CPB

Introducing Competition in
the European Rail Sector
Insights for a Holistic
Regulatory Assessment
Discussion Paper

180
Yves Crozet
University of Lyon

Roundtable

Corporate Partnership
Board

180
Yves Crozet
University of Lyon

Roundtable

Introducing Competition in
the European Rail Sector
Insights for a Holistic
Regulatory Assessment
Discussion Paper

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INTRODUCING COMPETITION IN THE EUROPEAN RAIL SECTOR | ITF ROUNDTABLE 180

Table of contents

Introduction ........................................................................................................................................ 4
Evaluating rail regulation: what indicators? ......................................................................................... 5
European railway programme ......................................................................................................... 6
Overview of rail performance indicators. ........................................................................................ 7
From company efficiency to cost benefit analysis................................................................................ 8
Productive efficiency and commercial efficiency: the crucial role of organisations ........................ 8
The economic calculation: cost-benefit and cost-efficiency analyses ........................................... 11
Multi-criteria assessment of rail freight liberalisation ........................................................................ 13
Rail freight: structurally imperfect competition ............................................................................ 14
Rail Liberalisation Index: can we evaluate the effects of competition? ........................................ 16
Conclusions ....................................................................................................................................... 18
References ........................................................................................................................................ 20
Annex A. Net Present Value and taking risk into account................................................................... 22
Annex B. Rail Liberalisation Index ...................................................................................................... 24
Annex C. Regulatory background for rail transport ............................................................................ 26
The diversity of railway regulation within EU28 countries ............................................................ 26
What room for manoeuvre do regulators have?........................................................................... 27© OECD/ITF 20193

INTRODUCING COMPETITION IN THE EUROPEAN RAIL SECTOR | ITF ROUNDTABLE 180

Introduction
In July 1991, after lengthy negotiations between European countries, EU Directive 91-440 was published,setting in motion the process of deregulating rail transport. As with other networked industries (power,
telecommunications), the European Union (EU28) was embarking on a new approach, separating
infrastructure and operation, at least from an accounting perspective. Once again, the clear objective
was to allow third parties access to the network and to make competition a key lever in the revitalisationof the sector.*
This initial ambition had been pursued for 25 years, as demonstrated by the successive “Railway
Packages” or the creation of the European Railway Agency (ERA), which plays an important role inquestions of security and interoperability. Development of the role of the ERA is at the heart of the“technical” pillar of the Fourth Railway Package approved at the end of 2015. This fourth package
contains a “market” pillar, which seeks to open up national passenger services to competition, from 2020
for on-track competition and 2023 for public service, off-track contracts.
The European Commission underlines the fact that the earlier rail packages have already substantiallytransformed the European rail transport sector. With this fourth package, the generalisation ofcompetition should lead to a single European railway area, which needed if this mode of transport is toachieve the objectives set out in the 2011 White Paper. Given the success of the reforms of the last 25
years, this direction should be pursued. Presented in this way, the matter seems simple, but is it really?
What has been the impact of introducing competition and notably on-track competition into railtransport?
There is not an easy answer to this question; there are various evaluation methods in response to thediverse objectives of the rail reforms. Thus, in the first instance this paper presents an overview of the
new railway regulation and its objectives, relating them to the available evaluation methodologies. On
this basis it then examines the strengths and weaknesses of the Cost Benefit Analysis (CBA) and the needto conduct Cost Efficiency Analyses, which are essential for benchmarking. These methods givesummarised and numerical results but they are limited by the fact that they have only local value,centred on one aspect or one company. Therefore it is also necessary to develop a more generalevaluation, making use of a multi-criteria approach (MCA) that seeks to make a more holistic (systemic)
evaluation of the still largely imperfect competition we find when we examine freight transport, the only
rail service where there is real on-track competition. The conclusion presents some recommendations
about regulatory impact assessments within the rail sector.
Box 1. Infrastructure manager and rail access charges: what is at stake?
The concept of a separate infrastructure manager did not exist in the European railway sector before
Directive 91-440. In almost all countries, an integrated historical operator dominated. Train paths wereallocated without any being charged. The separation between the rail and the wheel, even if it is only at
the accounting level, was firstly designed to contain the monopoly, on the recommendations of
economists (Katz and Shapiro, 1985). But the aim was also to introduce a fee for use of the railway, inorder to reflect the relative scarcities, notably in cases of congestion, as well as rail companies’*

Author affiliation on the cover was provided at the time of drafting.

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INTRODUCING COMPETITION IN THE EUROPEAN RAIL SECTOR | ITF ROUNDTABLE 180

readiness to pay. This commercial logic has played a large part in modifying how networks are managed,
but it also has its downside. Isn’t a monopoly, even one that is contained, likely to abuse the situation by
imposing excessive rail access charges to the rail operators?
The question of the level of track access charges is delicate. Infrastructure charges did not exist before
the rail reforms. They have now become more or less generalised, even when rail companies haveremained integrated. Whether or not they are independent, the infrastructure manager provides rail
companies with a service whose cost is reflected in the charges. But does the level of the track accesscharges really reflect the costs? This is not apparent when we look at the notable differences between
passenger trains and freight trains, but also from one country to another. The differences in theoperating costs and track maintenance costs do not play a great role in comparison with national
strategic choices taking into account the users’ willingness to pay. That is why the charges for freighttrains are for instance very high in Estonia and in contrast very low in Sweden. In this country, like inmany others, track access charges have been deliberately reduced to encourage this mode of transport.
Rail access charges for freight are also relatively low in France. In contrast they are relatively high for
high-speed trains. It is the same in Germany. The high charges are therefore not always an unbearable
cost for rail operators, but they can be. This is what work on “double marginalisation" has shown. When,like in France, the infrastructure manager, who is seeking to completely cover the costs of the highspeed lines, operates a differential price structure relating to the ability to pay of the rail operator, therisk is that the level of the traffic will end up being sub-optimal (Sanchez-Boras et al., 2010). This is evenmore true if the rail operator is in a monopoly position and able to practice yield management. This is
the case of the SNCF on French high-speed lines. There is therefore a high risk of seeing a classic
monopoly position being created by the combined actions of the infrastructure manager and the rail
operator (Messulam and Finger, 2015), deliberately reducing demand in order to increase income to thedetriment of users.
In reality, the risk is limited as the SNCF does not have a monopoly on transport services. In addition to
the high-speed lines, there are air routes, coaches, car-sharing services and, of course, private cars. But
there is a risk of seeing a growing proportion of the rail operator’s turnover absorbed by the charges
and it is clearly a barrier to entry for potential competitors. This is why the presence of an independent
regulator is essential to control the infrastructure manager not only to avoid discriminatory access, butalso to check its productivity gains.

Evaluating rail regulation: what indicators?
In its successive transport white papers (European Commission, 2001; 2011), the European Commission
was seeking to rebalance transport flows in favour of rail transport. This initiative was based on the ideathat rail transport has real advantages in terms of sustainable development. The negative externalities ofrail transport are generally lower than those of road or air transport, notably in terms of greenhouse gas
emissions. Rail transport is also primordial in densely populated areas where the road network issaturated in rush hour. The geography of Europe and the population density of certain countries arestrong arguments in favour of this. In the Netherlands, but also in Belgium, the United Kingdom, large© OECD/ITF 20195

INTRODUCING COMPETITION IN THE EUROPEAN RAIL SECTOR | ITF ROUNDTABLE 180

parts of Germany and in many of the large French, Italian and Spanish agglomerations, daily journeys
would not be possible without the use of trains and tramways. Their mass transit capacity is essential toallow the mobility of people in large agglomerations.
In addition, high-speed rail has experienced real commercial success, such as on the Paris-Lyon route andto a lesser extent between Paris, London and Brussels. The specific features of European geography andhistory also tend to favour rail transport. Although it is clear that rail transport is not suitable for the very
long distances between some European cities (such as Berlin–Lisbon or Paris–Athens), high-speed rail
has demonstrated its usefulness for linking cities such as Paris, London, Brussels, Amsterdam andCologne. At the national level, the French, German and Italian examples show that high-speed rail routes
can be very successful. It is not surprising that in 2011 (the White Paper) the Commission set itself thetarget of trebling the European high-speed rail network by 2030. Targets for rail freight are equally as
ambitious: 30% of inland freight transport over distances of more than 300 km should travel by water orrail by 2030 and by 2050 this proportion should have reached 50%.

European railway programme
To achieve these objectives, the EU28 has not only considered competition as a lever for modernisation,
as Figure 1 shows, it has intervened in a number of areas (Crozet Y. et al., 2015).
Figure 1. From objectives to resources: The EU28’s rail programme

Assuming that the EU28’s ultimate objective is an increase in traffic and modal share by the railways,
intermediate objectives were set, in the area of standards and regulation, as well as in the railway
product offer.
6

The first category includes the major decisions represented by successive directives and rail
packages, but also the promotion of new standards for train control and command systems© OECD/ITF 2019

INTRODUCING COMPETITION IN THE EUROPEAN RAIL SECTOR | ITF ROUNDTABLE 180(ERTMS), and safety issues, with the creation of the ERA, which develops procedures for railway
safety and interoperability.
In the second category, we find measures designed to promote a trans-European rail network
setting out the main corridors (TEN-T). In certain cases, the EU28 has provided funding, notably
in order to build international relationships. On these new or upgraded infrastructures,competition is a way of developing the service offer.

Overview of rail performance indicators.
Thus, liberalisation is a means of achieving the strategic objectives of increasing traffic and the modal
share of railways. As Figure 2 shows, from an evaluation perspective, these objectives can be related to acertain number of performance indicators.
Figure 2. Performance indicators and evaluation of public rail policies.

In the lower section of Figure 2, we find the traditional indicators of production efficiency andcommercial efficiency. These are generally established for one company, notably in order to compare its
performance with that of other companies (benchmarking). In the upper section of the diagram, along© OECD/ITF 20197

INTRODUCING COMPETITION IN THE EUROPEAN RAIL SECTOR | ITF ROUNDTABLE 180

with the cost-benefit analysis and the cost-efficiency analysis, we find traditional indicators that are notseeking to establish the performance of companies, but the costs and benefits for the community ofsuch rail services. This latter feature depends directly on public policies, given that a large proportion ofrail services are subsidised. However, public policies are also directly implicated when there iscompetition in the market between companies who do not receive subsidies, because public policies arealso affected by the national forms of regulation of the rail sector and transport in general. That is why
based on diverse performance indicators that are presented in the second part of this paper, it is also
necessary to develop multi-criteria approaches that are more qualitative and which seek to evaluate theimpacts of competition and rail regulation, notably regarding the role of the infrastructure manager.

From company efficiency to cost benefit analysis
To evaluate the impact of competition on rail transport, it is important to firstly refer to traditional
indicators. This section reviews some of the classic methods for measuring the productive efficiency ofcompanies and then looks at the cost-benefit and cost-efficiency analyses, which are a first step towards
a more global evaluation that seeks to measure impacts on the community.

Productive efficiency and commercial efficiency: the crucial role oforganisations
Measuring the efficiency of a company, and particularly a railway company, is not an easy task, as manydifferent types of indicators exist. To make matters clearer, it is important to distinguish between
productive efficiency and commercial efficiency.
With the former, this would involve comparing physical outputs, such as train-km withsignificant inputs such as the quantity of capital or labour (Bougna and Crozet, 2016).

Commercial efficiency is measured by comparing supply indicators (train-km) with demandindicators such as passengers-km or tons-km. It is possible for a company to have highproductive efficiency but low commercial efficiency, if the load factor of the trains is
insufficient.

It is also possible to combine productive efficiency and commercial efficiency in a single composite
indicator by bringing together traffic (Pass-km and Tonne-km) and the workforce employed. Although it
is only a rough measure, this indicator of what it is known as “apparent labour productivity” is very
instructive. Firstly, let us take a look at what has happened in France, to understand how this indicator isconstructed (Table 1).

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Table 1. France, apparent labour productivity
1996

2008

2015

Pass-kilometres (millions)

59 70082 40094 234

Tonne-kilometres (millions)48 60037 300205 80Kilometric units (millions)

108 300

119 700

114 814

Workforce

180 500

163 000

151 000

0.60

0.73

0.76

Millions of KU per capita
Source: National transport accounts

The last line of the table shows that labour productivity has increased in France by 26.6%. It has
improved from 0.60 to 0.76 million kilometric units (Pass-km + Tonne-km) per employee. This result
cannot be explained by the rise in the numerator. Due to the sharp drop in freight traffic, the kilometricunits fell between 2008 and 2015. The increase in passenger traffic is not enough to compensate for thedrop in freight, as can be seen by the figures for 1996 to 2008. It is only the decrease in the workforce,i.e. the denominator that can explain the productivity gains. The situation is different in two
neighbouring countries, Germany and Switzerland, which like France have maintained an integrated
historical operator. Table 2 demonstrates that like France, Germany and Switzerland have experienced
the impact of the financial crisis on freight traffic from 2008 onwards, and even for passenger traffic in
Germany. Nevertheless, between 1996 and 2015, apparent labour productivity increased by 103% in
Switzerland and 96% in Germany.
Table 2. Apparent labour productivity in Germany and Switzerland
Germany

1996

2008

2015

Switzerland

1996

2008

2015

Vkm (millions)
TKm (millions)
KUm (millions)
Workforce
Millions of KU per
capita59 30067 400126 700
260 000

113 634
77 791
191 425
178 168

98 44579 561178 006
184 391

11 6007 300
18 90032 00016 15012 53028 68028 00018 56015 06533 62528 000

0.49

1.07

0.96

Vkm (millions)Tkm (millions)
KUm (millions)
Workforce
Millions of KU per
capita

0.59

1.02

1.20

Source: DB (Facts and Figures 2015) and CFF (Faits et chiffres 2015)

In other words, given the modest increase in traffic in France, much larger cuts to the workforce would
have been needed in order to maintain productivity levels in line with those of its Swiss and Germanneighbours. Despite a context that favours commercial efficiency, (230 passengers per train on averagein France compared to 120 in Germany) the efficiency of the French rail system is low when we compare
outputs, namely passengers and tonne-kilometres with inputs, namely the workforce. Another way of
formulating the same observation is to look at the number of trains-kilometre (output) per employee(input) in 2015, which stood at 3 510 train-km/employee in France and 5 070 in Germany, some 24%
more per employee!
France, unlike Germany, is a country where rail competition is almost non-existent. We could therefore
be tempted to look for a relationship between low productivity gains and monopoly position. But things
are not so simple: in Switzerland, the Federal Railway (CFF) does not have any competitors for passenger
traffic, whether on-track or off-track. Therefore, the efficiency of rail transport companies does notdepend on competition. Organisational questions also play a key role. In Switzerland, a specificproductivity agreement was signed between the Confederation and the CFF in the early 1990s. In© OECD/ITF 20199

INTRODUCING COMPETITION IN THE EUROPEAN RAIL SECTOR | ITF ROUNDTABLE 180

exchange for generous public subsidies for the modernisation and development of the rail network, theintegrated Railway Undertaking (the CFF) agreed to reduce its workforce by more than 30% althoughtraffic increased by more than 60%.
Organisational change is therefore at the heart of railway revitalisation. It can be, as in Switzerland, theresult of a contract between the public authority and the historical operator. It can also come from theconstraint represented by competition, like in Italy. Since the beginning of the 2000s, rail transport in
Italy has shown real vitality, the first demonstration of which was the development of high-speed trains.
Covering an area between Naples and Turin, these trains now connect the largest Italian cities, withnumerous services offering day return trips between them, to such an extent that it can be considered
an inter-urban metro system. High-speed train traffic is increasing, and this trend should continue inyears to come because of the extensions that are underway or scheduled towards Venice, Bari, etc.
Extension of the network, competition for the high-speed train market, entrance of private capital – theItalian railway is on track for real renewal. Public policies have been largely inspired by the measures
recommended in the EC white papers: development of high-speed trains, implementation of theEuropean Railway Traffic Management System (ERTMS), deregulation in the form of opening-up tocompetition and private capital.
Competition has played a key role in encouraging traffic development, taking the form of on-trackcompetition rather than a system of franchises or competitive tendering. This is very rare, if not uniquein Europe1: since 2012 alongside the historical operator Trenitalia, there has been a new player on themarket, NTV (Nuovo Trasporto Viaggiatori), operating under the trade name of “Italo” and offering
services on the same routes. NTV is a private company owned by Italian investors (MDP Holding, IMI
investimenti, Generali, etc.). Its entry on the market received strong support from the transport ministry
who saw it as a stimulus for reforming the historical operator. Everything has been done to ensure NTV
has attractive track access, as well as access to the main stations, which recently included Termini, themain station in Rome. It should be noted that NTV is not the only new player in the peninsula. Anothercompany, Thello, whose shareholders are Trenitalia and Transdev, operates trains from Milan to Parisand Marseille.
For NTV, the first years of operation were difficult. Despite a wide range of fares and very varied
selection of services (including a “super premium” class with Pullman seats, its own staff and a meetingroom), the load factor barely exceeded 50% and losses were accumulating. High-yield passengers were
the hardest to attract. The results for 2015 are much more encouraging. The load factor now exceeds
70% and the annual number of passengers has leaped from a little over 6 million to more than 9 million
passengers. What is more, in 2015, NTV generated a gross operating surplus for the first time, and thecompany is planning to develop its activity, including in coach transport. But it should not be forgottenthat to achieve these results, the Italian infrastructure manager had to substantially reduce the track
access charges. The improved profitability of NTV and Trenitalia is mirrored by a reduced profitability of
the infrastructure manager.
In addition, an interrelation has been observed between the traffic on classic lines and that on the highspeed lines. The latter has grown rapidly: 8.6 billion pkm in 2011 (23.4 million passengers) comparedwith 11.09 billion pkm in 2015 (31.2 million passengers), an increase of some 29%. At the same time,traffic on classic lines has dropped sharply, to such an extent that total rail traffic in Italy barely exceeds
50 billion pkm, the same value as in the early 2000s. The question has to be asked about the cost for thecommunity of this substitution between customer bases. Users of high-speed rail lines have obviously
increased their well-being, particularly as competition has seen prices come down on lines where it

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exists. However, the public cost is high and it is necessary to compare the costs and benefits at the levelof the community. That is the role of the economic calculation.

The economic calculation: cost-benefit and cost-efficiency analyses
The role of the economic calculation, the most commonly used tool being the Cost-Benefit Analysis(CBA), is to compare different possible choices of investment in terms of their costs and their various
estimated benefits. The economic calculation makes it possible to assess the usefulness and the
profitability of a project compared to other projects with the same objectives. The two main indicators of
the economic calculation are the Net Present Value (NPV) and the Internal Rate of Return (IRR).
The NPV takes into account the investment made by the operator and the financial costs of the project.
This is always a value that is actualised to a base year. It is a notion that seeks to estimate the global
financial surplus of the project (Annex A). However, it should not only take into account monetary flows.
It is therefore necessary and possible to calculate a “socio-economic” NPV and IRR which take into
account non-sales costs and benefits. Factors that are accounted for include time savings but also thevariations in the usual transport-related pollution, safety and noise levels. The monetary estimation ofthese various benefits is by definition uncertain, due to the non-tangible nature of these effects. Yet, in asocio-economic assessment, they are often preponderant in the results. The values used to calculatethese benefits in value terms are therefore chosen by the public authority and can be assessed withsensitivity analyses.
The economic calculation has been used for many years in the transport sector. Thus, in France it ispossible to establish ex-post IRR for the country’s high-speed lines, which can be compared with theforecast ex-ante IRR. As Table 3 shows, the profitability falls as the network expands (Crozet, 2014).
Table 3. Ex-ante and ex-post socio-economic Internal Rate of Return values
LN1 (South East)
LN2 (South West)
LN 3 (North)
By Pass Paris
LN4 By Pass Lyon
LN5 (Mediterranean)

Ex-ante internal rate of return

Ex-post internal rate of return

28%
23.6%
20.3%
18.5%
15.4%
12.2%

?
12%
5%
15%
10.6%
8.1%

Source: J.P. Taroux (2013).

The high-speed lines offered the community good levels of socio-economic IRR, thanks to the timesavings and reduction in polluting emissions. The figure is not known for the first high-speed line, but it isvery probably in excess of 20%. For the line #3 (North), the low IRR comes from the fact that the traffic,
notably towards London, took a very long time to grow. Today, 20 years after the Channel Tunnel
opened, traffic has finally reached levels that have allowed Eurostar to become a profit-making company.
However, there was a long wait for the new line to be opened on the British side and access given to St
Pancras station. The ex post evaluations of the first 25 years of high-speed trains (TGV) in France showedthat the net surplus gain for the community stood at EUR 45.9 billion for line 1 (South-East),
EUR 23.8 billion for the Atlantic line (South-West) and EUR 4.9 billion for the Nord line. This gives a totalof EUR 74.6 billion (in constant 2005 euros), the vast majority of which comes from time savings forpassengers. This progressive reduction in profitability suggests that caution should be exercised withregards to the many network extension projects.
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It is particularly important to keep in mind that, often, public authorities overestimate the potential
major benefits of new transport infrastructures. The entire economic literature indicates that theseeffects are largely illusory (Flyvbjerg et al., 2003), but all the public decision makers believe in them inexactly the same way as national lottery players believe in their luck. When a project has strong politicalbacking, the individuals who perform the studies are encouraged to come up with traffic flow forecaststhat justify the project. In a manner of speaking, because the public decision maker wants the project togo ahead “at any price” it places itself in a position of weakness with respect to its private sector
partners.
The result is that negotiations between the public authorities and potential concessionaires areasymmetrical. Rail projects are very political and are characterised by three types of pressure: the line
must be built, the trains must run and price/quality must be acceptable. Finally, the concessionaire has
an extraordinary bargaining power due to the strong desire of the public sector to make the project
happen. Public entities are therefore ready to accept greater risks, give more guarantees than initiallyplanned or intended to provide loan guarantees, especially when they accept to introduce in CBA somepotential new gains.
Partly, but not only, for reasons of caution, the economic calculation has recently undergone a numberof changes which have resulted in new elements being included in the NPV.
In recent years, inspired by the work of T. Venables and D. Graham, it has been suggested toinclude “wider economic benefits”, taking into account the possible impact of new transport
infrastructures on productivity and ultimately on economic growth. But the results are still
uncertain and generally poorer than the project promoters expected. Thus, D. Graham has
evaluated potential gains from the British high-speed train project known as “High Speed 2” in amuch less optimistic manner, which could be described as more realistic, than the report fromthe consultants (KPMG, 2013) because there are high risks that the traffic levels will not live up
to expectations.

The question of risks is therefore on the table and it is now possible to take this into account invarious ways, notably by increasing the discount rate (Annex A). Despite this, it is not unusual tofind the public authority remains the insurer of last resort. Even when concession contracts
have been signed with private partners, for example for the launch of new high-speed lines, it ispublic funds that have been used to save the project.



For this reason, and given the growth in public deficits and debt, the recommendation has been
to take into account the scarcity of public funding. This is logical in the railway sector, which
requires heavy subsidising.

When looking at the cost to the community of rail services, we should not only take into account a
simple cost-benefit calculation. A cost-efficiency analysis is also required. This is a good way ofcomparing various options, but also, from a benchmarking perspective, a way of comparing the cost to
the community of various choices. That is why in the fourth railway package, the “markets” pillar clearlymentioned the objective of reducing the costs of the railway for the community. It is a question of
improving the cost-efficiency ratio and value for money for taxpayers. If competitive tendering is tobecome the norm for awarding public service contracts from 2023, this is in order to provide the bestprice for subsidised passenger rail services, which represent the majority of rail services. It is therefore
important to measure how much a train-km costs in absolute value terms and what it costs in subsidies.
Once again, the comparison between France and Germany is instructive.

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In Germany, from 1996 to 2009 (Guihéry, 2011), regional rail traffic increased by 55% (to 47 million passkm) but train-km only increased by 26% (to 630 million train-km). Therefore, demand grew much morethan supply. Thanks to on-track competition for this type of service, contract prices fell by 26%, to thebenefit of the organising authorities. This allowed federal subsidies to be reduced by 6% in constanteuros from 1996 to 2009. For a constant euro, the Länder offer 37% more services (2010/1996). Anothercomparison places train-kilometre subsidies in the area of public service obligations. In 2012, the subsidy
per train-kilometre stood at EUR 17 in France against EUR 9 in Germany2.
In contrast, in France, not only has public support increased substantially (+80% between 2002 and2011), but the same applies for the subsidy per train-kilometre, as the cost of the train-kilometre has
increased by 60%, some 5.3% per year, which is three times faster than inflation! This has all occurred asif the organising authorities, for a variety of institutional and political reasons, were incapable of stopping
costs getting out of control. As a comparison, in Switzerland over the same period, total public
contributions increased slightly then stabilised. As a result of the reduction in costs per train-km, thecorresponding subsidy dropped sharply (-22%).
We can observe that, in terms of labour costs; competition in the rail sector is not leading to the same
results as in other network industries. Usually, competition increases the pressure on companies andthus on employees. In sectors such as air or road freight transport, competition has led to a kind of"social downsizing". But it was not the case for rail. In Germany, like Britain, drivers found themselves ina strong position because their skills were in high demand. Sometimes, because of strikes, they haveobtained significant wage increases in exchange for more flexible work organisation.
This atypical development is not a hindrance to a win-win game. Higher wages for drivers are, subject toorganisational changes and productivity gains, concealable with declining public subsidies for the same
service. Therefore, there is possible room for manoeuvre, especially since the introduction ofcompetition will be gradual. In Germany, the market share of new competitors rose from 10% to 27% ofregional traffic from 2003 to 2014.
A potential avenue of research is put forward in recent work by the ITF (Casullo, 2016). The worksuggests that the impact of open access is evaluated through comparative econometric techniques suchas difference-in-differences estimators. The first step of this analysis requires matching rail networks
with similar characteristics to control for exogenous factors. Next, a meaningful dependent variable isselected (such as operating cost per train-km) and the evolution of this variable before and after market
opening is observed. Initial findings suggest that there is no evidence of cost reductions at the systemlevel in the immediate years after market opening.

Multi-criteria assessment of rail freightliberalisation
The indicators shown in the previous sections are characterised by their one-dimensional nature. In one
way or another, they seek to capture the relative efficiency of a company or a transport project in asingle value. But is it possible to do the same when assessing an entire public policy, such as on-track© OECD/ITF 201913

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competition in rail transport? We are going to attempt to answer this question by focusing on rail freight,
an area which was liberalised a relatively long time ago and where competition is now quite widespreadthroughout Europe. However, before attempting an assessment using the Rail Liberalisation Index (RLI),
it is important to bear in mind that we are in the presence of imperfect competition.

Rail freight: structurally imperfect competition
Since the first and second railway packages liberalised rail freight, in 2001 and 2004 respectively,
important changes have been seen in most European countries. In general, markets are more open andcompetition is increasingly a reality. The first phase of deregulation took some time, but it has now been
accepted throughout Europe, although the extent of liberalisation is not the same from one country toanother, as shown in Figure 3.
Figure 3. Rail freight liberalisation in European countries

Source: Independent Regulators’ Group, Rail, (2013).

In terms of liberalisation, EU28 countries are in very variable situations. Some, like the Netherlands,
Sweden, Germany or the United Kingdom, legally liberalised the market in the mid-1990s and newmarket players moved in. In other countries, legal liberalisation only occurred after the publication of theEuropean railway packages, in the first half of the 2000s. The first competitor only emerged much later,
often many years later, and in some cases even later still, in Finland, or never as in Greece. Liberalisationof rail freight is therefore not a tidal wave; it is a slow movement that is gradually taking placethroughout Europe.

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Even when competition exists , the sector remains heavily concentrated, which leads to the persistenceof strong market powers. In traditional competition analyses, economists closely examine the market
structure, i.e. the number of competitors. They consider that this largely determines the behaviour ofcompanies in terms of innovation and ultimately their overall efficiency. To evaluate the market
structure within a sector of activity, the most frequently used reference is the Hirschman-Herfindahl
Index (HHI) which is defined as the sum of the square of market shares (Shepherd 1984). The value of theindex increases when the number of companies decreases. Thus, in the United States the number of rail
freight companies fell from 36 to 7 between 1978 and 2004, which resulted in the HHI increasing from589 to 2 263, well above the value of 1 000 which is considered to be the critical value beyond which
there is a risk of powerful market powers emerging. (McCullough, 2005).
At first glance, the EU28 is in the opposite situation. The liberalisation of the market is currently
producing a reduction in the HHI. When there is a single operator, the HHI reaches its maximum level, of
10 0003. In the case of the United Kingdom, the growth in market share of the competitors of theprincipal operator HWS, gradually brought the HHI down, to around 4 250 in 2012 compared with 7 450
in 1997. The tendency is going in the right direction, but these are still the same very high levels ofconcentration that can be found in most European countries. In Germany, the HHI is greater than 6 300;
it is more than 5 000 in France4.
By comparing the development in North America and Europe, we can therefore ask ourselves whether
there is not a specific feature in rail freight that structurally maintains the HHI, and thus the market
powers at a high level. To understand this, we must bear in mind that an HHI of 1 000 represents asituation where ten operators each hold 10% of market share. Is this a reasonable objective for rail
freight? Are we not in a sector where in order to develop certain activities such as the transport ofwagon load traffic, or powerful corridors for container transport, it is necessary to hold a much higher
market share than 10%?
Competition in the rail freight transport sector is clearly a situation of imperfect competition. Entering
the market has a cost for the new participants. If they do not succeed in obtaining a return on theirinvestment, they have to restructure or leave the market after a few years of operation. As there aremany sunk costs, it is not possible to practice the “hit and run entry” so dear to the theory of competitivemarkets (Baumol, Panzar and Willig, 1982). A clear indication of this is that, in addition to the low
number of players, there is a high number of new participants leaving the market after failing to sustain
their activity. Thus in Sweden, after liberalisation of the market in one of the pioneer countries in thisapproach, between 2000 and 2004, eight companies left the market, including Ikea Rail.
We are therefore in a sector characterised by multiple barriers to entry, which manifest themselves
either in the entrance costs or the exit costs. As a result, competition is only legitimate if it leads to an
overall improvement in sector efficiency. This is measured by a number of indicators such as the share of
the rail freight market, the development of costs of the sector, productivity, etc. An assessment ofmarket liberalisation must therefore take into account medium and long-term effects. The players in themarket are all different. There is no “representative company” as there is in pure and perfectcompetition. Each company will adopt a strategy and target markets adapted to its specific assets. As
these are neither of the same nature nor of the same importance, the market powers must be closely
monitored in order to find out whether competition has really changed the situation.

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Rail Liberalisation Index: can we evaluate the effects ofcompetition?
To evaluate the effects of competition, the competition has to be measured, in order to establish adegree of intensity. That is what IBM attempted to do, at the request of Deutsche Bahn. On the basis of amulti-criteria method, a synthetic index was constructed to monitor the degrees of liberalisation. This is
the Rail Liberalisation Index (RLI), (IBM, 2011). Before we look at the results, it is important to describe
the evolving structure (Annex B). In 2011, the general index took into account two large categories ofindicators known as LEX and ACCESS.
The indicators contained in LEX represent 20% of the total. As shown below, they take into
account how the sector is organised and notably the vertical separation between theinfrastructure manager and the Railway Undertaking (RU). However, the main weight is given to
the regulation of access to the market and the power of the market authorities.



The ACCESS indicators are those that have the most weight in the indicator (80%). They assess
the various barriers to entering the market (information-related, administrative, andoperational) but also the proportion of the domestic market that is accessible, and in a moremarginal manner, the question of passengers ticketing.

The scores obtained for each indicator are then added together, taking into account the weightings
shown in Annex B. Thus, the higher the score of the RLI, the more open the rail market of the country
can be considered to be. When the index is above 800 points, liberalisation is considered as “advanced”(Austria, Germany, Denmark, the Netherlands, Sweden, and the United Kingdom). At between 600 and
800 the country is considered to be “on schedule” (13 EU28 countries including Italy, France andBelgium). While countries are considered to be behind schedule if they score between 300 and 600
points (six EU28 countries including Spain and Luxembourg). The annex includes the scores obtained forthe various years and their overall development for all of EU28 countries plus Norway and Switzerland.
The score for each country is interesting but we should avoid according too much importance to detailed
results, insofar as they depending on changing weighting and measuring tools that can still be perfected.
However, three things are worthy of mention.


The first is that the tendency is for all countries to see a gradual improvement in their RLI. In
less than a decade, this is a major result that tells us that the “competitive solution” is at work.

The second is that the very fact of changing the weightings reveals that liberalisation is acomplex process which adapts its ambitions to the changes observed. Thus, the ACCESS
indicators (evaluating barriers to entry) went from representing 50% to 80% of the total RLI
between 2002 and 2011.



The third, which is an extension of the previous point, is that the growing importance of the
ACCESS indicators is primarily linked to the fact that other indicators have been removed fromthe general index, gathered under the name of COM (Annex B). Yet, these last indicators
illustrate the effects of liberalisation in relation to the EU28’s general objectives, notably theevolution of modal share for railways and the proportion of new entrants.

The question of the market share of new entrants takes centre stage once again here because alongitudinal approach is required. What happens to new entrants? In a number of sectors of activity,
such as air transport, it has been seen that competition, after a phase of multiplication of operators,
results in a period of consolidation and finally, increased concentration. This is very similar to what is

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happening in rail freight, as the HHI shows us. However, can we consider that, despite the low number ofoperators, greater liberalisation goes hand in hand with a larger growth in traffic? Figure 4 partiallyanswers that question.
The countries with the greatest liberalisation (Sweden, United Kingdom) are those where the growth intraffic has been the most pronounced. However, for all the countries represented, this relationship is not
obvious, as is shown by the wide dispersion of points around the regression line, which also reveals avery weak correlation between the variables. It is therefore clear that competition may be a necessary
condition but it is not an adequate condition. Aspects such as the level of intermodal competition should
also be taken account, but not only from road transport. It is not widely known that the strong rise in rail
freight in Germany (+40% since 2003) was entirely offset by a fall in waterway traffic. The market shareof road freight transport has remained almost unchanged over recent years.
Figure 4. Degree of liberalisation and growth of rail freight traffic

Traffic growth 2003-2012

50%
40%

Germany

30%

Netherlands
Latvia20%

Hungary
Slovenia

10%

Poland
Italy

0%
-10%

Austria UK
Denmark
Sweden

550

600

650

700

750

800

850

900

Belgium-20%-30%

France

-40%
-50%
-60%

Estonia

Rail Liberalisation Index 2011

In general, competition has not had a particularly significant impact on rail freight traffic. Across theEU28, freight traffic grew once again after the sharp fall experienced in 2008 due to the financial crisis. In
2014, total rail freight in the EU28 reached 422 billion tons-kilometre. But if we look at modal share, rail
freight has taken almost nothing away from road freight, which represents over four times more traffic
than rail. Thus, in 2014, road freight transport represented 74.9% of land traffic in the EU28, against
18.4% for rail. In 2009, the figures were 77.1 and 16.9 % respectively. There has been an improvement
but it is modest. Can change be expected?
Probably not, because rail freight has to accept that it has only a niche market.
This firstly comes from a problem of relative cost. For a shipper, transport is a cost that can be
broken down into monetary cost and time cost. Competition between modes of transport
depends on both components. Road transport has taken such a predominant position in recent© OECD/ITF 201917

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decades because it has succeeded in reducing the trends of its monetary costs (in constantmoney terms, sometimes in nominal terms at certain periods) and also in making the most oftime savings made possible by improved road infrastructures and major technical progressincluded in the vehicles.
Changes in the nature of products being transported is also a key factor in this relative decline.
Which products use the rail mode of transport and which offer real prospects for development?
This is what the British Department for Transport has sought to identify (DfT, 2010). The main
products that are transported are assessed in terms of their degree of market maturity. Coal,for example, like aggregates or metals, represents mature and potentially stable or declining
markets. It is difficult to build upon such markets to envisage a significant development in railtransport. What then are the products with the highest added value per ton, transiting acrosslong distances, which could interest rail freight? The transportation of automobiles and parts
for the automobile industry is a potential target as there are few production plants in Europe,each one specialised in certain models. However, car makers are demanding in terms ofregularity and service quality. The same applies to intermodal traffic and notably containertransport. Growth perspectives are strong in this area but would require track to be available
across the network with track access charges that are not too high. This leads us to evaluate therole of the infrastructure managers (Annex C).

Conclusions
Railway reforms initiated in Europe 25 years ago have sought to revitalise this mode of transport. For
this, they have stepped up measures to allow competition, with a view to a single European railway area.
The results are today still modest in terms of traffic growth and rail market share. When it was set up,
mainly in the area of rail freight, “on track” competition took the form of imperfect competition andeven for “off track” competition barriers to entry and market powers remain important, as is the role ofmajor companies in many countries.
In this context, assessing the impact of new regulations for rail transport in Europe involves not just one
indicator. Thus, the introduction of competition is a necessary condition to question the inertia of old
railways companies. Nevertheless, this is not a sufficient condition for organisations, especially when
they feel protected by the state and as a consequence may not significantly increase their efficiency.

18



Therefore, the first recommendation we can make is to develop Europe-wide benchmark
studies using traditional indicators of productive efficiency and business efficiency, but also costbenefit analysis and cost efficiency analysis especially ex-post CBA. The results of such work may
be useful for each country and across the EU28, including the Commission, as monitoring
indicators of the 25 years of reform of the railway sector.

In this perspective, our second recommendation would be to bring together the three layers ofanalysis presented in the paper in order to inform an MCA of the liberalisation process. As
indicated at the beginning of the paper (Figure 1), competition is only one objective of theCommission. It is therefore necessary to promote a comprehensive ex-post evaluation© OECD/ITF 2019

INTRODUCING COMPETITION IN THE EUROPEAN RAIL SECTOR | ITF ROUNDTABLE 180

comparing the goals and the results of EU policy in the rail sector. It will be a way to question
the relevance of the goals and the consistency of the content of the EU policy.


Our third recommendation aims to enrich the toolbox of the RIA (Regulatory Impact
Assessment). It is obvious that an RIA is necessary. Whatever the sector, the regulation
framework has numerous impacts. Within the railway sector, the objectives of EU policy were,in 1991, to abandon the old regulation, considered as a factor of inertia, and to promote a new
regulation. Twenty-five years ago, it was clear that the benefits of the new regulation would behigher than the costs of deregulation. In order to demonstrate that, it is possible to apply to the
RIA the classical methodology of CBA. CBA is usually designed for the evaluation of investments.
However, this paper demonstrates that CBA also has the ability to ensure that regulation will be
welfare-enhancing from the societal viewpoint.

Notes
1 Open access exists in seven other countries (Austria, Czech Republic, Sweden…), just for some routes.
2 In 2012, the net public support to a 140 tons suburban train in France was estimated to amount only to EUR 7.1 train-km, as EUR 10.9 trainkmserve to pay track access charges. The net public to a support 140 ton suburban train in Germany is estimated to amount to only to
EUR 4.8 train-km (deducting track access charges).
3 10 000 is the market share assessed at between 0 and 100, but 1 if the market share is given as between 0 and 1.
4 The 2013 HHI is over 6 500 in France if we consider VFLI (10% market share), subsidiary of the SNCF, as a stakeholder of the historic operator.

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Annex A. Net Present Value and taking risk into
account
The Net Present Value (NPV) is the difference between the updated costs and benefits of all kinds
created by the operation, calculated in comparison to a reference situation. The calculation is performed
using constant money.
𝑇

𝑇

𝑡=1

𝑡=1

𝐴(𝑡0+𝑡)∆𝐼(𝑡0+𝑡)𝑅
𝑁𝑃𝑉 = −(𝐼 − 𝐼𝑎𝑣𝑜𝑖𝑑𝑒𝑑 ) + ∑−∑+𝑡𝑡(1 + 𝑎)(1 + 𝑎)(1 + 𝑎)𝑇

Investments
undertaken before
commission of theinfrastructure

Net returns earned
by the investment
over the project
lifespan

Major maintenance orrenewal investment
during the lifespan of
the project

Residual value ofthe infrastructure

Where:
t0 is the year preceding the commissioning of the project (or its first phase) is the duration of the project construction

T is the lifespan of the project from the year of commissioning𝐼 = ∑0𝑡=−𝜔 (1+𝑎)𝑡 is the initial cost of the project (discounted, spread over many years, or over𝐼(𝑡0+𝑡)a number of commissioning phases)I éludés is the sum of avoided investment

It is the variation in large maintenance investments which are not included in operating costs
and are made in year tAt is the economic benefit for the project at year t :𝐴𝑡 = 𝐴𝑢𝑠𝑒𝑟𝑠 (𝑡) + 𝐴𝑡ℎ𝑖𝑟𝑑 𝑝𝑎𝑟𝑡𝑖𝑒𝑠 (𝑡) + 𝐴𝐴𝑂𝑇 (𝑡) + 𝐴𝑅𝐹𝐹 (𝑡) + 𝐴𝑜𝑡ℎ𝑒𝑟 𝐼𝑀 (𝑡)+ 𝐴𝑝𝑢𝑏𝑙𝑖𝑐 𝑎𝑢𝑡ℎ𝑜𝑟𝑖𝑡𝑦 (𝑡) + 𝐴𝑟𝑎𝑖𝑙𝑤𝑎𝑦 𝑜𝑝𝑒𝑟𝑎𝑡𝑜𝑟𝑠 (𝑡)+ 𝐴𝑡𝑟𝑎𝑛𝑠𝑝𝑜𝑟𝑡𝑒𝑟𝑠 𝑢𝑠𝑖𝑛𝑔 𝑜𝑡ℎ𝑒𝑟 𝑚𝑜𝑑𝑒𝑠 (𝑡)22The benefits for each of the players are expressed in constant money. As a large number ofoutcomes impacting on these benefits do not have an intrinsic value in euros (value of time,carbon, safety, etc.), they have to be given a monetary value in the form of reference values

a is the discount rate or the “rate of exchange” between the future and the present, in constantmoney. The higher the chosen discount rate, the more we favour the present or near future
over the distant future. In real terms, a discount rate of 10% reflects the idea that there is anequivalence between receiving EUR 100 immediately or EUR 110 the next year. Its value candecrease over time. For example, in France, it could be 4% until 2034, then 3.5% in 2035 to2054, then 3% beyond 2055.

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

R is the residual value of the investment at the end of the period in question, which represents
the economic value over the useful life of the project. R can be negative if there is a land
restoration cost at the end of the project.



We can also add an Opportunity Cost of Public Capital (COFP) to evaluate the NPV, for example
by multiplying all public spending and income (other than tax variations) by a coefficient (0.3 inFrance or a multiplication by 1.3).
𝑁𝑃𝑉𝑤𝑖𝑡ℎ 𝐶𝑂𝐹𝑃 = 𝑁𝑃𝑉𝑤𝑖𝑡ℎ𝑜𝑢𝑡 𝐶𝑂𝐹𝑃 + [0.3 ∗ ( ∆𝑝𝑢𝑏𝑙𝑖𝑐 𝑖𝑛𝑐𝑜𝑚𝑒 + ∆ 𝑝𝑢𝑏𝑙𝑖𝑐 𝑠𝑝𝑒𝑛𝑑𝑖𝑛𝑔 )]In terms of risk, we can identify two categories. Probabilisable risk, which can be described bymore or less complex probability laws and can be quantified, and non-probabilisable risks,
which are unpredictable or even unimaginable. The first can be included in the economic
calculation. The second are more difficult to circumscribe and cannot be taken into accountthrough a calculation and must therefore be assessed qualitatively.



In France, taking into account systemic risks linked to weak economic growth halved the IRR ofhigh-speed train projects, when their profitability was already low.

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Annex B. Rail Liberalisation Index
Table B.1. The makeup of the liberalisation indices in 2011
LEX (20% of overall index)(25% in 2002, 30% in 2004, 20% in 2007)
Organisational structure

25

Incumbents' independent status with respect to the state

5

Degree of vertical separation - network/operations

80

Degree of horizontal separation - freight/passenger transport

15

Regulation of market access

45

Market access regime for foreign RUs

40

Market access regime for domestic RUs

40

Legal controlled access to operational facilities

20

Regulatory authority powers

30

General aspects of the regulatory authority

30

Scope of regulation
Powers of the regulatory authority

30
40

ACCESS (80% of overall index) (50% in 2002, 70% in 2004, 80% in 2007)
Information barriers

5

Duration for obtaining information

40

Quality of non-personal information provided

30

Quality of personal information provided
Administrative barriers

30
20

Licence

35

Safety certificate

25

Homologation of rolling stock
Operational barriers

40
45

Track access conditions

25

Infrastructure charging system

50

Other service facilities
Share of domestic market accessible 2009
Method of awarding transport contracts

20

Compliance with transparency provisions
Percentage of the accessible market for RUs

1070

Sales services in passenger transport

24

25
25

5

Rental of space ticket sales offices

50

Access to sales services

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COM (not included in overall 2011 RLI)
(25% in 2002, not included in 2004, 2007 and 2011)
Modal split changes

20

Change in the modal split for rail freight transport (2001 - 2008)

40

Change in the modal split for rail passenger transport (2001 - 2008)40

Share of modal split for rail freight transport 200810

Share of modal split for rail passenger transport 2008

10

Number of external RUs 200920

Certified RUs (excl. incumbent) in relation to network length40

Ratio of active RUs to certified RUs

50

Number of active RUs providing passenger services on a regular basis

10

Market share external RUs 200960

Market share ext. RUs in terms of transport performance in %75

Increase in market share of ext. RUs between 2006 and 2009 in %25

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Annex C. Regulatory background for rail transport
There is not a European railway regulator but the European Commission has been very active in thisarea. It has launched infringement proceedings against a number of countries to encourage them todevelop greater competition. It has also strongly emphasised the need to put in place national regulators
capable of ensuring respect free entry to the market, access to train paths and non-discrimination in
charges (Crozet Y., Nash C. and Preston J., 2012). This is considered as regulation stricto sensu, but there
is also a regulation lato sensu.

The diversity of railway regulation within EU28 countries
In the same way that each country has applied the rail reforms in their own manner, sector regulation
also takes very different form from one country to another.
In the mid-1990s, the United Kingdom opted for an independent and powerful rail regulator,
which was logical for the architecture chosen after the disappearance of British Railways. The
ORR (Office of Rail and Road, formerly Office of Rail Regulation) has statutory duties towards
freight. The ORR performs these duties in three key ways (ORR, 2013):oto “regulate Network Rail’s stewardship of the national rail network”

oto “license operators of railway assets”oto “approve track, station and light maintenance depot access”.

ORR carries out periodic reviews of Network Rail’s financial structure, usually every five years. This
process establishes track access charges for each type of freight locomotive and wagon for different
commodity types, together with a range of other charges such as a coal spillage charge and a freight-onlyline charge. The ORR has published a detailed account of the proposed charging principles for 20142019.

26

More recently (December 2010), France created an independent sector regulator. Its duties are
more limited than those of the ORR but they were extended with the rail reform law of 2014.
Thus, each year ARAF (the railway activity regulatory authority, now known as ARAFER since2016) must approve the track access charges proposed by the infrastructure manager.
However, ARAFER does not set the charges. In 2015, it refused the price rises announced for2017 by putting forward the argument that they did not demonstrate an effort to achieve
productivity gains by the infrastructure manager. Germany also has this same form of generally
a posteriori intervention from the regulator.

In the case of Germany, the rail regulator is not a sector regulator. Regulation of the rail sector
is the responsibility of an independent regulator covering a number of network industries. Since
2006 the Federal Network Agency for Electricity, Gas, Telecommunications, Post and Railway(Bundesnetzagentur, BNetzA) is the regulator responsible for the regulation of the German
railway market. Its responsibilities are based on the General Railway Law (Allgemeines
Eisenbahngesetz, AEG) and the Regulation on Railway Infrastructure (EisenbahninfrastrukturBenutzerverordnung, EIBV), which determines its main task as monitoring and controlling thenon-discriminatory access of all railway operators to infrastructure, especially the processes© OECD/ITF 2019

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granting access to networks and service facilities, time-table schedules as well as nondiscrimination of access fees (BNetzA, 2013). The regulatory remit of the BNetzA does notinclude an ex-ante approval of infrastructure charges. Rather, it comprises preventive as well as
ex-post measures: it examines the network statement and initiates investigations as a reaction
to complaints. If necessary, it is able to take action ex officio (BNetzA, 2013; LIB-Index, 2013).
Decisions by the BNetzA are then immediately effective and an objection has no effect of delay.
In addition to its monitoring responsibilities, the BNetzA has the authority to order coercive
measures up to EUR 500 000, without being able to impose fines. Since 2006, the regulatory
authority has initiated around 600 investigations and taken about 150 decisions (BNetzA, 2013;
LIB-Index, 2013).
Although the railway liberalisation process in Italy was one of the earliest in Europe,paradoxically the responsibility for regulation of the railway companies was for a long timeretained by the Government (Senn and Cini, 2011). From 11 August 2004 to 14 January 2014,
an independent office of the Ministry for Transportation, called Ufficio per la Regolazione dei
Servizi Ferroviari (URSF), played the role of the Italian Regulatory Body (Stanta, 2013),
established to comply with EU legislation (Directive 14/2001). The Italian rail regulator was only
made truly independent from government through the creation of ART (Transport Regulation
Authority) on 17 September 2013 by the decree-law 6 December 2011 n. 201. (becoming
operational on 15 January 2014). This is very recent compared with other major European
countries. However, the regulation of the railway sector was one of the Authority’s primarycommitments since its entry into operation. Beginning in 2014, a number of measures has been
adopted to ensure fair and non-discriminatory access to infrastructures and service facilities,
including the setting of access charges and the establishment of a regulatory period (ARTAnnual Report, 2016).

What room for manoeuvre do regulators have?
In general, rail regulation remains an open question. It is indeed possible to identify two approaches toregulation taking into account the fact that rail regulation can strongly encourage stakeholders, but it
cannot do everything (Crozet et al., 2014).
In the strict sense of the term, regulation is mainly intended to limit any discriminatory
behaviour from the natural monopoly which is the infrastructure manager. The first task is toverify that all operators have the same network access: Allocation of track paths in the
upstream phase (timetabling); equal treatment of trains in the operating phase; no pricediscrimination with the track access charges; access to essential facilities such as fuel delivery
points, depots, sidings, etc. Just drawing up the list of these essential facilities can cause debate.
For example, should marshalling yards or maintenance centres be included? To what extent
should the historical operator be required to give up certain specific assets? The aim here is to
reduce the barriers to entry, to allow new entrants onto the market.

Regulation in the broad sense covers the mechanisms that will allow not only survival but also
acceptable profitability for an adequate number of operators, to ensure the global efficiency ofthe sector. This raises technical questions such as the harmonisation of operating standards,
which must eventually become similar across the whole of Europe, but also economic and social
questions about the management of companies in this sector. The question of stateintervention is also crucial. Having been for a long time, and often still being, the main or sole

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shareholder in the historical operator, each country has a tendency to interfere in thecompetitive game, albeit in indirect or hidden ways. This is a delicate question that regulators
cannot always address directly, but that we have a duty to examine. The presence of the state
in a sector is not a problem per se, but the state should facilitate and not hinder the necessaryorganisational reforms, and this is not the case everywhere. Thus in France, successive rail
reforms, whether it was the reform of 1997 (creation of the independent infrastructure
manager, the RFF), or the reform of 2014 have not directly addressed the question of
productivity. This is due to the difficulty in adapting social relations and human resource
management. The risk is therefore that the government cannot drive the process, but is totally
captured (Laffont and Tirole, 1991) by various pressure groups. And thus, it has only very
reduced rooms for manoeuvre for changing things. The “tyranny of the status quo" (Friedman,1988) imposes its law and managers have to work with these constraints which make any real
improvements in their activity impossible.
In light of market opening, regulators should also be equipped to assess the impacts of liberalisation,
both ex ante and ex post. On the one hand, regulators that collect market data from infrastructure
managers and operators will be in a favourable position to carry out ex-ante assessments, or at least to
establish a baseline position for the analysis. Ex-post assessments, following the methodologies
discussed in this paper and the related literature should be encouraged. This practice will empower
regulators to evaluate market opening impacts and to inform future decisions and ex-ante analysis.

28© OECD/ITF 2019

Introducing Competition in theEuropean Rail Sector
This paper assesses the impact of European rail transport regulationin the past 25 years. It highlights competition as a necessary
condition to overcome the inertia of legacy railway operators, butargues that competition is not sufficient to increase efficiency when
they feel protected by the state.

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Published: 11/2019 | Photo credit: Robert_Chlopas/Shutterstock

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