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Liberalization of the Railway sector for the year 2020

Liberalization of the Railway Passenger Sector for the year 2020 Effects and Consequences

The Group

Alessio Gaggelli (IT)

Andreas Wisler (SWTZ)

Ewa Olszewska (PL)

José Pedro Castello Branco (PT)

Maarten Gutt (PL)

September 2008

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Introduction

Liberalisation of the passenger railway sector is one of the goals of the 3rd railway package. However, some questions remain: will that be possible? Does the context of the sector in the various European countries make this goal viable? And if so, what kind of liberalisation are we talking about?

This last question was one the first obstacles that we faced when defining the boundaries of our paper. Liberalisation can be viewed upon as thorough, meaning to fully deliver the railway passenger traffic to the private sector without any and all help or subsidies from the State. Or it we can look at it as a mixed solution. One where some services could be (and probable this is the operative word – more on that later) liberalised and others couldn’t.

We concluded that for a better development of this paper we should make some assumptions. These assumptions are related to the type of railway service and they help to ascertain what we think will be the short and medium term developments of this liberalisation. So, if we are talking about urban and regional services, we assumed that there will be public tenders to be carried out, tenders that will obligate the State to provide for some kind of subsidies in exchange for demands in terms of quality of service, type of service, frequency, etc. However, if we are talking about long distance (either being Inter-City, Inter-Region or International) those services will be opened to the market and not receive any kind of subsidies.

So, in short, we are talking about public services that can be carried out by the private sector with the financial help of the various governments and other services with prices, frequency and intensity to be decided by the market without any subsidies from the state.

Therefore, our paper will be divided into two parts:

1. A description of the state of the railway sector in general and liberalization in particular in Europe, followed by the situation that currently exists in each country represented by the group members, namely, Poland, Italy, Switzerland and Portugal;

2. Analysis of the probable consequences of the liberalisation as proposed by our assumptions;

Before we delve into the first part of our paper, let us briefly describe the 3rd railway package.

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THE CONTENT OF THE 3RD RAILWAY PACKAGE

Directive 2007/58/EC amending Council Directive 91/440/EEC on the development of the Community’s railways and Directive 2001/14/EC on the allocation of railway infrastructure capacity and levying of charges for the use of railway infrastructure – Directive on Passenger Liberalization

The aim of this directive is to address the opening of the market for international passenger services within the Community. Therefore it should not concern services between a Member State and third party and additionally Member States should be able to exclude from the scope of this directive services transiting the Community.

The Directive sets out the date for opening up the market for international passenger services on 1st January 2010.

Opening up the international passenger services, which include the right to pick up passengers at any station located on the route of an international service and to set them down in another, including stations located in the same Member State (cabotage) for competition may disrupt organization and financing of rail passenger services provided under a public service contract.

Therefore Member States should have the possibility to limit the right of access to the market where this right would compromise the economic equilibrium of these public service contracts. They might authorize, modify or deny the right of access for the international passenger service sought, including the levying of a charge on the operator of a new international passenger service, in line with the economic analysis and in accordance with Community law and the principles of equality and non- discrimination.

The levy is intended to compensate the authority for public service obligations laid down in public service contracts awarded in conformity with Community law.

Regulation (EC) No 1371/2007 on rail passengers’ rights and obligations

In the framework of the common transport policy, it is important to safeguard users' rights for rail passengers and to improve the quality and effectiveness of rail passenger services in order to help increase the share of rail transport in relation to other modes of transport.

The Commission's communication "Consumer Policy Strategy 2002-2006" sets the aim of achieving a high level of consumer protection in the field of transport in accordance with Article 153(2) of the Treaty.

Strengthening of the rights of rail passengers should be build on the existing system of international law on this subject contained in Appendix A – Uniform rules concerning the Contract for International Carriage of Passengers and Luggage by Rail (CIV) to the Convention concerning International Carriage by Rail (COTIF) of 9 May 1980, as modified by the Protocol for the modification of the Convention concerning International Carriage by Rail of 3 June 1999 (1999 Protocol). However, it is desirable to extend the scope of this Regulation and protect not only international passengers but domestic passengers too.

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Directive 2007/59/EC on the certification of train drivers operating locomotives and trains on the railway system in the Community

The aim of these common provisions should be above all to make it easier for train drivers to move from one Member State to another, but also to make it easier for them to move from one railway undertaking to another, and generally for licences and harmonised complementary certificates to be recognised by all railway sector stakeholders. To this end, it is essential that the provisions establish minimum requirements which applicants should meet to obtain a licence or harmonised complementary certificate.

In order to increase the freedom of movement of workers and the safety on the Community Railways, special attention should be paid to other crew members performing safety-critical tasks on locomotives and trains. Therefore Member States should ensure that other crew members performing safety-critical tasks meet the minimum requirements set out in the TSI on operation and traffic management.

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1 – Liberalization in Europe

Competition

The various European countries have different forms of competition in the passenger railway sector:

1. There are countries where the market of passenger traffic is fully liberalised, therefore existing various competitors (ex: UK; Denmark);

2. There are countries where even though the sector is liberalised, the main operator is still 100% state owned and there also exist small private operators who operate in specific lines (ex: Germany; Austria; Netherlands)

3. There are countries where the market is not yet liberalised, therefore the majority of the passenger railway services and/or lines are state-owned, but there exist some small lines that are owned by the private sector (ex: Portugal, with CP being the main operator and FERTAGUS managing a small suburban line; Sweden with SJ being 100% state owned and co-existing with some small private operators; Italy);

4. There are countries where the vast majority of services are operated by state owned companies, except for small local or regional undertakings where the state owned enterprise sub-contracts the service to a private company (ex: France; Norway);

5. There are countries where there only exists one operator, fully state-owned (Greece, Belgium, Finland, Luxembourg, Spain and Ireland).

As can be seen, there are different realities in terms of competition in the passenger railway sector. However, it should also be pointed out that there is one thing that is common to the most part of these countries, even in those where the sector is liberalised: there is always some form of public service. The State tenders with the operator the level of service (frequency, train lines to be operated on, schedules, tariffs, quality of service, etc) that feels is better suited to the area in question. Therefore, the concept of public service, even in a liberalised passenger sector, is something that is not forgotten and has to be provided. In most countries this embarks the majority of services and passengers.

Passenger railway services, either being urban, regional or even long distance in some countries, are part of one of the most important civil rights, the right to transportation at an affordable price.

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Possible Corporate Strategies for railway undertakers (RUs) in a liberalised market

Theory: Generic Strategies - Michael Porter (1980)

Generic strategies were used initially in the early 1980s, and seem to be even more popular today. They outline the three main strategic options open to organization that wish to achieve a sustainable competitive advantage. Each of the three options are considered within the context of two aspects of the competitive environment: Sources of competitive advantage - are the products differentiated in any way, or are they the lowest cost producer in an industry? Competitive scope of the market - does the company target a wide market, or does it focus on a very narrow, niche market?

The generic strategies are: 1. Cost leadership, 2. Differentiation, and 3. Focus.

1. Cost Leadership.

The low cost leader in any market gains competitive advantage from being able to many to produce at the lowest cost. Factories are built and maintained, labour is recruited and trained to deliver the lowest possible costs of production. 'cost advantage' is the focus. Costs are shaved off every element of the value chain. Products tend to be 'no frills.' However, low cost does not always lead to low price. Producers could price at competitive parity, exploiting the benefits of a bigger margin than competitors. Some organizations, such as Toyota, are very good not only at producing high quality autos at a low price, but have the brand and marketing skills to use a premium pricing policy.

2. Differentiation

Differentiated goods and services satisfy the needs of customers through a sustainable competitive advantage. This allows companies to desensitize prices and focus on value that generates a comparatively higher price and a better margin. The benefits of differentiation require producers to segment markets in order to target goods and services at specific segments, generating a higher than average price. For example, British Airways differentiates its service.

The differentiating organization will incur additional costs in creating their competitive advantage. These costs must be offset by the increase in revenue generated by sales. Costs must be recovered. There is also the chance that any

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differentiation could be copied by competitors. Therefore there is always an incentive to innovated and continuously improve.

3. Focus or Niche strategy.

The focus strategy is also known as a 'niche' strategy. Where an organization can afford neither a wide scope cost leadership nor a wide scope differentiation strategy, a niche strategy could be more suitable. Here an organization focuses effort and resources on a narrow, defined segment of a market. Competitive advantage is generated specifically for the niche. A niche strategy is often used by smaller firms. A company could use either a cost focus or a differentiation focus.

With a cost focus a firm aims at being the lowest cost producer in that niche or segment. With a differentiation focus a firm creates competitive advantage through differentiation within the niche or segment. There are potentially problems with the niche approach. Small, specialist niches could disappear in the long term. Cost focus is unachievable with an industry depending upon economies of scale e.g. telecommunications.

Source: http://www.marketingteacher.com/Lessons/lesson_generic_strategies.htm

Application on a liberalized passenger railway market

In our opinion, all three of these generic strategies can be applied in a liberalized passenger railway market. In a liberalized market, different competitors – in this case railway undertakers (RU) - will try to achieve their goals by strategies, which depend on their evaluation of the market.

1. Cost Leadership.

• To aim for cost leadership could be a strategy for rather big RUs, which hope to take advantage of scale effects and synergies. Also standardized rolling stock and processes could help to reduce acquisition- and maintenance-costs.

• Another way to achieve cost leadership could be in offering special low-budget services – as seen in the liberalised airline market (e.g. easyJet).

2. Differentiation

• RUs which try to different from others could try to establish a very high quality of their services. For example in using new and well equipped rolling stock, with a lot of space per passenger and good on board-services (Catering, electronic entertainment and information systems, Internet-Access, movies and news-channels, Newspapers and so on)

• Another way of differentiation could be a certain service level for the transportation service: guaranteed regular, fast and reliable connections.

3. Focus or Niche strategy.

• Niche strategies could be useful for rather small and specialized RUs. They could for example organise charter-trains for business-events or travel-agencies.

• Organized trips with historical rolling stock could be another niche for specialized RUs.

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Effects of liberalisation on marketing of railway undertakers

At present, marketing activities are mainly concentrated to inter-mobility transport system and developing the market with the goal to gain modal shift.

We assume that in the future, marketing activities will also focus on intra-mobility transport system (because of newcomers).

Depending on the degree of liberalisation, the RUs will have more or less freedom in their marketing decisions. As an example, we try to show, which could be the probable effects on the 7 so called P’s of the “Extended Marketing Mix”.

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Theory: Marketing–Mix

Services Marketing and the Extended Marketing Mix (7P's).

What is services marketing?

A service is the action of doing something for someone or something. It is largely intangible (i.e. not material). A product is tangible (i.e. material) since you can touch it and own it. A service tends to be an experience that is consumed at the point where it is purchased, and cannot be owned since is quickly perishes. A person could go to a café one day and have excellent service, and then return the next day and have a poor experience. So often marketers talk about the nature of a service as:

Inseparable - from the point where it is consumed, and from the provider of the service. For example, you cannot take a live theatre performance home to consume it (a DVD of the same performance would be a product, not a service).

Intangible - and cannot have a real, physical presence as does a product. For example, motor insurance may have a certificate, but the financial service itself cannot be touched i.e. it is intangible.

Perishable - in that once it has occurred it cannot be repeated in exactly the same way. For example, once a 100 metres Olympic final has been run, there will be not other for 4 more years, and even then it will be staged in a different place with many different finalists.

Variability- since the human involvement of service provision means that no two services will be completely identical. For example, returning to the same garage time and time again for a service on your car might see different levels of customer satisfaction, or speediness of work.

Right of ownership - is not taken to the service, since you merely experience it. For example, an engineer may service your air-conditioning, but you do not own the service, the engineer or his equipment. You cannot sell it on once it has been consumed, and do not take ownership of it.

What is the marketing mix?

The marketing mix is probably the most famous marketing term. Its elements are the basic, tactical components of a marketing plan. Also known as the Four P's, the marketing mix elements are price, place, product, and promotion.

Western economies have seen deterioration in their traditional manufacturing industries, and a growth in their service economies. Therefore the marketing mix has seen an extension and adaptation into the extended marketing mix for services, also known as the 7P's: physical evidence, process and people.

Source: http://www.marketingteacher.com/Lessons/lesson_services_marketing.htm

Application on a liberalized passenger railway market

1. Product The Product of a railway undertaker is in fact a service – to transport people from one point to the other by trains.

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http://www.marketingteacher.com/Lessons/lesson_pricing.htm

http://www.marketingteacher.com/Lessons/lesson_place.htm

http://www.marketingteacher.com/Lessons/lesson_place.htm

http://www.marketingteacher.com/Lessons/lesson_plc.htm

http://www.marketingteacher.com/Lessons/lesson_promotion.htm

http://www.marketingteacher.com/Lessons/lesson_marketing_mix.htm

http://www.marketingteacher.com/Lessons/lesson_physical_evidence.htm

http://www.marketingteacher.com/Lessons/lesson_process.htm

http://www.marketingteacher.com/Lessons/lesson_people.htm


Even in a fully liberalised railway market, the railway undertakers will be dependent of the existing or future railway infrastructure (as stations and tracks).

So the development of the product is not only a question of strategies and costs, but also depending on the requirements (gauge, safety equipment of the rolling stock, communication means and so on) and the availability of the railway network (especially train paths).

At first sight, the core service - the transportation of people from point to point by trains – is the same, regardless the company which carries it out. But there are many possible ways to make different the own service from the one of the competitors:

A RU can concentrate on direct connections between centres with a minimum of intermediate stops to offer the fastest possible travel. Others could try to establish a dense network with good connections between different lines to meet the needs of a big mass of people.

Another way to different from other RU are additional services, e.g. business areas with fast internet access, catering, luggage service and so on.

2. Price There are many ways to price a product. For railway undertakers in a liberalised market, we assume, that the following pricing strategies could be applied, depending on their general strategy and their position in the market:

Premium Pricing Use a high price where there is uniqueness about the product or service. This approach is used where a substantial competitive advantage exists. Such high prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights. (Source: http://www.marketingteacher.com/Lessons/lesson_pricing.htm)

This pricing strategy could be applied by RUs, which try to differentiate from others by a very high quality level or RUs, which have a kind of monopole.

Penetration Pricing. The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom and Sky TV. (Source: http://www.marketingteacher.com/Lessons/lesson_pricing.htm)

We assume that especially in the beginning of the liberalisation new competitors will try to break into existing markets in other countries. In that case some of them will surely apply penetration prices to quickly gain market share.

Economy Pricing. This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc. (Source: http://www.marketingteacher.com/Lessons/lesson_pricing.htm)

As already common in the airline business, also in a liberalised railway market, low-cost carriers are thinkable.

Price Skimming. Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced

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at a lower unit cost, other marketing strategies and pricing approaches are implemented. (Source: http://www.marketingteacher.com/Lessons/lesson_pricing.htm)

Id could happen, that well established RUs hold on to high prices with the objective of gaining as much as possible during the time other competitors need to get into the market.

3. Place (distribution, channel, or intermediary)

A channel of distribution comprises a set of institutions which perform all of the activities utilised to move a product and its title from production to consumption. Source: Bucklin - Theory of Distribution Channel Structure (1966)

As we are looking at a service, there is no physical good which has to be transported, stored and delivered. So it doesn’t need a big infrastructure to sell it.

A new RU in the liberalized railway passenger market could build its own distribution channels or could work with lokal agents (e.g. travel offices, shops and so on).

With the possibilities given by the internet, a RU could even decide to only sell its products online.

4. Promotion We assume that until now, promotion of RUs concentrated mainly on to inter-mobility transport system and developing the market with the goal to gain modal shift. In the future, promotion will also focus on intra-mobility transport system (because of newcomers).

The following promotion elements could be chosen by RUs in a liberalised railway passenger market

Personal Selling. Personal Selling is an effective way to manage personal customer relationships. The sales person acts on behalf of the organization. They tend to be well trained in the approaches and techniques of personal selling. However sales people are very expensive and should only be used where there is a genuine return on investment. For example salesmen are often used to sell cars or home improvements where the margin is high. (Source: http://www.marketingteacher.com/Lessons/lesson_promotion.htm)

If a RU chooses personal selling as a form of promotion depends mainly on how it wants to position itself: A RU which wants to different from others by quality will more likely try to have well trained sales personal which guarantee a good quality in consulting its customers. A RU which tries to different by low prices will probably even not have sales personal.

Sales Promotion. Sales promotion tends to be thought of as being all promotions apart from advertising, personal selling, and public relations. For example the BOGOF promotion, or Buy One Get One Free. Others include couponing, money-off promotions, competitions, free accessories (such as free blades with a new razor), introductory offers (such as buy digital TV and get free installation), and so on. Each sales promotion should be carefully costed and compared with the next best alternative. (Source: http://www.marketingteacher.com/Lessons/lesson_promotion.htm)

As competition gets stronger, the different RUs will surely try to attract customers by different measures. Sales promotion could be an important way to do so.

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Public Relations (PR). Public Relations are defined as 'the deliberate, planned and sustained effort to establish and maintain mutual understanding between an organization and its publics' (Institute of Public Relations). It is relatively cheap, but certainly not cheap. Successful strategies tend to be long-term and plan for all eventualities. All airlines exploit PR; just watch what happens when there is a disaster. The pre-planned PR machine clicks in very quickly with a very effective rehearsed plan. (Source: http://www.marketingteacher.com/Lessons/lesson_promotion.htm)

Public relations is an important element in the promotion mix of every company. As competition gets stronger, it will be more and more important, which general image a RU has in the public. So we assume that in a liberalised railway passenger market PR will have an important place in the promotion of every RU.

Advertising. Advertising is a 'paid for' communication. It is used to develop attitudes, create awareness, and transmit information in order to gain a response from the target market. There are many advertising 'media' such as newspapers (local, national, free, trade), magazines and journals, television (local, national, terrestrial, satellite) cinema, outdoor advertising (such as posters, bus sides). (Source: http://www.marketingteacher.com/Lessons/lesson_promotion.htm)

We assume, that advertising of RUs in a liberalised railway passenger market will change from the actual focus on the own products and services to focus also the competitors activities.

5. Physical evidence

Physical evidence is the material part of a service. Strictly speaking there are no physical attributes to a service, so a consumer tends to rely on material cues. There are many examples of physical evidence, including some of the following: Packaging, Internet/web pages, paperwork (such as invoices, tickets and despatch notes), brochures, furnishings, signage (such as those on aircraft and vehicles), uniforms, business cards. (Source: www.marketingteacher.com/Lessons/lesson_physical_evidence.htm)

Physical evidence will surely be an important measure for an RU in a liberalised railway passenger market to get their clear and distinctive appearance. A lot of measures are already usual (as signage on the trains, uniforms, brochures and so on) and will be extended as competition grows.

6. Process

For the purposes of the marketing mix, process is an element of service that sees the customer experiencing an organisation's offering. It's best viewed as something that your customer participates in at different points in time. (Source: www.marketingteacher.com/Lessons/lesson_process.htm)

As competition grows, it will be essential for an RU to constantly improve processes with the purpose to deliver a maximum of service at a minimum of costs. To manage all the customer relevant processes could make the important difference to the competitors.

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7. People

People are the most important element of any service or experience. Services tend to be produced and consumed at the same moment, and aspects of the customer experience are altered to meet the 'individual needs' of the person consuming it. Most of us can think of a situation where the personal service offered by individuals has made or tainted a tour, vacation or restaurant meal. Remember, people buy from people that they like, so the attitude, skills and appearance of all staff need to be first class. (Source: www.marketingteacher.com/Lessons/lesson_people.htm)

In a liberalised railway passenger market it will be important for RUs to differentiate from their competitors. So it will be very important, to have well trained and customer focused employees which can improve customer satisfaction with the RUs services.

Technologies to support liberalization

The state of the art

As seen in the previous sections, the liberalization process needs at least of two main ingredients: one is a clear and fair legal framework and the other is a common willingness among countries to achieve this goal. While the former is becoming more and more enhanced – also through the 3rd Railway Package –, the latter need to be more developed since several differences still remain among European countries.

Herein we should add a third component: the industrial and technological standardization. Because practical and easy implementation of a transport liberalization process – mainly the international one, but later on we will prove this is valid also for the national one – requires also abatement of technological barriers.

European Community has already acquired this concept and it has been developing and issuing specific requirements – the so called Technical Specification for Interoperability (TSI) – for the building of trans-European high speed rail system and overcome the issue on technological standardization. For each of the six main subsystems in the railway framework – i.e. maintenance, control-command & signalling, infrastructure, energy, rolling stock, exploitation – TSI define the technological layer on which they have to be developed in order to obtain interoperability and, hence, liberalization.

For sake of simplicity, among all technological differences between European countries, just the majors will be mentioned in this section, as:

track gauge;

power supply system;

safety & signalling system.

Track gauge Due to historical and political reasons, nowadays different gauges existing between some countries, mainly between the European eastern and western countries with respect to the central ones. Some trials have been done in the past in order to smooth this issue by means of special rolling stock but results, even if they deserve consideration, did not revealed themselves to be easily deployed. Therefore, this is

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the most important technological barrier which can only be overcome with rolling stock changing at the boundary of the different gauge rail networks.

Power supply system Despite gauge issue, all the remaining technological barriers have been surmounting during recent years. Concerning power supply voltage, no more difficulties exist. Most of modern locomotives and traction system of trainsets are able to work with a.c. – e.g. 15 kV-16 2/3 Hz, 25 kV-50 Hz – and d.c. – e.g. 1.5 kV, 3 kV – power supply voltages switching between them promptly at rail network boundaries.

Thus, such kind of rolling stock can cross countries edges avoiding substitution – when possible – of traction units before passing from one to another.

The proof of benefits is trivial: reduced journey-time, better service for passengers, interoperability facilitation and, once more, ease liberalization.

Safety & signalling system This item can be considered the most important because it is related to the main distinguishing point of railway transport, that is safety.

Each rail network/country has been developed its own signalling system and in some cases sharing common technology with others. However, also in these latter cases there are enough distinctions to make similar systems incompatible.

Harmonization of signalling system has been the more arduous and tough demand during the building of interoperability process. The answer has been the European Rail Traffic Management System (ERTMS) constituted by the European Train Control System (ETCS) & Global System for Mobile communication-Railway (GSM-R); it represents a new technology platform to develop interoperability among European countries.

For instance, a rolling stock equipped with a multi-voltage traction system and ERTMS can cross Europe from Naples – where ERTMS have started its commercial service on 2005 – to Amsterdam just changing drivers for working-time reasons!

It worth mentioning that there are still dissimilarities in the interpretation of ERTMS requirements by manufacturers – e.g. Man-Machine Interfaces (MMI) are different – which, at present, do not allow a straightforward interoperability.

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The countries

Portugal

The Portuguese railway is about 2,601 Km long, 55% of which is electrified. The majority of the network has iberic gauge (77%).

As can be seen on the map below the railway main network develops along the Atlantic coast where the majority of the Portuguese population is located. There are some “tentacles” that sprout from this main “spine” which service the inner regions of the Portuguese mainland. There are also some lines located on the Lisbon Metropolitan Area, which mainly service suburban trains, as can be seen in the main bubble in the same map.

Portugal has two operators, one 100% state-owned, CP, and one from the private sector, FERTAGUS. This private company operates in a small line that services suburban railway passenger traffic between the north and south margins of the river Tagus, located in the Lisbon Metropolitan Area. FERTAGUS provides public service and has a tender with the government.

CP is the historic operator (150 years old) and provides railway services in suburban, inter-city, inter-regional, regional and freight. It is 100% state owned and even though has administrative autonomy, it still has to report to the Ministry of Transport and the Government for every major decision in terms of investments and operation. It is obligated to provide public service for the vast majority of its passengers, namely, suburban and Regional up to 50 Km. CP hasn’t any form of tender with the government. It’s public service obligations are not yet contractually defined.

Since 1998 Portugal is slowly implementing changes in the railway sector. It started with the separation between the operator and the infrastructure manager (REFER). The freight operator of CP has already been formed into a separate and autonomous entity in order to enter the liberalisation of the railway freight sector.

It is the intention of the Portuguese government to start implementing some directives of the 3rd railway package, namely the liberalisation of international traffic. However, contrary to some more central European countries, the international railway traffic is almost non-existent, mainly due to its out-of-date infrastructure and

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trains. However, the Portuguese government has already started to implement its High-Speed project by tendering the construction of the line between Lisbon and Madrid. It is however still unclear which will be the nature of the future High-Speed operator. CP has already positioned itself to become a contender in the tender but it is still too soon for any further developments.

.

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The Liberalization In Portugal

Has as already been said there already exists two operators in Portugal, one State-Owned and one private operator.

The future will be strongly dependent on the State position towards the railway sector and, more specifically, to the needs of Public service, mainly in the metropolitan areas of Lisbon and Porto and also on some Regional services. These positions are either non-existent or very embryonic in order to be considered as a viable source of analysis.

However, the State, not only for railways, but also for other state-owned transport companies (road; river; etc), is debating what can be done to the huge debt that these same companies have amassed in the last 3 decades. And maybe this will spell out the solution that will be thought and that will lead Portugal towards liberalization, not only of the railway sector but also for other public transports.

And this should resolve one part of the problem. The other part, and considering our assumption, will be what kind of public service can be tenderized and what amount of money will be issued by the State in order for it to be performed by the private sector. And if tenderized what prices will be practiced. FERTAGUS has prices bigger than CP’s for the same type and quality of service.

These are questions that every other Government has put behind its back but these are problems that have to be resolved in the short term.

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Switzerland

The Swiss public transport system

Source: www.sbb.ch

The Swiss public transport system has a good reputation, and for good reason:

• It is environmentally friendly, safe and affordable.

• It covers the whole of the country.

• Through-tickets and customer-oriented products such as national rail passes and half-fare cards guarantee easy access and a high level of comfort.

• The integrated timetable guarantees an uninterrupted flow of transport with all modes (buses, tramways, trains, ships).

• New stops, new lines and denser timetables: this is how the public transport system meets its customers’ ever increasing demands for mobility.

• The diversity of Swiss public transport for tourists is a big plus for Switzerland as a traditional holiday destination.

• With a strong increase in productivity in recent years the public authorities can benefit from more and more services for every franc invested.

• Public transport has an important added-value effect for the country, which enables it to generate employment, directly and indirectly.

• The volume of freight transport carried across the Alps by rail has again increased. Its share of 65% lies well above the proportion of rail freight traffic in neighbouring countries (France and Austria).

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Source: http://www.voev.ch/Facts_on_Swiss_public_transport_and_arguments_in_favour.html

Public subsidies

For about 10 years the Swiss Confederation, the cantons and the municipalities have granted between CHF 4 and 5 billion of public funds annually to public transport companies (not taking into account the funds given for major rail projects). The Swiss Confederation and the municipalities have been decreasing their contribution, whereas the cantons have increased theirs. The Confederation’s share is about two-thirds, which represented CHF 3.2 billion in 2004 (out of 4.9 billion).

By comparison the public transport sector’s performance has increased from 2.0 to 2.5% annually in the last 10 years. Freight traffic has increased almost twice as much as passenger traffic. The 2004 figures do not include the rise in demand linked with the introduction of Rail 2000. If we combine passenger and tonne-km, performance between 1994 and 2000 increased by about 27% from 24.6 to 31.2 billion passenger/tonne-km. If we compare the public funds invested in public transport with performance, we can observe a distinct decrease of public expenses. Thus in 1996 the combined cost of a tonne/passenger- km cost the tax payer 18.7 cents, which went down to 15.9 cents in 2004.

The level of self-funding of public transport is 50%. This sector finances half of its costs through income obtained from the sale of tickets, while the other 50% comes from public subsidies.

Source: FSO, FFD, SAPT – cited on: http://www.voev.ch/Public_subsidies.html

Source: FSO, FFD, SAPT – cited on: http://www.voev.ch/Public_subsidies.html

Liberalisation of the market in Switzerland

The 1996 revision of the Railway Act introduced the principle of “commissioning”, spelling the end of retro-active covering of deficits. Instead the Confederation and cantons commission transport companies to provide public transport services at a

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price that is agreed in advance. Moreover, they began to tender bus services too, the immediate effect of which was the introduction of competition. This revision was followed in 1999 by the first Railway Reform act, which gave freight traffic free access to the network, as agreed between Switzerland and the European Union (Agreement on Inland Transport). Also included in this act were three important modifications concerning the SBB: the company became a joint stock company with a special legal status, was divided up into divisions, and had its debts liquidated.

Free access to the network has resulted in changes to the international freight transport scene. Foreign companies – three so far – are carrying freight on the Gotthard and the Lötschberg-Simplon routes. Moreover, the SBB and BLS have not only established links with foreign partners, but have themselves become active in Germany and Italy.

The second Railway Reform currently underway covers public transport as a whole. The two core elements of the new proposal are a new method of financing rail infrastructure and discrimination-free treatment of all transport companies.

An investigation into the progress of rail liberalisation in the year 2004shows that Switzerland is doing well, occupying seventh place out of 25 countries. Our Austrian and French neighbours are only in the middle group thanks to delays. In the COM index, which includes speed of introduction of new measures, Switzerland is in fourth place.

Source: http://www.voev.ch/Liberalisation_of_the_market.html

3rd railway package in Switzerland?

As Switzerland is not a member of the European Union, it’s not obliged to follow the EU-Regulations. The so called comité-mixte, who negotiates between European Union and Switzerland about the acceptance of EU-regulations in Switzerland, hasn’t yet negotiated about the implementation of the 3rd railway package in Switzerland.

So at the moment it hasn’t yet been decided, whether or not and when the 3rd railway package will be applied in Switzerland. If it will, it’s probable, that the regulators allow some of the possible exceptions regarding “cabotage” (transporting domestic passengers on international services between stations in the same Member State): • Limitation of cabotage if the profitability of public services on the same line are

endangered • levying of a charge on the operator of a new international passenger service in

favour of a public services on the same line

Poland In order to evaluate the liberalization of the Polish railway market, information and opinions from different Polish stakeholders have been gathered. These stakeholders include PKP Group, a private operator, UTK, the Ministry of Transport and the European Commission, departments of Transport and Energy and Enlargement.

PKP was mainly responsible for the restructuring of the labor base, which took a lot of training investments, adding further to their debt. Unprofitable lines are not closed down due to influence from local authorities, parliament, trade unions and the Ministry of Transport.

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Future restructuring of PKP is already being planned. PKP PLK, the infrastructure manager, will be taken out of the PKP group, for reasons of transparency and independency. In the new structure, PLK will be directly managed by the Ministry of Transport. Moreover, in 2 years, the Cargo and international division of PKP will probably go to the stock exchange as separate companies.

Market competition

In Poland the first private train already rode the tracks in April 2002. An important difference with the German market is that competition is of a different nature. In Germany, the former state operator DB allows private operators to fill niches and competition is therefore of a friendly kind, while in Poland competition is more direct and against PKP.

Mergers and acquisitions, which are also an indication of competitive forces, are taking

place at an international level. Examples include:

A joint venture of rail cargo companies is expected to be established summer 2008

with German, Russian and Polish operators

Hungarian cargo (MAV Cargo) is tendered out summer 2008. PKP is one of the bidders.

CTL Logistics, a Polish private operator, acquired a German rail operator beginning of 2008.

Two of the current operators in the Polish market are expected to be taken.

Quality of transport is becoming an increasing factor of importance in tendering procedures. Private operators are keen on obtaining quality certificates which enable them to prove quality levels.

Regulation function (UTK)

UTK started operating in 2004. Now, there are 59 licensed operators, mainly in the freight sector. This number is the second highest in Europe. The model for determining access fees uses the factors usage and speed and is based on the full cost method. The fee is a result of the cost that the infrastructure manager has budgeted for a year. Components consist of fixed costs (80%) and variable costs (20%). The fees increase with the quality of the network, such as speed. Indirect costs are also included, for instance credit, investments and maintenance fee. Access fees are high, but also unpredictable. The UTK sets different fees annually, which makes it difficult for operators to plan ahead. A legally binding document would be desirable.

Infrastructure

The Polish government is planning major investments with 19 billion euro of support form EU funds (85% Cohesion fund, 15% Regional Development Fund). Of this amount, 58% is spent on roads and 25% on railways. The Polish government is currently investigating the possibilities for a road pricing system. Road pricing will

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create more of a level playing field between road and rail, since operators on rail are already paying a fee for the use of infrastructure. The investments on rail are focused on modernization, interoperability, rolling stock for local lines and technical assistance for project documentation. Modernization involves increasing speed to a level of 120-200 km/h (rail – cargo), which today sometimes is a slow as 30 km/h. This investment will therefore highly contribute to the efficiency of the railway operators. Furthermore, a master plan for the railway sector is currently being developed, including a feasibility study about a high speed line between the three major Polish cities.

Liberalization impact

In terms of liberalization Poland is an average performer in the EU. Even though legislation has been adopted at an EU level quite recently, Poland has succeeded in transposing the larger part into national legislation. Some issues are still in the process of implementation. For instance, the structure of PKP is not final yet: PKP PLK S.A. the infrastructure manager may be removed from the holding into a company directly managed by the MOT and some subsidiaries of PKP may in the future be privatized.

Polish State Railways Group (PKP Group) was established in 2001 as a result of the state-owned enterprise Polish State Railways (PKP) restructuring. The reform was aimed at separation of railway operating activities and managing infrastructure as well as setting up independent commercial entities. The PKP Group is made of the mother company, which is PKP JSC and subsidiary companies. There are 4 passenger operators within the Group:

PKP Regional Services Ltd.

PKP Intercity JSC

PKP SKM (commuting railway in Pomeranian region)

PKP WKD (commuting railway in Warsaw agglomeration).

The mother company PKP JSC participated in cooperation with other companies in the works of Ministry of Transport on the new railway transport strategy. “Railway Transport Strategy up to 2013” was finally accepted by the government on 17th of April 2007, setting up the directions of actions for PKP JSC and Group companies in the next years. The most important for the railway passenger sector are:

- development of fixed rational mechanisms of functioning and financial support in the sphere of regional, inter-regional and international services,

- shifting the responsibility of regional railway services to local governments, - effective execution of the process of clearing PKP Regional Services of its

debts, - further shaping of the integration of Polish railway system with European

Union, i.e. preparation to full liberalisation of railway transport market, further implementation of TSI and the principles regulating the public service obligation.

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PKP Regional Services

„PKP Regional Services” Ltd. is the largest railway passenger operator in Poland.

In 2007 the company put into service:

• slow and fast trains within regional reach,

• fast trains connecting the largest cities and regions in the country,

• international trains in long-distance and border traffic.

The company organized also special trains on individual clients’ orders, ensured transport for participants of the biggest mass-events in the country and cooperated with other operators within the scope of mutual sale of the tickets, information for passengers and technical service of rolling stock.

The services that company provides do not have a commercial character and fall within the scope of public services. It should be financed by Competent Authorities on the level that secures coverage of costs beared by the carrier and obtaining the so called reasonable profit - which must be taken to mean a rate of return on capital that is normal for the sector and that takes account of the risk, or absence of risk, incurred by the operator by virtue of the intervention by the public authority.

According to the governmental strategy for transport PKP Regional Services Ltd. is to be a company owned by local governments, which are responsible for organizing and financing railway passenger services under the public service obligation. All the international and inter-regional services will be operated by PKP Intercity JSC. PKP Regional Services will operate then only regional and border-traffic services.

Due to railway transport market liberalization, there are two more operators in Poland, outside the PKP Group, which give regional railway passenger services, but the scope of their activity is limited.

The first is Masovian Railways – operating in mazowieckie voivodeship and the second is PCC Arriva – in kujawsko-pomorskie voivodeship.

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BiałystokDziałdowo

Iława

Malbork

Tczew

Piła

KołobrzegKoszalin

Wałbrzych

Gorzów Wlkp.

Dęblin

Konin

Łódź

Kutno

Krzyż

Rzepin

Zielona G.

OstrówWlkp.

Toruń

Kielce

Skarżysko Kam.

Radom

Tarnów

Lublin

Rzeszów

Przemyśl

Zakopane

BiałystokDziałdowo

Iława

Malbork

Tczew

Bydgoszcz

Koszalin

Wałbrzych

Konin

Łódź

Kutno

OstrówWlkp.

Toruń

Kielce

Skarżysko Kam.

Radom

Tarnów

Przemyśl

Zakopane

Częstochowa

Kraków

Gdynia

Legenda:linie, po których kursują pociągi międzywojewódzkieSpółki “PKP Przewozy Regionalne”pozostałe linie

Olsztyn

PKP Intercity

PKP Intercity JSC (PKP IC) is a commercial company established pursuant to the provisions of the State-Owned Companies Commercialisation, Restructuring, and Privatisation Act of 8th of September 2000.

The company operates the highest segment of railway passenger carriages – qualified services of the following train categories: InterCity, EuroCity, Express, Low Cost Railways, Euro-night and some international night trains. The company still makes big efforts to improve the standard of its services and to make travelling across Poland and Europe more comfortable. The main objectives for the next few years are:

- increasing of a company’s market share, - implementation of significant investments in the rolling stock.

Government’s plans for PKP Regional Services mean that the effects of liberalization of international passenger carriages, including the cabotage will affect mostly on PKP Intercity JSC. Though the company invests in new rolling stock and improves the quality of its services, e.g. through the development of coordinated (arrival/departure) connections, there is still a lot to do to become fully competitive in comparison to other (foreign) operators, which will be able to provide their services in Poland from 2010.

Nowadays we observe a big increase of passengers’ interest in travelling by rail. There many factors, which caused it, among others: increased road traffic, high level of the fuel prices. Still the time of the journey, its comfort, price and safety are very important reasons for choosing railway services.

On the other hand the prices of railway services seem to be too high comparing to the standard offered. Due to it, it may be difficult to compete with other operators in the scope of the quality of services. Passengers are ready to pay a little bit more for the higher comfort. And unfortunately form this point of view Polish operators have to make really big endeavours to satisfy the passengers’ needs.

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Italy

The Italian network managed by the Italian infrastructure manager RFI consist of about 16.000 km devoted to cargo, regional, long distance and high speed traffic – in Tab. 1 further details are shown.

Table 1 Main features of RFI network.

Rail network in service 16,344 km

Classification

Main lines 6,099 km

Secondary lines 9,335 km

Nodes 910 km

Type

Double track 7,077 km

Single track 9,267 km

Power supply

Electrified lines 11,539 km

- Double track 6,997 km

- Single track 4,542 km

Non electrified lines (Diesel) 4,805 km

Furthermore, there are several regional companies which have their own network and some of them have also the rights to access RFI network as Trenitalia has. Even if most of these small companies do not have an appropriate dimension to contend with Trenitalia in large regional business, a sort of competition already exists.

According to the aim of this study it is important to figure out how long distance and high speed market will evolve. The Italian high speed system is depicted in Fig. 1 with the 1250 km of exploitable network at 2011 – Turin-Milan-Naples and Milan-Venice lines, blue and green lines –, then journey time will be drastically shorted and travelling along the country will change completely!

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Knowing that, and also thank to the Italian legislation on liberalization, more than one private newcomer has been approaching railway high speed business. In particular, one of them is at a so advanced stage to be able to start its high speed services just in 2011, competing with Trenitalia directly. Hence, at present, Italy got the most liberalized railway rules in Europe but United Kingdom.

Looking at this simple and immediate example it appears that a liberalization process has to be carried out in a proper way, taking into account simultaneously of profitable service – as the high speed is – and universal service – requested by States to support mobility in their countries. If rules will not take care of this, there are companies of excellence dealing with profitable services and bad companies (may be just one!) supplying a poor universal service.

Thus, it is important to keep always in mind that advantages of liberalization have to be turned in gains for all customers (and stakeholders). 2020 is not so far!

Figure 1 Italian high speed network and European corridors. The yellow lines are at design phase, the green lines are in construction while the blue ones are in service.

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Conclusion – Liberalization: What can the future hold?

Our analysis strongly focused on the various realities in the different countries represented by our group, and we also tried to give you some broad strokes on what we thought are some of the main issues that are important to liberalization. It was done so for strong reasons: to show the differences between the countries; to show you that years of history and politics are a barrier. But can these differences be turned into opportunities? Will the railway be a bridge between different countries or a reminder of the differences in our European Union?

Liberalization could be a question of State vs. Market.

As was ascertained, the vast majority of the RU’s are State-Owned and they perform an important service: Public Transportation. Therefore, in the short and medium term, liberalization, as is our assumption, won’t be a full disclosure of the rail sector to the private sector and to the market.

There should have to be compromises between some factors, namely:

• Government objectives in Strategic Planning;

• Public service needs;

• Obligations issued by the European Union for the liberalization of the sector;

• The need to control public spending.

When deciding the type of liberalization and the services that can be tendered (Urban; Inter-City; Regional; etc) we think that these factors will be taken into account not only by the central Government but also by the EU. Therefore the issue of Public service should never be far behind of the level of liberalization that has to be put forth by the different countries.

Some countries will also not forget the importance of the historical, cultural and political backgrounds in order to better decide the future of the railway sector. In fact, in Portugal for example, the liberalization will have to decidedly take into account the aforementioned metropolitan areas of Lisbon and Porto, where large amounts of population use public service (and its reduced pricing policies) for its commuting and school trips. It will also have to take into account more isolated regions of the country and therefore a different solution has to be found that will forcibly involve the municipalities.

In Switzerland for example the cantons (regions) have historically a strong autonomy. So the state is defining, which are the criteria for a transport service to be considered as ‘public services’ and what the basic service level is. The Cantons have the lead in defining the regional traffic in detail and ordering the transport from a transport company. The cantons also decide if they give it to a certain transport company or if they make invitations to tender.

In Poland Voivodeship Marshall Offices are organizers of regional services. Proper cooperation with local governments resulted in regional trains timetable complying local transport needs in highest degree.

The shape and volume of inter-regional and international carriages are defined in the contract with Ministry of Infrastructure.

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Railway Transport Amendment Act (2005) was the basis of concluding an agreement with Minister of Infrastructure, assuring financial support for inter-regional and international services provided in terms of public service obligation for the following year.

In 2007 the company received financial support, which guaranteed putting into service 338 inter-regional trains and 187 international ones.

It seems to us that the differences between the various European countries will play a deciding role in the form of liberalization.

Another barrier towards liberalization will be the obvious differences between infrastructures and rolling stock. However, the main task has been done and in the near future we will have technologies deployed to liberalize railway market: the Railteam alliance is already an actuality.

All the considerations stated in the state of the art section seem to be definitely appropriate for long distance travelling but they are also suitable for regional one. In fact, interoperable networks and rolling stock will open regional tenders to a wider number of competitors, because traction and hauled stock could be directly used in different countries.

Once trains will be able to go through country boundaries without changing rolling stock, drivers and rules, a big step toward liberalization will be achieved. Accordingly, technological improvements supporting interoperability will make easier liberalization process both for long distance and regional railway market.

The market will have to respond to all these challenges. And has stated in the chapter concerning the corporate strategies and the market itself, there are various paths to follow and its agents will no doubt be ready. But the rules of the game will be different than the ones of offer and demand, of pure financial perspective. And how will the private sector react to that? There are examples in the European Union that can indicate the way that the public sector will adapt (UK; Portugal; Denmark) but these are situations that are specific either for a country or for a specific service or even railway line.

We are in the closing date to the liberalization of the international services, but these are not public services and therefore easy to make available to the market. And even so, in countries like Switzerland, this service is used by a large amount of people for trips that are not of leisure but of work.

In conclusion, in a continent where there is a large amount of differences, is there one path? One solution? We don’t think so.

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liberalization of the railway sector for the year 2020 … · liberalization of the railway sector...

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