JOINT TRANSPORT RESEARCH CENTRE

Discussion Paper No. 2009-22
December 2009

Long-Distance Passenger
Rail Services in Europe:Market Access Models and
Implications for Germany
Thorsten BECKERS & Christian von HIRSCHHAUSEN,
Technische Universität Berlin,
Fabian HAUNERLAND & Matthias WALTER,
Dresden University of Technology, Germany

SUMMARY

ABSTRACT ............................................................................................................................................. 3
INTRODUCTION .................................................................................................................................... 3
1.

SECTOR BACKGROUND ............................................................................................................. 4
1.1. The value chain and axes of competition .................................................................................. 4
1.2. Differentiation between long-distance and regional services ................................................... 5
1.3. Handling of non-profitable interregional services .................................................................... 6
1.4. Infrastructure organization ........................................................................................................ 6
1.5. Organization of long-distance services in selected European countries ................................... 7

2.

MODELS OF MARKET ACCESS ................................................................................................. 8
2.1. “Tendered Concessions” model ................................................................................................ 8
2.2. Network concession for a monopolistic operator ................................................................... 10
2.3. “Open Market” model............................................................................................................. 113.

CASE STUDY: GERMANY ......................................................................................................... 14

4.

CONCLUSION .............................................................................................................................. 16

NOTES ................................................................................................................................................... 18
BIBLIOGRAPHY .................................................................................................................................. 19

Berlin and Dresden, October 20092

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ABSTRACTThis paper focuses on classifying market access for long-distance passenger rail services in
Europe into three main models and discusses the advantages and disadvantages of each of thesemodels. The “Tendered Concessions” model aims to introduce competition for the market by which
operators are selected in a tendering procedure. The “Monopolistic Network Operator” model aims tosustain network effects by granting a concession to one operator. The “Open Market” model enhances
operators’ entrepreneurship by providing opportunities to plan services based on open access to the
network. We present the strengths and opportunities, risks and threats without favoring any one model.
Classifying the many design options and their different impacts will help to structure the ongoingpolicy discussion. The paper also gives an overview of the organization of long-distance passenger
railway markets in selected European countries, and discusses the development of Germany’s longdistance rail passenger services in particular.

Keywords: Long-distance passenger rail transport, market access, open access, competitive tendering* Corresponding author: Tel.:matthias.walter@tu-dresden.de+49-351-463-39762;

Fax:+49-351-463-39763;

Email:INTRODUCTION

The liberalization of European rail transport markets has been on the agenda of politicians,
academics, and industry for the last 20 years. Whereas infrastructure aspects and freight transport were
the primary focus, the regulation of passenger transport has largely been a secondary concern.
Directive 91/440/EEC explicitly addressed the vertical disintegration of national railway incumbents,
requiring at least accounting separation. The First Railway Package, effective after 2003, concentrated
on improving the effectiveness of recent legislation. The Second Railway Package, effective after
2004, included, among other issues, safety and interoperability. The latest regulation, the Third
Railway Package, contains Directive 2007/58/EC which aims at opening the market for international
passenger rail services after January 1, 2010. Of importance for domestic travel, the Directive includes
the possibility of passenger carriage within countries along international routes. Exceptions refer to theprotection of routes served with public service contracts. Open access for domestic services is notmandatory, but is used to augment competitively tendered services (see Griffiths, 2009, for the British
example). The key question in designing a model for market access is: Should access to long-distancepassenger rail markets be open, or via concessions, or possibly a mix? In this paper we address thisunder-researched question.
Beckers et al. — Discussion Paper 2009-22 — © OECD/ITF, 20093

The remainder of the paper is organized as follows: In Section 2 we give the necessary
background on rail passenger transport in Europe. We consider the value chain, differentiate longdistance services from other services, and point to the issue of non-profitable interregional services.
Furthermore we look at issues such as ownership of the infrastructure network and vertical separation,
because of the interdependencies between the design of access to the infrastructure and the potential
for competition for long-distance rail passenger services. Section 3 presents and analyzes the different
models of market access for long-distance rail passenger services using country examples. This
includes a franchising model with a number of concessions as well as a single concession to amonopolistic network operator. An opposing model is the “Open Market” approach in which
companies can introduce new services for any route for network slots they are awarded. Section 4 isdedicated to a more intensive case study of Germany, Europe’s largest market for rail services. It
includes an analysis of the current situation and an outlook on future developments. Section 5
concludes.

1. SECTOR BACKGROUND

1.1. The value chain and axes of competition
Analyzing the different forms of market access for long-distance rail passenger services cannot
be conducted without considering the other steps of the value chain in the railway sector, which aredisplayed in Figure 1. The infrastructure is a non-contestable natural monopoly consisting of network
capacity planning and the investment decision, network construction and maintenance, and network
access management and slot allocation. Much network construction and maintenance can beoutsourced to a competitive market for construction, maintenance and renewal activities. The
provision of transport services includes rolling stock ownership, ticket sales and distribution, and train
operations.

Figure 1. The value chain of the rail transport sector
Network
Network capacity
capacityplanning
planning andandinvestment
investment
decision
decision

Network
Network
construction
construction
andandmaintenancemaintenanceNetwork
Network access
accessandand slotslot
allocation
allocation

Rolling
Rolling stock
stock
ownershipownership

Infrastructure
Infrastructure

Sales
Sales and
and
distribution
distribution

Train
Train
operations
operations

Transport
Transport services
services

Source: Own illustration.

A first point of contact between network activities and train operations is assignment of network
access. In open access train operators must apply for network slots. Possible organizational forms forthe responsible authority are integrating with the network operator or remaining a separate agency.
Based on the allocation of network access, the next step is timetable preparation. It requires
coordination with other rail services provided by the same operators or others.
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Rolling stock is procured after the allocation of network access or a successful competitive
tendering. The procurement process for new rolling stock is long-term, and markets for second-handrolling stock hardly exist. Different technological requirements across countries and tracks make it
difficult to resell stock. Rolling stock ownership represents a competitive market with significant entry
barriers. To mitigate such effects, the rolling stock can be owned by independent companies founded
only for this purpose, or by authorities.
Based on the allocation of network access and the availability of rolling stock, ticketing, sales,and marketing can be organized. Sales can be classified into off-board and on-board. In the case of
longer travel times, on-board sales can be a reasonable option for passenger convenience and reduced
transaction times. Further options are represented by a markup of on-board ticket prices, or theimposition of pre-booking for increased planning reliability. On the other hand, ticket vending
machines throughout the countrywide network represent an essential facility which is generally too
costly to duplicate. Moreover, a well-established and popular Internet platform for scheduling andsales is a competitive advantage. At issue, however, is how much these services should be centralized
to provide fair, non-discriminatory access and to provide a united “face” to customers. The degree ofstate involvement in such a united face is another crucial point in the evaluation of the different
models of market access.
The actual nucleus of the value chain is train operations. However, one should remember thataround 50% of total costs are already predetermined by track and station access costs, energy costs,
and marketing and sales costs (Monopolkommission, 2009, pp. 49 and 94, and Preston, 2008). Train
operations can represent a state-granted monopoly or an open market. The quality and type of service
are partly predetermined in competitively tendered services or can be freely chosen in any open accessservices. Quality and service of train operations are strongly related to the rolling stock and the tracks.
1.2. Differentiation between long-distance and regional services
The differentiation of long-distance and regional transport services is a crucial point in the setup
of a model for market access for long-distance rail passenger services. Popular distinction criteria arerepresented by type of service, travel distance, and profitability.1 Using type of service, all high-speed
trains, intercity, eurocity and night trains are classified as long-distance, with the rest being urban,
local, or regional.
Travel distance could classify all trips over a certain threshold, e.g., 50 km, as long-distance,
depending on country characteristics. However, this would require complex data collection and theservice classification could only be based on the majority of passengers.
A third possible distinction criterion is profitability. Urban, local, and regional services areusually characterized by some form of state provision, i.e. an enterprise in public ownership or public
procurement. Through its nature as a public service obligation, the provider receives subsidies and cansell tickets at a price below cost recovery. To minimize these subsidies, countries such as Germany,
Great Britain, the Netherlands, and Sweden use competitive tendering.2 In principle, this procedure isalso possible for long-distance services, and is another crucial point in determining how much thedifferent forms of market organization could allow improved integration of subsidy instruments.3
Further differentiation of long-distance services is possible through different services classes, on-board
service, stop frequency, and so on.

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1.3. Handling of non-profitable interregional services
Since there are no generally accepted distinction criteria between long-distance and regional
services, there is a gap into which unprofitable interregional services fall. The handling of suchservices is especially interesting when looking at different models of market access. In this respect it isimportant to consider public service contracts. Directive 2004/18/EC defines these as contracts
between a service provider and a contracting authority. The term public service obligation is used for
public service contracts that offer an auction for subsidies and award the winning company amonopoly to operate a specified route with subsidies for a specified period.
In countries where a concession for the entire long-distance network is given, presumably nonprofitable sections are included. In Great Britain competitive tendering is applied to both profitable
and not profitable services, resulting in a concession fee for the former and a subsidy for the latter. The
Swedish national railway SJ decides whether or not a service is profitable. If the state-owned
enterprise decides not to operate a service, competitive tendering is introduced. In Germany, where
national law obligates the state to provide regional transport services, there is no legal base for public
assistance for long-distance services. Instead, regional authorities define parts of abandoned longdistance services as regional services which allows them to maintain service quality with publicfinancial aid to the engaged operator. Italy uses public service contracts to ensure services that
otherwise would not operate.
1.4. Infrastructure organization
There are strong interdependencies between the design of market access for long-distance railpassenger services and the organization of the infrastructure network.4 The key characteristics forAustria, France, Germany, Great Britain, Italy, the Netherlands, and Sweden are presented in Table 1.
Directive 91/440/EEC mandates a separation between train operators and the infrastructure
manager. Although by now all EU member countries’ railway markets have undergone suchseparation, there are different degrees. In Great Britain, the Netherlands, and Sweden there is fullindependence between infrastructure functions and long-distance passenger train operations. In
Austria, Germany, and Italy, a holding structure exists which comprises both infrastructure and train
operating functions. Both options are explicitly allowed following the Directive. France has a formal
separation, but by means of contracts important segments of the infrastructure maintenance are still the
responsibility of SNCF.
The rail networks in all considered countries are owned by the state. After the negative
experiences in Great Britain during privatization in the 1990s, no other country has privatized its
tracks or stations. Although the organizational structure of the infrastructure management varies
widely, this does not affect the general acceptance of public responsibility for the railway
infrastructure.

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Table 1: Characterization of European long-distance passenger rail transport markets
Austria

Degreeof Holding
infrastructure - integrationtransport
services
separation

FranceGermany

Great Britain

Italy

Netherlands

SwedenPartialseparation

Holding
integration

Full separation

Holding
integration

Full separation

Full separation

PublicPublicPublicPublicPublic100%
Trenitalia(state-owned),considerable
entriesannounced by
NTV (RomeMilan) and DB
in co-operation
withÖBB(MunichVerona)NS(stateowned)
andNS-/KLMjoint-venture
HSA(90%state-owned)
together 100%

SJ
(stateowned)
dominating,some smaller
railway
undertakingspresent

Two
concessions
granted to NS
until 2015, andto HSA until
2024

Concessions
only on routes
where
SJ
refusestooperatecommerciallyNo

Only for nighttrains, changeannounced for2009/2010
Purelycommercial
day
services
reservedbylaw to SJ,changeannounced for2009/2010

Network
ownership

PublicPublic (after
privateintermezzo)
100% SNCF 99% DB – Oligopoly of(state-owned)
Fernverkehr
privatetrain(state-owned)
operatingcompanies(apartfrom
temporary renationalizations)(Merkert,
2009)Marketdominance andoperatorownership

Concessions

100%
ÖBB
Personenverkehr (stateowned), entries
betweenViennaandSalzburg
announced byWestbahn(hourly
service)
and
Fair
Train
(every 3 hours)
No
No

No

Open access

Yes

Yes

No

CompetitiveNo
tendering forregionallydelimited areas
andlongdistanceconnections,franchised
under NationalRail
Yes, if not Yes
primarily
abstractive

Degreemarketopeningof Access for all None
operators given

Access for all Access for all
operators given operators
throughcompetitive
tendering

Accessfor Noneinternationalgroupings
given

Source:Own illustration according to Alexandersson (2009), Alexandersson and Hultén (2009),
Alexandersson et al. (2009), company websites, Holvald (2009), and Monpolkommission (2009,p. 56).

1.5. Organization of long-distance services in selected European countries
The long-distance passenger rail market in most countries is still dominated by the state-owned
incumbent which used to be (and in many countries still is) the only operator. The prominent
exception is Great Britain, where there are several train operating companies (TOCs) active on longdistance routes. Most routes are tendered by the UK Department for Transport and operated as
franchises. These companies operate under their own brands, but offer a common Internet platform
National Rail through the Association of Train Operating Companies (ATOC). Open access operators
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are presented on the National Rail website as well. Specific tickets are valid on trains by different
operators. Apart from temporary re-nationalizations (Merkert, 2009a), there is no publicly owned
British TOC, but some TOCs are partially owned by foreign, state-owned enterprises, e.g., the German
DB Regio owns part of Wrexham & Shropshire, and French Keolis owns shares in several British
TOCs (Nash and Smith, 2007, and Alexandersson, 2009).
There is more than one long-distance train operator in Sweden, Germany, and the Netherlands. In
Sweden, SJ operates profitable services on its own account. On routes which SJ refuses to serve, thestate organizes competitive tendering to find the most economic operator. As a consequence there areseveral active train operators, although SJ offers the majority of services. Except for winning tenderingand introducing night services, train operators other than SJ are so far not allowed to participate in themarket, but a change to more open access was announced for 2009-2010 (Alexandersson and Hultén,2009).
In Germany there is open access to the entire rail network, but Deutsche Bahn subsidiary DB
Fernverkehr AG holds a 99% share in long-distance rail passenger transport. However, the incumbent
is not the only active operator. After a few unsuccessful attempts, there are currently three enterprises
which together comprise less than 1% of the long-distance market (Holzhey et al., 2009, p. 99).
In the Netherlands long-distance rail services are split into two concessions operated by HSA andthe national Dutch railway NS. In other European countries, only the state-owned incumbent serves
the whole long-distance network. In some countries such as France the exclusivity is due to protective
legislation which guarantees exclusive rights to the traditional railway undertaking.
Directive 91/440/EEC mandates an opening for “international groupings”. The term describes
any association of two or more railway undertakings from different EU member countries for the
purpose of providing international transport services. In countries with exclusivity rights of theincumbent, this means that only international services may be operated. The right to form internationalgroupings is not limited to public train operators, and theoretically one international grouping could
operate in all EU member countries, as long as each service is at least transnational.
Austria and Italy grant rail access to all operators. While no significant market entries have been
observed, market entries in both countries have been announced by private operators for the near
future.5

2. MODELS OF MARKET ACCESS

2.1. “Tendered Concessions” model
We define our first model for market access as the “Tendered Concessions” model, featuring
Great Britain as the prominent, contiguous example. In this model the network of operations is
structured into a reasonable number of sub-networks based on a demarcation along regions or traffic
flows and tracks. There is competition for the market for each sub-network in terms of competitive
tendering. The tendering authority typically has extensive design and decision responsibilities. It
determines the level of supply as obligation in the tender documents. This includes routes, frequency
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of service, capacity, operation times, and (minimum) requirements of service quality. The aim of thecompetitive tender is to find the operator which best fulfills a list of criteria, with price often being themost important or single criterion. Quality aspects can represent an additional decision criterion withweights assigned to price and further aspects. In the case of profitable lines, the goal is to find theoperator which pays the maximum concession fee to the state. Track access charges are regularly
predetermined by the national track access charging scheme. One can generally differentiate between
three kinds of contracts:--

Under a management contract, the operational as well as the revenue risks are borne by theauthority.
Under a gross-cost contract, the service operator bears the operational risk. This means a highdegree of tariff regulation by the authority and relatively low incentives for the service
provider to attract as many passengers as possible.
Under a net-cost contract, the provider acts as the most entrepreneurial, and bears the risk on
both the cost and revenue sides. The predefined contractual agreement between the authority
and the operator has the advantage that performance control through a system of indicators
can be established and pressure is applied through penalties on subsidies or payments.

However, as the quantity of services is mostly predetermined by state authorities,
entrepreneurship is generally on a low level and the influence on costs and market development can be
restricted. In the case of Britain only the management changes when a franchise is awarded to a new
operator (Smith et al., 2009). While this introduces some employment certainty for existing personnel,
it also establishes bargaining power and information advantages over the new management. The
procedure additionally reduces the possibilities to influence costs and processes, and has direct effects
on franchise bids. Hence, it is doubtful whether the sole exchange of top management is suitable for
producing substantial changes in the service provision. This in turn is related to franchise duration,
since increased durations lead to possibilities for better innovation for the new management.
Obviously, the franchise duration must be aligned to the rolling stock life-cycle with replacement andrefurbishment dates. The importance of franchise duration may also be dependent on rolling stock
ownership. The British model introduced rolling stock companies (ROSCOs) as providers of therolling stock. Such an additional level in the value creation removes a barrier to market entry, because
the service provider is no longer concerned about the financing of rolling stock. In contrast, it isdoubtful whether this supports rolling stock innovation (Yvrande-Billon and Ménard, 2005) and evenmore important, it introduces new transaction costs (Merkert, 2009b).
The “Tendered Concessions” model exhibits further transaction costs in the coordination of many
players, particularly when there are network overlaps or connection points. Hence this model has highdisadvantages in comparison with a single network operator when the network effects are high. On theother hand, a star-like network structure such as in Great Britain facilitates a franchise demarcation
along regions or traffic flows and tracks. This is emphasized even more with a station structure, i.e.
London, where different routes serve different stations without long-distance service interchanges. The“Tendered Concessions” model, possibly with common concessions for both long-distance andregional rail, improves the timetable coordination between different services. It can even remove any
artificial distinction between long-distance and regional rail services. Under the model the allocationof subsidies to rail services operators or the concession payments to the authority can be carried out
fairly and transparently. For example, government can decide to pay subsidies only to regional rail
services which may be considered as public service obligations, but there is no general need to classify
a service into long-distance or regional.

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Furthermore, the “Tendered Concessions” model allows the state to compensate subsidies for
non-profitable lines through the collection of concession fees on profitable lines. Hence, the state canbalance expenses and revenues. We note, however, that there may be some additional costs for theauthorities that manage competitive tendering. In this model, profitability and losses are bounded andstate-regulated. This originates primarily in the design of auctions and reverse auctions whereinterested companies compete to win the franchise, and potentially articulate similar bids restricting
the margin a priori. Moreover, cap and collar regimes such as in Great Britain limit the risks andchances (Kain, 2007, and Preston, 2008). The British Department for Transport will skim 80% of therevenues lying above the 106%-level of the train operating company’s original forecast.6 Hence,
through a system of risk-sharing the rail operator’s profit is limited. This conclusion only holds for a
sufficiently high number of bidders that contribute to a market outcome with an efficient production ofservices, a bid that corresponds to average production costs plus an opportunity cost of capital that isnormal in the market and a quality of services that is at least as good as before. Consequently, in theabsence of corruption and collusion competitive tendering with a sufficiently high number of bidders
will represent a competition substitute.7 Unfortunately the substitute is frequently threatened by adecreasing number of bidders after an initial phase of tenderings (see e.g., Augustin and Walter, 2009,
for an example from the German bus market).
A critical issue in the “Tendered Concessions” model is that the state and its authorities define thelevel of service concerning routes, frequency, quality, etc. This leaves room for political influence,
e.g., routes or cities served because of localized political ambitions.
An extension of the “Tendered Concessions” model is possible through open access services
proposed by private companies without any subsidy requests. Such services can provide directconnections without the need for transfers. Since these services also compete with franchised services,
the regulation authority must decide whether they are not primarily abstractive from the franchisees’
revenues (Griffiths, 2009). This procedure requires an intelligent institutional design to secure a fairand efficient decision process and furthermore introduces additional transaction costs. In Britain, open
access services approved by the Office of Rail Regulation (ORR) have gained a share in passenger
revenues of only 0.6% (ORR, 2009). A simulation of the different market entry strategies by Preston
et al. (1999) shows that on-track competition in Great Britain usually reduces welfare resulting fromincreased consumer benefits, but greater profit reductions for operators. With the Directive
2007/58/EC coming into effect on January 1, 2010, open access will certainly play a more importantrole in continental Europe, but it is doubtful whether the directive will affect countries in island
positions such as Great Britain. The only track connection to continental Europe is the Eurotunnel, andLondon is the first major stop so that cabotage does not play a large role in Great Britain.
2.2. Network concession for a monopolistic operator
A single network concession for a monopolistic operator under a performance-based contract
represents a different type of concession. Such a concession appears to be relatively suitable whensubstantial network effects with many interconnection points and crosslines may be opposed to a split
in concession areas. A very dense network can, for example, be found in the Netherlands with frequent
timetable intervals similar to suburban transit systems. A monopolistic network concession can havethe effect that it prohibits market entry of competitors and can be used to strengthen the position of amonopolistic public company. In the absence of competition, incentives for a public monopolistic
network operator for efficient performance will be quite low. Hence, the challenge in this case is todesign an institutional setting which facilitates efficiency-oriented governance of the monopolistic
public company.
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In the Netherlands, a 10-year concession contract was directly awarded to the Dutch railway
undertaking NS in 2005 (Van de Velde et al., 2009). The contract is part of a major railway reform inwhich infrastructure management is defined as a government responsibility, and passenger transport istargeted as a non-subsidized commercial activity. Non-profitable regional lines were separated fromthe NS network and tendered (Alexandersson, 2009). The concession contract is monitored by
performance indicators, and NS must propose improvement values. The importance of such
performance indicators has to be highlighted in case of the permanence of a monopolistic network.
Difficulties can arise when trying to identify a reasonable benchmark company. This is necessary
when improvements are not only compared to a firm’s own base level, but also to best practices. As
monopolistic operator, an international comparison has to be made (see e.g., Coelli and Perelman,
2000), but this is difficult because of different operating environments, different purchasing powers,etc.
The early results of the Dutch concession contract are that investment activities intensified, andperformance in terms of customer satisfaction and punctuality improved. From 2009 on, NS should
pay for the concession. In fact, the concession for NS is complemented by a second concession for
train operations on the high-speed railway link (HSL-South) between Amsterdam, Schiphol Airport,
Den Haag, Rotterdam, and Brussels. This concession was granted in a competitive tendering to High
Speed Alliance, a joint-venture of NS and AirFrance-KLM, for the period from 2009 to 2024 (NS,2009, pp. 101, 120).
Open access has not been planned as an option in domestic services, although Directive
2007/58/EC naturally makes this possible for international services. This raises the issue ofsustainability of the NS monopoly. Facing these seemingly contradictory approaches in national andEuropean regulation, we note that the Netherlands have always been critical to opening up the national
market because of the country’s assertion that a single company with exclusive rights is more capableof efficiently serving such a densely used network.
2.3. “Open Market” model
The “Open Market” model is based on the concept of competition in the market. All European
countries that have introduced open access as the primary market entrance possibility, such as
Germany, Italy, and Austria, still face the existence of a single monopolistic network operator,
although some market entries have now been announced for the near future.
The “Open Market” model assumes that competition in the market, or at least the threat ofcompetition, results in a creative product offering, technological innovation, and downward pressure
on costs and prices. It emphasizes the entrepreneurship of operators, because they plan and determine
routes, frequency, quality, and are assumed to operate as profit-takers. Hence, political influence instate-owned companies could be a critical aspect. Full profit orientation can lead to a cutback ofservice offerings in rural and remote areas, because it may emerge that they are unprofitable tooperate. Nonetheless, if it is desirable to operate these services, the state faces a conflict between its
open access orientation and the necessity to subsidize. A suitable solution to determine the minimum
level of subsidies is competitive tendering, but this is not part of the “Open Market” model. However,
non-profitable lines may be separated from the open market. This provokes strategic behavior:companies could shut low-profit or loss-generating interregional routes under the certainty that they
will be publicly procured. They do not have to fear any negative network effects in terms ofconnections to profitable lines.

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Given that local and regional services are likely to remain public service obligations, the “OpenMarket” model for long-distance services requires a reasonable differentiation between these two
types of services. However, such a differentiation is not straightforward. Possible distinction criteria
were given in Subsection 2.2, but all are either difficult to measure or give providers room for strategic
behavior.
On the one hand, indirect subsidization is also possible via reduced track charges. On the other
hand, the state could potentially gain track access charges that are cost recovering. In either case, it is
not possible for the state to compensate subsidies through concession fees, in contrast to the “Tendered
Concessions” model. For very efficient and well-positioned firms, it is possible to gain high profits,
which may once again attract entrepreneurs and creative product offerings.
Reducing service offerings in rural and remote areas also represents opportunities forcompetitors. These lines offer a market niche with limited capital requirements in comparison to amajor high-speed trunk route, and the risk of direct competition with the incumbent, or even predatory
behavior, is low.
The discussion about cutbacks in rural and remote areas initiates a controversy in how far the“Open Market” model should be augmented with obligations for operators to serve regions, to provide
special rates for low-income customers, to provide interconnections with other means of transport, etc.
These obligations are all part of the larger question about how to accomplish welfare enhancements inthe “Open Market” model. More generally, the profit orientation in this model can lead to an increasein ticket prices in comparison to the politically influenced ticket prices of state-owned European
incumbents.
The “Open Market” model closely relates to another institutional aspect of European railway
organization: the separation of infrastructure and operations. There is a long-standing discussion on
the advantages and disadvantages of vertical integration vs. unbundling. Empirical results haveconfirmed the presence of economies of scope between a network and train operations for a majorityof European railways (Growitsch and Wetzel, 2009). However, it is doubtful if vertical integration isnecessary to exploit these economies of scope. Hirschhausen et al. (2004) found that only a few
critical transaction processes that demand a hierarchical organization are existent.
In practice, supporters, particularly labor unions in Germany, have pointed out the benefits ofinternal labor markets in the case of vertical integration.8 In contrast, there is a strong discrimination
potential against competitors. This potential is especially relevant for the “Open Market” model inlong-distance passenger rail transport with the importance of network effects, but is less relevant
where network effects are insignificant and the transport is less sensible to the particular time slot for
network access, e.g., for block train traffic in freight transport. It is also less relevant for tenderedservices, because the track allocation takes place on an upstream level. An independent network
operator will try to maximize network utilization and enforce the development of bottlenecks, while avertically integrated railway company will try to maximize the firm’s entire profits. If unbundling ispolitically not enforceable, then the minimum requirement for a functioning market is to implement aneffective access regulation.
The discussion concerning non-discriminatory network access is related to two more aspects.
First, transparency with respect to free capacities is necessary. This could easily be implemented withan Internet-based information system (Monopolkommission, 2009). Second, the “Open Market”
model also requires careful consideration of the long-term planning reliability for network access.
Once procured, rolling stock may be difficult to resell, and the deployment on other tracks may be
impossible due to different technological requirements. Hence, as investment in rolling stock is
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specific and secondary markets are almost non-existent, it is important to have ensured slots on tracks
for a sufficiently long period to recover the investment, e.g., for a minimum of 10 years.
Network access is not the only monopolistic bottleneck in the “Open Market” model.
Alexandersson and Hultén (2009) emphasize the need for an independent booking and ticketingsystem. An independent authority may also be desirable for timetable planning. Finally, in comparison
to other sectors, such centralized institutions and state intervention tend to limit the “free-ness” of thismarket.
Critical to all market access models, network effects can play a very important role in longdistance passenger rail transportation. In the “Open Market” model, additional offerings selected bycherry- picking can lead to service terminations of the incumbent because of revenue abstraction, to a
reduction of network effects, or to increased network congestion. Following this, the beneficial former
network effects such as interconnection possibilities, integrated vehicle scheduling, and costadvantages can be harmed or even destroyed.9 Thus, the “Open Market” model can present
disadvantages for consumers and can lead to inefficiencies from a welfare economic perspective.
On the other hand network effects may be so beneficial to the incumbent that on-trackcompetition never develops. Another negative impact on potential competition results from scarcity of
network capacities. In consequence, the network operator might have strong market power. This willbe especially problematic for consumers as well as from a welfare economic perspective in the case ofa monopolistic network operator which is privatized and aims at maximizing profits.
An additional possibility of the incumbent to foreclose competition is implementation of strategic
behavior against potential newcomers, e.g., the incumbent can invest in rolling stock only for the
purpose of deterrence. In general, strategic behavior of the different players can be expected and willcause net-costs from a welfare economic point of view.
We note that due to intermodal competition effects the controversy about the extent to which
intramodal competition in the railway market may be of little significance. The most importantcompetitors are motorized individual transport (MIT), air transport, and express coaches. However,these means of transport sometimes address different target groups, and we note that they partiallyserve different sub-segments of travelling. MIT is attractive because of its flexibility but may beinadequate for long trips and a lesser alternative for business travelers and the socially deprived.
Friederiszick et al. (2009) find a high competition intensity between low-cost airlines andDeutsche Bahn (DB). Holding the view that there is very low potential for on-track competition for
long-distance passenger rail services, Friederiszick et al. (2009) conclude that international railway
alliances such as Railteam are no threat to competition. With respect to intermodal competition, theresults of Friederiszick et al. (2009) are not generalizable, because air service plays no role in manyroutes that are less than 300 km, or that are point-to-point connections between cities with nosubstantial air connections. This in particular holds for a decentralized urban settlement structure suchas Germany (in contrast to France with its star-like travel flows to Paris). Friederiszick et al. (2009),
whose research has been financed by DB, have been criticized for their sample selection, e.g.,
Monopolkommission (2009, p. 78) particularly questions their short observation period (January 2006
until October 2007) with less emphasis on winter months.
Express coach services can be an alternative for young people, seniors, low-income earners, andothers who are not as sensitive to travel times. It is questionable how much of a competitive threat
express coach services represent to railways, or if they merely induce new traffic and entice
Beckers et al. — Discussion Paper 2009-22 — © OECD/ITF, 200913

passengers away from motorized individual transport (Walter et al., 2009). One option is the provisionof non-profitable interregional lines with economical express coach services.

3. CASE STUDY: GERMANY

Germany’s railway market is the largest in Europe, and a prominent example of an “OpenMarket” model for access to the long-distance network. A major reorganization of German railways
was conducted in 1994 with the Bahnreform. The first stage of this railway reform consisted of threebasic principles. The first was to reorganize the formerly West German railway Bundesbahn and theEast German railway Reichsbahn into a new, primarily state-owned, corporation. The second
concerned the delegation of responsibility for regional railway services to the federal states. The third,
and most important for studying market access models, was to introduce non-discriminatory market
access for private companies. Germany was hence at the forefront for providing open access to thelong-distance passenger rail transport market.
To date there has been no substantial on-track competition. Holzhey et al. (2009) count 9
attempts to enter the market in 15 years of liberalization, all of which are small-scale and consist of at
most 2 pairs of trains per day. Five of these services ceased after operating for a very short time. The
remaining services have in common the ability to serve routes that were previously operated by somekind of Deutsche Bahn train, in particular the so-called InterRegio lines. These were abolished
beginning in 1999 because of profitability problems (Link, 2004). The underlying concept of theInterRegio (and also of its competitive successors) was to connect the many medium-sized towns andvacation areas with metropolitan areas. The services stopped frequently (thus were slower thanInterCity or high-speed trains) and were also cheaper. The more utilized lines were reorganized into
InterCity lines, while the rolling stock partly remained the same and prices were increased.
Another condition for the start of the few commercial services was the introduction ofcompetitive tendering for regional rail services. The four services have used rolling stock from theirregional operations and two, Harz-Berlin-Express (Veolia) and Vogtland-Express (Arriva), represent
an extension of lines operated under a public service obligation. The InterConnex Leipzig-BerlinRostock (Veolia) was equipped with long-distance rolling stock after the first four years of operation.
It is also the only service directly competing with DB long-distance offerings. All of these services canbe distinguished from DB offerings by their longer travel times and lower prices (Séguret, 2009).
An exception is the night train between Berlin and Malmö in Sweden. Unlike the other services
mentioned which are provided by subsidiaries of international integrated private transport companies,
Berlin Night Express is operated jointly by Georg Verkehrsorganisation and SJ.
Interestingly, the four current long-distance offerings by DB’s competitors are connections to
Berlin through the eastern part of Germany. Two reasons for the existence of these routes may be theEast German settlement structure which has only three larger agglomeration areas (Berlin, Dresden,
and Leipzig) and the low percentage of travelers which make them unattractive for DB. A third reason
may be the price sensitivity in regions with lower per capita incomes.

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The low level of competition intensity can be attributed to four factors. The first is DB’s
vertically integrated structure with discrimination potential and information advantages, in particularthrough information exchange between long-distance operations and the network. The DB
infrastructure subsidiaries directly control 35% of total costs for long-distance service operations, suchas access charges, traction power, etc. (Holzhey et al., 2009, p. 102). This cost issue is particularly
relevant, since the sector is said to yield only low profit margins. However, this could also be related
to the incumbents’ business models. Low-cost airlines, for example, have been able to earn highprofits from a similar market situation in aviation.
The second factor is network access. Congestion is already a problem in Germany, and it has
been attenuated due to the present financial crisis and resultant decline in freight transport. The focus
of past network investments has been on new high-speed lines, e.g., Frankfurt-Cologne or MunichNuremberg-Erfurt-Berlin, whereas main junctions, e.g., in Frankfurt and Cologne, are congested,intersections exhibit obstacles (Vieregg, 2004), long-distance, freight and regional traffic are forced toshare congested track sections, and many lines are speed-restricted because of poor track. Moreover,transparency concerning free capacity could be improved. Holzhey et al. (2009, p. 115) have proposeda visualized network capacity timetable that is open to all interested companies. The instrument offramework contracts could be improved through more flexibility, longer lead times, and theprioritization against other awarding criteria (Monopolkommission, 2009, pp. 7, 61).
The third factor is the expansion strategy of local authorities that have begun to procureinterregional services. Good examples are the so-called regional services on the Elsterwerda-BerlinStralsund route with a line length of over 400 km and the service between Munich and Nuremberg thatserves the new high-speed line between Ingolstadt and Nuremberg with former long-distance rollingstock.10 Although these services may constitute travel improvements, they also signal that there is noneed for private initiatives for commercial lines, and they complicate the discovery of appropriate
connections (Monopolkommission, 2009, p. 58).
The fourth factor is the impact of today’s financial crisis that has made it more difficult to financerolling stock investments. However, two recent announcements of market entry may represent a new
strategy. In October 2009, the private newcomer locomore rail announced plans to operate three daily
trains from Hamburg to Cologne after August 2010, meaning that it has already successfully applied
for track capacity. Comfort and travel time should be comparable to DB InterCity services, and tickets
should be cheaper.11 locomore is supported by the US investment firm Railroad Development
Corporation. A potential strategy to reach competitive travel times and to save access costs may be tostop at alternative stations instead of running into bottlenecks and loops such as the main stations ofDortmund and Bremen.
A less advanced, but potentially more dangerous competitor for DB is Keolis, which is backed by
SNCF, Axa Private Equity, and a Canadian pension fund. Also in October 2009, it announced services
between Strasbourg, Frankfurt and Hamburg, and Strasbourg, Frankfurt, Berlin, and Hamburg
comparable to DB InterCity services. Keolis has not yet received a confirmation for track access. Thisdecision will be made by the network subsidiary of DB by April 2010, so that services could start at
the earliest in December 2010.
As a starting station, Strasbourg offers Keolis the possibility to use existing French maintenancefacilities and to span a real international network of train connections. However, possible market
distortions follow from the (partial) state ownership of both Keolis and DB which compete withprivate operators.

Beckers et al. — Discussion Paper 2009-22 — © OECD/ITF, 200915

These announcements both incorporate a new strategy for market entry compared to thepreviously introduced peripheral services of Veolia and others. Both potential entrants would serve
trunk routes that are characterized by competitive average speeds without the imperative use of
expensive high-speed vehicles.12 Competition in the high-speed segment up to 300 km/h may also be
limited by the close international cooperation and joint ventures in this segment, such as Railteam,
Thalys, etc.
However, it is important to bear in mind that the market organization and the regulatory setup are
by no means finalized. The coalition agreement of the new German government further assumes avertically integrated DB with a more independent management.13 The transport and logistics
subsidiaries shall be privatized as soon as capital markets recover. The issues remaining are the extent
to which a partially privatized monopolist can exercise market power to raise prices and to abandon
services in rural areas, and how the potential on-track competition can serve to mitigate such effects.
The suggestions from DB competitors (Holzhey et al., 2009, p. 113) aim to completely change
the organization of Germany’s long-distance passenger rail market. One option may be theintroduction of concessions for all routes and marketing of all services under a common brand.
Another option is to focus on concessions for interregional lines to establish a second long-distancenetwork alternative to the expensive high-speed segment. A third option is the systematic support oflong-distance services by track access charges where peripheric routes are subsidized through higher
charges on high-demand routes. A careful evaluation is necessary to determine the ability of these
options to resolve critical long-distance passenger rail market concerns. It must however be clear thatthe introduction of concessions would renounce the “Open Market” model practiced in Germany
so far.
The coalition agreement also includes liberalization of express coach services in Germany. Until
now, these services have been heavily restricted to single connections, mainly to and from Berlin(Walter et al., 2009). Express coach services could fill the gap left by abandoning trains on lessfrequented routes with bus units that are smaller than trains. On the other hand, market entry is also
likely to focus on trunk routes with great passenger potential and interest in low prices.

4. CONCLUSION

This paper has classified the models for market access in European long-distance passenger railtransport into the “Tendered Concessions” model, the “Monopolistic Network Operator” model andthe “Open Market” model. Noting that each European country will pursue its own approach aligned toregional circumstances, nonetheless our classification can help to structure the ongoing discussion. We
have presented the models’ strengths, opportunities, risks, and threats without favoring any one model.
There are very different design options which have very different impacts. Empirical experience withthe “Tendered Concessions” model in Great Britain has progressed the most, while open accessexperience is still in its infancy.
Open access appears to be the preferred regulation for international services, as manifested
through Directive 2007/58/EC. With this directive, cabotage is possible, but only when the routes
served under public service obligations are not distorted. It remains unclear whether open access for
16

Beckers et al.— Discussion Paper 2009-22 — © OECD/ITF, 2009

international services may distort tendered concessions in domestic markets, hence, if these twocontradictory regulations coincide. This may be a smaller problem for geographically or
technologically isolated rail markets, e.g. Great Britain, but could be a larger problem for networks
highly integrated in a central European country like the Netherlands.

Beckers et al. — Discussion Paper 2009-22 — © OECD/ITF, 200917

NOTES

1.

These distinction criteria are all used in the German market.

2.

Regulation (EC) No 1370/2007, coming into effect on December 3, 2009, strives to stimulatecompetition in passenger transport markets and specifies competitive tendering as the standard
award procedure. However, rail services are excluded from this rule, and direct awards withtenures of up to 10 years are possible (15 years when competitive tendering is used).

3.

Subsidies can accompany institutional problems such as the need for funding through tax
collection. We do not further consider such aspects.

4.

We define long-distance services as any rail services that are not classified as urban, suburban, or
regional services in Directive 91/440/EEC.

5.

See Monopolkommission, 2009, p. 56, andhttp://www.oepnvwettbewerb.de/index.php?option=com_content&task=view&id=1872&Itemid=
27, retrieved October 27, 2009.

6.

The cap and collar regimes are controversial because they can provoke strategic behavior in theestimation of revenues and costs (Preston, 2008).

7.

With a high number of bidders, an efficient market outcome is more or less guaranteed. With alow number of bidders, competitive pressure can be still high enough to lead to an efficient
market outcome, but this is more uncertain.

8.

This argument has enjoyed renewed attention in the current financial crisis, because the cargo
subsidiary of Deutsche Bahn experienced a sharp recession with a subsequent decline in the needfor personnel.

9.

Service terminations because of revenue abstraction do not necessarily lead to welfare decreases.
However, this is likely to lead to decreased network effects which in turn imply welfare
disadvantages.

10. In contrast to the ICE high-speed service on this line the additional train offers more stops withaccompanied increased travel time.
11. http://www.abendblatt.de/wirtschaft/article1253055/Hamburg-Berlin-SNCF-fordert-Bahnheraus.html, retrieved November 2, 2009.
12. The use of high-speed vehicles represents the third major market entrance strategy.
13. http://www.fdp-bundespartei.de/files/363/091024-koalitionsvertrag-cducsu-fdp.pdf,
retrieved November 3, 2009.
18

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