Efficiency in Railway Operations
and Infrastructure Management

12

Discussion Paper 2015 • 12
Dejan Makovsek,
Vincent Benezech andStephen Perkins

International Transport Forum,
Paris, France

Efficiency in Railway Operations andInfrastructure Management

Discussion Paper No. 2015-12

Summary and Conclusions of the Roundtable on
Efficiency in Railway Operations and Infrastructure Management(18-19 November 2014, Paris)

Dejan MAKOVSEK, Vincent BENEZECH, and Stephen PERKINSInternational Transport Forum at the OECD, Paris

May 2015

THE INTERNATIONAL TRANSPORT FORUM
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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

Table of contents

1. Introduction .............................................................................................................................. 4
2. Is there a simple approach to assessing railway efficiency? .................................................... 5
A basic but balanced scorecard.................................................................................................. 5
Caveats to the simple approach to railway efficiency assessment ............................................. 7
The importance of the narrative ................................................................................................. 9
3. Taking account of multiple railway efficiency dimensions .................................................. 14
4. The policy maker and exogenous efficiency determinants ..................................................... 16
5. Conclusion............................................................................................................................... 18
Bibliography ................................................................................................................................ 20

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

1. Introduction

The ITF has produced a series of reports and discussion papers addressing the interrelated issues ofrailway structure and performance; see for example Beck et al. (2013), Thompson (2013), ECMT(2007) and, Thompson (2007). The academic literature on this subject is also significant, with good
examples in Mizutani et al (2014), Nash et al. (2013), Van de Velde et al. (2012) and Kirchner (2002,
2004, 2007 and 2011). All of these studies have confronted the question of how to measure theperformance, or efficiency, of railways both in the sense of how one railway compares with others(cross-section) and how railways have changed as a result of policy interventions (time-series). The
purpose of the roundtable discussions was to revisit the issue of how to define and measure efficiency
at the proper level of detail and with reasonably available data so that policy makers can benchmark
the performance of their railways, evaluate the impact of past changes in railway structure, ownershipor regulation and assess the likely outcome of future initiatives. The challenge is inherent in thephrases “proper level of detail” and “reasonably available data”.
Efficiency entails maximizing the outputs from a set of inputs (technical efficiency) or creating an
optimal mix of inputs to maximize output (allocative efficiency). When we consider efficiency, we are
inclined to think in terms of a single dimension, a single number or percentage. The railway businessis not that simple. Railways come in all shapes and sizes: vertically integrated, vertically separated,public and private, passenger or freight dominated or mixed, supported by subsidies or fully selfreliant. The provision of railway services is multidimensional. In economic terms the railway company
is a multi-product firm. It is a very capital intensive business, economies of scale and density can berelevant and some natural monopoly characteristics are present. In most contexts and on mostcontinents, a competitive railway market is not a straightforward concept.
This complexity makes it difficult to produce a description of efficiency that is equally relevantfrom different viewpoints or to all stakeholders. The answers to questions on railway efficiency will
depend on who is asking. Primarily, apart from the owners of rail companies, the questions may comefrom three main stakeholders:the government;the users of the network (in a vertically separated railway) or the users of railway services;and

the economic regulator, if there is one.

In most countries, governments pay large subsidies for railway infrastructure and passenger
transport. In these cases, the focus of the government will be in asking if those subsidies are spent
efficiently or how, through higher efficiency, they could be reduced.
Train operators will be interested in efficiency in terms of availability and access costs of railway
infrastructure, while the users of railway services will place their stress on punctuality/reliability or
speed of transport.

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

The regulator will pursue both technical and allocative efficiency. It will require different
information to examine each aspect. Its focus will include rate setting, user charge price caps, safety
and performance in terms of operating and financial indicators.
Against this background the current paper explores how railway efficiency can be conceptualized
and measured at different levels of inquiry and depth, developing the work begun in the paper by Becket al (2013).

2. Is There a Simple Approach to Assessing Railway Efficiency?

A basic but balanced scorecard
The simplest approach would be to derive key performance indicators (KPIs) from published data.
Thompson and Bente (2014) show an example of what sources and types of publicly available data
exist (supplemented by data they have collected themselves). Their sample includes some railways in
the EU, plus the railways of Switzerland, Norway, China, US, Canada, Japan and Indian Railways.
They propose an approach that can be used to produce some information on railway efficiency in alimited time-frame with limited data. The indicators proposed refer to basic indices of size and scale
and from these parameters basic ratios of efficiency and productivity can be developed (e.g. traffic
density, wagon/coach productivity…). Adding a few more data points, one might create a basic butbalanced score card of railway efficiency that would consist of six types of indicators (Bente &Thompson 2014):
system scope;asset utilisation;

human resource utilisation;

operational performance;financial performance;customer-centric service quality.

An example of more detailed KPIs that could be included in each of these fields is presented inBox 1.

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

Box 1. A balanced score card for railway efficiency
System scope

Asset utilization

Passenger service scope
•
Fleet
•
Transport units (pass-km)•
Train-kilometres•
Staff
Freight service scope
•
Fleet
•
Transport units (ton-km)•
Train-kilometres•
Staff
Infrastructure scope
•
Lines
•
Track
•
Stations•…

Infrastructure assets•
Train-km/line-km per year•
Train-km/track-km per year•
Transport units/line-km per year•
Transport units/track-km per year
Passenger fleet•
Transport units/unit of fleet per year•
Kilometres in service/unit of fleet per year
Freight fleet•
Transport units/unit of fleet per year•
Kilometres in service/unit of fleet per year

Human resources

Operational performance
Unit cost, infrastructure•
Asset maintenance (per line/track-km per year)•
Operational (per line/track-km per year)
Unit cost, train operations•
Passenger service (per train-km)•
Freight service (per train-km)

Infrastructure, number of staff in•
Operations/traffic management•
Asset maintenance•Network development•
Total cost of labour by division
Passenger service, number of staff in•
Sales and marketing•
Operations•
Asset maintenance•Total cost of labour by division
Freight service, number of staff•
Sales and marketing•
Operations•
Asset maintenance•Total cost of labour by division

Financial performance

Customer-centric indicators

Revenue (core, ancillary)

Modal competitiveness•
Relative speed between modes•
Relative performance between modes•
Relative cost/price between modes•
Modal split(the points above) subdivided by•
Freight into business lines (combined/block/…;
container/bulk/…) Passenger into:•
Between agglomerations•
Cross-country•
HSR

Cost (core, ancillary)
Asset values (book value, MEV, shadow price)•
Infrastructure•
Passenger service•
Freight service
Subsidy (OPEX, CAPEX)(NEW) Investment/capital employed(Re-) Investment/capital employed
Indebtedness/EBITDA-ratio
Cash-flow from financing activity (depreciation – CAPEX +subsidies-net borrowing)
Source: Bente & Thompson (2014).

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

Both cross-sectional (comparing systems) and time series (change over time) indices will be
required to monitor performance. Time-series analysis makes it possible to compare the performanceof a railway system compared to previous years but no matter how well the railway may appear to be
performing against itself, it may still be relatively inefficient when compared to other railway
companies. Using cross-section (with time-series) one could try to assess whether some railway
companies consistently come out on top of the distribution in terms of efficiency over a number ofthese fields and over time. Both types of data have to be treated with caution. Time series indicators
suffer from the risk that the categorisation of inputs or outputs change from one year to the next andthey can be heavily influenced by major organisational or economic changes, for instance since 2008.
Outsourcing services can, for example, have a very large impact on indicators of the efficiency ofusing human resources. Cross-sectional data similarly risk comparing systems where outputs or inputs
have been delineated differently. The limits are addressed more thoroughly in the next section. It isclear that some subjective judgements in the creation and use of these KPIs will have to be made andthat an integral part of using such an approach is significant input from railway experts in interpreting
the results. A key weakness of the use of KPIs is that different measures will give different results (forexample cost per train-km and cost per track-km) and it is not clear which measure should be used.
The outcomes of such an exercise would be subject to multiple caveats, which we examine in thenext section, and would give an observer a first indication of the efficiency of a railway system
without explaining why observed efficiency differences arise, a point addressed in section 2.3.
Caveats to the simple approach to railway efficiency assessment
The simplest benchmarking approach is to compare a railway to its own past performance. Even inthis case, however, “ceteris paribus” may not hold. Past data on financial performance may need to be
adjusted as a result of organizational changes in the company, changes in accounting standards orpolicy, inadequate application of accounting standards1 or external policy decisions,2 where the Stateis the owner. There may also be times during which railway investment or maintenance is inadequate,
thus storing up problems for the future.
Cross-sectional benchmarking is equally challenging and requires two preparatory processes. The
data used from different systems must be standardised and normalised. Standardisation refers tomaking sure that the activities or materials compared are alike. Normalisation requires taking accountof differences in economies of scale and density. In railways, company size or scale of activity has asubstantial impact on the perceived efficiency (most notably asset utilisation).
A rich data set is required to enable standardization for cross-sectional analysis. Comparison isincreasingly compromised by data availability as a result of organizational changes, changes inownership and integration of railways into larger logistics chains. The UIC Lasting Infrastructure
Costs Benchmarking initiative3 was an excellent example of how to undertake cross-sectional analysis
and illustrates how many different factors need to be taken into account before the cost of maintenanceand renewals can be examined on comparable grounds. Reported costs across different infrastructure

1

Nash and Smith (2014) cite examples where no depreciation or interest is entered into the accounts for
assets that have been purchased with grants.

2

E.g. prior to privatisation, the state might decide to treat railway infrastructure as a strategic asset andremove it from the balance sheets of the railway infra manager. This would, at least in part, change its
borrowing capacity against its assets and influence all future business activity.

3

Information on the initiative is available here: http://www.uic.org/spip.php?article582

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

managers were harmonized under this initiative to account for complexity of the network, for example
in terms of the number of switches per track km.
Another challenge is the use of demand to supply ratios to compare the output of railways(passengers carried) with inputs (e.g. train kilometres). In principle in a fully competitive market there
should be convergence in these ratios between railways but in practice the demand or output ofrailway services is dependent on a number of exogenous factors and public policies. Having low
traffic levels does not necessarily imply that train operations are inefficient, and vice versa. To provide
two illustrations:heavily subsidized passenger traffic provided in a thin market under public service obligations
might yield low passenger numbers per train-kilometre, even though it is managed highly efficiently,
simply because the market is so small;a financially self-sustained, profitable freight railway business can still be managed below bestpractice efficiency standards.
Bonnafous and Crozet (2014) illustrate how demand/supply ratios can be misinterpreted and how
the use of a limited number of indicators can provide a misleading picture without thoroughknowledge of the root causes of efficiency. The French rail system, when compared to its peers seems
to be fairly successful in passenger transport. In fact, it ranks first in Europe with 406 million trainkilometres and an average of 227 of passenger per train. Other national incumbents like DB or SBB lie
far behind with countries in Europe like Germany or Switzerland with 100 and 130 passengers per
train, respectively. But when one probes deeper, it is revealed that this performance is the result ofstructural differences – in France 2/3 of passenger traffic is carried by the TGV. The high speed trains
have a higher capacity, higher occupancy (due to use of yield management in setting fares) and they
cover long distances. The illustration suggests, how basic structural differences, which are ultimately
the result of geography public (transport) policy decisions can determine the outcomes of simple
efficiency comparisons.
The observed “efficiency” of a railway system through demand/supply ratios is influenced byfactors exogenous to the system (topography, historic evolution, etc.), government policy andendogenous factors, which are dependent on the efforts of the management and policy maker. Without
adjustment for exogenous factors, KPI’s such as “cost per transport unit” may be useless.
Finally, a problem that requires special attention is data availability. Research efforts, especially in
the EU have been hampered by lack of good quality data. As Thompson and Bente (2014) note, mostrailways do not see the need for detailed information for internal management purposes or do not think
it is in their interest to release such information to permit public comparisons to be made. Given thatmost railways in the EU receive substantial financial support from government sources, it is more thanquestionable to what extent such a practice is acceptable, although it is a well-documented
phenomenon in the broader context of state-owned companies, particularly where strong unions havedeveloped (e.g. Salinger 1984, Rose 1987, Hendricks 1977, Savedoff and Spiller 1999). These authors
identify concealing data as a strategy for protection of the company’s cash flow. Better information on
efficiency might lead to the shedding of excess workforce or substitution of labour with capital orother changes, which the unions would perceive as a threat to their bargaining power.

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENTThe US example illustrates that information can be systematically collected and publicly reported,
including from fully private businesses.4 Moreover, a lot of the collected information is publicly
available, while a small part of commercially sensitive information is reserved for regulatory purposes
only.
Given the caveats, a general recommendation in developing “high-level” aggregate analysis,
especially when time and resources are limited, is to build on simple indicators, preferably those thatthe railway organisation already routinely collects. These may simply be unit costs, so long as they are
not dependant on external factors5 and are controllable by management. This should reduce issues withdata availability and the interpretation of data6. Even in this case, it should be recognized thatexogenous factors and the level of demand7 will heavily influence the outcomes of any comparison,
especially the cross-section type. The example in box 1 tries to follow this approach, as much of theinformation mentioned is in many cases already publicly available. Developing indicators that requirelarge amounts of data that are not readily available can undermine transparency and may be
counterproductive for monitoring performance over time, making updating of indicators difficult.
The importance of the narrative
To illustrate the importance of the context in which a railway operates, and especially structuralreforms and changes in policy that have affected the railway over recent decades, this section looks
more closely at the cost efficiency of the railway systems in two countries, the Netherlands and GreatBritain.
The evolution of infrastructure costs in the Netherlands
The transformation of the railway sector in the Netherlands started in the 1990s. Full verticalseparation occurred in 1995 and by 1998 all network maintenance was outsourced. In 2005,
infrastructure maintenance, capacity management, and traffic control activities merged to form
ProRail BV (Public Limited Liability Company), which became the infrastructure manager in a clear,vertically separated framework.
At first sight, from Figure 1, it would appear that vertical separation led to a decrease in theefficiency of the railway system. Maintenance costs soared from 1997 and the overall cost of runningtrains in the country steadily increased from the time of separation in 1993 (Swier, 2014). However,
the main reasons behind the surge in costs are not directly linked to technical inefficiency andoutsourcing; changing circumstances like a fast increase of rail contact fatigue, more severe safety
rules, night work and increase in track utilization explain a lot of the cost increase.

4

The railway companies face charges in case of reporting inaccurate data. The incentive for accurate
reporting is enforced through the fact that such data are often used in court proceedings with shippers or
the regulator and are subject to intense scrutiny.

5

For example if the infrastructure manager is state owned and subsidized, it is the decision of the state howmuch money it wants to make available for maintenance or renewals so these costs are outside of thedirect control of the infrastructure manager.

6

However, care should be taken when comparing different railway companies or countries because unit
costs depend on economy of scale and density, which need to be controlled for.

7

Deciding whether demand should be treated or not as an exogenous factor is a complex question. On the
one hand it is easier to compare situations for a given level of demand. On the other hand, growing
demand is often an objective of railways companies, as exemplified by net cost contracts in franchising.

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

In the first ten years after outsourcing, ProRail had input contracts for maintenance. Even though
failure rates became lower than before outsourcing, costs did not go down. The performance/priceratio really started to improve after the introduction of powerful performance contracts defining
precisely the expected outputs without setting out explicitly the technical ways of achieving these
outputs8.
Separation was accompanied by the establishment of more transparent financial reporting rules,
with assets depreciated according to replacement value rather than historical cost accounting value andthe inclusion of traffic control and capacity management in the Prorail balance sheet. Arguably, there
is a noticeable increase in stewardship costs (measurement and accountance, taxes…) which is partly
attributable to separation but these remain small compared to the increase in asset depreciation costs(see Figure 2).
Figure 1. Evolution of maintenance cost of the Dutch railway network

Fixed Maintenance slot scheduleRail Contact Fatigue

Source: Adapted from Swier 2012.

810

One of the biggest challenges when writing these performance contracts, especially those related to daily
maintenance, is to set out outputs that guarantee track quality in the long-term and prevent subcontractors from opportunistically reducing costs by only carrying out short-term maintenance.

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

Figure 2. Evolution of cost items in infrastructure spending in the Netherlands

Source: Swier 2014.

International comparison of ProRail gives a mixed picture. In terms of quality, ProRail fares
significantly better than other European railway infrastructure managers, with less rail breaks andtrack or signal failures, but their maintenance unit costs are higher than the European average (Hansen
et al, 2013), stressing the need for quality-adjusted metrics.
The cost of the railway system in Great Britain
The British Railway system underwent structural changes, including full vertical separation,around the same time as the Netherlands. The Railways Act of 1993 established the privatisedframework for British railways, breaking up the historical BR into more than 100 separate companies,
the relationships between which were to be set in contracts or through regulatory mechanisms.
Infrastructure was taken over by Railtrack, a newly established public sector company whose shareswere subsequently sold to the private sector and train operations were divided among 25 geographicalfranchises. Maintenance and renewal were subcontracted by Railtrack to several private engineering
companies formed by privatising the relevant parts of British Rail. Railtrack went into administration
as a result of the derailment of a train near Hatfield in 2001. The accident was caused by a faulty rail.
Even though casualties were limited (four deaths), the derailment had major repercussions as it laidbare the company’s ignorance of the condition of its assets. In response, Railtrack imposed speed
restrictions over large sections of the network. This resulted in the government compensating the train
operating concessions, providing grants for track renewals and allowing the infrastructure company toraise additional debt. Railtrack was replaced by and their activities were taken over by Network Rail, a
not for profit company eventually defined as State-owned for national accounting purposes.
The dynamics of infrastructure spending in Great Britain can be divided in three periods. After
privatisation and before the Hatfield incident, maintenance costs went down and total expenditure wasstable. This was not only the result of efficiency gains but to a large extent due to less maintenancebeing carried out by subcontractors, which worked on fixed-cost contracts. Moreover, even if
investment rose during this period, experts agree that it was inadequate considering the increase inpassenger demand (Nash, 2002). This eventually led to a spiralling of costs after 2001, when Network
Rail started making up for the inadequate levels of maintenance and investment under Railtrack and

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

adapted to tougher safety requirements9. Substantial inefficiency crept into Network Rail’s cost baseas the regulatory mechanism was temporarily suspended (see Office of the Rail Regulator, 2003).
Since 2004-2005, Network Rail, under regulatory pressure, has improved efficiency substantially. Unit
costs are still higher than 1996-1997 levels and international comparison suggests that costs are still
about 30% higher than what could be expected of them (McNulty, 2011). Two main reasons are givenin the McNulty report. The first one concerns a lack of outsourcing, Network Rail having taken overall private contractors in 2003 for safety reasons, and because this would result in better coordinationand economies of scale, or at least this is what Network Rail argued. The second reason is themisalignment of incentives as a result of vertical separation. The huge increase in indebtedness to
support the investment in the years 2001-2004 also contributed to sustained higher costs up to 2011.
The overall picture for train operating companies (TOCs) is similar. Right after privatisation, costs
went down as the result of TOCs making low bids to win franchises; franchising was in this regard a
success, with passenger numbers increasing and government subsidies decreasing significantly. From2001 on, TOC costs increased sharply, with 35% unit cost growth from 2000 to 2006 (Smith andWheat, 2012). This was the result of several factors, including fuel prices, emphasis of franchises on
quality (cleanliness, information…) and an above-inflation increase in staff costs. Interestingly,
despite this increase, train operating costs in Great Britain are comparable and even slightly lower thanin other European countries (Civity, 2012). Once again, this figure needs to be interpreted looking at
the railway context. For instance, the incumbent Dutch operator also has among the lowest unit costs
but with much higher traffic density (passenger-kilometre per track–kilometre), thus enabling large
economies of density.

9

12

The strengthening of safety requirements resulted from the public outrage over the Hatfield incident.
However, it is now argued (Evans, 2007) that safety statistics had not deteriorated. The very high level ofmaintenance required after the incident rather stemmed from the fact that Railtrack did not know the stateof their network and could thus not direct maintenance to the portions of the network that required it
most.

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Figure 3. Expenditure of the British railway system by cost item
between 1996 and 201010

Two main conclusions can be drawn from these two case studies.
First, unit costs need to be interpreted cautiously. In the case of infrastructure maintenance, unit
costs are as much a reflexion of the network complexity, purpose and usage as one of the efficiency ofits maintenance manager. An in-depth knowledge of the “engineering narrative” is required to carryout international comparisons. The same applies to TOCs and overall industry costs, where costs perpassenger-kilometre are likely to be more favourable on systems with high track usage rates.
Second, when looking at the evolution of costs for a single country, the broader railway context
needs to guide interpretation. For instance, even though the evolution of infrastructure costs is similar
between ProRail and Network Rail, the underlying mechanisms are very different. The role ofoutsourcing is opposite in the two countries. In the Dutch case, outsourcing proved beneficial toefficiency after a running-in period of ten years or so while in the UK it provided short term benefits
but ended up being very costly. The difference lies in the way contracting is managed. When applying
econometric methods, these elements need to be precisely taken into account.11 Moreover, not only thecosts but also the quality of the railway system needs to be investigated: differences in performance(capacity, functionality, reliability etc.) often explain cost differences and if delaying maintenance ischeap in the short-run, it is often not economically justified.

10

ROSCO - Rolling Stock Leasing Cgenerally s of change in organizother conclusions then as well.about
the effects of change in organization or it is a problem ofompany.

11

As noted by Nash and Smith (2014), vertical separation or outsourcing “is not a dummy variable in the
regression” i.e. a variable, which can take the value 1 or 0 (e.g. is there vertical separation or not).

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

3. Taking Account of Multiple Railway
Efficiency Dimensions

If the narrative determines the measured efficiency as well as its interpretation to the extent
illustrated in the previous section, then a simple approach to railway efficiency will not yield a very
accurate image. One could try to expand the set of the observed KPI’s, but given the dimensions
which affect railway efficiency, this would not be easily manageable and there is also the question ofwhich KPI to give greater weight. Two possible approaches that could translate this complexity into anunderstandable form, as outlined by Smith and Nash (2014), use econometric functions and Data
Envelopment Analysis (DEA) to describe efficiency. The advantage of the DEA method overeconometric approaches in terms of handling multiple inputs and outputs and not requiring thespecification of a particular functional form have disappeared over time as econometric approaches
have evolved. The major weakness of DEA is its inability to take account of random noise, which maylead to inefficiency being over stated. Econometric analysis is therefore preferred.
The econometric efficiency measurement techniques rely on three approaches:cost functions,

production functions,

distance functions.

The cost function assumes cost minimisation in the production process and relates cost to the level of
outputs and input prices. It can deal with multiple outputs, economies of scale and density. It also
allows for cost changes over time, for instance resulting from technological progress. It is the only oneof the three approaches that accounts for both technical and allocative efficiency and railway
efficiency measurement most commonly relies on cost functions. The relative cost efficiency oftransport operators is also the key focus of policy makers and regulators, hence also their reliance on
this approach. Another reason for preferring the cost function approach is that data on costs is morereliable12. Even though some of the caveats evoked for the simple scorecard approach to railway
efficiency remain, one key advantage of the econometric method with costs is that it produces a single
efficiency indicator, controlling for all the factors that can be modelled in the regression (such as costchanges over time, or some of the differences between countries).
The cost function approach can be upgraded to allow the relative efficiency of companies to varythrough time and allows an estimation of this variation. The expansions are termed SFA (Stochastic 13
Frontier Analysis). As the name suggests, the method is used to construct an efficiency frontier and to
estimate the distance of individual observations (railway companies in our case) from the frontier
12

Getting comparable data may be difficult, for instance for financial costs, but at least cost data does not
suffer from the problem of outsourcing.

13“Stochastic” refers to something than can be estimated statistically, but cannot be precisely predicted.

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Dejan Makovsek et al. — Discussion Paper 2015-12 — © OECD/ITF 2015

EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT(graphically similar to Data Envelopment Analysis). The approach can be and is used with panel data(cross-section and time-series data).
SFA seeks to go beyond the cost function approach by recognising that firms' costs will deviate
from the frontier due to random noise (e.g. random events such as bad weather) as well as inefficiency.
It thus seeks to decompose the error in the model into these two components and obtain a bettermeasure of inefficiency.
Econometric approaches require the choice of an appropriate functional form but this is hardly aproblem, as the commonly translog function is very flexible and Box-Cox transforms allow the data to
dictate the functional form. The choice of distribution for the inefficiency term in stochastic frontier
analysis is arbitrary. In the case of SFA, there is a risk that unobserved heterogeneity will be captured
as inefficiency. More recent literature, cited in and including Smith and Nash (2014), have proposed anumber of useful methods to address this issue when panel data is available. In practice, cost functions
and increasingly SFA are being used by the regulators. Regulators usually apply a number of different
methods and approaches to derive an average indicator of efficiency across the methods in order toaccount for the inherent uncertainty in the data and the modelling process.
Econometric models require a lot of data. Panel data is particularly useful in this regard forseparating unobserved heterogeneity from inefficiency. In addition to panel data, regional data withincountries is useful to examine within system performance, enacting better like-for-like comparisonsacross countries, better capturing scale and density effects and increasing sample sizes.
The econometric modelling approach produces a top-down view of efficiency that will benefit
greatly from a bottom-up engineering narrative to provide insight into what determines performance.
For instance, in its last review of pricing, the Office of Rail Regulation (ORR) in the UKcommissioned a number of engineering studies to help understand differences in indicators ofefficiency between Britain and other countries.
In an international comparison exercise with a US railway company, Jan Swier (2014) shows anexample of the importance of such an engineering analysis. He found that unit rail infrastructure costs(measured on a life–cycle basis) were as much as five times higher in the Netherlands. This is whereanother aspect of the narrative comes in: what is the purpose and level of use of the tracks? A precise
statistical analysis of these questions for the US railway company and ProRail allowed Swier toestablish the cascade diagram in Figure 3. Usage and complexity explain 60% of the cost difference.
The biggest cost elements in the Netherlands are the large number of switches and signals, as well as
the extension of electrified tracks. In contrast, the US company benefits from having dedicated freighttraffic and high traffic density in ton-kilometres with few trains.

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

Figure 4. Life-cycle cost comparison between the Netherlands anda US railway company

LCC comparison rail infrastructure;
the Netherlands - US (INDICATIVE)

120

4

100

0

9

LCC index

11

80

7

60
100
40
20

4

4

5

5
17 19

9
10
11
12

19

M

or L
e CC
(c
o r
M mp a ilor le i nferd i x) m a stes a ru
el rs ct
re ha u re
fu l lin Neli n g ya Ls
60 N tall rd s
% o atiLeLe ssl e ca onss co 80 ss te n s(c m % sw ary
o m p l l e i tcM
p l ex ss h eorex tra si sed a Lo ) le f fic gn a
M yw w ve c ls
or o er l c o nee f rk ( ma ro s trolfe 9 0 te sincr
Pu Hig tive % v i al gs
rc he w ers cosr
Sc ha s u ti o rk us ts
C ale in g l iza in g 65 %a
O rg o ad Po tio n h rs )
pe
(7
v w
ra rel an t e r in t /5)
tio ate ag (e hena d e s stim U
l e sp (e a S
LC xce ecs sti m te d
C l le (e a )ra n c sti ted
il i e m )nf (e a t
ra st edst im )
ru a
ct te d
ur )
e
U
S

0

Differences

Source: Swier 2014.

4. The policy maker and exogenous efficiency determinants

The importance of exogenous determinants of costs, as argued in a previous section, can be a far
greater determinant of differences in performance than railway company management. Of the threemain stakeholders mentioned in the introduction, it is the policy maker that has the greatest power indetermining the exogenous circumstances. The policy maker may not be able to change thetopography or the density of settlement of a country, but he can define national transport policy, hecan choose the structure of the railway company, its ownership and the form of economic regulation.
Although it may be debated whether the structure, the ownership and the regulation of the railway
company are exogenous reasons, this paper assumes them as such, as they cannot be decided by the
management of the railway company.
The private railways of the US, Mexico and Canada are vertically integrated companies,
competing with other private companies across large areas of land and large markets. These railways
are considered to be performing efficiently, but their exogenous (and historical) circumstances aredifferent to other countries, those of Europe for example, where most traffic is carried by railway
companies that are still state owned.

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

In the EU the dominant mode of private participation, where it has developed, is through exclusive
concessions for passenger transport (with competition for the market). Open access freight and more
recently passenger train operations (competition in the market / on the track) have gradually expanded
since the mid-1990s. The effects of competition on efficiency are not obvious. The EU 15 railways do
not show a particularly positive picture in terms of traffic growth or modal share. As Thompson and
Bente (2014) note, it is possible that the restructuring reforms in the EU have not been implemented toa sufficient extent to have a significant impact. It is also possible to argue that the outcomes would
have been worse without the reforms.
The organizational structure in the case of most railways in the EU has not substantially changed.
In some cases, a restructuring was made from a single company to a holding structure. There are now
14 cases of full vertical and horizontal separation in Europe. Recently, France reintegrated theinfrastructure manager, Reseau Ferré de France (RFF), with the national train operator, SNCF,
recreating a fully vertically integrated company. Bonnafous and Crozet (2014) note this will lead tofurther growth of unit costs due to the balance of power being shifted in favour of the company andthe unions rather than the public regulatory authority. It will also likely undo any advances ininfrastructure management efficiency achieved through devolving infrastructure management role to
RFF.
The UK is the most analysed case of railway privatization and vertical separation in the EU. The
process of the privatization of the original British Rail was marked by a steep learning curve on thepart of the infrastructure manager and the regulator. Smith and Nash (2014), in their literature review,
show that not everything in the UK went “according to plan”. The events that led to the bankruptcy of
the infrastructure manager and its administration resulted in a major loss of efficiency, which has not
yet been recovered. In freight transport, privatisation effects were overridden by exogenousdevelopments in the economy and especially the structure and geography/distance of coal transport. 14
In passenger transport, the growth of traffic can be attributed to exogenous developments in theeconomy for the major part. Cost of operations in passengers franchising were found to haveincreased, partly due to inadequate franchise size and overlap. These developments contrast with othercountries like Germany and Sweden, where savings of 10% to 30% are reported as a result of theintroduction of competitive tendering for exclusive concessions for passenger services.
Vertical separation adds transaction costs for coordination and internal accounting and negotiation,although the exact magnitude of these costs is debated. The McNulty study (2011) noted in the UKthat the major issue of vertical separation is not the transaction costs but rather a misalignment of
incentives between the operators and infrastructure manager, which could increase the cost of the laterfrom 2 to 20%. The most comprehensive study to date, EVES-rail (van de Velde 2012), concluded thatthe vertically separated model works less well on intensely used networks and provides the perhaps
counter-intuitive result that vertical separation reduces cost on less intensely used networks. But the
study also provides no evidence that the introduction of competition had any effect on cost. The
analysis is subject to data issues and did not take account of some factors that may be important (e.g.
differences in declared and effective economic regulation). Finally, the EVES study gathers data froma large sample of Asian and European railways so its results only reflect average behaviour. It is notable to explain some of the finer changes that have been observed, for instance in the Netherlands
where vertical separation first introduced a disturbance in the system with worsening of performance
before a net improvement was evident (Figure 5).

14With the closing of the coal mines in the UK, coal power plants had to shift to imported coal. That meant
the more than half of the increase in ton kilometres in rail freight could be explained by the increase
length of coal hauls from the ports to the coal power plants.

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

2013

ProRail BV

2005

1998 Outsourcing Maintenance

1995

Separatio

Figure 5. Example of technical failure performance of ProRailbefore and after vertical separation

Source: Swier 2014.

Given this discussion, a further element that could be added to exogenous performance drivers
might be cultural differences between countries. This leads to further pertinent questions on the studies
of organizational structure and ownership we have available today. To what extent do the changes inorganisation and ownership drive the outcomes and to what extent are there deeper root causes
influencing the results - do we have a confounding problem? If this is the case, what can we really say
about railway efficiency, structure and ownership of railways in the EU or elsewhere?
Clearly, the meaning of such questions is not that no progress has been made in our understandingof the problem. We need to emphasize, though, that an immense obstacle to informing the policy withsolid analysis is the lack of quality data.

5. Conclusion

Railway efficiency is a challenging concept due to the complexity of the production process in
the railway business.
A basic view of railway efficiency can be formed with a small set of cross-section and time series
data producing a limited set of KPI’s. Railways generally produce this data as it is needed for internalmanagement but it is not publicly available in every jurisdiction. A basic responsibility of governmentis to require companies report key data, with publication by companies or the government. Railway
experts will inevitably be required for interpretation of the results but large deviations from efficient
operation should be evident. For some purposes the set of basic indicators identified in Box 1 will be
sufficient.

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For monitoring efficient use of public subsidies and regulating monopolistic infrastructure
managers and exclusive train operating concessions, more sophisticated econometric techniques (suchas SFA) will need to be employed. These have much greater data requirements.
When benchmarking the performance of several countries, the use of KPI requires detailed
harmonization of data, as exemplified by the UIC study. There is a link between this harmonisation
process and statistical methods: both are trying to take account of factors before getting to an
efficiency judgement. Further, econometric approaches could even inform the harmonisation process
as it informs on the factors that need to be controlled for.
With both basic indicators and econometric analysis, a narrative of exogenous and endogenous
drivers of railway performance will need to be developed to understand differences in railway
performance properly. The narrative includes the function of the railway network (whether it carries
mixed traffic or is dominated by one traffic type), the topographical characteristics of the country,
historical policy decisions and other elements, outside of the scope of influence of the company’s
management. Interpretation of any kind of efficiency analysis results without taking account of thenarrative will lead to misinformed decisions.
Along with econometric analysis, bottom-up engineering analysis can be employed to develop
the narrative in sufficient detail to shape the parameters used in the econometric functions modelled.
Bottom-up analysis can also shed light on whether the parameter estimates in a model make sense.
As the brief review of the current state of the art in railway efficiency assessment revealed, boththe simple and econometric approaches are very data intensive and suffer from problems with data
availability and quality. While there are positive exceptions in data collection and availability,
inadequate data explains why questions with regard to railway efficiency are often still very muchopen. The problem is not that it is unclear what data should be collected. In the US, both accounting
regulations for private companies and data reporting requirements imposed by the regulator, theSurface Transportation Board, make most of the data required for construction of a “balanced
scorecard” publicly available. US and Canadian data reporting requirements provide a model for thedata needed for regulation of vertically integrated freight-dominated railways elsewhere.
In Europe, good quality studies have been undertaken, in terms of data quality and common termsof reference, in a number of EU research projects on railway infrastructure expenditure (e.g. the
RailCalc and GRACE projects). However, data is not collected routinely or when it is, it is only madepublic after it is has been processed to mask the identity of individual railways, as the UIC isconstrained to do by its member companies. Such practice is at odds with substantial shares of publicmoney involved in the operating of national railways.
Much work by regulators and maybe supranational organization will be required to ensurecollection of consistent data across countries. The European data situation could be greatly improved
if a regulatory body, such as the European Railway Agency, were mandated to specify data to bereported by every railway, requiring annual production and publication. A small number of national
regulators already do this and the annual network statements of some railways provide a wealth of
information. Further, when maintenance and construction is outsourced, the necessary information isreadily available in the contracts and invoices. While respecting subsidiarity and confidentiality, thespecification of a common set of information to be produced for all the railways would be extremely
useful for comparing performance.
Finally, most studies of railway efficiency are focused on technical cost efficiency. Performanceon costs reflects the inside view but what is ultimately important is service to the customer. More

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EFFICIENCY IN RAILWAY OPERATIONS AND INFRASTRUCTURE MANAGEMENT

effort needs to be invested in providing data and KPIs on the service quality related to how users
choose between transport modes.

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