destined for privatisation);

21 − vertical separation of infrastructure and operations and the division of the latter into a number of distinct profit centres;

− privatisation of non-core activities;

− open access to third parties throughout the network;

− contractual agreement between the government and the railway to specify public service performance and specific payments;

− initiatives by the railway to reduce costs;

− differentiated solutions for network modernisation in order to improve level of service; and

− introduction of new information systems to provide better support to management decisions.

A new law for the Czech railways was passed by parliament in December 1994. This law establishes the principle of open access throughout the network and defines the role of the Rail Regulator in ruling on commercial disputes, pricing and track access. The network has been separated from operations and plans exist to franchise network services to the operation units. In Poland, the Polish State Railways, Polskie Koleje Panstwowe (PKP), has privatised the majority of its subsidiary activities. They plan to split-up the organisation into three business units and reduce the network by about one-quarter. Plans to upgrade the main line network for speeds of between 160 and 200 km/h and new operation control systems are being discussed on the basis of recent developments in telematics. The Hungarian State Railway, Magyar Állanmvasutak (MAV), is becoming an autonomous state-owned company which has been established on the base of the EU Directive 91/440. Non-core activities have been privatised or outsourced. Inside the organisation, separate departments have been established for infrastructure and for commercial activities. The relationship between the government and the railways has been defined and a significant part of the accumulated debts written off. To sum up, it appears that whereas the restructuring of the railways in the Czech Republic, Hungary and Poland started some time after the deregulation of the markets for road or air transport, these countries have nevertheless made faster progress than six EU members which have made no attempt to implement EU Directive 91/440.

3. Regulation and taxation in EU countries, 1995

The competitive situation for different transport modes is characterised by a number of parameters:

− contribution to the cost of infrastructure;

− contribution to the cost of environmental damage;

− contribution to additional social costs (police, medical care);

− regulation of individual working hours for drivers;

− regulation of operation periods and driving ban periods for vehicles;

22 − regulation of maximum outside dimensions, gross weights, and other safety features of vehicles;

− regulation of market access as an additional transport service supplier;

− regulation of driving and operating rules;

− limitation of the number of vehicles operated on certain markets, especially in border crossing and transit movements;

− vehicle and fuel taxation; and

− tolls and charges.

To a large extent, the legal framework for the transport market determines the cost level of transport operations. A further factor influencing cost is national taxation, where not only the magnitude but also the structure of taxes plays an important role. If, for instance, the vehicle tax for a truck is 2 000 ECU per year, the resulting cost amounts to 0.015 ECU/km for a truck operating on long distances with an annual mileage of 130 000 km. On the other hand, trucks operating on short distances (e.g. for combined transport), with a yearly mileage of 25 000 km, will bear a financial burden of 0.08 ECU/km. This means that an increase in vehicle taxation will tend to hit the combined transport mode more than the long distance one.

The following sections provide an overview of some relevant elements of the above list of harmonisation issues for EU countries, categorised by road, rail and inland waterways. Examples from non-EU countries are added to complete the picture.

3.1 Taxation and tolling in the road sector

Although much effort has been invested in harmonising taxation, the situation in 1995 was still very diverse. Progress had been made with the fuel tax on diesel, where the minimum is 0.25 and the maximum is 0.44 ECU per litre of diesel. This means that a truck operating on a route between a low-tax and a high-tax country can save up to 76 per cent on fuel taxes if the tanks are filled in the low-tax country. The countries applying motorway tolling have comparatively low vehicle taxes. Whether or not this financial structure represents an advantage over high vehicle taxation depends on the mileage driven on toll motorways. If motorway tolling is applied, this does not mean that international transport on roads will pay the fees in every case. In France, it has been observed that trucks partly avoid the motorways and choose the toll-free major local roads. Obviously, the benefits in terms of time savings do not make it worthwhile for all operators to prefer the secondary network to the toll roads.

The only EU country applying a taxation/tolling structure which can have some effect on road freight transport decisions is Austria. High vehicle taxes for the domestic haulage firms and yearly usage fees for all trucks operating on Austrian motorways are coupled with tolls on parts of the network (tunnels, bridges, Tauern motorway). There is still a dispute between the Austrian government and the EU Commission over the large deviation of Austrian taxation policy from the EU average. Austria provides a good example of the difficulties that arise when a country applies policies which are recommended in the Green and White Papers of the Commission. Another example is Germany, which had to fight hard to get the Commission’s agreement to introduce a vehicle tax structure differentiated according to environmental criteria.

23 Table 3.1 Taxation and tolling in the EU member countries, 1995

Country vehicle tax 40 t road usage fee 40 t motorway tolls fuel tax road vehicle. road vehicle ECU per litre ECU p.a. ECU p.a. diesel Austria 2 800 3 700 part 0.25 Belgium 1 110 1 250 none 0.30 Denmark 550 1 250 none 0.30 Finland 1 480 none none 0.30 France 860 none yes 0.33 Germany 1 490/1 700 1 250 none 0.33 Greece 340 none yes 0.26 1 000 none none 0.30 Italy 775 none yes 0.44 Luxembourg 720 1 250 none 0.25 Netherlands 1 000 1 250 none 0.32 Portugal 380 none yes 0.30 Spain 410 none yes 0.25 Sweden 1 720 none none 0.28 United Kingdom 2 110/2 300 none none 0.40 p.a.: per annum Source: UIRR, 1996

3.2 Regulations concerning road traffic and combined transport

All European countries have introduced rules to regulate truck operations in some way. The most important regulations of this type are:

− Driving bans for the operation of heavy road vehicles on Sundays, weekends, holiday weekends, or at night; − Maximum-driving and minimum-resting hours for truck drivers. Many countries applying driving bans exempt pick-up and delivery operations between the shipper and the combined transport terminal. In addition, in some countries access to a “rolling motorway” (transport of complete trucks on flat cars) is exempted from this ban.

24 Table 3.2 Truck and combined transport regulations in EU member countries

driving ban on Sundays combined transport "rolling motorway", on holiday weekends exempted from driving ban cabotage or bonus Austria yes yes yes Belgium no Denmark no Finland no France yes no no Germany yes yes yes Greece no Ireland no Italy yes no no Luxembourg no Netherlands no Portugal yes no no Spain yes no no Sweden no UK no Source: UIRR, 1996

Social regulations, which include driving time, are the most important factor for intermodal competition. Driver costs account for about 50 per cent of all road operation costs. If the transport distance exceeds approximately 600 km, the transport company has different options on how to handle the problem with respect to maximum driving hours (UIRR, 1996):

1. They can ignore the maximum-driving and minimum-resting hours rules, and go the entire distance with one driver and only minor driving interruptions. This is certainly the least costly solution.

2. They hire a second driver who continues driving after the maximum-driving time of the first driver has elapsed; the first driver may sleep during the driving period of the second driver. This type of operation will practically double the personnel expenses.

3. They can interrupt operations during the entire rest period of the driver. This will delay transport speed and decrease the vehicle fleet circulation.

4. They can arrange for a change of driver somewhere en route. But this is difficult to organise and functions only on corridors where the company operates on a frequent basis.

5. They can shift transport from road to combined transport.

If routes along European corridors cross borders before the maximum driving hours have been reached it is hard to control the rules. This holds in particular for transit routes through small countries such as Belgium, Denmark or Austria. On long distance routes to south east Europe, eastern Europe, Turkey or the Middle East, the control of social regulations is impossible. It has become common practice that only one driver is hired for a tour. The German directives for driving personnel explicitly state that it is not necessary to set rules for the second driver (Fahrpersonalrecht, 1996) as two driver truck operations are no longer practised by the companies.

25 The rail unions and the unions for combined transport complain that frequent single driver operations on international transport corridors practise uninterrupted driving for far longer than the allowed period. Indeed, this illegal practice provides road transport with a major competitive advantage vis-à-vis rail or ship.

The EU rules for driving and resting times have not been changed since 1985. It is still an unsolved political problem whether changes in these rules are for European common transport policy or whether it is the responsibility of the road hauliers associations and labour unions. With no strong country- or industry-driven initiative, the preferred strategy is to leave the situation as it is.

Control activities for checking the regulations differ throughout member countries. Although no reliable statistics are available, it seems that the controls are more strict in France, the UK, the Scandinavian countries, Germany, Switzerland and Austria than in other countries. Unfortunately, country reports are not published by the Commission.

3.3 Licenses and quotas in international road transport and combined transport

While licensing policy had been very strict in some European countries in the past, it has been relaxed in recent years, particularly for international transport. Domestic transport has also been liberalised gradually and free cabotage will be possible starting from 1998. As this development has already been anticipated by the road haulage industry and control of existing quantity regulations is very weak, this type of restriction is diminishing in importance.

European countries, however, will continue to apply licensing policies on operations between EU and non-EU member states. Some countries, including Switzerland and Austria, foster combined transport through certain types of licensing agreements. Austria has always kept the number of licenses, especially for road transit through its territory, very low. Additionally, Austria also seeks to encourage the use of environmental friendly modes of transport, such as combined transport, in the bilateral road transport agreements with its Central and Eastern European neighbours. Therefore, many of these agreements contain a provision which enables transport operators to get additional licences if they make use of the “rolling roads” in Austria.

3.4 Environmental regulations

Environmental standards for trucking are set by the EU directives. Table 3.3 overleaf shows the development of exhaust emission standards for trucks from 1988 to 1999.

26 Table 3.3 Truck exhaust emission standards, 1988 until after 1999

Trucks EEC Directive EEC Dir. 91/542 EEC Dir. 91/542 German Proposal 88/77 EURO 1 EURO 2 EURO 3 from 1988 from 1992/93 from 1995/6 from 1999 CO 12.3 g/kWh 4.90 g/kWh 4.00 g/kWh 2.0 g/kWh HC 2.6 g/kWh 1.23 g/kWh 1.10 g/kWh 0.6 g/kWh

NOx 15.8 g/kWh 9.00 g/kWh 7.00 g/kWh < 5.0 g/kWh Particulates - - - - 0.40 g/kWh 0.15 g/kWh < 0.1 g/kWh

Source: Umweltbundesamt, 1995

These standards are not particularly strict and they do not force the industry to change considerably its technology. The reductions can be achieved by improving the combustion technology for the conventional diesel engine. Some contribution can also be expected from changes in fuel technology. But it will not be necessary for the industry to foster the development of alternative propulsion technology.

3.5 The EUR+3 countries, Norway and Switzerland

Austria, Sweden and Finland joined the European Union in 1994. In the case of Austria, the negotiations concerning the agreement on transit traffic on road and rail were very difficult and their effects are still subject to varying interpretation. The situation in the Austrian transport market before and after the entry to the EU is summarised in Table 3.4.

Table 3.4 Austrian regulations following entry into the EU

Situation before: • Regulation through quotas for road freight transport, fixed by bilateral agreement, and transit treaty in effect since 1993 between the European Community and Austria aimed at reducing NOx-emissions by 60 per cent between 1991 and 2003. • No liberalisation of inland waterways.

Situation after: • Harmonisation of technical standards, measures of vehicles and social requirements. The 38 t limit for trucks still valid, but 40 t tolerated. • Transit agreement between Austria and EC incorporated into Austria’s act of accession to the European Union. • Continued: Regulation by quota of bilateral road freight transport until 1997. • Continued: Quantity regulation (maximum number of truck trips limited to 108 % of 1991 volume) • Beginning in 1997: liberalisation of bilateral transport between Austria and EU countries. During a transitory period the EU directives do not apply to Austria.

Source: Austrian MOT, 1994

Austria has tried to protect its transport market from the liberalisation shock observed in other EU countries attracting high international and transit transport flows. It has therefore included a number

27 of conditions in the agreement on transit transport which should guarantee that the country will be able to control the transport market according to environmental quality specifications. For example, until 1998, any change in the agreement can only be decided unanimously (i.e. with the vote of Austria). In January 2001 the European Commission will check, in co-operation with the European Environmental Agency (and not with the European Council) and on the basis of a scientific study, whether the environmental goals have been achieved. If this is positive, the agreement will end. Otherwise, the agreement will be continued or the European Council might decide on a new regime designed to guarantee the Austrian ecological targets are achieved. The other EU countries are obliged to prevent haulage companies from cheating on the transit regulation, including the eco-point system, after bilateral traffic is liberalised (e.g. by combining several bilateral movements).

The fact that Austria also applies a system of road tax discs or vignettes for motorways and tolls on major tunnels, bridges and the Tauern motorway together with the eco-point system leads, from the viewpoint of other EU countries, to an accumulation of unfair market barriers and resistance.

Swiss transport policy is also dominated by the issues of protecting people and the Alps from damage produced by transport, in particular by transit traffic. Since Switzerland applies a direct form of democracy which allocates the political power predominantly to the cantons and allows for a popular referendum in case of important nation-wide decisions, the principles of transport policy and their implementation are much more rigid than in other countries, including Austria. According to a referendum promoted by the "Alps Initiative" the protection of the Alps against destruction by transit traffic is an element of the Swiss constitution which says in Article 36 that:

− transit freight transport has to be carried by rail;

− within 10 years all road freight transit has to be shifted to rail; and

− the capacity of transit roads should not be extended.

The most important means to achieve these goals is the 28 t limit for trucks. Furthermore, road haulage firms have to pay for their heavy vehicles fuel taxes, low vehicle import taxes and vehicle taxes including taxes on heavy duty vehicles. The following table shows that the vignette charges are much higher than the EURO Vignette which is applied in 5 EU countries (max: 1 250 ECU). The maximum amount of heavy vehicle tax in Switzerland is 2 960 ECU. Taxes, user charges, and regulations add up to the most restrictive road haulage regime in Europe. It is planned to substitute the flat tax on heavy vehicles by a kilometre charge. For instance, a 28 t truck would have to pay 0.46 ECU per km. In the case of abandoning the 28 t weight limit and joining the EU 40 t limit, this charge would increase to 0.66 ECU per km. The tax reform is prepared on the basis of the "true costing" principle which states that traffic has to pay for all costs which it is responsible for, including infrastructure and external costs.

28 Table 3.5 Heavy vehicle motorway tax in Switzerland

Amount per year (ECU)

Trucks and articulated vehicles 3.5 - 11 t 330 11 - 16 t 990 16 - 19 t 1 320 > 19 t 1 980

Trailers 3.5 - 8 t 330 8 - 10 t 660 > 10 t 990 Source: Swiss MOT, 1996

In contrast to Austria or Switzerland, Sweden has little problem with transit transport movements. This might be why the Swedish government did not place so much emphasis on keeping all freight transport regulatory and fiscal conditions unchanged after joining the EU. While the classification of vehicle and fuel taxation according to environmental criteria was preserved, an essential element of the Swedish taxation system was removed. Prior to its accession to the EU, Sweden used a kilometre tax for trucks. An electronic odometer would keep track of the mileage driven and charges would be imposed on the basis of a registration card stamped in the vehicle’s meter. At the EU’s insistence, Sweden abandoned this tax and replaced it partially by a diesel tax. Furthermore, the government decided to apply the EURO Vignette system (introduced in Germany, Benelux and Denmark) as from spring 1997. Surprisingly, the EU Commission recently stated in its Green Paper on fair and efficient pricing in transport that a kilometre charge would have substantial advantages on both excise taxes as well as a time-based vignette system, because it can be adjusted to more closely reflect road damage and other costs (EU Commission, 1995).

The following table shows that the change in Sweden’s taxation system has brought considerable tax reductions for Swedish road hauliers. Depending on the classification of their truck/trailer combination, the road hauliers can save up to 3 400 ECU per year (estimated on the basis of average mileage). As no compensating measures have been adopted, this tax relief could have a direct impact on the development of the freight market structure in Sweden.

29 Table 3.6 Harmonisation of road freight taxation in Sweden with EU fiscal conditions (ECU per year)

Taxation Oct. 1992 Taxation Oct. 1993 Total weight Vehicle tax Km tax Other tax Vehicle tax Diesel tax Other tax Change of tax

Truck 18 t 3 309 3 283 2 249 2 647 2 321 2 606 -1 267 Trailer 12 t 464 956 360 372 371 417 -620 -1 887 Truck 18 t 3 309 3 283 2 249 2 647 2 321 2 606 -1 267 Trailer 20 t 695 1 299 600 556 619 695 -724 -1 991 Truck 18 t 3 309 3 283 2 249 2 647 2 321 2 606 -1 267 Trailer 30 t 1 543 2 835 892 1 236 920 1 034 -2 080 -3 347 Truck 24 t 3 731 3 950 3 149 2 985 3 249 3 649 -947 Trailer 12 t 464 1 147 432 372 446 500 -1 673 -2 620 Truck 24 t 3 731 3 950 3 149 2 985 3 249 3 649 -947 Trailer 18 t 1 095 2 133 648 878 668 751 -1 579 -2 526 Truck 24 t 3 731 3 950 3 149 2 985 3 284 3 649 -947 Trailer 30 t 1 543 3 401 1071 1 236 1 105 1 240 -2 430 -3 377 Source: Hansson, 1993

In Norway, the traditional regulatory control of road haulage was abandoned in the period between 1983 and 1986 (see TOI, 1994). As in Sweden, a kilometre fee graded by weight of trucks and trailers was substituted in 1993 by a combination of diesel tax and annual vehicle tax to bring the country into line with the EU and regulations in the neighbouring country. As this resulted in a considerably reduced tax burden on road haulage, the champions of rail transport complain that the adjustment to EU rules has taken place at the expense of railway transport. In contrast to most EU countries, coastal transport plays the predominant role, accounting for about 75 per cent of total freight transport (in 1988) and 85 per cent of freight transport between Norway and EUR12 (in 1991).

4. Developments in road and rail transport and modal structure

4.1 Road transport in EUR15

Road statistics in Europe are still not prepared on the basis of standardised reporting. Therefore, different sources (IRF, EUROSTAT, ECMT, UIC) report different data. The statistical office of the European Commission has tried to fill in blanks, to smooth anomalies, and recalculate data in the frequent cases of diverging definitions or differing statistical approaches. Nevertheless, it is almost impossible to apply an econometric analysis to explore the relationships between the driving factors of market change (e.g. change of transport time, cost or service quality, partly influenced by the liberalisation process) and changes in absolute or relative market indices in terms of transport volume, miles travelled or modal split.

30 But it is possible to give aggregate figures for EUR15 and to combine them with selected country statistics.

Figure 4.1 Road freight and total transport in EUR15, 1970-1994 (tonne-km)

2,5

2

AAA

AAA AAA

AAA AAA AAA

AAA Total

1,5 AAA

AAA AAA AAA

AAA Freight

AAA AAA

AAA

AAA

AAA AAA

1 AAA AAA Road Freight

0,5

0 1970 1975 1980 1985 1990 1994 year Source: EU White Paper COM (96)421 final

It is obvious that road freight transport has grown much more rapidly than total freight volume (in tonne-km) and faster than GDP, which has developed comparably to total freight volume (i.e. at an average growth rate of about 2 per cent per annum). The time periods 1975-1980 and 1985-1990 show the highest growth rates in road transport. Both periods were characterised by economic recovery after periods of decline. The upswing in road transport after 1985 however, cannot be explained by economic indicators alone. The 1975-1980 growth rate of road transport was 3.8 per cent and the 1985-1990 growth rate 4.3 per cent. As this growth rate fell in the 1990 to 1994 period to 2.4 per cent, one can conclude that the rapid steps of liberalisation which took place in the road sector immediately following the 1985 judgement of the European Court of Justice are reflected in the phenomenal increase in road freight transport.

An analysis by country supports this hypothesis. The exception is the effect of German unification which, for economic reasons, induced a rapid shift from rail to road. Instead of allocating this shift to the early 1990s it should be re-allocated to the peak growth period in road transport in 1985/1990. If one discounts the effect of German unification, which pushed up road transport in the beginning of the 1990s, the average growth rate of road transport in 1990/94 would have been considerably lower than 2.4 per cent.

31 Table 4.1 Road freight transport in Europe, 1985-1994 million tonnes 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Austria Belgium 300.8 293.9 301.0 335.1 337.4 322.6 355.2 339.0 343.1 390.2 Denmark 208.5 219.4 214.7 228.9 225.6 205.1 190.0 202.2 Finland France 1232.7 1254.0 1309.0 1486.6 1469.4 1456.7 1444.6 1378.2 1272.3 1349.9 Germany-W 1716.8 1835.9 1858.0 1988.1 2125.6 2493.6 2866.0 2903.0 2842.0 Germany-E 545.0 539.1 521.0 534.9 528.1 369.3 428.0 659.0 710.0 Greece 159.7 152.6 157.6 142.3 205.4 169.5 188.6 160.2 212.8 Ireland 91.1 94.9 87.4 82.1 83.1 81.1 79.9 83.7 Italy 327.6 888.1 911.8 923.2 944.7 924.3 Luxembourg 14.1 16.3 24.3 29.4 34.1 Netherlands 389.4 414.2 418.6 461.4 448.8 461.5 457.8 474.4 476.3 Norway Portugal 210.9 230.6 238.2 271.7 239.0 230.3 Spain 924.7 1095.5 1122.0 1221.5 987.2 700.2 688.5 576.1 614.3 Sweden UK 1411.5 1426.7 1487.6 1698.3 1751.1 1696.4 1557.3 1516.0. 1586.1 Source: EUROSTAT, 1995; DIW, 1996

Table 4.2 Road freight transport in Europe, 1985-1994 billion tonnes-km 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Austria 11 9 11.9 12.0 13.1 13.2 13.3 13.7 13.7 14.2 15.2 Belgium 22.1 23.7 25.2 28.8 30.4 32.1 34.1 34.9 34.0 35.5 Denmark 8.3 8.8 8.8 9.1 9.2 9.4 9.0 9.4 8.8 9.5 Finland 20.1 20.7 21.9 23.3 24.9 25.4 23.8 22.9 24.1 24.8 France 83.8 87.7 94.6 106.7 112.0 114.8 117.2 120.0 115.3 122.1 Germany-W 132.2 138.5 142.7 151.4 160.7 169.8 187.7 192.9 184.6 270.4 Germany-E 15.1 15.3 15.5 16.4 16.9 13.0 15.0 26.1 26.9 Greece 10.4 12.5 13.1 12.4 12.5 12.6 11.9 9.7 14.0 14.3 Ireland 4.5 5.1 5.0 5.0 5.5 5.1 5.1 5.1 5.2 5.2 Italy 144.4 150.5 157.6 164.0 167.2 177.9 182.8 184.9 179.4 187.5 Luxembourg 0.2 0.2 0.2 0.2 0.2 0.2 0.6 0.6 0.6 0.7 Netherlands 18.4 19.2 20.2 22.2 22.1 22.9 23.3 25.8 26.0 25.7 Portugal 9.4 9.0 8.6 9.4 10.5 10.9 10.8 10.9 10.0 10.0 Spain 110.5 114.0 124.6 134.9 145.0 150.0 157.2 150.6 164.2 172.3 Sweden 21.1 22.9 22.6 22.6 24.7 26.5 25.3 24.3 25.9 27.5 UK 99.1 101.1 108.6 124.8 132.1 130.6 127.2 123.6 131.4 140.6 Total EU 711.5 741.1 781.2 844.3 887.1 914.5 944.7 955.4 964.6 1061.3 Source: European Commission, DG VII, 1996

32 4.2 Rail transport in EUR15

Due to the statistical reporting scheme of the UIC, rail statistics appear much more complete, comparable and reliable than the road statistics.

Figure 4.2 Rail freight and total transport in EUR15, 1970-1994

1,8 1,6 1,4 1,2 Total 1 Freight

0,8 Rail 0,6 Freight

0,4 0,2 0 1970 1975 1980 1985 1990 1994 year Source: EU White Paper COM (96)421 final

Figure 4.2 illustrates the rapid decline of rail freight transport over the past 25 years. Railways have lost 22.3 per cent of the freight market over this period which means, on average, a negative growth rate of minus 1.1 per cent. The phase of maximum growth in road transport coincides with the phase of maximum decline in rail transport. In 1975 to 1980, the growth was minus 2 per cent and in the period between 1985 to 1990, minus 3 per cent per year. Obviously, the hypothesis that road transport has benefited from the liberalisation process after 1985 can be equally used to explain the extraordinarily large losses of the railways. Again, German unification, characterised by a rapid readjustment of the rail market share in East Germany from about 70 per cent to less than 30 per cent within 4 years, cannot be interpreted as a main reason for this development, since it came after the peak period of railway decline in Europe. But it is true that the losses of the European railways would -- on average -- look less dramatic if one would abstract from this structural effect in Germany.

33 Table 4.3 Rail freight transport in Europe, 1985-1994 million tonnes 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Austria 55.5 52.6 52.3 53.1 56.2 60.2 62.2 59.6 63.0 62.0 Belgium 72.7 63.3 64.2 66.0 66.1 67.3 64.9 63.9 58.0 63.6 Denmark 7.4 7.4 7.2 7.4 7.8 8.0 8.1 8.2 8.5 9.7 Finland 30.6 27.7 30.1 33.0 33.6 34.6 31.1 32.6 37.9 40.2 France 160.4 5.0 140.8 143.3 144.7 140.7 139.4 135.7 119.8 127.4 Germany-W 293.5 277.2 269.3 273.9 278.8 275.1 273.3 251.9 230.6 309.1 Germany-E 329.1 328.1 331.9 336.3 325.0 224.0 111.8 888.9 80.4 Greece 4.2 4.1 3.8 4.0 3.9 3.6 3.4 3.2 3.3 1.3 Ireland 3.4 3.1 3.0 3.0 3.1 3.3 3.3 3.3 3.1 3.0 Italy 48.7 51.6 54.5 52.1 55.7 59.4 61.0 59.9 58.9 67.0 Luxembourg 15.9 15.6 12.9 14.6 15.8 15.7 15.5 15.2 16.2 17.9 Netherlands 20.3 19.1 18.6 19.6 19.4 18.4 17.8 17.2 16.7 17.8 Norway 25.5 25.3 23.2 22.5 23.4 21.3 21.6 18.5 20.2 20.0 Portugal 4.7 5.3 5.7 6.0 6.2 5.9 7.0 7.4 7.2 7.1 Spain 30.1 29.4 28.7 28.5 29.4 26.5 25.3 22.4 19.2 21.3 Sweden 53.3 52.7 51.1 52.4 53.7 52.9 52.0 50.3 50.4 54.0 UK 139.7 138.4 144.5 149.5 143.1 138.1 135.8 122.4 103.3 97.4 Total EU 1295.0 1105.9 1241.8 1265.2 1265.9 1155.0 1033.5 1760.6 896.7 918.8 Source: UIC, 1996

Table 4.4 Rail freight transport in Europe, 1985-1994 billion tonnes-km 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Austria 11.3 10.7 10.6 10.7 11.3 12.2 12.3 11.6 11.2 12.4 Belgium 8.3 7.4 7.3 7.7 8.1 8.4 8.2 8.4 7.6 8.1 Denmark 1.7 1.8 1.7 1.7 1.7 1.7 1.9 1.9 1.8 2.0 Finland 8.1 7.0 7.4 7.8 8.0 8.4 7.6 7.8 9.3 9.9 France 55.1 51.0 50.6 51.5 52.4 50.7 50.6 49.5 45.0 48.8 Germany-W 62.9 59.6 58.0 58.9 61.1 61.3 62.0 55.8 51.8 70.6 Germany-E 57.6 57.9 58.1 59.4 58.1 39.8 17.8 13.7 12.5 Greece 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.5 0.5 0.3 Ireland 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Italy 16.9 17.5 18.6 17.9 18.7 19.4 19.9 19.9 18.4 20.5 Luxembourg 0.6 0.5 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.6 Netherlands 3.3 3.1 3.0 3.2 3.1 3.1 3.0 2.8 2.7 2.8 Norway 2.9 3.0 2.8 2.6 2.7 2.6 2.7 2.8 2.9 2.7 Portugal 1.2 1.3 1.5 1.6 1.6 1.5 1.7 1.8 1.7 1.6 Spain 11.4 11.1 11.2 11.4 11.2 10.7 10.0 9.0 7.6 8.6 Sweden 17.3 17.5 17.3 17.8 18.2 18.4 18.0 18.5 18.1 18.6 UK 16.1 16.6 17.5 18.1 16.7 16.0 17.3 15.5 13.8 13.0 Total EU 276.0 267.3 267.3 272.0 274.7 256.0 234.8 220.7 206.1 221.1 Source: UIC, 1996

34 4.3 Inland waterways and pipelines in EUR15

Indexing volumes to 1970, inland waterways and pipelines have gained 5.0 per cent and 25.6 per cent respectively up until 1994. Since the freight market grew by 65.5 per cent, this implies a relative loss of market share. In contrast to developments in the railway sector, inland waterway shipping did not lose market shares in the 1985 to 1990 period, which indicates that this sector is organised much more competitively than the railways. Indeed, the majority of companies are small and medium sized. The stagnation of the market for inland waterway shipping after 1990 was caused in the first instance by the changing structure of goods unfavourable for this mode of transport and by the increasing flexibility of road haulage firms which have been able to provide better service by unmoral transport rather than by road/barge container shipping. The drop in tariffs in road haulage has had less of an influence on the inland waterway mode than on the railways. Figure 4.3 illustrates developments in inland waterway shipping and pipeline transport over the past 25 years.

Figure 4.3 Inland waterway and pipeline transport in EUR15, 1970-1994 (in tonne-km)

1,80

AAA AAA

1,60 AAA

AAA AAA

1,40

AAA AAA

AAA AAA

AAA AAA AAA

1,20 AAA

AAA Total Freight

AAA

AAA AAA

AAA AAA AAA AAA AAA

AAA AAA AAA AAA

AAA AAA AAA

1,00 AAA

AAA AAA AAA

AAA AAA AAA Inl. Water 0,80 0,60 Pipelines

0,40 0,20

0,00 1970 1975 1980 1985 1990 1994

Source: EU White Paper COM (96)421 final

4.4 Combined transport in EUR15

The volume of cross-border road/rail combined transport between EU member states has more than doubled in the last decade (from 9 million tonnes in 1985 to 19 million tonnes in 1994). Road-barge combined transport increased from 2 to 6 million tonnes. As the market grew at a similar pace, the modal split has not changed substantially. The share of road/rail combined transport was 5.5 per cent in 1985, 5.2 per cent in 1990 and 5.7 per cent in 1994. If one includes road-barge container traffic on the river Rhine, then the combined share of all forms of combined transport has risen from 6.7 per cent in 1985 to 7.7 per cent in 1994.

35 The reasons underlying the “lost decade” in a modal shift policy have been analysed by Bukhold (1995) in a study for the European Centre of Infrastructure Studies (ECIS). Results show that cross-border combined transport in Europe is still far from being a Trans-European Network (TEN) in its own right, as proposed in the TEN Guidelines. Rather, it is concentrated in three areas: (1) trans-Alpine traffic, (2) traffic to and from Germany and (3) container traffic on the river Rhine. All other flows together account for only 3 per cent of the total volume of European combined transport. Domestic combined transport has so far achieved notable volumes only in Germany and France. The only origin/destination relationships in which combined transport is very strong (more than 30 per cent of cross border road traffic) are trans- Alpine relations which are characterised by heavy restrictions on lorries (transit through Switzerland, maximum lorry weight 28 t) or high tolls combined with the eco-point system (in Austria). This has enabled Italian combined transport to gain the record share (30 per cent) of cross border road traffic.

Figure 4.4 Cross-border modal split for combined transport in selected countries, (based on tonne-km)

Source: Bukhold, 1995

Figure 4.4 shows a part of the country breakdown of the combined transport activities in Europe. A full overview is given in the Appendix. Countries with a strong road haulage industry such as France, the Netherlands or Denmark, have done little to promote combined transport and show almost no change in transport volumes over time. Furthermore, there are various incompatibilities regarding technical standards, which make international combined transport difficult if the containers have to be processed on the way to their destination. Finally, the slots for combined transport on railway networks are not easily obtained. Priority is usually given to passenger transport in day time and heavy goods trains at night time. It is difficult to discover free capacity for combined transport at peak traveller times . In many cases such bottlenecks result from traditional management and organisation systems practised by the state-owned railway companies. A high level group of the European Commission transport directorate, DGVII, is presently working on a network of railway “freight freeways”. This network should specialise in freight trains, operating in an homogenous manner to increase the capacity and overall average speed of the trains.

36 If the processing equipment for containers were standardised alongside these freeways, it could open up the opportunity for a substantial increase in the service quality of combined transport which in turn would increase the market share of the main origin/identification routes in Europe.

4.5 Developments in modal split in EUR15

Comparing freight modal split figures over time underlines the interpretation presented in the section on Road transport in EUR15 and Rail transport in EUR15. That is, road transport is the winner in terms of market change. The railways have been losing market share, as well as transport volume, in absolute terms. Other modes such as inland waterways or pipelines have slightly increased their transport volumes but not enough to maintain their market share (Figure 4.5).

Figure 4.5 Market shares of freight transport by mode in EUR15, 1985-1994 (tonne km)

Freight Modal Split

80

70

60

50

40

AAAA

AAA A

30 AAAA

AAAA

AAAA AAA

AAAA AAA AAA

AAA AAA AAA

20 AAAA

AAAA

AAAA AAAA

AAAA

AAAA AAA

AAA AAA

AAA AAA AAA AAA AAA

10 AAA

AAA AAA AAA AAA AAA AAA AAA AA

AAA AAA AAA AAA AAA AA AAA

AAA AA AAA AAA 0 1970 1975 1980 1985 1990 1994

Year

AAAA AAA AAA

AAAA AAA AAA

AAA AAA AAA Road A Rail Inl. Pipeline Waterw.

Source: EU Commission, 1996

In the period between 1970 and 1994 road transport increased its freight market share from 48.6 to 71.7 per cent. Rail’s share has dropped from 31.7 to 14.9 per cent, inland waterways from 12.3 to 7.7 per cent and pipelines from 7.4 to 5.6 per cent. This process was almost continuous, i.e. the railways lost year after year. But there were peaks which can be identified after a closer look at the statistics. The first insight is that railways always suffered heavy losses in times of economic decline which were not won back in the following phase of economic recovery. That meant that railways continued operating at a

37 lower level until the next phase of economic depression came. The second insight is that the period 1985- 1990, which should have been a period of stabilisation as the macroeconomic indices showed modest economic growth, was a phase of maximum losses for the railways and gains for road haulage.

Looking briefly at the figures one might argue that this process continued at the same pace after 1990, but this is incorrect. After correcting for the effect of German unification, which caused a decline in railway freight transport of about 45 billion tonne-km (from 1989 to 1993) and was responsible for one- half of the losses of railway freight in the period 1990 to 1993, it becomes apparent that the speed of structural change slowed down remarkably after 1990. Therefore, the time period immediately following the decision of the European Court of Justice and the subsequent steps to liberalise the European transport markets were decisive for the restructuring of the transport markets.

4.5 EUR12 versus EUR+3, Norway and Switzerland

Comparing developments in road freight market shares in the three countries which joined the EU in 1994 and the EUR12 countries reveals significant differences. While the road market share in EUR12 increased from 51 per cent to 73 per cent from 1970 to 1994, the shares in the EUR+3 countries for 1994 were much lower: 64 per cent in Finland, 59 per cent in Sweden and 41 per cent in Austria. Since these developments started from a high level of road market shares in Finland and Sweden, the growth rates of road transport in these countries are much lower compared with EUR12. In Sweden the road market share for long distance freight transportation increased in 1995 by 2 per cent, while the railways lost almost the same percentage. A report by Statskontoret (Swedish Agency for Administrative Development) refers to these market shares, and blames the changes on the reduced taxes/increased weight of trucks (see the earlier section The EUR+3 countries, Norway and Switzerland). In Norway there was a similar market development. However, as the performance of road haulage is highly dependent on climatic conditions, it is not possible to identify the real causes of this development. Furthermore, road and rail haulage play a minor role compared with coastal shipping, in particular in foreign trade with other EU countries.

In the case of Austria, road haulage started from a low base value in 1970 (19.5 per cent market share) and then grew quickly in the next 25 years to about 41 per cent. From 1985 to 1994 there was little change in the Austrian freight transport market structure (a 2 per cent increase in the road market share). This differs totally from developments in West Germany where road transport increased its market share dramatically in the period between 1985 and 1994 when it went up from 52 to 66 per cent (+14 per cent) of the total freight volume (in billion tonne km). From 1985 to 1993 the German railways lost about 18 per cent of their freight transport turnover, while the Austrian figures remained stable. In the following year, the Austrian rail freight turnover (in tonne-km) even showed an increase of about 10 per cent.

As the Swiss statistics are not directly comparable with the European Commission DG VII statistics which have been used for the EUR12/EUR+3 comparisons, Switzerland cannot not be added to the picture. But there is clear evidence that the Swiss transport market structure looks significantly different from that of the EUR12 countries. In 1993 the railway share of freight transport turnover in this country was 38 per cent. The railway share for the Alps transit was even 83 per cent (17 per cent for road haulage). This is due to the strict regulations (28 t limit) and the high taxes/user charges for trucking. Naturally, a part of the freight transport crossing the Alps has been shifted to other routes, mainly to the Austrian Brenner pass. Swiss modal split data show little change in market shares in the critical phase of EU liberalisation (1985-90). We can thus conclude that the Alpine countries have temporarily decoupled from the EU-wide tendency of market shifts towards road transport. Given that the development of freight demand in terms of logistics and goods structure has not been much different from that in neighbouring

38 countries, one can establish the hypothesis that the stricter regulations and ecological requirements (quantity regulation and eco-point system in Austria) have contributed to stabilise the freight transport market and provided the basis -- together with investment policy and institutional changes in the railway sector -- for a better market position of environmentally friendly transport modes.

Figure 4.6 Road freight market shares in EUR12 and EUR+3

0,8

0,7

0,6

0,5

0,4

0,3

0,2

0,1

0 1970 1975 1980 1985 1990 1994

EUR12 Austria Finland Sweden

Source: EU Commission, 1996

4.6 Developments in the modal split in selected CEC Countries

The most significant developments in the freight transport sector for the CEC countries include a drop in total traffic, the expanding role of road haulage, a dramatic increase in the number of firms, faster international than domestic traffic growth and stiffer international competition (Burnewicz, 1996). Table 4.5 shows the market changes over the period 1990 to 1993/1994 in the Czech and Slovak Republics, Poland and Hungary. It can be seen that the total freight traffic volume (in billion tonne-km) dropped dramatically from 1990 to 1992 and then stabilised. In Poland it began to rise again in 1993.

39 Table 4.5 Freight transport in CEC countries

billion tonne-km Year Czech Slovak Poland Hungary Republic Republic Rail 1990 38.05 26.25 83.50 16.80 1992 31.11 13.08 57.76 10.02 1993 25.61 14.30 64.36 7.46 1994 23.16 12.30 65.79 7.43 Road 1990 16.82 6.48 40.30 15.20 1992 20.25 6.00 42.01 12.80 1993 24.36 5.46 40.74 13.38 1994 22.66 5.87 45.37 13.01 Inland 1990 1.40 3.00 1.00 2.10 Waterways 1992 1.29 1.69 0.75 1.57 1993 1.28 0.84 0.66 1.62 Pipeline 1990 2.70 4.81 13.89 5.29 1992 1.92 3.41 11.93 4.33 1993 1.98 3.52 12.20 4.33 Sources: ECMT, 1995; IRU, 1995; Burnewicz, 1996; Tanczos, 1996.

The market share for rail freight fell sharply in the first phase after the political changes. In 1993 and 1994 modal split seems to have stabilised at a lower level. But rail modal shares in Poland and Czech/Slovak Republics (about 50 per cent) are still very high compared with figures in , given that the freight traffic share for the EU countries is below 15 per cent. Several reasons could be responsible for this unexpected result:

1. Higher levels of trade in goods with former COMECON countries.

2. Different structure of trade, incorporating a higher share of bulk cargo.

3. Better performance of railways in relative terms compared with trucking.

4. Constancy of habits of large enterprises, which continue to play an important role.

5. Low tariffs of the railway companies due to public subsidies.

Analysing the present situation for instance in Poland does not provide many reasons for hoping that the decline of the railways will stop in the medium and long run. Reasons (4) and (5) will vanish over time. Reason (3) will also disappear after a major extension of the road network and the construction of motorways and primaries. Road transport will then be more reliable and safer than it is today. With regards to reason (2), one can observe that the Polish railway company, PKP, is loosing ground, in particular in the bulk cargo markets for agricultural products (minus 70 to 80 per cent), fertilisers, wood, sand and gravel (Burnewicz, 1996). Similar developments are reported from Hungary and the Czech Republic where the volume of minerals and steel products, construction products and "miscellaneous products" decreased by 48 per cent, 60 per cent and 70 per cent respectively in the period 1989-94. Therefore, a hypothesis can be established that the market process is following the same path observed in western Europe: There are periods of rapid decline in the railway shares, most frequently induced by economic decline, followed by phases of relative stabilisation. It is highly improbable that the market losses experienced in negative business cycles can be regained in subsequent periods of prosperous growth.

40 Figure 4.7 Market shares for road and rail in CEC countries, 1990-1994 (tonne-km)

0,7 AAA

0,6 AAA

AAA

AAA Cz+Sk rail

AAA AAA

AAA AAA

AAA AAA

AAA AAA AAA AAA

AAA AAA

0,5 AAA Pl rail

AAA AAA

AAA

AAAA AAA

AAA AAAA AAA

AAA AAA AAAA AAAA

AAA AAAA AAA AAA AAAA

0,4 AA Hu rail

AAA AAA AAA AAAA

AAA AAA AAA

AAA

AAAAAA

AAA AA

AA Cz+Sk road

AAA AAA

0,3 AAA

AAA AAA AAA

AAA AAA

AA AA

0,2 Pl road AAA

AAA Hu road 0,1

0 1990 1991 1992 1993 1994

year Source: Burnewicz, 1996; Tanczos, 1996; Chatelus, 1996

5. Conclusions

The liberalisation of the European transport market started with a decision of the European Court of Justice in 1985 which led to rapid change in market regulations. These changes were necessary to create a single market in the transport sector. A continued “common” single transport market with heavy restrictions on trade, quantity of service and quality of service and price would not have been appropriate, as free movement of people, goods, services and capital are the basic principles of common market policy.

Common transport policy decisions after 1985 substantially changed the conditions for road transport whereas the situation for the other competing transport modes has changed very little. Faced with strong competition, private road hauliers took advantage of the increased scope for market-oriented activities. As a consequence, a highly competitive road freight sector has developed in Europe within a short period of time, offering high-quality supplementary services such as just-in-time delivery and permanent information on the actual location of the transported goods at reasonable prices. Thus, from a customer’s point of view road haulage has become cheaper and better.

As regards the rail sector, European railway companies have always been free to organise Europe- wide freight transport without quantity restrictions. As public enterprises they have been subject to different types of regulations, motivated by social goals and monopoly control. But because the companies developed under totally difference public regimes which protected them from competition and prevented them from forming international partnership, they were not at all prepared to compete or to co-operate on a European scale.

European common market policy at the beginning first focused on creating a free market situation for the road sector with the result that the rail and inland waterway sectors lagged behind. The reasons for this lack of action in the rail and waterway sectors were the different national interests. Today, six EU countries have still not implemented Directive 91/440 which was designed to develop the competitiveness of the European railways. And among the nine countries which have implemented the

41 Directive and taken the first steps towards opening up the railway market there is not one good example of railway reform. On the side of the EU Commission there are no plans to introduce supplementary directives to Directive 91/440 before 1997 which will be 12 years after liberalisation first started in the road sector. This slow progress towards liberalising the railways (and partly also the inland waterways), however, has not prompted the European Parliament to bring further legal action before the European Court of Justice.

In addition to the inertia of the railway companies and railway policy in Europe, there are other reasons why the relatively environment-friendly modes of transport such as rail, inland waterways, coastal shipping or pipelines have lost market share. These are the absence of harmonised competitive conditions -- social regulations, fiscal harmonisation and safety regulations -- and the failure to internalise external diseconomies. The enforcement of social regulation (driving and rest times) seems to be a key factor for intermodal competition. While there are strong internal incentives in the railway sector to follow the rules, the incentives in the road sector do just the opposite. Furthermore, railways suffer from old and partly counterproductive safety regulations which push up costs for the equipment and rolling stock and reduce service quality. The environmental advantages of rail, waterway shipping and pipelines have not been transformed into market advantages as there is no common internalisation policy.

Freight transport markets have changed dramatically in the past two decades. All environmentally friendly modes have lost market share while road transport has expanded. Railways have lost in absolute and relative terms. The reasons for this are the structural change in market demand, their inertia to adjust to demand requirements, slow progress of railway reforms for political reasons and the lack of harmonisation such as balanced regulation and internalisation of externalities. The potential for rail freight markets to transport high volumes over long distances therefore has not been exploited. In addition, international combined transport has not become widespread and remains a marginal competitor. Identifying European freeways for freight rail transport will not be enough to alter this situation. Change will only come about if private European companies for intermodal transport are established which operate in close partnership with private forwarders and consignors and use low-cost shuttles on freight freeways.

Central and East European countries have experienced rapid change in their economic structures since the beginning of the 1990s. These include freight transport where the rail market share plummeted from the high position it held formerly when it was protected. In contrast with a number of EU countries, Poland, Hungary and the Czech and Slovak Republics have initiated railway reforms which might help limit the market losses, assuming the railway companies become strong enough to compete successfully. Nevertheless a further decline of environmentally friendly modes will be unavoidable unless a strict environmental pricing/regulation policy is applied. This will probably not occur as economic goals dominate environmental sustainability issues in these countries.

Some European countries like Austria, Switzerland or Sweden have implemented environmental policies in the transport sector which correspond closely to the issues in the EU Commission Green Papers. This is also reflected in the modal split figures which show that environmentally friendly modes have a better market position. Also the modal split of transit traffic is influenced by this policy, as for instance trans-Alpine intermodal transport to and from Italy. Austria and Sweden are the only EU countries which are willing to support the Commission’s Green Paper on Fair and Efficient Pricing and implement appropriate policies. Switzerland is preparing a fiscal reform for the transport sector to implement the principle of "true costing" of all infrastructure and external costs to the responsible units, a principle which corresponds to the ideas published in the EU Green Paper on Fair and Efficient Pricing in Transport. Nevertheless, Switzerland and Austria are under heavy pressure from the majority of EU member countries and the Commission itself to abolish their existing pricing/regulation practices and to adjust to the EU average or “mean” values.

42 The comparison of transport market figures between the EUR12 countries on one hand, and the EUR+3 countries, as well as other countries like Switzerland which have not participated in the EU liberalisation policy on the other hand, indicates clearly that the way in which EU liberalisation policy has been implemented has favoured the environmentally less friendly modes and accelerated the decline of rail and inland waterways. Although this fact is well known and heavily criticised by some Member states, it has not been possible to implement harmonisation policy in tandem with liberalisation because of the voting mechanism in the EU. The Member states find themselves currently in a prisoner’s dilemma situation which is unlikely to be reversed in the foreseeable future. This is because even if the long-term optimum solution was defined and agreed, it is unlikely to be implemented as every Member State is afraid of losing out to the others. Thus there is little reason to expect that after the decade of liberalisation in the transport market a decade of harmonisation will follow.

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