Review of Introduction of Competition in Railways in Europe

1. Review of Introduction of Competition in Railways in Europe Torben Holvad, John Preston and Biao Huang Transport Studies Unit, University of Oxford

2. Background • Traditionally, railways were organised nationally as state monopolies. • key motivation for initiating reforms • lack of customer orientation • perceived level of cost inefficiencies • Allowing alternative providers is crucial to enhance the competitive pressure • The extent and form of deregulation vary among the countries in Europe

3. Reform Experience in Five Countries • Five case study countries are chosen representing a spectrum of market models • Emphasis on the issue of competition in the rail market • capital market competition • product market competition • Three types of reform path • No significant change in either market • Competition mainly introduced in product market • Competition introduced in both markets

4. Capital and Product Market Competition Product Market Competition Capital Market Competition

5. Country comparison using 7-Ds • Decentralisation of regulatory control • Disintegration of the industry (vertical and horizontal) • Domain of contractual assignment • Discretion of management • Distribution of risks • Duration of contracts • Destination of subsidies

6. Decentralisation of regulatory control • DK: Largely centralised; Regional authorities responsible for small “private” railways • GB: Fairly centralised despite the fragmentation • G: The Länders have been responsible for regional traffic operations since 1996 • F: Six ‘experimental’ regions took over passenger rail services • S: The counties responsible for regional traffic operations since the end of the 1980s

7. Disintegration of the industry • DK: Vertical separation of operations and infrastructure. Limited horizontal separation • GB: Far-reaching vertical and horizontal institutional separation of the industry • G: Organisational separation of DBAG; Access for international and regional operations • F: Organisational separation of infrastructure; Access for international operations • S: Institutional separation of infrastructure and traffic operations

8. Domain of contractual assignment • DK: Regulated within detailed contractsincluding minimum service standards • GB: Considerable in theory, but limited wrt the planning of services with poor commercial prospects • G: National—theoretically the widest conceivable; Länder’s—regions determine • F: Similar to Germany • S: National—considerable as SJ operates on commercial principles; Regional—very limited

9. Discretion of management • DK: DSB is now independent public Co. with substantial management autonomy • GB: commercial service in theory but extensive specification of service in practice • G: National—commercial; Regional—LA involvement institutionalised • F: National—performance contract but not formal; Experimental regions—vary • S: National—commercial; Regional—local services open to political interference

10. Distribution of risks • DK: DSB—net-cost contracts; ARRIVA—net-cost contract with penalties/rewards included • GB: Operators usually bear all the risks; some contract with additional penalty schemes • G: National—commercial operation; Länder’s —operators bear production and revenue risks • F: National—Net-cost contract; Regional—Operator shares revenue risk with region • S: National—Commercial; NC contract for subsidised service; Regional—Gross cost

11. Duration of contracts • DK: DSB—5 years; ARRIVA—8 years; • GB: As a rule, 7 years; up to 15 years in a few cases; Longer contract for re-franchising • G: National—no formal contract;Länder’s—from 1 year (temporary regime) to 15 years • F: National—no formal contract at present; Experimental regions—3 years • S: National—no formal contract but 1-3 years for subsidised service; Regional: half a year to 5 years

12. Destination of subsidies • DK: State financing of infrastructure project; subsidisation of non-profitable passenger service; • GB: Limited public financing of infrastructure work; Selective financing of traffic operations • G: Gov. contributes to the financing of new infrastructure project; Regional service subsidised • F: State financing of infrastructure project; subsidisation of domestic passenger service • S: State financing of infrastructure project; subsidisation of non-profitable passenger service

13. PRODUCTIVITY ANALYSIS Resources Inputs Market take-up Utility Service supply CBA and MCA SERVICE PROVISION EFFICIENCY ANALYSIS MARKET EFFECTIVENESSANALYSIS Railway Sector Performance Change Analytical Framework of Performance Measurement

14. Performance: Labour Productivity

15. Performance: Capital Productivity

16. Performances: Market Effectiveness

17. Performances: Service Provision Efficiency

18. Performance Change: Overall Assessment

19. Conclusions and Recommendations • Theory suggests product market competition may be productively and dynamically efficient but may be allocatively inefficient • Empirical evidence is inconclusive: increase in demand and reduction in costs • Difficult to identify the effect of other external factors and analyse counter factual • Requires detailed analysis at micro level, using quantitative models of on-track and off-track competition