Japan Railway & Transport Review No. 29 (pp.19–23)
Feature: Railway Management and the Role of Government |
Introduction |
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The globalization of economic activity and gradual liberalization of the transport market in the 1990s led to major changes in the organizational structure and monopolistic nature of some railways. Separation of railway infrastructure and operations laid the foundations for introduction of competition to railways as well as for their economic rationalization. This article analyses the basic principles of the European transport policy and the objectives of European legislation on the modernization and competitiveness of railways within the transport system. It also examines how railway infrastructure and operations were separated in various European railway networks as well as the structural consequences of the separation. Finally, the railway infrastructure pricing principles as well as the impact of the separation of infrastructure and operations on railway finances and transport demand are discussed. | ||||||||||||||||||||||||||||||||||||||||
European Railway Legislation Modernization and Competition | ||||||||||||||||||||||||||||||||||||||||
The old European railways urgently needed reforms to offer customers efficient, high-quality, market-oriented services at lower cost. They could not ignore the globalization of economic activity and liberalization of transport markets without remaining hamstrung by out-of-date organizational structure and monopolistic business tendencies. The finances of traditional railway businesses are inherently non-transparent because they run train operations on their own infrastructure with very high sunk costs. In addition, ownership of infrastructure eliminates any incentive to promote free competition because monopolistic tendencies do not favour entry of other railway operators on the same infrastructure. Unlike other transport modes, railway infrastructure costs in Europe currently account for some 30% of the total operational costs. This was a major factor in the EU drive to separate the accounting of infrastructure and operations because it enables fair comparison with the infrastructure costs of other transport modes, such as roads and airports, which are largely borne by the state. Against this background and to reverse the declining fortunes of European railways (Figs. 1 and 2), the EU formulated a Transport Policy with five basic aims:
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Figure 1: Share of Passenger Transport Market for Each Transport Mode for ECMT Countries Figure 2: Share of Freight Transport Market for Each Transport Mode for ECMT Countries |
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Separation of Infrastructure and Operations |
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EU Directives 91/440/EEC, 95/18/EC, 95/19/EC specify the necessity for separate accounting of infrastructure and operations as the minimum reform; the directives do not actually specify splitting infrastructure and operations into two or more separate business entities. Consequently, Member States have adopted two basic methods to achieve the required minimum: Institutional separation in the UK (Railtrack/Train Operating Companies (TOCs)), and France (French National Railways (SNCF)/Reseau Ferre de France (RFF)), and organizational separation as in Germany (Deutsche Bahn AG (DB AG)/DB Netz).
Institutional separation
Organizational separation
Structural consequences of separation |
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Figure 3: New Organization Structure of Railways and Interactions between Various Subsystems Figure 4: New Roles and Challenges of New Organizational Structure of Railways Table 1: Questions on New Strategic Organization of Railways Table 2: Factors Affecting New Organizational Model of Railways |
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Basic Principles of Infrastructure Pricing |
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Like other transport operators, railway operators must observe the normal rules of business competition, which preclude state subsidy except where the railway operator is obliged to offer unprofitable services, known as public service obligations (PSOs), for social reasons. Excluding PSOs, when infrastructure and operations are completely separated, the railway operators pay fees for using the infrastructure to the owner based on the pricing principles outlined below.
Costs of transport infrastructure Operation of railway infrastructure involves various costs, some of which should be borne by the users. Economic theory divides these costs into fixed costs and direct costs. Fixed costs includes construction costs, various maintenance costs (lighting, staff) and some other labour costs when there are legal or contractual obligations. In the case of Railtrack, fixed costs account for some 90% of total costs, and about 75% for SNCF. Direct costs depend on the degree to which the infrastructure is used; if there are no users, this cost is a debit. Most maintenance costs are direct costs. Marginal costs are the additional costs incurred by operating an additional train, etc. The transport sector has internal costs (costs to users) and external costs (costs to non-users). The latter are costs due to traffic congestion, pollution, noise, safety, etc. Clearly, users of the road infrastructure pay only internal costs but not the external ones, leading to some advantageous disparities in comparison with railways.
Examples of infrastructure pricing principles
Additionally, EU Directive 95/19/EC stipulates the following obligations:
The various tariffication models can be classified into three basic types: German model with two components:
French model with three components:
British model with two components:
In the British approach, the infrastructure owner (Railtrack) always collects at least 90% of the total costs—a financial utopia, but very sensible for a private company. |
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Percentages of Railway Infrastructure Expenses in Europe |
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Percentages near 100% In theory, Germany and the UK both use pricing models where RI revenues and expenses are balanced. However, In Germany, the truth is that various forms of state aid and subsidies comprise about 35% of RI expenses with revenues covering about 65%. For example, some staff costs are subsidized by the federal government. In the UK, revenues should cover 106% (100% expenses + 6% profit) of expenses, but since such a model would quickly wipe out many TOCs, the government provides subsidies, etc., to the TOCs thereby adopting a dual policy of balanced revenues and expenses, and solvency.
Percentages far below 100%
Percentages near 0% To date, only the Netherlands has applied a zero-pricing policy. However, the General Directorate for Transport of the European Commission with responsibility for competition has enforced a change of this policy. Sweden is also preparing a modification of its existing pricing in view of the near-zero charges in the freight sector and based on marginal social costs for passenger transport. |
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Financial Impact of Separation |
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Except for the Netherlands, the costs of RI usage represent a significant amount of money for railway operators In the UK, the RI usage charges to TOCs were calculated so that the resulting revenues would cover RI expenses. This significant burden on TOCs is tempered temporarily by state subsidy that will drop to zero at the end of the concession period. In Germany, RI usage charges are also effected in order to cover most of the total RI expenses, thus creating a serious problem for the operating expenses of the railway operator, as well as for the regions of the country, where some competence of questionable effectiveness for the subsidy of regional character railway lines has been conceded. By contrast, in France, RI pricing is based on the solvency of the railway operator, creating serious deficits for the infrastructure manager. |
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External Costs and Consequences for RI Pricing | ||||||||||||||||||||||||||||||||||||||||
Increasing environmental awareness and a clearer understanding of the environmental impact of the various transport modes are driving the concept that the polluter pays and are resulting in internalization of external costs. A relatively recent study of 17 countries (15 EU Member States, Norway and Switzerland) showed that the external cost of transport in 1991 was €272 billion (€1=US$0.91) or about 4.6% of the GDP of these countries. This breathtaking amount of money is the social cost of accidents, noise, air pollution, climate change, etc., caused by transport. Figure 5 shows a comparative analysis of the various transport modes—road traffic accounts for 92.2%, air transport for 5.9%, railways for 1.7%, and inland waterways for 0.3%. Of course, introduction of common rules for calculating external costs is difficult, but the problem of pricing will be even greater. Internalization of external costs will surely benefit railways while making road transport much more expensive. EU Directive 93/89/EEC aimed to tackle this problem but did not achieve spectacular results. Internalizing the external costs of transport is strongly resisted by special interest groups such as the auto and oil industries and there are no guarantees that it will ever be achieved.
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Figure 5: Comparative External Costs of Various Transport Modes |
Further Reading |
Vassilios A. Profillidis Dr Profillidis is Associate Professor of civil engineering at Democritus University of Thrace in Greece. He received his Ph.D. from the Ecole Nationale des Ponts et Chaussees of Paris. He worked as a research associate in the Research Department of the International Union of Railways (UIC) and SNCF. He has published 70 papers in scientific journals and conference proceedings and is the author of Railway Engineering. |