Extinction looms for the private operator
International Freighting Weekly: 7th December 2009
European Rail Freight Association president Tony (Lord) Berkeley sees liberalisation of European rail freight as a political issue - one that the 'liberalisers' are losing as EU rail directives lead to the consolidation of major freight operators and the emergence of an oligopoly - "a market dominated by a few large suppliers".
Rail freight liberalisation has been on the European agenda since 1991, when the first directive was issued, designed to bring the single market to rail freight in the same way as it did to road freight some years before.
Several directives and 18 years later, there has been change, but open access, liberalisation and competition are still incomplete, with different barriers in each member state and with many governments failing to implement either the spirit or the letter of these EU laws.
From the customers’ point of view, this might seem irrelevant. The more important question from them is: "Do I get the quality, the service and the price I need from using rail freight?" Often the answer has been "no", when there is no choice of operator or logistics provider.
Just as it is unthinkable now for there to be only one logistics operator seeking a customer’s business using road freight, it is often the norm for only one operator - generally the state-owned incumbent - offering rail freight services. The reasons for this may range from legislation, inability to access tracks of terminals and safety rules designed by the state railway aimed at making compliance by any other operator difficult.
Over the last few years, more private sector operations have started in some member states that were previously closed, bringing competition to parts of the market.
New entrants expect, supported by the EU legislation, fair competition. They expect transparency of accounting between their state-owned competitors - who are also often infrastructure managers. They also expect independent regulation to ensure fair access to the tracks, sidings and facilities therein, reasonable charging and quick and simple appeal procedures.
When they get this, the presence of competition has demonstrated growth in rail freight, compared with a reduction in traffic where there is no competition.
What are the present problems, particularly for the intermodal sector, across Europe?
The EC in October identified many of these in letters to 21 member states, listing their non-compliance with the First Railway Package and threatening them with proceedings in the European Court for non-implementation of EU legislation.
So, for example, France could be fined for not having an independent regulator with adequate powers; Poland, for allowing the infrastructure manager to retain links with train operators; Germany, for not following the rules on infrastructure charging; and Italy, for just about all of these and more.
The depressing thing about this list is that it covers 21 member states, each with different failures to comply with the law.
Although welcome, this is still only the tip of an iceberg, but the problem is that the shape of the berg is different in each member state. The UK did not receive a letter.
In practice, this means that rail timetables are often set by the incumbent to suit its own traffic and to prevent competitors getting decent paths. Additionally, infrastructure managers’ charges bear no relation to the "short-run marginal cost" required in the legislation for freight.
Charges are often not fixed by the managers but by the state, and with no independent regulation.
All this puts added risk on any private sector operator, while the state-owned ones often do not have to bother with risk, and anyway, they often control the means of beating the competition.
There are still internal frontiers. Old legislation that requires state-owned railways to take all trains across borders has not been repealed. They can easily ensure that private operators are delayed and subject to high costs for this "service".
There are still countries where the charges paid for using the track are different for incumbents and private operators - and access charges across Europe vary enormously, from a low of €0.3 (US$0.5) per train/km in Sweden to more than €10 ($15) per train/km in Slovakia.
Few of the charges bear any relationship to the actual cost of maintaining the infrastructure, nor to the legal requirement to charge freight short-run marginal cost, unless a higher charge will still enable the sector to be competitive.
Finally, we have the shrinking independent sector, with more and more such operators being taken over by incumbents.
This not only reduces choice for customers of rail freight, but could lead, in quite a short time, to just two or possibly three major players in this market across Europe.
Competition in many parts will be almost non-existent, or confined to local specialist or short-line operators. One must question whether this state of affairs complies with EU competition law and whether such an outcome does not create dominant positions in the European rail freight market.
One can also question how incumbent operators, generally seeking state aid for passenger or infrastructure maintenance but with no transparency of accounts, can find the money to purchase competing businesses.
Examples of recent purchases or reported market interest by state-owned incumbents in private or independent operators include DB Schenker, which has bought holdings in PCC Rail and PTK Holding (Poland), EWS Railway in the UK, France and Spain, and Ferrovia Nord Cargo in Italy. SNCF has bought Veolia Cargo in Germany and is reported to be looking at CTL, Poland’s largest independent operator. And Switzerland’s SBB Cargo is being fought over by SNCF and DB Schenker.
So it is difficult to avoid the conclusion that some companies are getting into a very dominant position in many rail freight markets, and once that is achieved, undercutting prices on those routes on which there is competition usually follows.
We appear to be heading towards a noncompetitive, European state-owned duopoly, which will undoubtedly result in less competition, lower service quality and poor efficiency, leading in turn to lower volumes carried by rail.
What is the solution? Why not require all incumbents or holding companies to sell their freight operators, unless they publish separate and independently audited accounts for these subsidiaries?
There is no reason for states to own logistics companies, and their sale could raise useful funding for other investments in the railway.
It would mean that all operators would compete on more equal terms. Some would be much larger than others, but it should mean that one operator would not have an inbuilt advantage due to its relationship to the infrastructure manager or government.
Unless action is taken to stop, or even redress, the move towards a duopoly of rail freight across Europe, there will be no independent or private operators left to compete in a few years’ time.
The EC should undertake an urgent investigation into the rail freight market across Europe from a competition point of view and investigate whether the everincreasing concentration of train operations into one or two large companies is not contrary to the efficient operation of a single market.
It also needs to put the segmentation of the rail freight market right, and should lower the notification threshold for mergers and acquisitions with EU competition authorities.
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