COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT

Accompanying the document

Proposal for a Directive of the European Parliament and of the Council amending Directive 2012/34/EU of the European Parliament and of the Council of 21 November 2012 establishing a single European railway area, as regards the opening of the market for domestic passenger transport services by rail and the governance of the railway infrastructure

Disclaimer: This impact assessment commits only the Commission's services involved in its preparation and does not prejudge the final form of any decision to be taken by the Commission

TABLE OF CONTENT

1. Introduction........................................................................................................................... 5

2. Procedural issues and consultation of interested parties........................................................... 6

3. Problem definition.................................................................................................................. 9

4. Objectives........................................................................................................................... 31

5. Policy options...................................................................................................................... 34

6. Analysis of impacts.............................................................................................................. 39

7. Comparing the options......................................................................................................... 59

8. Monitoring and evaluation.................................................................................................... 61

Annexes

Annex I – The 4th Package – The 'Big' Picture.................................................................... 63

Annex II – Consultation analysis........................................................................................... 72

Annex III – Evidence of discriminatory practices.................................................................... 85

Annex IV – Options analysis.................................................................................................. 92

Annex V – Analysis of the costs and benefits of further separation requirements................... 108

Annex VI – Analysis of social impact.................................................................................... 126

Annex VII – Governance and access conditions to rail related facilities................................... 127

Annex VIII – Summary of the conference “The Last Mile towards the 4th Railway Package”.................................................................................. 133

Annex IX – Glossary and Acronyms..................................................................................... 157

1. Introduction

1.1 Background

In its 2011 White Paper on transport policy adopted on 28 March 2011 (hereinafter the 2011 White Paper), the Commission announced its vision to establish a Single European Railway Area and clarified that this objective implies creating an internal railway market where European railway undertakings can provide services without unnecessary technical and administrative barriers. [1]

Several policy initiatives have recognised the potential of rail infrastructure as a sustainable backbone for the internal market and a driver of sustainable growth. The European Council conclusions of January 2012 highlight the importance of unleashing the growth-creating potential of a fully integrated Single Market, including measures with regard to network industries.[2] Furthermore, the Commission Communication on Action for Stability, Growth and Jobs adopted on 30 May 2012 stresses the importance of further reducing the regulatory burden and barriers to entry in the rail sector, making country-specific recommendations to that aim.[3] In the same manner, on 6th June 2012 the Commission adopted the Communication on strengthening the governance of the single market, which also stresses the importance of the transport sector.[4]

At the same time, important financial means have been made available for investment in rail infrastructure by Member States as well as through EU structural funds. In addition, the Commission has proposed for the next 2014-2020 multi-annual financial framework the creation of a new infrastructure instrument supporting the priorities in Transport, Energy and Telecommunications: the "Connecting Europe Facility" (CEF)[5]. Of the total €50-billion envelope €31.7 billion are allocated to transport infrastructure.

The EU railway market has seen important changes in the recent decade. They were gradually introduced by three legislative "railway packages" (with some accompanying acts) intended to open up national markets and make railways more competitive and interoperable at the EU level, while maintaining a high level of safety. The most recent development is the adoption (passed 2nd reading in Parliament in July, to be adopted by the Council before the end of 2012) of the recast of the 1st Railway Package, which, in addition to legislative simplification and consolidation, reinforces existing provisions on competition issues, regulatory oversight and financial architecture of the railway sector[6].

Despite the considerable development of the 'EU acquis' establishing an internal market for rail transport services, the modal share of rail in intra-EU transport has remained modest. Therefore the Commission has planned to put forward the 4th Railway Package (cf. Annex I for further details) in order to enhance the quality and efficiency of rail transport services by removing the remaining identified obstacles of different types, and by thereby fostering the performance and competitiveness of the railway sector. As announced by the 2011 White Paper, these issues will be addressed by different initiatives:

· Removing remaining administrative and technical barriers, in particular by establishing a common approach to safety and interoperability rules to increase economies of scale for railway undertakings active across the EU, decreasing administrative costs and accelerating common administrative procedures, as well removing disguised discrimination;

· Opening the domestic rail passenger market, granting open access rights but also addressing competition for public service contracts (PSCs)[7] award process, in order to complete the process of rail passenger market opening; accompanying measures will facilitate Member States' retaining integrated timetabling and ticketing systems where this benefits the passenger;

· Optimising the governance of infrastructure management, in particular by ensuring that the infrastructure manager performs a consistent set of functions that optimises the efficient use of infrastructure capacity and ensuring effective non-discriminatory access to the infrastructure.

1.2 Scope of the impact assessment

This impact assessment focuses on the third point mentioned above. It draws in particular on the experience gained in all 25[8] Member States which have opened the rail freight and international passenger markets under EU law as well as those that have already chosen to take measures to open their domestic rail passenger markets to competition.

This impact assessment will not deal with the issue of access and governance of rail-related services (such as passenger stations, freight terminals, maintenance facilities) as this has been already been addressed recently by the Recast of the First Railway Package. However, since this issue is directly linked with the governance and the conditions of access to the railway networks, this question is presented under Annex VII of the present document.

2. Procedural issues and consultation of interested parties

2.1 Organisation and Planning

This IA is prepared by DG MOVE to support the legislative initiative on the governance of railway infrastructure in the Single European Railway Area (Agenda Planning number 2011/MOVE/…). The Commission proposal in this regard will include amendments to the Directive of the European Parliament and of the Council establishing a single European railway area[9].

An Impact Assessment Steering Group was created in December 2011 and has been actively consulted during the IA process. This Steering Group has counted on the membership of DG CLIMA, COMP, ECFIN, EMPL, ENER, ENV, ENTR, LS, MARKT, REGIO, SANCO, EEAS, TRADE ELARG and SG and met 8 times, with the last meeting being held on 4 October of 2012. The IASG has been re-consulted in writing on the final draft on 8 October 2012.

2.2 Consultation and Expertise

Expertise

In order to support the Commission in the impact assessment process, an external consultant was tasked to prepare a support study[10] and to undertake a targeted consultation. The study started in December 2011 and the final report was delivered in November 2012.

Consultation of stakeholders

To gather the views of the different stakeholders, a comprehensive mix of targeted consultation methods completed by a Eurobarometer survey was preferred to an open consultation for two main reasons:

(1) The technical nature of some of the questions: not all stakeholders could have been expected to have a knowledge of the subject-matter, in particular passengers.

(2) Representativeness of passengers' responses would have not been ensured without a structured sampling of responses, and in particular the Eurobarometer offered the possibility to interview a carefully structured sample of 25.000 respondents in their own language.

Within the main consultation organised by the external consultant (from 1 March 'til 16 April, responses obtained up to mid-June were accepted), tailored questionnaires were sent to each group of main stakeholders - railway undertakings, infrastructure managers, public transport ministries, safety authorities, ministries, representative bodies, social partners etc. The consultation reached out to 427 rail stakeholders and had a 40% response rate. The consultant and/or the Commission services also held face-to-face interviews in 10 Member States - Austria, Czech Republic, France, Germany, Hungary, Italy, Netherlands, Sweden, Poland and the United Kingdom.

The views of passengers were collected through a Eurobarometer survey, which reached out to more than 25.000 respondents, with a representative sample (circa 1000 per Member State) of respondents in each of the 25 Member States with railways.

A stakeholder hearing was held on the 29 May 2012 (with some 85 participants). Commission services have also met with sector representatives on an on-going basis throughout 2012 to listen to their views, including organisations such as CER (incumbent railway undertakings), EPTO (private passenger transport operators), ERFA (private rail freight operators), ETF (transport workers), EPF (passenger federations), EIM (independent infrastructure managers) and UITP (urban transport operators). The consultation process was concluded by a large conference “Last Mile towards the 4th Railway Package” with 420 participants representing the entire sector in September 2012.

The majority of stakeholders agreed during the targeted consultation that the quality of rail services and the competitiveness of the sector in the EU were affected by different access barriers for RUs. 69% found different interpretation of legislation to be an issue. Infrastructure capacity constraints were considered to be the main access barrier for RUs (quoted by 83%).

The result of the consultation shows that views are highly polarised regarding the appropriateness of solutions to these problems (e.g. how to ensure independent and efficient governance of railway infrastructure). Some stakeholders - a large majority of transport ministries, competition authorities, regulatory bodies, independent infrastructure managers and RUs, passengers and freight forwarders associations - advocated a complete separation which would ensure full transparency and a level playing field for all operators. Other stakeholders, in particular holding companies, infrastructure managers depending on such holdings and workers' representatives, argued that there is no empirical evidence about the benefits of complete separation and that some scientific literature indicates that it could lead to higher transaction costs. These stakeholders think that a stronger role of regulatory oversight could be sufficient to solve the issues. 64% of respondents support the idea of creating of a specific body of representatives from all infrastructure users to ensure interests are taken into account in a non-discriminatory way.

In line with the IA Guidelines on the consultation of social partners, the Sectoral Social Dialogue Committee was consulted on 26 March and 19 June 2012, in particular with regard to the options and social impacts. However, during the meetings worker organisations did not wish to position themselves on any of the options related to the IM governance, as they considered them as supporting measures in favour of market opening, a principle to which they were fundamentally opposed. Finally the network of the Committee of Regions was used to reach local and regional passenger transport authorities. Such consultation was open from 14 May till 21 June.

Throughout the consultation process the Commission has taken a proactive approach to prompt stakeholders to participate. Given that all relevant parties have been given an opportunity to express their opinions the minimum consultation standards of Commission have been met. More detailed overview of the consultation process, representativeness and content of responses is provided in Annex II.

2.3 Impact assessment Board

This impact assessment was reviewed by the Commission's Impact Assessment Board on 7 November and 30 November 2012. Based on the Board's recommendations, the impact assessment has been revised as follows:

The problem definition has been revised to make it more robust. Additional anecdotal evidence, benchmarks between comparable Member States, in particular to examine to which extent the institutional setting in place can influence the success of liberalisation and improve the intensity of infrastructure use have been added. Where relevant, analogies with other network industries have been made. The context of the initiative has been further clarified with a presentation of the current approach and on-going reforms in Member States, as well as with additional explanations on its relation with the Recast and with on-going infringement procedures. The content of each possible policy option, their differences and their implications, as well as the criteria for screening them have been further explained. The definition, analysis and comparison of alternative policy scenarios presenting (a) only efficiency measures and (b) efficiency measures in combination with 2 different separation modes, have been strengthened with further discussion. Where possible, a quantification of the costs and benefits related to each policy scenario has been added. Furthermore quantitative estimates of the impact of this initiative, when combined with the other initiatives of the 4th Railway Package aimed at opening the domestic rail passenger markets, have been added. The methodology retained for the calculation of both costs and benefits has been more clearly explained. Stakeholders' views have been further detailed throughout the report and the choice of a mix of targeted consultations completed by a Eurobarometer survey justified. Finally the presentation of the report has been improved with the provision of references of the studies, reports and decisions quoted as well as web links, where available. Graphs and figures have been revised and further explained, referencing of stakeholders opinion and studies improved, and the map demonstrating the structural models of Member States has been incorporated. Notwithstanding, where relevant the limits of available quantification have also been stipulated.

3. Problem definition

3.1 Description of the current framework for the governance of railway infrastructure

3.1.1 Rail infrastructure as natural monopoly

Railway infrastructure is a natural monopoly[11]. Its construction is very expensive and consequently it is not economically justified that each railway undertaking builds its own tracks. Therefore there is a need for specific rules in order to ensure optimal management and utilisation of the shared infrastructure by different railway undertakings. Even then the construction and maintenance of railway infrastructure is mostly not commercially viable and relies on public support. Revenues collected by infrastructure charges are typically absorbed by maintenance needs. Against the background of growing pressure on public finances, improving the efficiency of railways is more crucial than ever.

This intrinsically raises two challenges from an economic and regulatory point of view:

- Efficient management challenge: the current governance does not provide sufficient incentives and means for infrastructure managers (hereinafter IM) to respond to the needs of the transport services market and to contribute to the optimisation of the performance of the sector taken as a whole;

- Equal access challenge: Given that historically infrastructure was owned by incumbent rail operators, conflicts of interest naturally lead to discriminatory/protectionist practices of incumbents which impair competition in rail services. Eliminating the incentives for the incumbent to discriminate against its competitors via different infrastructure management functions is arguably even more necessary in the rail sector than in the electricity or telecom grids, as the rail IMs have a wider range of services and therefore more means for discrimination.

3.1.2 Infrastructure management functions

Infrastructure management relates to different activities which can be categorised in different manners but correspond basically to the four following elements:

a) Infrastructure development. This includes responsibilities for the ultimate network planning, financial and investment planning and building on the basis of market analysis, business plans, fund raising from public authorities and financial markets. Simplistically, this means building new tracks, depots and stations to increase the size of the rail network.

b) Track access charging. This includes the determination and collection of charges but also more generally infrastructure marketing – i.e. relations with customers (railway undertakings and other categories of applicants for infrastructure capacity), public authorities and regulators. In practice, this means that the IM markets access to the network.

c) Infrastructure operations, including path allocation and traffic management. This includes the provision of services necessary for infrastructure access on a long or short term basis through assessment of availability and allocation of individual train paths, timetabling, traffic management, control command and signalling as well as traffic information services. In short, this means that the IM is responsible for the organisation of the traffic on its network, including in case of traffic disturbances.

d) Infrastructure maintenance. This includes infrastructure upgrade and renewal and is linked to asset management activities. The IM is thus responsible for organising and conducting the maintenance of the network assets.

According to current legislation, the functions of the IM may be allocated to different bodies or firms. On the one hand, the two "essential functions" of IM - path allocation and track access charging - may be assigned to an allocation body and charging body (See under Section 3.2.1.2).

3.1.3 The current European regulatory framework for the governance of the railway infrastructure

The Commission has long considered that the improvement of the functioning of the internal market should stimulate the rail industry to become more efficient and responsive to customers’ needs. Thus the development of EU rail market access legislation has progressively encouraged market opening.

Within this framework, certain degree of separation between infrastructure management and transport operations have been introduced under EU law with the aim to thereby prevent discriminatory practices distorting competition in integrated structures[12]. This policy is in line with the general Commission policy for the regulation of network industries (see Box 1 below).

Box 1 - Analogies with other network industries: link between market opening and separation

As highlighted in the report on the market functioning of network industries (Electronic Communications, Energy and Transport) produced for the Economic Policy Committee and published by the Commission on 16 November 2012, network industries share common characteristics. On the one hand, the infrastructure segment displays features of natural monopoly (high sunk costs and non-duplicable network) and is subject to regulation on pricing and access to the network. This applies to the transmission and distribution networks in e-communications (backbone, backhaul and last mile) energy and transport infrastructures (road, rail, ports and airports). On the other hand, competition needs to be ensured in network services, as long as each operator gets a fair and transparent access to the infrastructure. These industries are intrinsically characterized by the co-existence of competitive and regulated segments with natural monopolies, sunk costs, and economies of scale due to the crucial role played by the underlying infrastructure. Given the economic costs associated with monopolistic rents, these sectors have thus been reshaped by major regulatory reforms over the past two decades, mainly in order to promote competition and safeguard consumers' rights.

In the case of companies which integrate infrastructure and the related upstream or downstream services, it is difficult for other operators on these related markets to compete against such a company, since the control over the infrastructure confers a number of competitive advantages to the integrated company: not only does it have exclusive information about costs and other items of the infrastructure which are relevant for competitors, but it also has the possibility to exploit the control over the infrastructure in order to limit the actions of the competitors. Therefore on the one hand market opening of such network industries requires a separation of accounts which allows a transparency of costs of and charges for the infrastructure and on the other it must be ensured that the decisions related to the management of the infrastructure are taken in an independent way. European legislation in all the network industries mentioned above has opted for the unbundling of infrastructure and related services as a preferred means to guarantee non-discriminatory access to the infrastructure, and to make market-opening a success.

This was done in the air transport sector. After the three liberalisation packages adopted between 1987 and 1993, separation measures were introduced to ensure access of airlines to the necessary resources and services in airports: Council Regulation (EEC) No 95/93 on common rules for the allocation of slots at Community airports and Regulation (EC) No 793/2004 of the European Parliament and of the Council of 21 April 2004 amending this Regulation introduced slot allocation bodies and ground handling services which had to be independent from air carriers. The aim was to prevent dominant air carriers from controlling these functions of the infrastructure manager and services with a view to discriminate their competitors.

Market opening in the telecom sector followed the same principles. Regulation (EC) No 2887/2000 of 18 December 2000 provided for an unbundled access to the local loop. The Regulation addresses the problem of the lack of competition on the local network where incumbent operators dominated the market for voice telephony services and high-speed Internet access. Allowing new entrants access to the local loop has led to increased competition and stimulated technological innovation on the local access market. It has not only produced much lower charges for telecom users, but also encouraged the provision of a large range of competitive electronic communications services.

In the energy sector, the process of market opening has been launched in the mid-90s to enable all consumers to benefit fully from competition and fair prices. The Second energy Package of 2003 introduced some limited unbundling provisions, with the requirement that network operations be legally and functionally separated from supply and generation or production activities. The functional independence was described with some limited safeguards concerning the structure, but essentially it was only about legal separation.

However, the Commission’s Energy Sector Inquiry, launched in June 2005, identified a number of areas where the market was not working properly. This concerned in particular the continuing market power of incumbents in many Member States, stemming from an inadequate separation of network and supply companies and leading to foreclosure of new entrants and investments. The integration of network and energy generation in the same companies also caused an unwillingness of integrated national incumbents to make investments in cross-border infrastructure, since integrated companies have an incentive to protect their own home markets from competing energy producers from other EU countries. This has undermined cross border integration of networks. That is why the Commission proposed in 2007, in its Third Energy Package, an ownership unbundling of the network from energy supply and generation activities. In addition to the ownership unbundling, the option of an independent system operator (ISO) was proposed, giving the member states also the opportunity to let the transmission networks remain under the ownership of energy groups, but transferring operation and control of their day-to-day business to an independent body. A third possibility was added at the request of a number of Member States during inter-institutional debates: the ITO model. This model, the Independent Transmission Operator (ITO), envisages energy companies retaining ownership of their transmission networks, but the transmission subsidiaries would be legally independent joint stock companies operating under their own brand name and with a number of very strict structural safeguards ensuring the autonomy of the ITO from the holding company. These safeguards contain the appointment and supervision of board members, the prohibition of financial flows between ITO and the holding, the decisions on investments and many other strict "Chinese walls" which practically prevent the holding company from influencing the day-to-day management of the ITO. The addition of the ITO model to the package allowed a compromise and the adoption of the Third Energy Package in 2009. Because Chinese walls under the ITO model are very burdensome, one can observe that Member States tend to prefer the full ownership unbundling. For the same reasons, in a Member State where the ITO model was retained, such as Germany, the two biggest infrastructures (out of four) were sold by energy holdings to third parties.

For more than twenty years, Directive 91/440/EEC[13] has provided for the separation of accounts between rail infrastructure and transport operation to ensure financial transparency and avoid cross-subsidisation between infrastructure and operation management. Following the First Railway Package adopted in 2001, additional separation requirements were introduced through Directive 2001/12/EC[14] and Directive 2001/14/EC[15]. The latter stipulates that the "essential functions" of IMs – train path allocation and infrastructure charging - must be separated from transport operations in legal, organisational and decision making terms. In addition, the same Directive foresees that Member States have independent Regulatory Bodies in place to oversee railway markets and to act as an appeal body for rail companies.

The Recast of the First Railway Package (hereinafter 'the Recast') merging nine previous legislative texts was proposed by the Commission in September 2010 with the objective to strengthen the power of regulatory bodies, improve the framework for investment in rail, and ensure fairer access to rail infrastructure as well as rail related facilities and services. Following a final vote of approval in the European Parliament on 3 July 2012 and adoption by Council on 29 October 2012, these new EU rules will be transposed by 2015.

Despite requests from some Members of the European Parliament and specific Member States during inter-institutional negotiations, issues related to the separation between infrastructure management and transport operations were finally not directly addressed by the Recast. The Commission argued in particular that further stakeholder consultation and a robust impact analysis was required. As a final compromise, the Recast calls on the Commission to act by December 2012: "the Commission shall, if appropriate, propose legislative measures […] to develop appropriate conditions to ensure non-discriminatory access to infrastructure, building on the existing separation requirements between infrastructure management and transport operations, and shall assess the impact of any such measures".

Further details on the current legal framework are provided in section 3.2 as part of the baseline developments.

3.1.4 The implementation of the EU regulatory framework by the Member States

Member States have chosen different models of governance to implement this legislation. More than half of the Member States with a rail transport system (13 out of 25) went beyond what is required by EU law and opted for an institutional separation between (a) a fully-fledged IM in charge of all the IM functions described under section 3.1.2 and (b) the transport operators. These Member States are listed in category 1 in Table 1. Others have chosen to establish more complicated structures. Four Member States in category 3 kept a fully integrated structure (with only separation of accounts between infrastructure management and transport operations) but delegated the two essential IM functions to external bodies (called charging and capacity allocation bodies). Some Member States established a holding structure with a legally separated subsidiary in charge of infrastructure management (categories 2 and 5). Ireland and the United Kingdom (in respect of Northern Ireland) benefit from an exemption from separation requirements until 15 March 2013 and have until now maintained a fully integrated structure in charge of both transport operations and infrastructure management, including IM essential functions.

Table 1 – Institutional settings in the Member States

Category || IM responsibilities || Level of independence || Member States

1 || IM in charge of all IM functions (incl. capacity allocation and charging) || IM institutionally independent from any railway undertaking || Bulgaria, Czech Republic, Denmark, UK (for the part of Great Britain), Estonia, Finland, Greece, Netherlands, Portugal, Romania, Spain, Sweden and Slovakia

2 || IM in charge of all IM functions (incl. capacity allocation and charging) || Legally independent IM owned by a holding company which also owns and controls a railway undertaking but with strong guarantees of organisational and decision-making independence in relation to the railway undertaking || Belgium and Latvia

3 || IM in charge of IM functions with the exception of the essential functions (capacity allocation and charging) under the responsibility of a separate body || IM integrated in a structure responsible for transport operations Separate body in charge of essential functions institutionally independent || Hungary, Lithuania, Luxembourg and Slovenia

4 || IM in charge of the essential functions (capacity allocation and charging) but having delegated specific parts of the essential function capacity allocation and other IM functions (e.g. maintenance) to a railway undertaking || IM institutionally independent from any railway undertaking || France

5 || IM in charge of all IM functions (incl. capacity allocation and charging) || Legally independent IM owned by a holding company which also owns and controls one of the operators with limited guarantees of organisational and decision-making independence in relation to the railway undertaking || Austria, Germany, Italy and Poland

6 || IM in charge of all IM functions (incl. capacity allocation and charging || IM integrated in a structure responsible for transport operations and || Ireland and the United Kingdom (for the part of Northern Ireland)

The Commission is, however, of the opinion that not all Member States have implemented the legislation properly and has accordingly launched a number of infringement procedures concerning in particular three groups:

· Category 3 Member States having integrated IMs working alongside an independent charging and path allocation body, in so far as in cases of disruption on the network the path allocation is performed via traffic management by the incumbent rail operator.

· Category 5 Member States, with holding companies in which the IM is a controlled subsidiary and where the guarantees of decision-making independence from the railway holding are missing or insufficient in the view of the Commission.

· Category 4 - France, where parts of the essential function of path allocation and traffic management have been delegated by the independent IM to the incumbent railway undertaking.

3.1.5 On-going reforms in Member States

As a consequence of these infringement procedures, because of the termination of the on-going derogation as well as national debates on the benefits of separation, six Members States are in the process of reforming the institutional structure of their national rail sector:

Belgium is currently in the process of reviewing its legislation to ensure institutional separation between the IM and the incumbent. The national government indicated that it intends to submit such reform to the national Parliament by the end of the year. The Polish government has also indicated at several occasions its intention to dissolve the existing holding and separate institutionally the IM and the incumbent. However it has recently announced that such reform would be postponed to focus efforts on the absorption of EU funds for rail infrastructure projects. In Hungary, public authorities have also indicated that preparations for further separation are on-going but the exact timing and content of such reform remains uncertain. In Italy the newly created independent transport authority has been tasked to issue recommendations to the national government on separation between the IM and the incumbent. The issuance of such recommendations is due by 30 June 2013.

The termination of the derogation applicable to Ireland until 15 March 2013 will also lead to a reform of the national rail sector. Irish authorities appear inclined to establish a legally independent IM owned by a holding company but with strong guarantees of organisational and decision-making independence in relation to the incumbent railway undertaking. France announced on 30 October 2012 the creation a new fully fledged infrastructure manager grouping RFF with the SNCF services active in infrastructure management (DCF for traffic management and SNCF Infra for maintenance). This new infrastructure manager should be attached to the incumbent operator SNCF in a new grouping called "Pole ferroviaire public unifié". However the legal form of this grouping will only be decided next year. French authorities indicated publicly, that they are willing to put in place all the necessary safeguards to ensure the absence of conflicts of interest between the infrastructure manager and the incumbent and to prevent discriminatory practices.

No other Member State has indicated so far its intention to review its institutional settings. Germany and Austria do not appear to be willing to abandon their holding model. However German regional authorities awarding public service contracts and new entrants active on the German market repeatedly requested the introduction of institutional separation. The coalition agreement concluded in 2009 by the political parties of the current majority in the Bundestag foresaw that the independence of infrastructure management should be guaranteed, profit transfers excluded and infrastructure revenues used exclusively in favour of infrastructure.

In Member States such as Finland, Romania, Spain, Sweden and the United Kingdom, the current institutional separation is largely supported, including so far by national incumbents. In the United Kingdom, the McNulty study commissioned by the previous government proposed to test "alliancing" as a way to ensure better alignment between the infrastructure manager and the railway undertakings in charge of franchises. However, even in the most advanced type of alliances to be tested, the current institutional separation would not be questioned. Similarly the national governments in the Netherland and Czech Republic have not indicated so far their intention to modify the current institutional settings in absence of EU reform, despite calls from their national incumbent (respectively NS and CD) to reintegrate.

The current situation in all 25 Member States with a rail transport system and the possible reforms mentioned above are illustrated by Map 1.

Map 1 - Current institutional settings and announced reforms in Member States

3.2 Description of the problem

In its 2010 Communication concerning the development of a Single European Railway Area[16], the Commission explained that "competition between railway undertakings is still limited by various factors stemming from the protectionist behaviours of historical incumbent operators and the collusive management of rail infrastructure, which, being a natural monopoly, should be accessible to all applicants in a fair and non-discriminatory manner. Insufficient transparency of market conditions and ineffective functioning of the institutional framework in most Member States continue to make the provision of competitive rail services difficult. Operators entering a new market continue to face discrimination in obtaining access to the infrastructure and rail-related services, which are often owned and operated by the incumbent rail undertaking. Member States’ regulatory bodies encounter difficulties in carrying out their supervision duties over IMs, in particular to ensure non-discriminatory treatment of new entrants and to check whether charging principles and accounting separation are properly applied."

The key issue addressed by this IA is that, despite regulatory developments in recent years, the current governance of railway infrastructure in the EU still causes problems of (1) network inefficiencies and (2) discrimination in infrastructure access, preventing the smooth functioning of the Single European Railway area. Accordingly, the analysis of problems has been grouped under efficient management and equal access challenges.

Box 2: Key issue of availability of data

Key issue of availability of data

Evidence used to support the problem definition is mostly anecdotal for a number of reasons.

· Given the very different models of IM governance, regulatory practices and level of competition on domestic rail markets, comparisons between Member States are often difficult. For this reason, the statistical comparisons provided under this report for benchmarking purposes exclude Member States whose performances are overly determined by geographical and technical factors (peripheral Member States with an isolated rail network and/or with track gauge different from the main network: Baltic States, Finland, Spain, Portugal and Greece). As far as IM efficiency is concerned, statistical benchmarking remains problematic and inconclusive as efficiency very much depends on the national cost structures, characteristics of the network, management practices or commodities transported but also on the level of public support and business climate.

· Furthermore, studies prepared on functioning of rail models in other major economies outside Europe (e.g. in USA, Canada, Russia, Japan, China) should be interpreted with care. They do not allow comparison between separated and integrated structures and can only evaluate whether performance of an integrated company has evolved positively over time. But these countries are organised with a single RU enjoying a monopoly and do not provide indications on the best possible model for the EU rail system which is already characterised by a single market with competition between different operators.

· The same type of concerns exist regarding evidence on discrimination in terms of access to infrastructure. A low number of complaints can be, on the one hand, an indication of a well-functioning open market where conflicts are prevented by structural measures. On the other hand, there might be no complaints in a closed market where new entrants have no trust on regulatory interventions. When markets are only formally open to competition and there is no entrant to submit complains, discriminatory practices are particularly hard to detect.

· By definition, the lack of financial transparency is an element which is difficult to assess and quantify. Therefore, assessment of the various impacts of distortions of competition caused by possible cross-financing between infrastructure and rail operations can be made only on a case by case basis.

However, all the evidence and information collected from stakeholders is convergent and indicates that the problems discussed below could significantly affect the benefits of the Single European Railway Area and, in particular limit the impact of rail market opening initiatives. Anecdotal evidence is referred to under this Section 3.2. This evidence is further substantiated and completed in Annex III.

3.2.1 Efficient management challenge

3.2.1.1 IMs are not sufficiently market oriented

Since railway infrastructure is a natural monopoly and its construction and maintenance relies heavily on public funding, IMs tend to manage the infrastructure giving priority to the instructions received from the public authorities and to neglect the needs expressed by users – railway undertakings. In this context, construction of new lines but also maintenance and closure of existing ones may be dictated by political considerations rather than an in-depth assessment of potential market developments.

According to the Everis study[17], path allocation management shows that IMs tend to be reactive rather than proactive. They respond to applications for paths rather than trying to optimize the use made of infrastructure. .

IMs may fail to have a sufficient knowledge of the market, the needs and the business environment in which the infrastructure users operate. They may not be in a position to respond adequately and comprehensively to the operational constraints faced by their users. In some cases, IMs may neglect in particular the needs expressed by small operators and new entrants. This could lead to suboptimal use of resources and limit the development of rail operators. Politically, driven rather than market-oriented priority rules for traffic management (e.g. between freight and passenger traffic) illustrates this situation.

IMs generally acknowledge the "need to better meet their customers' and funders' needs"[18] and require tools necessary to fulfil such responsibilities, while, infrastructure users, in particular railway undertakings, claim that their interests are not sufficiently taken into account in both operational and investment decisions taken by the IMs and request to be better associated to such decisions.

Box 3 – Cases of non-market-oriented decisions of IMs in the UK and Austria

McNulty Report[19] (2011) points out that the UK still suffers from a lack of coordination between IM Network Rail and railway undertakings, having different goals and objectives. It recommends closer co-operation and alignment between organisations and the establishment of stronger incentives to focus on cost reduction and the delivery of high-quality services.

The Austrian IM ÖBB Infrastruktur AG instructed all railway undertakings in its network statement 2012/13 to use the new Inn Valley route only with locomotives which are equipped with the signalling system ETCS. At this moment only ÖBB’s own subsidiaries and DB have the necessary locomotives. All the other (private) rail freight operators will only be able to use such locomotives in about two years, since the rail industry is not able to supply these locomotives before. ÖBB refuses to grant a transition period to the new entrants, in which they could use either ETCS or the national PZB system, although, according to the private operators, there are no technical reasons for this refusal. Both ETCS and PZB can run on the new route, and PZB fulfils the environmental/noise reduction requirements. The new route is part of an important trans-European corridor. Therefore the behaviour of the IM could mean that other operators cannot offer services, in addition to the Inn Valley route, on the entire trans-European corridor. There is a risk that the positive environmental effect brought to the sensitive alpine eco-system by enhancing quality of infrastructure and moving goods from road to rail will be annihilated by this measure.

Baseline developments

The Recast reinforces the obligations of IMs to consult infrastructure users on important decisions, including the content of the IMs business plan and network statement detailing the conditions for access to the infrastructure.

The Recast also foresees that performance targets which are defined in contractual agreements between Member States and IMs shall be user-oriented. The Railway Directives also require Member States to set incentives for IMs to reduce both infrastructure costs and the levels of access charges. However, the performance targets will be set by IMs and public authorities with little or no involvement of rail operators and do not therefore guarantee that users' needs will be adequately addressed.

The Recast also details the content of the performance scheme which IMs must introduce as part of their infrastructure charging scheme. In this framework, penalties for IM actions disrupting the operation of the network, compensation for undertakings suffering from disruption and bonuses rewarding better-than-planned performance are foreseen. However performance schemes focus only on cases of disruption of traffic and delays and do not provide incentives in relation to other aspects of performance such as line speed, operational costs or capacity under normal conditions.

In conclusion, these ad hoc consultations of infrastructure users will not allow a structured, transparent and continuous exchange of information between IMs and users. They will not address specific operational problems that may emerge during infrastructure usage. Some Member States, such as France, the UK and Sweden, have already taken the initiative to create formal structures of coordination between IM and its infrastructure users

3.2.1.2 Inconsistencies in the management of infrastructure and increased coordination costs

The capacity of an IM to develop and optimise transport infrastructure and ensure quality, reliability, flexibility and customer orientation, depends on its control over the functions listed in section 3.1.2.

According to current legislation, the functions of the IM may be allocated to different bodies or firms, e.g. the two "essential functions" (path allocation and track access charging) may be assigned to an allocation body and charging body. Accordingly, several Member States (Hungary, Estonia, Luxembourg, Slovenia, and Lithuania) have externalised these two essential functions to independent bodies, while the rest of functions have been kept within an integrated incumbent structure. The allocation of the essential functions to entities outside the IM has certainly brought great advantages for a more equal access to infrastructure and thereby helped market access of new entrants. However, These governance models and the model adopted by France (which is splitting the different functions further), do not allow the IM to have effective control on all the activities required to manage the infrastructure, as it is dependent on decisions of other bodies with specific and possibly diverging interests. Infrastructure managers consider on the contrary that they should have all the levers of control over their business. This position is largely shared within the rail sector.

Box 4 - Example: Conclusions of the "Assises du ferroviaire" in France

In September 2011 the French government launched the "Assises nationales du ferroviaire"[20] to involve all French stakeholders in the preparation of a new reform of the rail sector, focussing on market opening, financing and governance issues. The conclusions of this process were adopted in December 2011. They demonstrated a large consensus on the inefficiency of a system based on the allocation of infrastructure management functions in two separate entities: on the one hand the IM RFF in charge of infrastructure development, capacity allocation and charging and on the other hand, SCNF in charge of maintenance works as well as traffic management.

RFF transfers to SNCF each year a network management fixed fee of around €3bn. RFF is responsible to oversee SNCF’s efficient use of the network management fee. However, at the moment, there is a relatively small technical team available to RFF to oversee the efficiency and effectiveness of SNCF’s management of the IM contract. This means that some of SNCF’s actions might not be fully observed, or properly monitored. This structure would lead to a lack of coordination with a negative impact on operations and to the absence of costs optimisation. It was therefore recommended to unify all infrastructure management functions in the same entity soon.

There are substantial interactions between the functions currently defined by EU law as essential and the other IM functions described under section 3.1.2, such as infrastructure development, traffic management and infrastructure maintenance. As illustrated below, their distribution among different market players can lead to inconsistencies in the management of infrastructure and increase coordination costs.

· Charging and maintenance - if the body responsible for the charging cannot control the costs of the infrastructure (i.e. investment and maintenance activities), the charges may not be set at the right level to reflect these costs. It also means that possible cost savings or scale effects may not be passed on to the infrastructure users in terms of lower charges, even though this is a requirement under EU law. It may also lead to a situation where the IM does not charge railway undertakings for maintenance costs, thereby ultimately leading to a decrease in maintenance services and to the degradation of the rail infrastructure.

· Charging and development - under a charging system designed to obtain full cost recovery, control over the charging is important for being able to fund projects under the best possible conditions. The price signals sent out by the different charging levels of various parts of the network should be correctly set to prompt the best possible use of the network as a whole (new sections and existing network).

· Path allocation and traffic management - the re-allocation of pre-assigned train paths in cases of delays and disruption of traffic is one of the core activities of traffic management, and at the same time it is part of the essential function path allocation. In addition an adequate path allocation process implies an in-depth knowledge of traffic management practices and constraints and some return on experience which cannot occur when these functions are assigned to separate entities.

· Path allocation/traffic management and maintenance - if the body responsible for path allocation and traffic management does not have full control over the actual availability of the allocated slots (which depends inter alia on maintenance works planned and executed by another body) this could create problems in traffic management. Furthermore, regarding the planning of works, only the allocating body knows, on the basis of path requests received, which are the most intensely used parts of the network and therefore could need maintenance most urgently in order to ensure safety levels and to avoid disruption of operations.

· Path allocation/traffic management and development - infrastructure development has a direct impact on travel time, the number of paths available, potential traffic types (platform length, etc.) and the quality of operations on lines. Therefore splitting control functions over path allocation and infrastructure development decisions will, in the best case scenario, create coordination problems.

· Development and maintenance - where the functions of development and maintenance are split, there is a threat that suboptimal trade-offs could be made between the network “maintenance" and “development” works. It is necessary to coordinate “development” and “renewal” in order to avoid having too many renewal and development operations going on at the same time, as these activities reduce the number of available train paths.

· Path allocation and charging - charges are a price signal to infrastructure users and a tool to optimise the use of the infrastructure. If the entity in charge of path allocation has no control over track access charges, they miss such optimisation and only face the costs of infrastructure (development and maintenance). Without the possibility to manage revenues, the IMs' financial management is limited to the channelling of subsidies without any consideration of profitability.

Box 5 - Analogies with other network industries concerning infrastructure managers functions

Air transport: Airports are responsible for their own investment planning and maintenance, they also collect airport charges, while slot allocation is the responsibility of a "coordinator" which is independent from the Member State, the airport managing body, service providers and the airlines operating from the airport in question.

Electricity and gas: Transmission system operators are by definition responsible for infrastructure development and maintenance. They collect congestion charges and allocate transmission capacity.

In both cases, the entities in charge of infrastructure management have a direct responsibility for infrastructure development, charging, operations and maintenance.

Baseline developments

While the definition of essential functions and the separation requirements applicable to them have not been changed by the Recast, the latter provides for a new definition of IM which refers to a "body or firm responsible in particular for establishing, managing and maintaining railway infrastructure, including traffic management and control-command and signalling". However this does not ensure that all the functions listed are in the hands of the same entity as the text foresees explicitly that "the functions of the IM on a network or part of a network may be allocated to different bodies or firms".

It cannot be excluded that Member States which have allocated IM functions in different entities will adjust the governance of their infrastructure on their own to reunify them. This should be the case in France where there is large consensus on the unification of all IM functions in the same structure (see Box 5 above) and in Hungary where the government announced a reform of the national institutional settings (see Section 1.3.5). However other Member States, in particular Lithuania, Luxembourg or Slovenia (which finalised in 2011 a reform maintaining the fragmentation of IM functions) suggest otherwise.

3.2.1.3 Cross-border cooperation between IMs is insufficient

An important condition for completing the Single European Rail Area is well functioning cross-border cooperation of IMs. With this regard, the problems mentioned hereunder, and illustrated by examples in Box 6, are still widespread.

IMs do not efficiently cooperate to cope with traffic disruptions and temporary traffic restrictions, especially when more than two IMs are concerned. They may neglect the impact of their decisions on the business situation of international traffic and traffic beyond their network. There is a lack of integrated and proactive cross-border communication with users, such as railway undertakings, terminal operators and shippers.

As regards investment, national infrastructure management often neglects interoperability and cross-border infrastructure (in particular port terminals and hinterland connections by rail) in favour of the needs of domestic passenger and freight traffic. Where the investment decisions of national infrastructure management are biased towards the needs of the incumbent, international trains suffer most because they have to be configured and/or routed according to the "weakest link" in the infrastructure chain (in terms of ERTMS deployment[21], axle loads, loading gauge, electric supply, train length, train mass etc.).

National infrastructure funding priorities may not necessarily consider future pan-European demand despite the incentives to do so which is provided through EU co-financing instruments such as the TEN-T programme. The long lifetime of assets, conservatism of the sector and a preference to maintain national or regional specifications curb the benefits for investment. Obligations imposed by Member States to keep unprofitable infrastructure open results in funds trickling away, and not being focused on main international corridors. Considerations of available approvals prevail over traffic needs when it comes to project selection.

Freight trains run at low speeds (18 km/h) on many international routes. This results from time-consuming operations at borders for railway undertakings. Operations at borders have not yet been streamlined to exploit the advantages of the internal market and the Schengen rules. As a result, rail fails to capture certain commodity groups who prefer the higher speeds of road transport.

Box 6 – Examples of IMs coordination problems

IMs along the corridor Rotterdam-Genoa made substantial investments to enhance capacity and establish the interoperability of train control and command systems on the basis of ERTMS. In doing so, they expected that all participants would stick to the agreed time tables. However the corresponding investments on the German stretches of this corridor will only be made several years later, which means that benefits will be delayed for other IMs as well as for the users.

Rail freight undertakings operating in France and the UK enjoy moderate levels of infrastructure charges that are by and large competitive with road. Whereas this allowed rail freight to grow in England, the number of freight trains through the Channel tunnel to and from London did not grow or even dropped though the link accommodates trains with the main continental (UIC) gauge and has capacity available. Infrastructure charges in the tunnel and on the link to London are high such that freight trains are not attractive and shippers prefer trucks. A better coordination of charging policy between the four different IMs involved might open the opportunity to attract more trains and at the same time safeguard the financial interest of all companies involved.

Freight trains operating on the South East Axis to and from Greece/Turkey suffer from important delays at borders. On such axis two TEN-T corridors (IV and X, passing respectively via Belgrade and Budapest) compete on the basis of different infrastructure charges. A better coordination between IMs could curb delays and allow more balanced use of capacity.

This situation contributes to an imbalance between international and domestic traffic for passengers but also the negative trend observed in the development of international freight traffic, as illustrated by the Figure 1 below.

Figure 1 Evolution of domestic and international traffic in the EU (in Mton/km for freight traffic and Mpassenger/km for passenger traffic)[22]

Figure 1 shows in particular that international passenger traffic remains very marginal when compared to domestic passenger traffic. It also shows that, despite the potentially higher competitiveness of rail freight vis-à-vis other transport modes over medium to long distances, international freight continues to decline, both in absolute and in relative terms when compared to domestic freight traffic.[23]

Baseline developments

Some on-going actions are already heading in the direction of increased integration of national infrastructure management at the European level, with a specific emphasis being put on EU freight corridors.

The Rail Freight Regulation[24] provides a cooperation framework for freight. Corridor structures involving Member States and IMs are set up to cooperate on specific aspects. The Rail Freight Regulation requires coordination of infrastructure management in aspects such as maintenance work, upgrades and renewals, the allocation of international paths and in the supervision of international traffic. The activities of the Corridors in the field of allocation of paths and traffic supervision are based on the work done by RailNetEurope (RNE), a partnership of IMs and allocation bodies which strives to simplify, harmonise and optimise international rail processes such as Europe-wide timetabling, co-operation between IMs in the field of operations, train information exchange in real time across borders and reporting.

The obligations of national IMs to cooperate in the allocation of infrastructure capacity and in the charging for the operation of train services crossing more than one infrastructure network will be extended from the corridor approach to all networks and types of traffic with the Recast. It will actually oblige IMs to formalise their cooperation with the establishment of IMs' associations which can charge and/or allocate capacity at an international. The Recast also foresees that regulatory bodies will have to increase their cooperation in order to supervise the IM's joint activities. The Commission will be invited to participate in IMs' deliberations on common principles and practices.

While the cooperation activities under the Rail Freight Regulation are comprehensive (addressing path allocation and charging but also development, maintenance and operations) they are limited to specific rail freight corridors. At the same time, the obligations under the Recast apply to all networks and types of traffic, but relate only to path allocation and charging. Therefore there is still a need to address coordination problems related to development, maintenance and operations beyond EU rail freight corridors and to ensure consistency between the existing approaches.

3.2.2 Equal access challenge

The level of entry into freight markets has progressively increased as a result of the various market opening measures implemented on the basis of national initiatives before 2000 and at the EU-level since 2000. As indicated in Figure 2 below, progress can be observed over the last 5 years in almost all countries.

However there are marked differences in the level of entry reached as well as in the growth of new entrants' market shares. The share taken by non-incumbents reached 40% in only four Member States in 2010 (NL, SE, UK and RO), all of them with separated structures. For the period 2006-2010 examined in Figure 2, new entrants' market shares have grown by 13.8% on average in Member States with separated structures while it has increased by only 8.9 % in Member States with integrated structures.

Figure 2 Market share of non-incumbent freight operators

Source: Rail Market Monitoring Scheme 2007, 2009 and 2012 and SDG report

Comparison of entry levels in passenger markets remains difficult at this stage as market opening for domestic services has only been introduced by a very limited number of Member States, from different dates and under conditions which are not harmonised by EU law (see for further details the IA report on market opening of domestic passenger services). However it can be noted that the pace of market entry in those few Member States which have already allowed the provision of domestic passenger services in open access differs substantially. Such differences seem somehow correlated with the separation model in place in those Member States: in the case of Germany, Austria and Italy which formally opened their domestic passenger market more than a decade ago, the number of new entrant remains very limited and market entry took place only very recently (only Westbahn since 2011 in Austria, only NTV since 2012 in Italy, only HKX since 2012 and InterConnex in Germany). In the case of the Czech Republic, the UK and Sweden, the number of new entrants is higher and market entry of open access operators came faster after formal market opening (in the UK Grand Central and First Hull, in Sweden both Veolia and Blataget, in Czech Republic both RegioJet and LEO-Express).

3.2.2.1 Persistent conflicts of interests of IMs

Experience over the last decade has demonstrated that the implementation of current separation requirements did not completely prevent the conflicts of interest and discriminatory practices in respect of access to rail infrastructure and related services. In addition, the existing legal framework has proven to be insufficient to allow detection and prevention of cross-subsidisation from IMs to incumbents. Even reinforced regulators' powers as already foreseen under the Recast cannot prevent this, as the risk is inherent in some of the existing institutional settings.

3.2.2.1.1 Diverging interpretation of existing rules

The current EU legislation requires legal, organisational and decision-making independence for the essential functions, but it does not provide for concrete criteria as to how the IM needs to be organised in order to meet these basic requirements. While there is broad agreement about the definition of legal independence (meaning that the relevant body must have a separate legal personality), definition of organisational and decision-making independence must be interpreted on the basis of existing case-law of the European Court of Justice (ECJ). Consequently there are problems with the transposition and enforcement of these requirements and The Commission has initiated several infringement procedures.

According to the Commission, to fulfil their objective of absence of conflict of interest, separation requirements should at least imply restrictions in the composition and nomination of the management boards, cooling-off periods for managers, the existence of separate staff, facilities and information systems and new powers to national regulators, as explained in Annex V of the Communication on the implementation of the First railway Package[25]. The interactions between railway undertakings and IMs, where these independence rules have not been implemented properly, have created conflicts of interest and still result in access barriers and market distortions, such as access denials and discriminatory charges.

Discriminatory practices in Member States with vertically integrated undertakings are illustrated by a high number of examples which are detailed under Annex III. These discriminations relate in particular to charging and path allocation practices but also to asymmetries in access to information.

While such practices are illegal under the current regulatory framework, it generally takes time for the regulator to investigate and decide on the legality of such practices, at the expense of new entrants who are accumulating costs during the investigation period (which could take years).

The absence of independence between IM and incumbent railway undertakings can also distort competitive tendering procedures, given that the incumbent may have access to information on the technical characteristics of the network and their implication for transport operations which are not available for new entrants. Integrated structures may also be in a position to include in their offer infrastructure related improvements. And the possibility to prioritise infrastructure investments may give a decisive advantage to the bid submitted by an integrated structure[26]. Discriminatory practices may lead to distortions of competition in the award of public service contracts but also to a lower number of bidders since some of the latter are deterred from participating in tendering procedures.

The progressive reduction in the number of bidders in competitive tenders observed since 1997 in Germany, illustrated by Figure 3 below, can be explained by various factors such as a consolidation of the sector, the increased competitiveness of the incumbent but also by the deterrent effect of discriminatory practices which German public transport authorities complained about.

Figure 3 Number of bidders in competitive tenders for public service contracts (PSC) in Germany

Source: Holzhey, M., Berschin, F., Kühl, I. and Naumann, R. (2011) Wettbewerber-Report Eisenbahn 2010/2011 quoted in Appendix K of the IA support study.

Baseline developments

The Commission has provided some interpretation of the practical implications of existing independence requirements in Annex V of the Communication on the implementation of the First railway Package. However, some Member States do not consider that such interpretation derives necessarily from existing law. ECJ is expected to express its view on on-going infringement procedures and address this specific issue before spring 2013. The ECJ ruling early next year will pave the way for a timely and well-informed inter-institutional debate on the need for new measures.

While the ECJ will decide on whether specific national transposition measures can be considered sufficient to comply with the existing independence requirements, it is not expected to provide detailed guidance on how to ensure uniform and effective implementation. If the ECJ supports the Commission interpretation and considers national transposition measures insufficient, there would be a need to clarify in law which are the necessary safeguards to implement existing independence principles. If, on the contrary, the ECJ considers national transposition measures compliant with existing EU requirements, it would prove that EU law currently in force is inadequate to prevent discriminations. This would represent an additional incentive to further detail and strengthen separation requirements.

Some Member States are currently taking new national measures on separation of infrastructure management from transport operations. However, as indicated under Section 3.1.4., the outcome of these initiatives is still uncertain. And in other Member States the conflicts of interest are likely to persist without modification of EU law and these issues would thus continue to hinder competition in the railway markets and the development of the Single European Railway Area. Some Member States are still caught up by their multiple roles as national policy decision makers, owners of rail assets, shareholders of railway undertakings and contractors of rail services – and find it difficult to distinguish between their different responsibilities in their different roles. This situation results in very conservative and defensive positions aimed at protecting the incumbent which they perceive as their national champions.

While a majority of interested parties, including national regulatory bodies, favours institutional separation (see Annex II stakeholders consultation, section 2.4.3), several incumbents are actively lobbying national authorities to maintain regulatory status quo or even to weaken existing separation requirements. DB and SNCF claimed, during bilateral consultations with the Commission services, that, as dominant operators, they can defend the interest of all railway undertakings in their relation with IMs and should therefore act as "system integrator". The complexity of interfaces would be lower, operational co-ordination and dispute resolution easier within such "system integrator". As part of an integrated company, IMs would be more "customer-driven". In addition, DB argues that the persistence of an integrated structure has clear advantages in terms of fiscal consolidation.

3.2.2.1.2 Persistent risks of cross-subsidisation due to lack of financial transparency

The enforcement of existing account separation requirements[27] has proven to be difficult and insufficient for various reasons:

a) These requirements can be circumvented, for instance via accountancy tools (evaluation of certain assets belonging to the different subsidiaries, grants given between subsidiaries and holdings which have an effect of reducing or increasing results of the respective entities, profit transfer agreements, asset sharing, etc.);

b) Monitoring by regulatory bodies is very complex, lengthy and resource consuming process requiring specific expertise. In many cases incumbents show little willingness to fully comply with information requests. Even the most powerful and well-equipped national regulators, such as BNetzA in Germany and ARAF in France, have indicated difficulties in fulfilling this task[28] and may therefore tend to prioritise other actions;

c) Any results of ad hoc investigations and conclusions by national regulators can be contested and experience shows that such fairly systematic contestations related to account separation. Judicial appeal procedures against regulators' decisions lead to particularly long delays (up to five years[29]) in the implementation of corrective actions which may create irretrievable damage to the market;

d) Existing account separation requirements do not prevent the distortion of competition resulting from the potentially more favourable conditions of financing that the holding can obtain due to its larger scope of activity benefitting both rail transport undertakings and the IM.

Box 7 – Examples: Competitive advantages of (semi)integrated structures in terms of cross-financing

The RGL-AECOM-Frontier Economics study on account separation (2009) shows that the provision of regulatory accounts by integrated structures upon requests by regulators is unlikely to correctly identify if cross-subsidisation is taking place or not. For instance, depreciation of fixed assets is one of the main costs for railway undertakings. However, changes in valuation methods for depreciation can significantly affect both profitability and charges. Financial accounts typically do not calculate marginal costs and, as a result, statutory accounts are unable to provide clear insight on this key variable necessary for cross-subsidisation calculations. Therefore it would remain feasible for the profit-making subsidiaries of holding structures to offset the losses of the other subsidiaries. The study indicates that the Deutsche Bahn considers that its structure is compatible with the accounting separation requirements of Directive 2001/12/EC. However, at the same time Deutsche Bahn acknowledges the existence of a control and profit agreement between each subsidiary of the DB Group. This agreement does not contain any limitations as to the use of revenues from one subsidiary (including the infrastructure) for the purposes of subsidisation of another (including train operating subsidiaries). As a result, profits generated by one of the entities can be transferred to the other, without possibility for monitoring of cross-subsidies. The study shows that the efforts of regulators cannot prevent cross-subsidisation alone.

In its investigation on Ferrovie dello Stato (FS) practices, the Italian Competition Authority (ICA) ascertained that the “complex and unified strategy” developed by FS to keep Arenaways out of the profitable route between Milan and Turin between 2008 and 2011 included Trenitalia providing a misleading representation of its costs when the Regulator (URSF) asked the data necessary for the assessment of economic equilibrium of PSCs, so as to deceive it.

DB Holding concluded profit transfer agreements with all its subsidiaries, including the infrastructure companies DB Netz (for rail network), DB Station and Service (for passenger stations) and DB Energie (Energy supply). On the basis of these agreements, profits of subsidiaries are transferred to the holding, which in turn compensates losses of these subsidiaries. In the last years the infrastructure subsidiaries DB Netz and DB Stations and also the subsidised regional passenger branch DB REGIO have transferred "profits" to the holding, which were only possible due to the State financing of these companies, and would otherwise not exist. At the same time DB Holding compensated losses of transport operators under competition. This mechanism makes it possible to increase track access charges to the detriment of only the competitors, while the DB railway operators may be compensated for losses resulting from higher access charges. This does not formally represent a discrimination, since formally all pay the same access charges, but it has the same effect. Since track access charges constitute about 45% of the total costs of a railway undertaking[30], the effect of increasing track access charges is significant for competition[31].

In Germany, DB Regio has been subject to allegations that its services are cross-subsidised from infrastructure access charges, which is possible because of the existence of profit transfer agreements between DB Holding and its subsidiaries. The practice of "profit" transfer to the holding and redistribution among subsidiaries is said to have a number of anti-competitive consequences. E.g., DB is able to present offers for transport services which are only possible on the basis of such a cross-subsidising mechanism between the sectors transport and infrastructure. E.g., in the contract attributed for the "Elektronetz Nord" in Saxony-Anhalt, DB REGIO took over the risk of increases of track access charges for a period of 15 years. Such an offer is only possible when it is irrelevant for DB whether the revenues come from the infrastructure or from transport operators, since profits and losses are balanced out at the level of the holding. If the track access charges are increased, DB REGIO will make a loss, however this will be compensated by a corresponding profit of DB Netz from the increased track access charges. DB's competitors for transport services, which are not able to use such a mechanism of profit transfer, are obviously unable to make offers in which they would commit to compensate all possible increases of track access charges for such a long period[32].

Baseline developments

The Recast provides for clear competences and additional means to regulatory bodies to monitor the existing obligations in terms of account separation. With its implementation, regulators will have in particular the power to carry out audits or initiate external audits to verify compliance with accounting separation requirements. It stipulates that the accounts for the different areas of activity must be kept in a way that allows detection of transfer of public funds and of the use of incomes from infrastructure charges. But, despite these improvements, monitoring of the use of public finances within integrated structures and identification of cross-subsidisation practices will remain a specifically complex and difficult exercise because of the great variety of accountancy tools which can be used to circumvent account separation and the very high number of financial transactions to be controlled. Furthermore, adoption of ex-post corrective would continue to take years while irretrievable damage would be caused to the functioning of the rail market (with in some cases the bankruptcy of the new entrants which suffered from the anti-competitive practices of the integrated structure).

3.2.2.2 Wide range of IM functions being the source of discrimination.

Beyond the essential functions, the absence of separation for other IM activities (development, infrastructure operation and maintenance) in integrated structure causes potential conflicts of interest.

Development decisions on infrastructure may lead to discrimination as an incumbent in control will be able to prioritise them to the advantage of its own subsidiaries.

When the entity in charge of traffic management remains under the control of the incumbent, the latter can interfere to ensure that it is better served in the daily re-allocation of train paths in case of delays or disruptions (incidents, accidents, strikes, climate-related problems, etc). In such cases, there is also an element of urgency which makes traceability and opportunities of appeal extremely difficult and creates more room for discriminatory practices.

In relation to maintenance (as for infrastructure development), there are clear risks in integrated structures that IM decisions are prioritised in favour of the transport operation subsidiary as illustrated by the examples presented in Annex III. An integrated IM may disinvest in lines used essentially by competitors and conversely may continue to maintain under-utilised lines used by the incumbent. The planning of maintenance works may also be used by an IM in an anti-competitive way if it schedules maintenance work to affect the transport operations of new entrants more severely than those of its own transport companies.

Furthermore, as discussed in Section 3.2.1.2, there is substantial interaction between the essential functions (capacity allocation and infrastructure charging) and other infrastructure functions (maintenance and development).

Anecdotal evidence proving the existence of discriminations rising from the absence of separation requirements for traffic management, infrastructure maintenance and infrastructure development functions are provided under Annex III.

Baseline developments

The Recast extends part of the existing separation requirements (accounting separation, organisational and decision-making independence) to access to those rail-related facilities which are considered essential (such as passenger stations, freight terminals, maintenance facilities and port facilities). These new rules apply to transport operators holding a dominant position in national rail transport markets and operators of specific service facilities. However these legislative changes preserve the concept of essential functions of infrastructure management and do not extend the IM functions covered by the separation requirements. As such they do not prevent discrimination in infrastructure maintenance and development decisions or in traffic management.

Table 2 – Mapping between Problems, Problems drivers and their root causes

3.2.3 Who is affected

The problems described above and the measures to be proposed to address them will affect a large number of players in the rail market. They affect in particular national authorities which are responsible for establishing the IM and assigning infrastructure management functions but also which finance the infrastructure and award public service contracts. They affect the regulatory bodies which oversee railway markets and act as an appeal body for rail companies if they believe they have been unfairly treated, IMs which are responsible for infrastructure management functions and are subject to separation requirements, railway undertakings operating freight and passenger rail transport services and other authorised applicants which are infrastructure users. They will also affect indirectly passengers and potentially those using rail freight transport services, as well as operators of rail service facilities whose activities depend on the volume and nature of rail traffic.

3.2.4 Aggregated baseline scenario

The detailed elements of the baseline scenario were provided while different root causes were discussed. The overall conclusion is that while the Recast and the Rail Freight Regulation already contain some obligations for IMs to cooperate with their counterparts and to consult infrastructure users on specific issues, a more systematic and consistent approach would be necessary to address the problems mentioned above and their root causes. The Recast foresees explicitly that Member States can allocate IM functions to distinct entities, but it does not modify the scope of the IM functions subject to independence requirements nor the content of these requirements. In this context, the models of IM governance in place in Europe will not ensure the optimisation of infrastructure management and a level playing field for infrastructure access. Existing distortions of competition are likely to persist despite the reinforcement of regulatory activities.

3.3 Subsidiarity

3.3.1 Legal basis

EU action in the field of rail transport infrastructure is grounded in the Treaty on the Functioning of the European Union, in particular in its Articles 58, 90 and 100 setting the basis for internal market in the context of an EU Common Transport Policy.

3.3.2 Subsidiarity

The rationale for a European action in the field of railway infrastructure stems from the trans-national nature of the Single European Railway Area. Actions by Member States alone cannot ensure the coherence of market access and competition rules needed for the emergence of a genuine internal market for rail transport. The absence of a clear and comprehensive system of governance of infrastructure hinders the cross-border operations of rail service providers.

Rules to improve the governance of infrastructure should be developed so that they can be adapted to the existing institutional setup in each Member State. However, this should be done following common general principles and requirements in order to ensure the coherence of the single market. Therefore, to ensure the viability of a Single European Railway Area, EU railway acquis should be developed further, allowing the railway operators to benefit from a single consolidated legislative framework and to face predictable business conditions throughout the EU.

4. Objectives

4.1 General objectives:

The 2011 White Paper foresaw a progressive modal shift from airplane and road vehicles, so that by 2050 the majority of medium-distance passenger transport should go by rail. This modal shift will contribute to the 20% reduction of GHG emissions foreseen in the Europe 2020 Agenda for smart, sustainable and innovative growth. More specifically, the White Paper concluded that no major change in transport will be possible without the support of an adequate infrastructure and a smarter approach to using it.

The overall objective of the Fourth Railway Package is to enhance the quality and efficiency of rail services by removing remaining legal, institutional and technical obstacles, fostering the performance of the railway sector and its competitiveness, in order to further develop the Single European Railway Area. The initiative on infrastructure governance aims to improve the management of rail infrastructure, where necessary, through revisiting remaining institutional obstacles:

GO: Strengthen further the governance of railway infrastructure, thereby enhancing the competitiveness of rail sector vis-à-vis other modes and developing further the Single European Rail Area.

Overall, the stakeholders have supported, during stakeholder consultations, the general problem and the problem drivers as identified by the Commission, as well as the general direction of EU action - 69% agreed with the objective of improving access to infrastructure (see Annex 2). Others considered that the availability of rail-related facilities or the lack of adequate regulatory oversight constitute the most important access barrier for railway undertakings.

4.2 Specific objectives:

The general objective has been translated into specific and operational objectives attributed to the two challenges of efficient management and equal access challenges:

EFFICIENT MANAGEMENT CHALLENGE

SO1: Improve the IM ability to manage efficiently the infrastructure in favour of users

EQUAL ACCESS CHALLENGE

SO2: Eliminate conflict of interest and distortions of competition in infrastructure access

4.3 Operational objectives:

The following operational objectives have been identified in order to address the drivers identified in the previous section.

EFFICIENCY CHALLENGE

OO1: Ensure better coordination/alignment between the IMs and rail operators

OO2: Ensure coherence in the management of the different IM functions

OO3: Ensure that the cross-border and pan-European dimension of rail infrastructure is adequately addressed

EQUAL ACCESS CHALLENGE

OO4: Extend the scope of "essential functions" to all IM activities which are potential sources of conflict of interest and distortion of competition

OO5: Apply appropriate safeguard measure(s) preventing conflicts of interest and distortions of competition to all the "essential functions" of IMs

Given the nature of the initiative, which is to identify the optimal governance structure of IMs, the operational objectives remain rather generic indicating the scope and direction of intended change. Targets cannot be set for these objectives; however the progress will be measured according to the monitoring indicators outlined in Section 8.

Table 3 – Mapping between problem drivers, root causes and objectives

4.4 Coherence with other horizontal policies

The proposed initiatives aim to meet the objectives of the renewed policy agenda outlined in the Europe 2020 Strategy, the 2011 White Paper for transport and the Strategy for Growth and jobs. Transport infrastructure is being considered as the backbone of the internal market and this objective has been retained as one of the "Twelve levers to boost growth and strengthen confidence" in the recently adopted Single Market Act[33].

Additionally, this initiative is consistent with EU competition policy and legislation in the transport sector, which aims to ensure that transport markets operate efficiently, as has been seen in the aviation sector. The equal access challenge identified in the previous sections is in line with this horizontal objective.

5. Policy Options/Policy Scenarios

5.1 Identification of possible policy options

The problem definition identified two main challenges to be addressed in order to find an optimal governance structure of IMs – efficiency challenge and equal access challenge. Section 2 above identified for each challenge a series of root causes. In order to solve the identified problem, five groups of options are considered, each of them proposing options to remedy the different problem elements. For each group, two to four options are identified in addition to the baseline options which are presented under Annex IV.

Efficiency challenge:

· C options: Coordination between IM and RUs (linked to operational objective 1)

Option C1: RUs participating in the administrative board or supervisory board of the IM. While EU law currently in force implies that RUs do not control the decision making process of IMs in relation with essential functions, this option would foresee that all RUs active on a network would be entitled to a seat in the supervisory board or management of the IM responsible for this network. RUs would therefore take a direct and active part in the management of the infrastructure. This Option C1 corresponds to the arrangements in place in Switzerland for the company in charge of capacity allocation, Sillon Suisse SA - Trasse Schweiz AG which is owned by four Swiss operators CFF, BLS, SOB and UTP which seat in its administrative board.

Option C2: Coordination bodies. This option foresees a creation of coordination bodies representing all RUs and providing opinions to IMs. RUs would not participate in the administrative board or supervisory board of the IM, preserving the existing principle of decision-making independence. However, in order to align strategies and to jointly address issues which cannot be solved by the implementation of the charging principles, performance regimes foreseen by the Recast (such as operational costs or capacity under normal conditions), would be part of a consultative body allowing a constant exchange of information between IMs and RUs. Such arrangements are already in place in a limited number of Member States (such as the United Kingdom and France).

Option C3: Financial incentives alignment. Under this option financial incentives are introduced for both RUs and IMs to ensure that they contribute to the jointly established efficiency targets. Such type of arrangements is recommended by the McNulty report for the UK (see Box 3).

· F options: Consistent management of key functions (linked to operational objective 2)

Option F1: New coordination mechanism. This option would maintain the current possibility to allocate IM functions to different entities and foresee the establishment of a mechanism to oblige these entities to better coordinate the management of IM functions to ensure consistency of their decisions.

Option F2: Unified IM. Under this option, all IM functions – path allocation and track access charging, but also traffic management, infrastructure maintenance and development are put under the responsibility of a single entity, the unified IM.

· CB options: Cross-border infrastructure management (linked to operational objective 3)

Option CB1: Establishment of a EU network of IMs. This option consists in the institutionalisation of a network of national IMs to exchange best practices, in particular on operational and infrastructure development issues. A pan-European organisation such as RailNetEurope already constitutes a coordination forum gathering the vast majority of IMs on specific technical projects, such as the development of common IT tools.

Option CB2: Creation of an EU structure integrating IMs. This option foresees the establishment of a structure, such as a European Economic Interest Grouping (EEIG) integrating the existing national Infrastructure Managers into a single European Infrastructure Manager. Such type of structure is already foreseen for the management of specific European rail freight corridors.

Equal access challenge:

· SF options: Functions subject to the separation requirements (linked to operational objective 4)

Option SF1: Traffic management also covered by separation requirement. Traffic management - a function which cannot be dissociated from path allocation and has a very important potential for discrimination - is added to the list of essential functions subject to separation requirements.

Option SF2: Traffic management and maintenance also covered by separation requirement. Essential functions subject to separation requirements are extended to include both traffic management and the maintenance of new infrastructure considering the inter-relation between the two and their high potential for discrimination.

Option SF3: All IM functions subject to the same separation requirements. This would mean that path allocation and track access charging as well as traffic management, infrastructure maintenance and development are subject to the same separation requirements, independent of the fact that these functions are performed by the same entity or by different ones.

· S options: Way of separation between IMs and RUs (linked to operational objective 5)

Option S1: New competences for regulatory bodies. This option foresees that regulatory bodies are tasked with controlling that existing independence requirements in organisational and decision-making terms are respected. In this framework any RU would have the right to appeal to the national rail regulator if it believes that these independence requirements are not respected. In line with this option, the German rail regulator today has competences to control the implementation of the German rules related to separation.

Option S2: Clarify existing EU law. This would mean revision of the existing provisions in the Directive so that the interpretations provided by Annex V of the Communication on the implementation of the First Railway Package would become indisputable. This would clarify in particular that the existing independence requirements in organisational and decision-making terms require in particular strict separation between the holding and IM supervisory/management board, cooling off periods for IM board members, own staff, IT tools and premises. In this option, the competences for regulatory bodies are also extended as foreseen under Option S1. Such option corresponds to the measures developed in Belgium and Latvia (see Section 3.1.4).

Option S3: Institutional separation between IM and RUs. Under this option, the same persons are not entitled to control, hold any interest or exercise any right over an IM and a RU. When both IM and RU are public entities, distinct public authorities must exercise such control over them. This option corresponds to the institutional settings in place today in 14 out of 25 Member States (see categories 1 and 4 in Table 1 under Section 3.1.4).

Option S4: Compliance officers in integrated structures. The supervisory board of integrated IM would appoint a compliance officer responsible for monitoring the implementation of any specific measures taken within the integrated structure to ensure non-discriminatory behaviour. The compliance officer would also issue recommendations and report on these measures to the supervisory board and to the regulatory body. Such arrangement is in place today within the Deutsche Bahn group.

5.2 Screening of policy options

In total, 19 possible policy options (including baseline options) related to the five problem elements have been identified. The combination of all these options could create theoretically 576 scenarios which would evidently be impracticable to assess. To reduce complexity, these 19 policy options have been pre-screened for each problem element as per Annex IV. Such screening is based on (1) stakeholder views, (2) compliance with subsidiarity/proportionality principles, (3) effectiveness in terms of policy objectives as well as (4) overall feasibility. Where relevant, the implementing measures are also discussed in Annex IV. The table below summarises the results of the screening.

Table 4 – Result of policy option screening

Problem element || Respective category of options || Policy options considered || Retained

Insufficient market orientation of IMs || C options: Coordination between IM and RUs || Option C0: Baseline – improvements as foreseen by the Recast || √

Option C1: RUs participation to IMs' board ||

Option C2: IMs-RUs coordination bodies || √

Option C3: Alignment through new financial incentives ||

IM functions managed in an inconsistent manner || F options: Consistent management of key functi