Discussing the 4th railway package : which role for markets in domestic rail passenger transport?
Date: 2016-02-24
Institutions: European University Institute
Subjects: carriage of passengers, common transport policy, liberalisation of the market, proposal (EU), rail network, rail transport

I

December
2014

Discussing the 4th Railway 
Package: which role for markets 
in domestic rail passenger 
transport? 
Editors: Matthias Finger, Nadia Bert, David Kupfer

Highlights

Although  the  4th  Railway  Package  was  proposed  by  the  European 
Commission in 2013, a consensus has not yet been reached. Recently, 
however, significant steps forward have been taken. Various stakeholders 
and prominent academics in the field gathered at the 9th Florence Rail 
Forum to reflect upon the latest developments in the legislative process. 

Discussion  at  the  Forum  focused  on  the  opening  of  competition  in 
rail passenger transport and the changing role of the regulators at all 
levels. According to the provisions listed in the 4th Railway Package, the 
tasks of the national regulatory authorities are likely to increase, and, 
inevitably, new challenges will arise. Regulators will play a crucial role 
when  it  comes  to  resolving  two  major  issues:    on  the  one  hand,  how 
to harmonise the openness of the market of commercial lines so as to 
guarantee fair and open access to the network in all EU countries for all 
operators; on the other hand, how to deal with the provision of services 
under  Public  Service  Obligations  (PSO)  and  how  to  differentiate 
between directly awarded contracts and competitive tendering for PSO 
lines. 

QM-AU-14-005-EN-N
ISSN: 2467-0405

fsr.eui.euOBSERVER REGULATIONFLORENCESCHOOL OF REGULATIONEUROPEAN TRANSPORTThe  4th  Railway  Package:  further 
challenges for the regulator

The aim of the 9th Florence Rail Forum was to discuss the proposed 4th Railway 
Package,  especially  the  aspect  of  the  opening  of  domestic  rail  passenger 
markets. Other elements of the package, such as the technical pillar and the 
financing  components,  had  already  been  discussed  previously  in  Florence. 

To  recall,  the  European  Commission  issued  a  Communication  on  the  4th 
Railway  Package  (COM(2013)25)  in  early  2013,  only  one  year  after  the 
approval  of  the  Recast.  The  European  Parliament  subsequently  adopted  its 
first reading position on the six legislative proposals in February 2014. But, 
as of today, a consensus on the different elements of the proposal has not yet 
been reached, and the Package is still in discussion. 

Still it appears that on the so-called “technical pillar” (safety and interoperability 
Directives along with a new regulation on the European Railway Agency) the 
Council  is  supporting  the  Commission’s  proposal  which  had  already  been 
voted by the Parliament. Overall, there seems to be a broad agreement on the 
need to remove existing administrative and technical barriers to enable the 
Single European Railway Area.

However, opening up the market in domestic rail passenger transport is more 
controversial, and two major issues are particularly under discussion, namely 
(1) the opening up of domestic commercial lines, where the main challenge is 
to guarantee fair and open access to the network (especially in those countries 
where vertically integrated railway undertakings operate) and (2) the complex 
relationship with services provided under Public Service Obligations (PSOs). 
Here, the 4th Railway Package actually amends Regulation 1370/2007 and the 
Commission foresees a differentiation between smaller scale contracts (which 
may be directly awarded to an operator) and larger contracts (which will have 
to be opened for competitive tendering).

In both cases, the national regulator will have to play a key role and will thus 
have to be considerably strengthened. Already in the Recast, the regulator had 
been given more powers, and the 4th Railway Package is further strengthening 
its  role,  especially  when  it  comes  to  overseeing  the  independence,  the 
transparency, the impartiality and the non-discriminatory behaviour of the 
infrastructure  managers,  as  well  as  of  the  services  facilities  managers.  This 
role is even more important in the case of integrated railway undertakings. 
What is new is the constantly growing powers of the regulator in this matter.

In addition, the 4th Railway Package raises a series of new and unprecedented 
challenges for the railway regulators worth highlighting, namely:

- A first challenge is to regulate “reciprocity”: as a matter of fact, the European 
Commission  supports  a  ‘verification  clause’  according  to  which  integrated 
railway  companies  could be banned from operating abroad, if they do not 
guarantee free access in their home country (COM(2013)29). It is not clear, 
how this provision can be dealt with by the regulators.

2 ■  FSR Transport ■ Issue 2014/08 ■ December 2014

 
 
-  A  second  challenge  pertains  to  the  role  of  the  regulator  in  competitive 
tendering,  notably  when  exclusive  franchises  (so-called  “competitive 
contracts”) are awarded (as opposed to open access). In this case, does the 
regulator have to ensure competitive tendering (and how would he do that 
concretely?)  or  should  he  simply  serve  as  an  appeal  body  in  the  case  of 
complaints? 

-  Related  to  this  is  the  third  challenge,  namely  the  role  of  the  regulator  in 
performing the so-called “economic equilibrium test”. This test must be applied 
by  regulators  in  order  to  decide  whether  competition  in  the  market  (open 
access)  or  competition  for  the  market  (competitive  tendering)  has  to  be 
applied. 

- Furthermore, the idea has emerged that a combination of competitive and 
PSO contracts could be awarded. This constitutes the fourth new challenge 
for regulators and raises in particular the question of how to “package” such 
competitive  and  PSO  contracts  together:  what  role  exactly  will  regulators 
have to play when competitive and PSO contracts are combined?

 In addition to these four very concrete new challenges for regulators, further 
questions  arise  from  the  4th  Railway  Package  as  to  their  future  role.  These 
questions  will  inevitably  have  to  be  addressed  at  some  point  by  the  policy 
makers. They are as follows:

-  As  regulators  will,  sooner  or  later,  get  involved  in  PSO  contracts,  the 
question arises as to whether they should also tackle PSO financing. And how 
concretely they would do that.

- Another related question pertains to the future relationship between railway 
regulators  and  Transport  Authorities,  as  it  are  these  Transport  Authorities 
that currently award the PSO contracts.

- Furthermore, the question will arise as to whether regulators should play 
a  role  in  transport  plans,  infrastructure  developments  and  other  planning 
instruments, as they all have the potential of being discriminatory.

- Another question will pertain to performance, especially the performance 
of the infrastructure managers: should regulators oversee their performance? 
A  question  which  is  in  direct  relationship  with  the  costs  of  using  the 
infrastructure. 

-  Finally,  the  question  remains  as  to  which  role  regulators  should  play  in 
ensuring passenger rights, the enforcement of which, has, so far, not yet been 
explicitly attributed to rail regulators.

We will discuss at least some of these broader questions during our upcoming 
Florence Rail Forums!

Matthias Finger

3 ■ Discussing the 4th Railway Package: which role for markets in domestic rail passenger transport?

9th Florence Rail 
Forum - Summaries 
of discussions

Discussions during the 9th Florence Rail Forum were 
structured around three main elements: 

• The 4th Railway Package under negotiation – where 
do we stand?

• Liberalization of national passenger markets – which 
way forward for competitive lines and PSO?

• What role for regulators?

 Railway Package under negotiation 

The 4th
– where do we stand?

Several  elements  of  the  4th  Railway  Package  are 
still  under  discussion  at  the  Community  level,  and 
the  Commission,  the  European  Parliament  and  the 
Council  are  still  negotiating  their  position  .  In  the 
debates at the Forum it became clear that the market 
pillar  is  still  conflictual  while  agreement  has  largely 
been achieved on the technical pillar. 

Several  participants  at  the  Rail  Forum  expressed 
criticism  on  some  amendments  introduced  by  the 
European  Parliament,  which  were  described  as  a 
watering down of the initial Commission draft in terms 
of providing for independent regulators and fair open 
market competition. The amendments of the plenary 
of the Parliament, which - as was pointed out - were 
taken against the recommendations of the  Transport 
and Tourism Committee, would significantly weaken 
the  “Chinese  walls”  which  the  Commission  aims 
at  introducing  in  order  to  guarantee  independence 
between  operator  and  network  management  in 
integrated rail companies. At the same time there were 
also other amendments that were received positively 
because they provided clarification.

Several  concerns  expressed  by  Member  States 
(Council  level)  and  associations  were  shared  by  the 
Commission, and the importance of mutual openness 
was  underlined.  It  became  clear  that  negotiations 
between Parliament, Commission and Council would 
go  on.  While  there  was  agreement  that  the  proposal 
should be less prescriptive it was the perception of the 
Commission and other stakeholders that the European 
Parliament  with  its  amendments  “had  thrown  out 
the baby with the bath water” by removing too many 
crucial elements. It was suggested that the focus should 
now  be  on  making  sure  the  regulation  contains  the 
necessary  safeguards  without  being  too  prescriptive. 
This  refers  in  particular  to  the  governance  rules  for 
imposing Public Service Obligations (PSOs).

Some of the regulators expressed concern about the fact 
that the Parliament had limited the essential functions 
of the regulator to path allocation and infrastructure 
charging. Several also considered traffic management 
and maintenance as having a competitive impact and 
would like to see them included in the functions of the 
regulator. 

Separating the technical and the political pillar?

On  the  procedural  side  an  important  element  is  the 
question  of  whether  the  political  and  the  technical 
pillar  of  the  4th  Railway  Package  should  be  split  up. 
During the Forum some pointed out that the Italian 
Council presidency failed to conclude the negotiations 
on the technical pillar, which will now be concluded 
under the Latvian presidency.

The Commission does not want to “hold the technical 
pillar hostage” to achieve progress on the political pillar. 
Nevertheless there is the fear of “losing momentum” 
if  the  technical  pillar  is  voted  on  separately.  It  was 
recalled  that  it  is  currently  the  European  Parliament 
that wants to achieve progress on the political pillar. 
The  discussion  often  came  back  to  where  a  possible 
compromise  could 
lay  between  the  sometimes 
divergent  positions  of  Council,  Commission  and 
Parliament.

4 ■  FSR Transport ■ Issue 2014/08 ■ December 2014

Further on the railway tendering path 

Didier van de Velde | Delft University of Technology; Faculty of Technology, Policy and 
Management; Section Policy, Organisation, Law and Gaming 

Only  Great  Britain  has  chosen  for  a  regime  that  is 
almost  entirely  based  on  competitive  tendering  in  the 
rail  sector.  After  its  introduction  passenger  numbers 
gradually  rose  to  an  all-time  maximum  and  from  a 
burden to the public purse the sum of all franchises can 
now be provided with almost no subsidy. Despite this, 
the  McNulty  study  published  in  2011  by  the  British 
government and Rail Regulator found the network as a 
whole (i.e. including the infrastructure) to be inefficient 
with costs 30% in excess of its peers, with misalignment 
of incentives between players as a main cause after the 
vertical separation introduced in the 1990s. Alliancing 
between 
train 
operations was suggested (and is currently tried) as a way 
to solve part of  these problems;  tendering  of  vertically 
integrated  franchises  was  suggested  but  not  tried  yet 
(see  also  the  article  by  Prof.  Nash  in  this  Observer).

infrastructure  management 

and 

that  have 

No  other  country  has  chosen  to  introduce  a  similar 
regime.  Those 
introduced  competitive 
tendering  in  their  railway  sector  have  done  so  on 
regional  routes  (often  branch  lines)  or  local  services 
on  the  main  network,  and  did  this  in  rather  small 
contracts compared to the British practice. This is best 
exemplified by Sweden, Germany and the Netherlands. 
Efficiency  gains  of  around  20%  are  often  reported,  as 
are  innovations:  new  rolling  stock,  higher  frequencies, 
more  attractive  services,  better 
integration  with 
local  and  regional  public  transport  services,  etcetera. 

Thorough  studies  reviewing  these  practices  remain 
scarce,  and  in  depth  European  comparisons  close  to 
inexistent.  Nevertheless,  the  measures  included  in 
the  4th  Railway  Package  suggested  by  the  EC  ask  for 
tendering  all  PSO  services,  together  with  open  access 
on  commercially  viable  services.  This  is  backed  by 
an  impact  assessment  report,  the  quality  of  which  has 
been  criticized.  The  Impact  Assessment  Unit  of  the 
European Parliament even writes (May 2013): “Assumed 
impacts of the different options are well illustrated and 
described,  but  the  reasoning  as  to  why  these  impacts 

occur  as  a  result  of  a  specific  policy  does  not  appear 
to  be  based  on  facts,  academic  literature  or  existing 
evidence.”  So  is  this  policy  dogmatic  and  unfounded? 
Several remarks should be made to inform the debate.

Competitive  tendering  outside  the  UK  often  came 
with  decentralising  services  from  national  to  regional 
tiers of government who took this opportunity to force 
new  operators  to  provide  service  characteristics  that 
incumbent  state  monopolists  often  were  reluctant  to 
provide, or could not fund without added public money. 
Note that in many cases regional authorities even chose 
to  bear  themselves  the  revenue  risk  of  those  services. 
Many  observed  innovations  are  therefore  the  direct 
result of shifts towards more voluntaristic regional rail 
policies  focussing  on  expansion,  improvement  and 
better  integration  with  local  public  transport  as  input 
to  –  and  not  as  outcome  of  –  competitive  tendering. 

The competitive nature of tendering did indeed lead to 
efficiency  improvements  in  productive  terms:  higher 
staff  and  rolling  stock  productivity,  new  maintenance 
practices, etc., even though this was to some extent the 
result  of  the  possibility  (or  even  obligation)  given  to 
winning operators to adopt simplified working practices 
(such as using no conductor in the Dutch case). However, 
note  also  the  cost  increases  observed  in  Great-Britain.

As  passenger  transport  services  are  characterised  by 
strong  consumer  side  network  effects,  splitting  large 
networks  into  smaller  tendered  parts  will  therefore 
require coordination. Balancing contract size, operator 
freedom  and  central  planning  will  therefore  be  a 
challenging  task  when  continuing  on  the  tendering 
path. The danger is that the desired-for entrepreneurial 
freedom  of  the  operator  gets  –  paradoxically  – 
large  share  of  central  planning. 
replaced  by  a 

Finally,  the  growing  discussion  and  growing  body  of 
evidence showing that vertical separation might increase 
costs due to incentive misalignments (McNulty study), 
in  particular  under  high-density  traffic  (EVES-Rail 
study) is also important. While the EC takes the position 

5 ■ Discussing the 4th Railway Package: which role for markets in domestic rail passenger transport?

optimisation commonly realised by the Japanese private 
and vertically integrated railways could usefully be taken 
here and one desirable step in that direction would be 
to  implement  cases  of  vertically  integrated  franchises 
to  see  how  that  model  could  combine  benefits  from 
competition  with  those  from  vertical  integration.

that  vertical  separation  is  necessary  to  guarantee  fair 
competition  and  that  competition  is  necessary  to 
guarantee customer focus and market innovation, practice 
shows that tendering can be large and growing even in the 
absence of full vertical separation (Germany). Therefore, 
a growingly relevant question is whether over the longer 
run  vertical  separation  could  be  a  costly  obstacle  to 
sector-wide  optimisation.  Shake-ups  and  management 
reforms  of  old  railways  were  long  overdue  but  the 
resulting performance improvements – often attributed 
to  vertical  separation  –  may  well  have  been  realised 
under different institutional configurations. Inspiration 
from  the  long-term  system-wide  (train/infrastructure) 

Competition – a goal in itself or a strategy for efficiency?

It  was  generally  well  received  that  the  discussion  on 
the  4th  Railway  Package  has  moved  from  a  rather 
ideological approach to a more constructive approach. 
In the current discussion, at least at this 9th Florence 
Rail  Forum,  there  is  a  clear  focus  on  the  cost  of  the 
rail  system.  One  of  the  central  statements  was  that 
competition or any governance approach in itself does 
not have a purpose if it leads to an increase of the overall 
cost  of  the  rail  system.  One  very  concrete  example 
that was given refers to the provision of separating IT 
systems between operator and infrastructure manager 
where  there  may  be  less  costly  alternatives  to  the 
current  approach:  instead  of  forcing  rail  companies 
to  invest  several  hundred  millions  for  the  set-up  of 
new  IT  systems  the  same  goal  can  be  achieved  with 
an  audit  and  corresponding  penalties  in  cases  of 
noncompliance. 

There  are  different  opinions  on  the  effect  of  market 
elements in the rail system as also divergent experiences 
were  made  in  different  countries.  It  was  pointed  out 
that  stakeholders  need  to  accept  that  competition  is 
the  chosen  strategy  to  achieve  efficiency  in  the  EU 
–  even  though  it  is  not  excluded  that  efficiency  can 
be achieved by other means as well. It was clear that 
there  are  many  instances  that  question  any  direct 
relation  between  open  markets  and  cost  savings.  Yet 
the  focus  of  European  Rail  policy  lies  on  addressing 
the  inconsistencies  yet  sticking  to  making  use  of 
competition as an instrument to achieve efficiency.

Liberalization of national passenger markets 
–  which  way  forward  for  competitive  lines 
and PSO?

In  the  discussion  about  the  effects  of  competition  - 
both on open access lines and for contracts in PSOs in 
competitive  tendering  procedures  -  many  references 
were made to the British example and what conclusions 
to  draw  from  it.  Britain  was  described  as  “15  years 
ahead” with reforms the EU is currently advocating.

In this regard the McNulty report was often referenced. 
One suggestion was that there has to be a different view 
on railway governance as a whole. Given the high costs 
of the system in Britain today, what is needed is better 
coordination. Access charges alone are not sufficient as 
an instrument for coordination. Also the coordination 
that can be achieved through non-binding mechanisms 
does  not  extend  beyond  issues  that  involve  the 
allocation  of  funds.  It  was  concluded  by  some  that, 
in  order  to  achieve  such  coordination,  integration 
between  operator  and  infrastructure  manager  was 
needed – in spite of this being in contradiction to the 
principle of vertical seperation.

It  became  clear  that  the  relationship  between 
competition,  on  the  one  hand,  and  overall  network 
coordination,  on  the  other,  is  especially  acute  in 
densely  used  networks  and  in  smaller  countries.  As 
regards the question of whether Member States shall 
be  allowed  to  contract  entire  networks  or  whether 
a  certain  minimum  amount  of  contracts  shall  be 

6 ■  FSR Transport ■ Issue 2014/08 ■ December 2014

mandatory,  the  Commission  acknowledges  the  risk 
of fragmentation in smaller networks. A compromise 
could be to allow a differentiation depending on the 
size of the network.

Tendering of PSOs

An important aspect of the discussion was the role of 
markets  in  PSOs.  While  there  is  general  agreement 
on introducing competitive tendering, different views 
were expressed on the how and why. For instance, direct 
award  should  be  limited  to  exceptional  situations, 
and on this point the Parliament’s amendments were 
considered  as  too  permissive.  However,  another 
opinion expressed was that the competence to decide 
whether  or  not  to  impose  a  PSO  has  to  remain 
with  the  local  transport  authority:  even  in  cases  of 
commercially attractive lines a city or a region should 
have the possibility to offer more or better services than 
the market would provide on its own. It became clear 
that there was some opposition to the new definition 
of  Public  Transport  Authorities  (PTAs),  which  some 
consider  as  too  narrow.  A  possible  outcome  may  be 
that the current definition will not be changed. There 
was  a  general  agreement  on  the  question  whether 
mandatory tendering would bring down costs. Many 
cases spoke in favor of the assumption that the process 
of tendering would reduce costs and thus the burden for 
the tax payer. Yet also several caveats to this assumption 
were  presented.  Competition  may  sometimes  come 
at  a  price  that  is  higher  than  the  actual  cost  savings 
achieved by it. While in many ways unique, the British 
case illustrates this problem as in spite of a relatively 
smoothly working system of tendering overall system 
costs are too high.

Level playing field and legacy costs

It was stressed by some operators that fair conditions 
were  needed  not  just  for  new  entrants  but  also  for 
incumbent operators. It was pointed out that incumbent 
operators,  unlike  new  entrants,  are  burdened  with 
significant  legacy  costs.  It  was  pointed  out  that  with 
their current debt resulting from retirement schemes 

and employee friendly work time arrangements, several 
operators are not able to compete with companies that 
do not face such costs. There were different views and 
different experiences on that issue. In some countries 
such as GB the winner of a competitive tender takes 
over the operating company including its staff, so the 
age of staff and pensions cost are not an issue in the 
competition. However, it was also stressed that in other 
cases tenders were frequently won by the companies 
with  the  youngest  workforce  as  they  could  offer  the 
lowest wage costs. To date there are no uniform rules 
on  the  obligations  of  a  new  operators  vis-à-vis  their 
predecessors.  The  availability  of  rolling  stock  was 
mentioned as one of the biggest remaining issues.

Competitive pressure is however an important driver 
for change and can facilitate a process of making the 
railway  companies  more  efficient.  However,  it  was 
recalled  that  railways  are  very  different  from  other 
industries.  Because  of  its  nature,  the  principle  of 
“creative destruction” where new and agile companies 
replace old incumbent inefficient ones, does not apply 
to railways: size and age can be a good thing in railways 
also  from  an  efficiency  perspective.  This  is  why  it  is 
necessary to help the change process of the incumbent 
operators before introducing competition.

Public Transport Plans and Network Statements

Some concerns were raised over the level of detail and 
prescriptiveness  required  of    Public  Transport  Plans 
and  Network  Statements.  Yet  from  the  Commission 
side it is clear that the plans serve as a means to address 
the crucial issue of gradually defining common rules 
for the imposition of PSOs. 

Also,  the  importance  of  introducing  more  reliability 
of  financing  was  stressed  from  several  sides.  The 
Network Statement should clarify what kind of major 
disruptions will impact the network over the upcoming 
five years. Such information is needed by all operators 
to  make  business  decisions.  Many  believed  that  the 
way this is managed in Great Britain is exemplary.

7 ■ Discussing the 4th Railway Package: which role for markets in domestic rail passenger transport?

 
 
Back To Basics 
Juan J. Montero UNED University, Madrid

The  overall  policy  objective  of  the  European  Union  for 
the  railway  industry  has  traditionally  been  the  creation  of 
the  Single  European  Railway  Area.  The  full  exploitation  of 
economies of scale at a continental level will ensure significant 
benefits to European citizens. Cross-border services are only 
an example. A more efficient provision of national services, 
even  of  regional  and  suburban  railway  services,  could  be 
reached  if  large  European-wide  service  providers  would 
compete in the market or for such markets. The consecutive 
Railway  Packages  have  tried  to  eliminate  obstacles  for  the 
creation of railway transport providers with a European-wide 
scope. 

The  Fourth  Package  could  finally  eliminate  the  most  basic 
and structural obstacle to the Single European Railway Area: 
the national monopolies for the provision of national railway 
services. 30 years after the first intervention of the European 
Union, the traditional market structure of the industry could 
be finally transformed. However, the elimination of national 
monopolies  is  only  a  precondition  for  the  creation  of  the 
Single European Railway Area. 

As  in  most  network  industries,  the  vertical  integration  of 
network  and  transport  services  is  rightly  perceived  as  an 
obstacle  to  competition.  As  railway  networks  are  natural 
monopolies  that  require  significant  support  from  public 
budgets,  national  monopolies  seem  to  be  the  only  choice 
for  the  management  of  the  railway  infrastructure.  Vertical 
the  national 
integration  could  automatically  extend 
monopoly  over  networks  to  the  downstream  market  of 
transport services. As a result, railway services would still be 
defined along national borders.

Vertical  separation  was  the  preferred  remedy  for  the 
European  Commission.  However,  it  has  been  severely 
opposed by some of the most relevant players in the industry. 
Furthermore, uneven implementation of vertical separation 
has  created  unacceptable  asymmetries  between  vertically 
separated  players  in  some  member  States  and  vertically 
integrated  players  (even  if  as  a  holding)  in  other  Member 
States. Too much energy might have been consumed in the 
debate  over  vertical  separation.  Behavioral  remedies  have 
proved successful in other network industries. The adoption 
of  a  full  regulatory  framework  on  access  to  vertically 
integrated networks has allowed vibrant competition in the 
telecommunications industry. It has allowed market entry to 
new postal players. 

Competition law has proven to be an effective safety network 
for those occasions where the regulatory framework has not 

8 ■  FSR Transport ■ Issue 2014/08 ■ December 2014

ensured fair access and a level playing field for competition. 
Intervention against margin squeeze by vertically integrated 
network operators has resulted in major fines of the European 
Commission  and  the  National  Competition  Authorities  for 
abuse of dominant position by traditional monopolies in the 
telecommunications and postal industries. 

Another  obstacle  for  the  emergence  of  European  players 
are specific national policies for the provision of services of 
general  economic  interest.  National  monopolies  exploiting 
cross-subsidies and benefiting of state aids for the provision of 
other services are an obstacle for the Single European Railway 
Area.  However,  general  economic  interest  can  be  protected 
through  other  instruments  which  are  just  as  effective  and 
are  fully  compatible  with  the  creation  of  European-wide 
operators. The general regulatory framework designed by the 
European  institutions  for  the  services  of  general  economic 
interest (Altmark and the subsequent application of the state 
aid rules by the European Commission) allows Member States 
to define their own policies to support railway services. Such 
framework unbundles the key elements of the public policy 
(objective  identification  of  public  service  objectives,  of  the 
best provider of the service, and of the cost of the provision 
of the service) in such a way that public intervention does not 
require a national monopoly and therefore is not an obstacle 
to the European Area. The full development of the 1370/2007 
Regulation is necessary to complete the process.

Finally,  European-wide  players  can  only  emerge  through 
consolidation  of  the  existing  national  players.  The  same 
process  has  been  identified  in  most  industries.  In  other 
network 
former  national  monopolies  are 
expanding  around  Europe:  a  Spanish  telecom  operator  is  a 
relevant  player  in  several  countries,  a  Dutch  express  mail 
operator is active in most Member States, an Italian electricity 
operator is a leading player in other Member States, etc.

industries, 

It  is  important  to  ensure  that  the  consolidation  process 
evolves  in  objective  and  fair  terms.  No  artificial  obstacles 
should be posed to the process, and no artificial advantages 
should  be  given  to  specific  players.  The  rules  on  state  aids 
should be strictly applied to avoid discrimination.

The reform of the railway industry will not be completed with 
the elimination of national monopolies. Competition has to 
rely on a clear and fair regulatory regime for legal certainty: 
Clear and fair rules on network access, rules on services of 
general economic interest and rules on state aid.

Another  question  discussed  was  whether  tendering 
PSOs  would  increase  investments  in  innovation  and 
improvement of service. While the case of Sweden was 
often presented as a positive example for this, it was also 
pointed out that those innovation activities were not 
actually the result of entrepreneurial decisions by the 
private operators but rather the reaction to direct and 
prescriptive orders by the transport authority. Here the 
discussion also touched upon the power relationship 
between operators and transport authorities. Transport 
authorities  may  use  the  tendering  requirement  as 
leverage to impose decisions on the operators.

Competition and competitive lines

The  discussion  focused  on  competitive  tendering 
and competition “for the market”. It is clear that open 
access competition (“competition in the market”) still 
remains an exception. As open access systems develop 
it emerges frequently that the “rules of the game” have 
yet to be defined for such situations.

The cost and the benefit of vertical separation

 As often before opinions were divided on the question 
of  railway  governance  and  unbundling.  With  regard 
to the different experiences made it was pointed out 
that vertical separation increases the need for external 
coordination, which increases overall costs. It became 
clear that there will be different models in the future 
and fully integrated Railway Companies will continue 
to  exist  as  well  as  fully  separated  ones.  While  it  is 
still  controversial,  the  discussion  on  this  issue  in  the 
European  policy  debate  is  about  to  come  to  an  end: 
there is political agreement on the principle of leaving 
it up to Member States to decide on the organizational 
model  for  their  railway  companies.  Closely  related 
to  this  topic  was  a  discussion  on  reciprocity:  in  its 
proposal the Commission had foreseen the possibility 
to exclude railway companies with insufficiently open 
markets in their home country from operating on other 
markets.  It  remained  open  if  and  in  what  form  this 
principle will stay in the final text. The most important 
open question concerning this is by which body and 
based on which principle this would be decided on.

The  point  was  raised  that  the  “price  to  be  paid”  for 
abandoning the aim of full vertical separation will be 
enabling fully competent and independent regulators. 
This  issue  was  discussed  in  more  detail  in  the  last 
session.

What role for regulators?

Overall,  among  the  stakeholders  present  at  the  9th 
Florence  Rail  Forum  there  was  agreement  on  the 
need for strong regulators. To operate effectively they 
need clear rules, legal certainty and sufficient funding. 
Furthermore clarification is needed on the role of the 
regulators vis-à-vis other actors. Also discussed were 
the  key  functions  of  the  national  regulators.  Going 
beyond what is already foreseen by current legislation, 
the 4th Railway Package would introduce the task of:

•  Insuring  the  independence  of  the  infrastructure 
manager and the compatibility of the appointments in 
key positions of infrastructure managers and operators;

•  Performing  the  economic  equilibrium  test  in  the 
context of the imposition of PSO services.

Regulators in the Member States are at very different 
stages  of  their  development,  and  this  element  was 
very prominent in the discussion already in the past 
Florence  Forums1  .  In  Italy  a  fairly  new  regulatory 
body  is  beginning  to  take  an  important  role  in  the 
regulation of competition of railways. This is a unique 
example  as  open  market  competition  for  high  speed 
train services does not exist in other countries in the 
EU. Here the regulator has to lay out rules for a fair 
system of capacity allocation, which can be a sensitive 
issue in particular where highly requested paths and 
times  slots  are  concerned.  A  way  to  go  about  this  is 
to increase the transparency of the capacity allocation 
process  and  the  coordination  process  in  particular. 
This  includes  disclosing  information  to  interested 
parties  about  paths  requested  by  other  applicants 
and  operational  details  on  the  allocation  procedure 
followed. 

1. 

7th  Florence  Rail  Forum  (Florence,  29th  November  2013) 
Current Challenges of Rail Regulation in Europe: The European 
Regulators‘ View 

9 ■ Discussing the 4th Railway Package: which role for markets in domestic rail passenger transport?

Rail passenger market competition in 
Britain

Chris Nash - Institute for Transport Studies University of Leeds

Britain is the country with the most experience of rail passenger 
market competition in Europe. Virtually the entire network is 
subject to competition for the market through franchising, and 
this has been the case since 1994-7 so most franchises have been 
let more than once. It also has a limited amount of competition 
in the market, both where franchises overlap and also because 
open access competition is permitted as long as the regulator 
judges it will bring significant new traffic to  the railway rather 
than simply abstracting traffic from the franchisee.

The  British  experience  is  often  claimed  to  be  a  big  success 
(ATOC,  2013)  and  indeed  passenger  traffic  has  grown  by 
more than two thirds since 1997. However, Wardman (2006) 
finds a large part of the growth to be due to external factors: 
strong economic growth over much of the period at a time of 
only slowly growing car ownership and increasing car journey 
times and cost (unlike earlier times when rapidly growing car 
ownership,  the  construction  of  the  motorway  network  and 
reducing car operating cost offset the benefits to rail of growing 
incomes).  Even  where  growth  was  due  to  improved  services 
and new rolling stock, much of this was specified for and paid 
for by the government. Nevertheless he did find a small positive 
residual effect of the introduction of franchising.  

What is less encouraging is that overall real cost per passenger 
train kilometre is 25% higher than it was in 1997, with most of 
the  increase  being  in  infrastructure  cost  but  a  small  increase 
even  in  train  operating  cost  (Smith  and  Nash,  2014).  The 
McNulty report (McNulty, 2011) found a major cause of this 
increase  to  be  a  lack  of  alignment  of  incentives  to  optimise 
infrastructure  manager  and  train 
system  cost  between 
operating companies, and advocated closer working together, 
including alliances or joint ventures between the two. The most 
extreme example of this to date is that of South West Trains, 
where an alliance involves complete sharing of staff (other than 
the most senior) and of changes of revenue and cost from that 
foreseen  at  the  time  of  the  alliance,  thus  completely  aligning 
incentives.  

But other problems have been clear. Although franchise length 
has varied, it has typically been less than 10 years, and it appears 

that  this  has  been  too  short  to  incentivise  train  operating 
companies to seek major changes in operating practices or to 
look for major innovations in rolling stock (Nash et al, 2014). 
Financial problems of franchisees have in some cases been met 
by renegotiation or – worse – putting franchises on short run 
management contracts. Many of the franchises have been too 
large,  whilst  splitting  services  on  a  particular  route  between 
operators (whether by overlapping franchises or by open access 
competition)  loses  economies  of  scope  (Wheat  and  Smith, 
2015).  Competition  between  train  operators  for  skilled  staff 
has  led  to  labour  cost  for  train  operators  rising  much  faster 
than in the economy as a whole.  

One  particular  aspect  of  franchising  in  Britain  which  is 
different from any other European country is that the process 
was  started  by  creating  25  companies  from  the  British  rail 
passenger  network;  whoever  wins  a  franchise  takes  over  this 
company, rather than assembling their own staff and assets. This 
leads to a relatively fast and trouble free handover compared 
with  other  countries  where  handovers  have  sometimes  been 
characterised by severe shortages of labour and many cancelled 
services. Doing anything else when franchising is practiced on 
such a large scale as in Britain may be problematic. But it does 
remove  the  pressure  of  a  potential  newcomer  entering  with 
lower labour costs or higher productivity.  

British  experience  seems  to  suggest  two  alternative  ways 
forward  suitable  for  different  types  of  service.  Firstly  small 
short tightly controlled gross cost franchises may be suitable, 
where there is a relevant authority able efficiently to undertake 
service  planning,  pricing,  marketing  and  procurement  and  it 
makes sense for them to do so as part of an integrated network 
for all modes.  Such contracts focus attention on meeting the 
requirements  of  the  franchising  authority  at  minimum  cost. 
The  sole  (to  date)  example  of  this  in  Britain  is  the  London 
Overground – a 6 year franchise. The second is medium sized 
long franchises with a lot more freedom to invest and to develop 
services themselves. Chiltern, with a 20 year franchise is a good 
example of this. What is clear is that franchising involves a lot 
of choices for the franchising authority and getting these wrong 
can seriously damage the outcome of the process.   

10 ■  FSR Transport ■ Issue 2014/08 ■ December 2014

References

ATOC (2013) Growth and Prosperity: How franchising helped 
transform  the  railway  into  a  British  success  story.  ATOC, 
London. 

McNulty,  Sir  R  (2011)  Realising  the  potential  of  GB  Rail: 
final  independent  report  of  the  Rail  Value  for  Money  study. 
Department  for  Transport  and  Office  of  Rail  Regulation, 
London.

Andrew  Smith  and  Chris  Nash  (2014)  Rail  Efficiency:  cost 
research  and  its  implications  for  policy.  Forthcoming  ITF 
Discussion Paper.

Chris Nash, Andrew Smith, Roger Goodall, Nicole Kudla and 
Rico  Merkert  (2014)  Economic  Incentives  for  Innovation: 
A  comparative  study  of  the  Rail  and  Aviation  Industries 
(Feasibility Study): Final report. University of Leeds

Wardman, M. (2006): ‘Demand for rail travel and the effects of 
external factors’, Transportation Research, 42(3), 129–48.

Wheat,  P.E.  and  Smith,  A.S.J.  (2015),  Do  the  usual  results  of 
railway  economies  of  scale  and  density  hold  in  the  case  of 
heterogeneity  in  outputs:  A  hedonic  cost  function  approach, 
Journal of Transport Economics and Policy. 49(1) 35-57.

Adequate financing of regulators needs to be ensured. 
The  risk  was  mentioned  that  ever  more  tasks  are 
conferred upon regulators which can however not be 
carried out sufficiently due to a lack of resources.

In  the  discussion  there  were  also  some  challenging 
opinions on the future role of regulators and transport 
authorities. Many of the tasks carried out by regulators 
important 
or  transport  authorities  touch  upon 
entrepreneurial  decisions  of  the  railway  companies. 
Furthermore  according  to  some  the  experience  in 
Britain  leads  to  no  other  conclusion  as  that  efficient 
coordination in an unbundled system is not possible 
without  extensive  coordination  by  the  state  level. 
This  leads  to  a  paradox  that,  what  was  meant  as  a 
program  to  restrict  the  role  of  the  state  and  unleash 
the productive energy of private operators might lead 
to (or necessitate) an even bigger state bureaucracy to 
counterbalance the undesired effects.

11 ■ Discussing the 4th Railway Package: which role for markets in domestic rail passenger transport?

Further readings

Florence School of Regulation Transport Area, 2014, 9th European Rail 
Transport  Regulation  Summary:  Discussing  the  4th  Railway  Package: 
which role for markets in domestic rail passenger transport?

This document summarises the content of the presentations delivered 
during the 9th Florence Rail Forum, offering short summaries of each 
presentation, and illustrating the main points made and matters treated.

Presentations  were  delivered  by  representatives  of  different  types  of 
stakeholders, who reacted to the same initial questions that have been 
addressed in the present Observer:

• The Fourth Railway Package under negotiation – where do we stand?

• Liberalisation of national passenger markets – which way forward for 
competitive lines and PSO?

• Tendering of PSOs: what are the remaining challenges?

• Which role for national regulators and competent transport authorities?

McNulty, Roy, 2011, Realising the Potential of GB Rail: Report of the 
Rail Value for Money Study

The Value for Money Study was commissioned jointly by the Department 
for Transport and the Office of Rail Regulation. According to the Report, 
lessons  should  be  learnt  from  history.  Therefore,  on  the  basis  of  the 
British experience and with the scope to address the British authorities, 
a  wide  range  of  recommendations  focused  on  creating  an  industry 
environment which encourages cost reduction, changes which deliver 
new  efficiencies,  and  mechanisms  to  drive  implementation  are  put 
forward. The Study estimates that implementing these recommendations 
could deliver savings between £700 million and £1 billion annually by 
2019.

van de Velde, D., C. Nash, A. Smith, F. Mizutani, S. Uranishi, M. Lijesen 
and  F.  Zschoche  (2012)  “EVES‐Rail  –  Economic  effects  of  Vertical 
Separation in the railway sector”

The goal of this study is to assess the potential impact of various forms 
of partial or total vertical separation in the rail sector in the European 
context. A main policy question is whether a limitation in the choice 
between structural railway regimes is recommendable or not. Existing 
economic studies draw mixed conclusions about the impacts of various 
reforms  –  hence  the  need  for  a  thorough  assessment  of  key  impacts 

12 ■  FSR Transport ■ Issue 2014/08 ■ December 2014

and mechanisms in order to guide policy‐makers ahead of discussions 
pertaining to the Fourth Railway Package.

Montero, Juan J., 2014, Rail Transport: A Balance Sheet, EUI Working 
Paper RSCAS 2014/115

The  creation  of  a  single  European  railway  area  is  the  overall  policy 
objective  of  the  European  Union  for  the  railway  industry.  Rail 
infrastructure  management  is  seen  as  a  natural  monopoly  to  be 
operated  at  a  national  scale.  Competition  is  possible  downstream  in 
the  provision  of  rail  transport  services.  A  European-wide  market  of 
rail  transport  services  would  benefit  from  larger  economies  of  scale, 
and  competition  would  ensure  such  efficiencies  are  passed  down  to 
European citizens and businesses. However, the reform process has been 
set back by Member States that disagree with the full vertical separation 
of infrastructure management and transport service provision, as well 
as  by  Member  States  that  want  to  delay  the  full  liberalization  of  the 
industry. As a consequence, inconsistent national models are emerging 
and non-sustainable asymmetries between Member States are creating 
tensions. The Fourth Railway Package is the opportunity to conclude the 
European railway reform process, both for commercial services and for 
public contract services. Imaginative solutions are necessary to reach a 
workable consensus.

Knieps,  Günter,  2012,  Competition  and  the  railroads:  A  European 
perspective,  Discussion  Paper,  Institut  für  Verkehrswissenschaft  und 
Regionalpolitik, No. 142 

The reform of European railroads is a time-consuming process strongly 
characterized  by  its  path-dependency.  In  this  paper,  Prof  Knieps  firstly 
provides with a short outline of the historical roots of the controversial 
debates  on  the  role  of  the  state  and  the  markets,  focusing  also  on  the 
organization  of  competition  in  European  railroad  industries.  Secondly, 
he  presents  the  opening  of  the  market  for  train  services  in  the  context 
of the liberalisation of European transport markets since 1985. Thirdly, 
he analyses the evolution of track access regulation in Europe during the 
last decades, differentiating between the period of negotiated third party 
access since 1991, the introduction of ex ante regulation by the first railroad 
infrastructure package in 2001, and the danger of overregulation posed by 
the  Draft  Directive  of  July  2012  establishing  a  single  European  railway 
area. Fourthly, the role of competition on the markets for rail services and 
the reform process of interoperability requirements are considered. The 
paper concludes with an evaluation of competition on the markets for rail 
services and public subsidies for rail infrastructures as well as subsidies 
for train services.

13 ■ Discussing the 4th Railway Package: which role for markets in domestic rail passenger transport?

QM-AU-14-005-EN-N
ISSN: 2467-0405

Florence School of Regulation,
Transport Area 

European University Institute
Convento di San Domenico, 
Via delle Fontanelle 19
San Domenico di Fiesole (FI)
50014 · Italy

Contact FSR-Transport:
 fsr.transport@eui.eu

FSR-Transport 

The Florence School of Regulation (FSR) is a project within the European University Institute (EUI) focusing 
on regulatory topics. It works closely with the European Commission, and is a growing point of reference for 
regulatory theory and practice. It covers four areas: Communications and Media, Energy (Electricity and Gas), 
Transport and Water.

The FSR-Transport Area’s main activities are the Florence Transport Forums, which address policy and regulatory 
topics in different transport sectors (Rail, Air, Urban, Maritime, Intermodal transport and Postal and delivery 
services).  They  bring  relevant  stakeholders  together  to  analyse  and  reflect  upon  the  latest  developments  and 
important regulatory issues in the European transport sector. These Forums inspire the comments gathered in 
this European Transport Regulation Observer.

Complete information on our activities can be found online at:  fsr.eui.eu

Content © Authors, 2014© European University Institute, 2014