Lessons From Rail Freight Liberalization

Dr Dewan MZ Islam

Rail Freight Workshop

University of Westminster

12.11.2009

Outline of the presentation

o Modal share of freight transport modes;

o Strength, weakness of European rail freight transport;

o Rail liberalisation in the US;

o Rail liberalisation in the EU;

o Rail Liberalisation Index 2007; and

o UK Rail liberalisation.

European Rail Performance in billion tkm

Source: EU Energy and Transport in figures- Statistical Pocketbook 2007/08

EU railways can take lesson from US rail liberalisation

Modal share of inland freight transport modes in EU-27 in %

Source: EU Energy and Transport in figures- Statistical Pocketbook 2007/08

Evolution of modal split of international freight transport

Source: Mid-term review of EC White Paper 2001

Expected growth in freight transport activity by mode Expected growth in freight transport activity by mode (2000=100)(2000=100) ‏‏

Source: Mid-term review of EC White Paper 2001

Strength and Weakness of EU RailwaysRail is an environment friendly mode of transport;

Can apply economies of scale,

Can replace multiple trucks from the road,

European governments favours rail over road to shift cargo from congested road to rail (and waterways transport).

But rail is constrained by

– Outdated business attitude and operational practices,– Lack of dynamism, – Lack of reliability, – Lack of flexibility, – Lack of customer orientation,– Lack of interoperability between national systems,– Political influence,– Aging infrastructure and rolling stock, and – Decreasing investment

Rail can regain its share if it becomes efficient, competitive, integrated, dynamic, modern, and customer responsive services.

Rail Liberalisation in the US – Background

Rail industry has always been owned and operated by the private sector;

The rail industry came at the centre of public scrutiny and political intervention due to

– Importance – fixedness as well as – monopoly in several regions,

The policies and regulations developed over the first 100 years of rail freight operations were intended to prevent a monopoly and to maintain open access;

A regulatory board established in 1887, the Interstate Commerce Commission (ICC), grew in power to

– control freight rates, – oversee mergers and acquisitions, and – enhance competition between the modes by preventing ownership in different

modes.

Rail Liberalisation in the US – Background Rail industry was losing market share by the middle of the 20th Century.

Rail freight traffic began to suffer because of competition fromdynamic road.

The result was so bad that whereas in the 1920 the railroads accounted for 75% of all intercity freight movements, by 1975 the share had fallen to 35%.

The ICC had set rates deliberately low for farm products and higher rates for general freight (the most attractive to truck competition).

At the same time the railway companies had little incentives to modernize, because the ICC had to rule on major changes, and

Even, the railways found it difficult to obtain approval to close unprofitable tracks and services.

Rail Liberalisation in the US -Background

By 1960 one third of the US rail industry was bankrupt or close to failure.

This situation forced the policy makers to act promptly and wisely.

Also the willingness to undertake regulatory reform was enhanced by the findings and conclusions of several academic studies.

Economists demonstrated that the regulatory board (ICC) had been‘captured’ by the industry itself, with members being drawn largely from the transport companies themselves.

At the same time the accepted theories concerning the threat of monopoly control over prices were being challenged by a new theory of contestability.

This old theory held that a monopolist would be prevented from charging monopolistic prices if there was a threat that other firms could enter the industry. The threat of entry would be sufficient to discourage the monopolist from abusing his market position.

The key problem was freeing entry levels. In many regulated industries, the regulators restricted entry. Thus, the conditions for policy change were thrust on legislators, and there was a growing acceptance for a solution based on a relaxation of regulatory control.

Rail Reform in the USThe first round of policy change was the Railroad Revitalization and Regulatory Reform Act of 1976 (sometimes referred to as the 4R Act) which eased regulations on rates, line abandonment, and mergers.

This reform was important, but not good enough to revitalise the rail sector.

Four years later, the Staggers Rail Act of 1980 reformed the rail sector.

The most important features of the Staggers Act were

– granting of greater pricing freedom, – streamlining merger timetables, – expediting the line abandonment process, – allowing multi-modal ownership, and – permitting confidential contracts with shippers.

Rail deregulation in the United States is considered by many experts as a good example of

– how a policy shift can produce significant changes in the economic health of an industry .

Result of Rail Reform in the US

The railroads immediately began to concentrate on their core freight activity, the business which was most profitable and least subject to competition from other modes was bulk freight.

Rail traffic became increasing dominated by flows of coal, grain, and ores

– 43% of all traffic was accounted for by coal shipments in 2003. Larger capacity wagons were brought into service.

The high cost of maintaining unprofitable routes was a major drain on resources. Thus the railroads began abandoning these tracks.

Operating costs were reduced significantly by staff reductions. Also other concessions, such as working hours, have significantly improved productivity.

Result of Rail Reform in the USThe railroads began changes in freight rates (as they are allowed to enter into confidential contracts).

This introduced more competition between the modes and led to lower rates overall.

The post deregulation period has been marked by a significant development in mergers and acquisitions.

– From 56 Class I railroads in 1975 reduced to 7 in 2005 (two of which are Canadian). The intermodal ownership and operation has led to a revitalization of the general freight business.

– For the first time, intermodal traffic accounted for the majority of rail revenues in 2003.The railways have achieved much higher levels of performance.

By 2003 the market share of intercity rail freight shipments was 42%, against 35% in 1975.

The US railroad industry has made profits since deregulation, and has been rescued from bankruptcy.

Rail Performance in the US

US Track Mileage and Carrier

Criticism of US Rail

Consumers are hard hit by unfair rail monopoly;

The US railways are exempt from the antitrust law;

The antitrust law is designed to prevent monopoly mergers and anticompetitive abuse of power;

Now four major US Freight railways have divided the country into regional monopolies;

These big operators control over 90 percent of US freight rail shipments;

This monopoly power allows the railroad to raise shipping rate to anticompetitive levels on captive shippers.

– Source: The Salt Lake Tribune www.sltrib.com

Railway Reform in Europe – background

There is a basic difference in pre-reformed railways in the US and Europe;

European railways were owned, operated and regulated by government; on in contrast- the US railways were owned and operated in private sector;

So there is big difference in the attitude, motivation, management, and operation of railways between the two continent;

The railways were operated by national companies within nationalboundaries; in contrast - US railways were operated on a continental scale;

Against the poor performance and decline of modal share it was essential to reform the European railways. Congestion on the road is another motivation for rail reform in the EU.

Railway Reform in Europe The Treaty of Rome in 1957 called for ‘a common policy for transport;

For two decades nothing much happened after this (indicating European willingness to reform);

European Parliament became impatient and brought a case against the Council of Ministers;

In 1985 the Court of Justice ruled partially in favour of the Parliament;

A new era of Community transport regulation/ policy started (up to the Third Railway Package and beyond);

The Treaty of Maastricht, adopted in 1992, is another important milestone in the development of European transport policy.

Prior to this Treaty transport decision-making were made unanimously;

The Treaty of Maastricht simplified the decision making process, replacing ‘unanimous’ to ‘majority one’.

Railway Reform in Europe

European Commission adopted series of (policy) papers including

– 1992 Green paper on the impact of transport on the environment,– 1995 Green paper on Citizen’s network,– 1996 White paper on a Strategy for Revitalising the Community

Railways,– 1998 White paper on Fair payment for Infrastructure Use,

Rail legislation in the nineties introduced a certain degree of market opening and prompted the railways to concentrate more on competitiveness.

Since then, the European Commission has put forward further initiatives in the shape of packages of legislative measures.

A turning point for European Railway liberalisation: Directive 91/440

The directive (91/440) transformed the legal framework of European state railway companies,

It was the beginning of the end of state-operated monopolies,

It laid down the first foundation for the creation of European railway market,

It required railways to be operated commercially like private companies,

Managerially it was meant to be separated from the state,

Separate account for infrastructure and operation.

The First Railway PackageThe First Railway Package was adopted on 26 February 2001, implemented by member states on 15 March 2003,

It is an important suite of EC Directives. The first Directive ( 2001/12/EC) is designed to:

– Open the rail freight market for international competition;– Clarify the formal relationship between the state and the infrastructure

manager, on the one hand, and between infrastructure manager andthe railway undertakings (RUs), on the other hand.

The second Directive (2001/13/EC) set out the conditions that freight operators must meet in order to be granted a licence to operate services on the European rail network and

The third Directive (2001/14/EC) introduced a defined policy for capacity allocation and infrastructure charging.

The Second Railway PackageThe Second Railway Package was adopted in April 2004

Directive 2004/51/EC (further revision of Directive 91/440) opens up both national and international freight services on the entire European network from 1 January 2007;

Directive 2004/49/EC (the Railway Safety Directive) develops a common approach to rail safety. It lays down a clear procedure for granting the safety certificates which every railway company must obtain before it can run trains on the European network and harmonises safety levels across Europe by, among other things; specifying what infrastructure managers need to do in order to receive safety authorisation.

Directive 2004/50/EC (on Interoperability ) harmonises and clarifies interoperability requirements; and

Regulation (EC) 881/2004 sets up an effective steering body, the European Railway Agency, to co-ordinate groups of technical experts seeking common solutions on safety and interoperability.

Third Railway Package

The European Commission adopted the Third Railway Package on 26 September 2007, consisting of:

Directive 2007/59/EC on the certification of train drivers operating locomotives and trains. It lays down the conditions and procedures for the certification of train crews operating locomotives and trains;

Directive 2007/58/EC on the allocation of railway infrastructure capacity and the levying of charges for the use of railway infrastructure: and

Regulation 1371/2007 on rail passengers' rights and obligations: ensures basic rights for passengers, for example, with regard toinsurance, ticketing, and for passengers with reduced mobility.

Rail Liberalization Index 2007

Variable Implementation The reality is that not all countries did follow these EC Directives and Packages time and quickly enough.

The European Commission (EC) sent formal notices to 24 European Union (EU) member states on June 26 2008 regarding their failure to properly implement the First Railway Package legislation.

The EU contents that

– The creation of an integrated railway market is a key factor in boosting its efficiency and competitiveness, as well as a further step in ensuring sustainable mobility in Europe.

As part of its duty to monitor the transposition of EU legislation into national law, the EC found implementation failures in Austria, Belgium, Bulgaria, the Czech Republic, Germany, Denmark, Estonia, Greece, Spain, Finland, France, Hungary, Ireland, Italy, Lithuania, Luxembourg, Latvia, Poland, Portugal, Romania, Sweden, Slovenia, Slovakia and the United Kingdom.

"Proper transposition of the first railway package is essential for creating competition in the European railway markets and increasing the competitiveness of railways in relation to other modes of transport," said Antonio Tajani, EC vice president in charge of transport.

UK Rail Liberalisation and Current Status

UK is at the top of EU Rail Liberalisation Index 2007 and 2004: considered as a good example by many.

In the course of the reform of the British rail sector in 1994, the former British Rail (BR) was spit into more than 100 companies.

Infrastructure was separated from operation-

– Infrastructure manager (IM)- Railtrack, currently Network Rail (non-dividend company).

Network Rail is responsible for access and management of network.

The Office of Rail Regulation (ORR) acts as the regulatory authority (as per directive 2001/14/EC).

ORR can impose fine of up to 10% of annual revenues of a licensed RU.

In 2006, a total of 23 Improvement Notices and five Prohibition Notices were issued. Six cases of infringement against safety regulations were initiated and fines amounting to a total of almost Euro 1.4 million were imposed.

UK Rail Liberalisation and Current Status

In addition to regulatory maters the ORR is responsible for issuing licences, safety certificates and homologation (granting approval) of rolling stock.

UK has published for the first time its network statement for the year 2008 (although it was due in 2005)

99.9% of all passenger services are awarded in the form of tender procedures, and a franchise agreement is signed with the RU that wins the tender, guaranteeing its exclusive rights. Some franchises overlap.

Open access for passenger is available on the short –distance line e.g. between Heathrow airport and Paddington station in London.

Rail freight operators have open access to British rail network.

The increase (from 7.1% in 1995 to 11% in 2005) of rail freight share is considered a success by many.

Performance of UK Rail Freight Sector

Summary US rail liberalisation/deregulation is a good example; customersbenefited from the lower freight rate, operators benefited through higher productivity and higher revenue;

But the US rail freight market is now captured by four major (monopolistic) regional operators;

Thus further reform is essential;

EU rail liberalisation is significantly different than the US Rail liberalisation;

EU rail industry including operation was in government sector;

Rail Liberalisation Index 2007and other reports suggest that the early reformed country’s rail freight sector (for example UK) is operating in a competitive environment and has gained market share;

EU rail liberalisation is making railway services European rather than national, although slowly.

ReferencesRail Liberalisation Index 2007, Kirchner, October 2007, Brussels,

Modern rail Modern Europe- Towards an integrated European Railway Area (available in http://ec.europa.eu/transport/index_en.htm)

EU Energy and Transport in figures- Statistical pocketbook 2007/08 (http://ec.europa.eu/transport/index_en.htm)

European Commission. Green Paper: Towards a European strategy for the security of energy supply. 2001. Luxembourg: Office for the Official Publications of the European Communities.

European Commission, White Paper: European transport policy for 2010: time to decide. 2001, Luxembourg: Office for the Official Publications of the European Communities.

European Commission, Mid-term review of White Paper 2001, 2006, Luxembourg: Office for the Official Publications of the European Communities.

Rail Freight Group, 2008, Successes and lessons of rail liberalisation in the UK;

http://people.hofstra.edu/geotrans/eng/ch9en/appl9en/ch9a1en.html

http://econpapers.repec.org/paper/agsiaae06/25368.htm

http://ec.europa.eu/transport/index_en.htm

http://www.sltrib.com

Thanks a lot for your attention

Dr Dewan MZ Islam

NewRail, Mechanical and Systems Engineering,

Newcastle University, UK

+44 191 222 3972

Dewan.islam@ncl.ac.uk

Any Question?