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Brussels and rail 'liberalisation'

Centre for Social Europe: December 2005

In December European Union transport ministers agreed rules ordering EU member states to prepare the ground for 'liberalisation' of their railways by 2010.

This decision means that each member state will be asked to comply in the next four years with various directives dealing with railways, including Council Directive 91/440/EEC.

This infamous directive, introduced on 29 July 1991, demands an historically unprecedented liberalisation model instituting a "vertical split" separating rail infrastructure from operation of rail services. It stipulates:

1. Operational autonomy for railway operators
2. Separation of the infrastructure from service operations (as an absolute minimum - although not exclusively - for accounting purposes)
3. Open access for international undertakings
4. Introduction of track access charges and a sound financial basis for railway operators

If this sounds familiar, it is because this was exactly the basis of British Rail privatisation by John Major's Tory government in 1996. The Railways Regulation 1992, which began the privatisation process, was introduced under Section 2(2) of the European Communities Act 1972 in order to comply with directive 91/440/EEC.

This EU 'liberalisation' model has proved disastrous in many ways. The privatisation of rail infrastructure maintenance directly led to the catastrophic deterioration of track causing the deaths of many passengers and rail workers. Private train operators' record profits are siphoned from public subsidy, there is a perpetual squeeze on rail workers' pay and ticket fares continue to rocket, making Britain's railways the most expensive in Europe.

However, rail 'liberalisation' is not a new idea. In 1957 the newly-founded European Commission established a plan for a common transport market run on the basis of "free competition" and the "principles of the market economy", as written into the Treaty of Rome.

On the basis of this plan, on 13 May 1965 the Council of Ministers adopted a decision to harmonise provisions affecting competition in the transport sector. In short, railways have always been a fundamental part of plans to create an internal EU market designed to benefit the needs of the corporate sector.

Yet, it was not until the signing of the Single European Act by Margaret Thatcher in 1986 (which included the Single Market initiative) and a ruling by the European Court of Justice, that the Commission drew up Directive 91/440/EEC 'on the development of the Community's railways'.

Resistance to EU rules

Despite the introduction of 91/440, the path followed by national rail administrations of other European member states has differed radically from the UK government's wholesale adoption of the Commission's privatisation model. This was due in large measure to the disastrous experience of the directive's application in the UK.

The French example has been based on a public sector strategy, to create a TGV (high-speed train) network operating in a competitive transport market, against both road and low-cost air travel, with commercial business objectives.

In Germany, Deutsche Bundesbahn research showed that if intercity journey times were no more than twice the air travel time and no more than half the car travel time, than rail would be the preferred mode. Both rail administrations have sought to connect major cities with high-speed rail connections that fall within these parameters. Both the (French) TGV and (German) ICE have rapidly filled their capacity and today represent an important export market for their respective manufacturing sectors, while UK train-building has ceased to exist during the past 10 years of rail privatisation.

Such a contrast of fortunes is not merely the result of the greater political willingness of successive French and German governments to protect national industrial champions.

Poor performance

The poor operational safety and financial performance of the UK privatised rail sector arose as the direct outcome of the functional dissonance inherent in the "vertical split" model advocated in 91/440.

As research carried out for the Russian Department of Transportation noted, operationally the concept that train and track are as separable as aircraft and airport is invalid for several reasons:

1. The train is constantly physically connected to the track
2. The track is a one-dimensional, limited, dedicated resource
3. As railway control technology becomes more sophisticated, train/track controls become more integrated
4. Best practice railway operations depend upon deployment of this advanced integrated train/track control and safety technology - separate train/track ownership makes it very difficult to develop and implement this technology

The idea that competing train operating companies can compete for slots in track use is also limited as train path scheduling on the fixed track infrastructure has limited flexibility - even advanced computer technology cannot easily generate alternative and new train path allocations.

The failure to recognise these fundamental features and to misinterpret functionality as 'market failure' is a long-term characteristic of European Commission thinking on rail liberalisation. Such blindness is also evidenced in the operational and financial failure of Railtrack Plc and the belated decision by the UK's Strategic Railway Authority to consolidate competing operating franchises into one operating contract in each region and in most cases on each route.

The financial problem of the EU "vertical split" model is that train operating companies cannot possibly absorb the true cost of the infrastructure. So this model relies on a valuation determined by low track-use charges, which can realistically be borne by train operating companies. This means that fresh investment is at a very large multiple of the privatisation investment valuation - an asymmetry which is a barrier to the seamless investment that the industry requires.

Three steps to rail 'competition'

In addition to the structural underpinning legislation contained in 91/440, the Commission has delivered a bewildering stream of Directives, White Papers and 'rail packages' since 1991 with the central aim of opening national rail administrations to market competition. In general, attempts at liberalisation in the railway sector have progressed much more slowly than in telecommunications or energy. Since the late 1990s the Commission has concentrated on encouraging 'interoperability' of high-speed rail systems and liberalisation of rail freight markets through a step-by-step approach.

Initially, the Commission proceeded by using 'fair competition' arguments to advance its objectives. Directive 1893/91 called for elimination of public-sector obligations, with a block exemption for regional and local transport requiring the purchase of public services by contractual agreement by the "relevant authority". In France and Germany this is understood to be regional, as opposed to national government.

Directive 2001/12/EC amended 91/440/EEC specifying contractual relationships between infrastructure owners and railway operators.

Directive 2001/13/EC, amending Directive 95/18/EC, introduced a licensing regime for railway undertakings. Directive 2001/14/EC amending Directive 95/19/EC dealt with allocation of infrastructure capacity, charging for the use of infrastructure and safety certification.

The second step, which came into force on 15 March 2003 goes under the name of the "First Railway Package", which although only referring to rail freight, represents an attempt at liberalising the sector. Initially, 'open access' and forms of head-on competition were to be introduced, at least on the Trans-European Rail Freight Network (50 per cent of EU railway networks and 80 per cent of traffic), but full 'open access' was rapidly proposed starting from January 2006 as part of the "Second Railway Package". However, a number of technical directives had to be added to eliminate technical and legal barriers to open access. This was accomplished with Directive 96/48 on the interoperability of the trans-European high-speed rail system and Directive 2001/16 on the interoperability of the trans-European conventional rail system.

The third step came on 23 January 2002, when the European Commission proposed the "Second Rail Package" aimed at the rapid construction of an integrated European railway area, based on the guidelines in the 2001 White Paper aimed at safety, interoperability and opening up of the rail freight market by 2006 through full open access to domestic markets.

The Commission also proposed establishing a European Railway Agency responsible for providing technical support for the safety and interoperability work.

Most recently, in 2004 the Commission proposed a "Third Rail Package" with a view to opening up international rail passenger services to competition by 2010 on the model proposed for rail freight in the second package, and introducing international "train drivers' licences". These licences would facilitate cross-border working and enhance interoperability but raise fears about the possibility of 'social dumping'.

The future of rail privatisation in the EU

As recent national rail strikes in France in November showed, rail workers' in EU member states have certainly not been reconciled to rail privatisation, even with the Commission's careful institutional approach to opening up national markets to liberalisation measures.

In fact, the fast-approaching date of January 2006 for full 'open access' rail freight competition has led to a recent hardening of attitudes amongst the four largest French rail unions representing the majority of rail workers.

As a consequence of European rail freight liberalisation, the reorganisation of SNCF freight is being fought hard by rail workers.

Where such liberalisation steps will lead now is less clear, French Ministers and SNCF President Louis Gallois have strenuously denied any intention to privatise SNCF. Gallois said Europe's railways are all public companies except in the UK, "and the English experience is not a great reference". Robert Watson, a British railway consultant, believes the EU may well have had an adverse effect on the rail system: "Open access has destabilised the European railroad environment".

This would also appear to be the view of DeutscheBahn AG, SNCF's principal potential freight competitor in Europe. DBAG CEO Hartmut Mehdorn told International Railway Journal last month: "A large integrated railway and competition are not mutually contradictory. Nowhere else can you find de facto so much competition as in the German network. Moreover, open access also exists de jure in Germany. From next year onwards, when the amended railway legislation comes into force in Germany, open access to railway infrastructure will apply to such an extent that we begin to wonder whether this is not excessive intervention in our freedom of business management. An integrated railway is also absolutely essential to ensure continuing technological development of the wheel/rail system".

Mehdorn's long-term goal has been to privatise DB as an integrated railway. He strongly believes that the separation of infrastructure from operations, which has been carried out by most of western Europe's national railways at the behest of the European Commission, is bad for railways.

Mehdorn has often pointed out that the only financially successful railways around the world are fully integrated ones. North America's unified private freight railways are profitable, but struggle to fund adequate long-term capital investment programmes.

The privatisation of the big three JR railways in Japan has been a financial success. However, the outright privatisation of New Zealand Railways ended in failure, with the government being forced to take back ownership of the infrastructure. The private owner simply could not earn enough to fund the cost of maintaining the track.

The recent announcement (November 28) from the incoming German government of Chancellor Merkel of their intention to raise ?1.25 billion from 25 per cent share capital in Deutsche Bahn, to finance a massive acquisition programme confirms that the EU rail liberalisation model may have hit the buffers for the time being.

The unelected European Commission is on a collision course with the elected member state governments who increasingly see the Brussels model of rail privatisation as a recipe for compromising safety and the decline of rail.

Brian Denny is a spokesperson for Trade Unionists Against the EU Constitution and is Head of Communications for the RMT
Alex Gordon is the South Wales & West Regional Council Secretary of the RMT