Tuesday, January 17, 2017

Norway’s reformed railway prepares for passenger competition

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2017 is a landmark year for Norway’s rail sector as competitive tendering begins for two passenger operations packages, and a reformed administration, including a revamped infrastructure manager, starts work. Kevin Smith visits Oslo to find out more about the reforms and what the government is hoping to achieve.

OSLO’s central station at rush hour is a scene not too different from any other main station in any other major European capital: a steady flow of people and trains arrive and depart as they head to destinations all over the country.

 

What is notable, however, is the volume of people now passing through Norway’s major rail hub, and using its trains in general. Ridership on state-owned Norwegian State Railways’ (NSB) services has increased by 5% in each of the last five years to reach 67.1 million passenger journeys in 2015, as more people turn away from the car and take the train.

Fredrik1Recent government investment in new rolling stock and infrastructure capacity improvements as well as more customer-oriented services have all contributed to this upturn. While the previous 10-year National Transport Plan (NTP), which is updated every four years, laid the foundations for this change, the latest 2013-2023 version, is upping the ante.

In total the latest NTP for rail is worth NKr 168bn ($US 19.86bn), an increase in spending of 49%. Investment in 2017 is set to reach NKr 21.9bn while spending in the first four years of the plan has actually exceeded the expected allocation by 7%, or NKr 4.6bn, as the government strives to transform Norway’s railway into a more important element of its transport matrix.

Greater investment in the network is married to structural changes to how the railway sector is run. Indeed, Norway’s railway entered a new era on January 1.
Heralded as the “most significant change in the Norwegian railway for a generation” by the administrators overseeing the transition, the reform has been five years in the making. The most obvious changes are to the two state-owned companies that have overseen the Norwegian network since infrastructure was split from operations in 1996.

Infrastructure manager Jernbaneverket now ceases to exist and has effectively been split into two entities: a new infrastructure manager Bane Nor and a separate Railway Directorate. The Directorate will coordinate developments in the sector, including high-level planning of infrastructure investments and tendering operations contracts for the country’s 4167km railway network, which will be divided into six to eight separate biddable packages.

Among those to which it could award contracts is previous monopoly operator NSB. This company has been streamlined into solely an operating company, severing its rolling stock, real estate, and passenger ticketing divisions into separate state-owned companies.

The Ministry of Transport has driven these changes, and Mr Fredrik Arnesen, the ministry’s director general, who is overseeing the railway sector, says they are reflective of how far the railway has come, and the government’s vision to establish a more cost-effective and efficient railway sector.

“I’ve been here for 13 years and when I entered into this office in 2003, the railway sector received very little attention among the politicians in the government, the parliament and in the media,” Arnesen says. “No one expected that much of the Norwegian railway and it wasn’t very good.

“Now 13 years later we have a very different situation. We have three times the level of public spending. The transport sector in general, and rail especially, is high on the political agenda and the railway has a positive development and is written about very often by the media.”

While plans for reform had been mooted for a number of years, the winter of 2009-2010 was a watershed moment.

The poor performance of the rail network during a particularly harsh winter prompted the government to ask sector leaders to form a taskforce to identify its major problems. Arnesen participated in this process and says that it was commonly understood that the standard and capacity of the infrastructure at that time was poor. However, rather than describing this in-depth, he says the emphasis of the report was on what the authors identified as the three major challenges facing the sector.

  • an over emphasis on building capacity into the network without considering specific customer needs
  • an absence of market-led efforts in the sector, which was resulting in a lack of efficiency, and
  • too many overlaps of responsibility and misunderstandings between the leading bodies.

In response the government allocated more funds for the railway, which is reflected in the projects included in the NTP, including a programme of track doubling, constructing the new 22km Follo Line, and the rollout of ERTMS, and vowed to develop a long-term strategy, which would clarify rail’s role within the larger transport sphere in Norway.

These changes were given further impetus following the September 2013 general election and the formation of a new minority Conservative-Progress coalition government. The new administration decided to push ahead with major structural reform of the sector, outlining three major political aims:

  • improve strategic governance to emphasise greater operational freedom
  • improve relations between different entities working in the sector, and
  • clarify the laws governing entities working in the sector and to shift some strategic responsibilities between different players where appropriate.

“We think that these political ends were well adapted to what we said the challenges were and that we had a very good foundation for reform,” Arnesen says. “Importantly we also had support from the sector itself, with the main entities - and their employees - open to reform because they saw some weakness in the sector we have today.”

The task then was to find a system that was right for Norway. Arnesen says that the Ministry consulted with the industry to see what it thought needed to be improved. It also looked at other countries’ approach. “Our first observation was that there is no perfect model that all countries have chosen to follow,” Arnesen says. “All models are adapted to specific national differences.”

While conscious of developing a system appropriate to Norway’s star-network centred on Oslo, which features significant single-track sections, among the lessons learned from Switzerland according to Arnesen was the understanding that when you break up the sector that there is always one entity strong enough to hold the others together.

From Britain, Arnesen says of particular interest was how it manages competition processes and “how they try to be as predictable as possible.” The ministry also looked at how the Office of Rail Regulation (ORR) negotiates its contract with Network Rail, the infrastructure manager, and how this situation plays out in Germany. As its nearest neighbour, Sweden’s approach to market liberalisation was also closely monitored. “We tried to find some inspiration in these,” he says.

Once they had settled on a model, it was up to the government to negotiate with its coalition partner to agree on a white paper for reform. This was presented to parliament in spring 2015, and approved in June 2015.

Implementation

Arnesen says that since then work has focused on implementation, specifically in three main pillars: reforming Jernbaneverket; introducing competition; and reforming NSB (see below).

“I have never before worked on something so complex,” Arnesen says. “We are changing the structure of the whole sector, which is financially challenging. There are also many people working in the sector, and for many their entire work will change.”

Among the biggest obstacles according to Arnesen is the reforms to Jernbaneverket. He says that in its previous form it faced two major challenges: one of which is to be a kind of production entity, which is responsible for building, maintaining and developing the infrastructure. “At the same time, it is kind of a strategic rail authority, looking to where we should build railways in the future and supplying the Ministry with the basis for these plans,” he says.

As a result, the planning element has been stripped out leaving Bane Nor as an organisation solely focused on building, developing and maintaining infrastructure. Funding will be delivered in four-yearly cycles rather than yearly-appropriations and performance measured in terms of the quality of the existing infrastructure, punctuality and quality of service.

Another key change is the establishment of a board to oversee its activities and improve accountability when things did go wrong.

Bane Nor will also assume ownership of NSB’s commercial real estate division, which as Mr Christoffer Serck-Hanssen, managing director of the Railway Directorate, points out doesn’t employ a great number of people, but is extremely valuable. “We are getting away from a situation where NSB owned the whole station and JBV the railway infrastructure, which gives a better opportunity to coordinate station development,” Serck Hanssen says.

Around 3900 Jernbaneverket employees have transferred to Bane Nor with the remainder of its 4000-strong team moving to the directorate. Serck-Hanssen says that as well as Jernbaneverket employees, the organisation is staffed with people from NSB, consultants and people from outside of the industry, including from utilities and the oil sector.

In addition to leading the operations tendering process and purchasing infrastructure services, the directorate’s work will also inform the National Transport Plan process, all of which Serck-Hanssen says will offer much-needed coordination.

“Previously the ministry had the responsibility of putting all of this together without the capacity to do it,” he says. “We are a more rail-specific unit than the ministry which often had to lean on JBV on certain issues. Now the directorate will look after these.”

The litmus test for the reforms are the first two train operating packages: Package South, which encompasses the long-distance service from Oslo to Stavanger and various local and regional services along the route; and Package North, which includes the long-distance service from Oslo to Trondheim, and related regional diesel services as well as diesel services in the north of the country as far as Bodø.

Bidding for these packages was initially expected to open in February and May respectively with the goal of starting services at the December 2018 timetable change. However, the ministry says it has revised the timetable in order to clarify some questions relating to the process and to avoid running two competitions simultaneously. Specifically, the ministry requires more time to assess future pension arrangements and also to give the new companies more time to understand their role as sub-suppliers to passenger operators by allowing more dialogue to take place with prospective bidders. In addition, the ministry is keen to accommodate the outcome of the 2018-20289 NTP in the invitations to tender. While no date has been confirmed for bidding on Package South, the expectation is that the contract will still start in December 2018, with Package North following in December 2019.

The ministry led the development of the tendering process up to January 1 with the directorate taking over from that point. Arnesen says that these two packages were chosen to kick off the bidding process as they were straightforward to separate out and have limited impact on the capacity constraints in the Oslo area.

Prequalification began in mid-2016, with approved bidders set to secure five-year eligibility to bid for contracts. And while the competition is constrained by the timetable, the use of existing rolling stock, and the network’s capacity limitations, bidders are encouraged to look at how they might be able to grow traffic, including the possibility of running more trains. Arnesen says bids will be judged on price (40%) and quality of service (60%) and could potentially differentiate in areas including management of personnel, sales and distribution, how passengers are met on the trains, and how the operator will work with other transport companies to offer good onward connections.

Strike

However, he is mindful of shaking things up too much. Last autumn Norway experienced its first rail strike in decades as drivers walked out at plans to cut 300 jobs at NSB causing widespread disruption.

Arnesen describes getting the balance between reforming the sector and keeping the unions on side as “one of the most difficult things of our work.” He says that the unions submitted 13 requirements to the minister and the terms of the tender will reflect the government’s response to these concerns.

He adds that going ahead with two smaller packages first will also provide the directorate with the flexibility to alter its approach to more complicated subsequent tenders. In particular, this may inform thinking of how to effectively divide the packages that will serve the Oslo metropolitan area, and multi-use stations such as Skien. Ultimately though Arnesen says the goal is to issue one package per year, and to have completed a single cycle by 2023-2024.

With only two of the network’s routes operated on a commercial basis government subsidy will remain crucial to rail operations in Norway. However, experiences from the Gjøvik tender in 2005, which reduced the cost to the state by 10%, and from elsewhere in Europe, show that introducing competition can cut this contribution.

“When we visited Baden-Württemberg in Germany, we heard how opening up regional services there helped to reduce government payments by 50%,” Arnesen says. “We don’t expect to have such large potential in Norway, but we expect to have more efficiency. NSB has said that it is cutting 300 out of 700 administrative positions to prepare for competition. The fact that they can do that makes us think that there is potential for greater efficiency and savings.”

2017 is a year of transition for the Norwegian railway sector: for the Ministry of Transport as it takes on ownership of five separate companies; the new Railway Directorate and Bane Nor as they adjust to their new roles; and NSB as it adjusts to becoming a streamlined operator and prepares to bid for the first two tenders.

It will be a few years until the results of the reforms become apparent, indeed before passengers begin to use different branded trains. But change and competition is very much here to stay in Norway as it joins the growing list of European countries to liberalise its passenger market.

 

NSB prepares for life as a competing operator

INEVITABLY as the incumbent monopoly operator, NSB has the most to lose from opening the passenger rail market to competition. Indeed, the structural reforms have already had a profound impact on the organisation, its identity, and working culture.

Mr Tom Ingulstad, NSB senior vice-president and head of NSB Passenger Trains, says that since the reforms were announced work has focused on overseeing the successful transfer of the company’s rolling stock division, real estate holdings, and sales and distribution channels to new independent companies, while preparing the new NSB to compete for future operations tenders.

Relinquishing these sectors is intended to create a level playing field for competition and to prevent a conflict of interest with other prospective bidders. NSB, and third party operators, will lease trains from Materiellselskapet, and award maintenance contracts to Mantena. Critically ticketing will go through a single channel operated by Entur to avoid any discrimination in the market and to provide complete access for passengers, although Ingulstad says NSB is keen to retain its NSB.no web portal and ticketing app. It will also continue to operate services under a revised agreement with the ministry until they come up for tender.

Ingulstad“We have to transform into a company without a protected home base for operations, because by definition we will lose this as the ministry gradually divides the network in the next few years,” Ingulstad says. “Generally, when you are no longer a protected monopoly business, you have to be fewer, you have to run faster, you have to cut costs.”

Cost cutting has come in the form of job losses - an estimated 300 by the end of 2016 - with an emphasis on reducing administrative staff and experts in certain areas where NSB can no longer afford to take the lead, particularly in research and development.

Many people will transfer to one of the new companies or the directorate, and Ingulstad hopes that these bodies retain the same motivation as NSB to push the boundaries, pointing to past successes of the NSB passenger app and its approach to the environment.

However, he also emphasises that this is not the first time that NSB has cut jobs.

“These are the rules that we have to play by and it is not a case, at this stage, of the management looking to maximise profits, it’s just about survival,” Ingulstad says. “We have to calculate the margin and that will be a modest margin, and the rest will be costs. We all need to keep costs as low possible, and sell as many tickets as possible.”

The loss of the real estate business and the transfer of its rolling stock debts will result in a major change to the company’s financial structure. Ingulstad says the ministry has yet to conclude the level of financial support that the operator will receive for daily operations and to compete in the market, admitting that there is a fine balance between what is required and what might be perceived as unlimited funds from the state.

He did confirm the company’s intention to bid for the first two packages, which represent 25% of NSB’s current revenue. However, he envisages that any bid will be quite different from the existing operation.

“We cannot use the fleet as we used to, we can’t use the conductors and the drivers in the same way because they have to be isolated,” Ingulstad says. “We will also have to run it with less staff and less administration. We are looking for alternatives and to try new ideas and we have come up with some. But it won’t be until the government defines exactly what they want, that we will know what to offer.”

This is not the first time that NSB has been exposed to competition in its domestic market. In 2005 NSB secured the 10-year public-service obligation contract for the Gjøvik Line from Oslo to Gjøvik and Skøyen to Jaren, holding off competing bids from the likes of Arriva, Veolia, Danish State Railways (DSB) and Keolis. NSB subsequently established its NSB Gjøvikbanen subsidiary to operate services which commenced in June 2006. This contract was due to expire in December 2017 following the award of an 18-month extension in 2014, but the ministry agreed with NSB Gjøvikbanen in February 2016 to extend the contract until December 2020 in order to facilitate the introduction of competitive tendering.

Ingulstad says unlike the Gjøvik Line, NSB will not establish individual subsidiaries to operate any individual packages that it might win. However, separate subsidiaries will be used during the bidding period to avoid a conflict of interest with existing operations.

NSB also has experience in bidding for operations contracts in Sweden through its Tågkompaniet subsidiary. NSB initially purchased a 34% stake in 2005, increasing this to 85% in 2006, and since then the company has gradually increased its footing in the Swedish market. This includes securing the contract to operate Norttag-branded services in Sweden’s four most northly counties in August 2016, local and regional services in Gävleborg and Värmland, and an international service from Gothenburg to Oslo in cooperation with NSB. It also operated weekend Stockholm - Västerås - Ludvika services until December 2016.

Ingulstad says NSB is continuing to explore opportunities in Sweden through Tågkompaniet, including a possible bid for the upcoming Pågatåg regional tender in Skåne.

“Business in Stockholm is just as valuable for us now as business in Stavanger,” Ingulstad says. “The language and the currency are obviously different, but it doesn’t matter too much. We are looking at Sweden now as more or less a home market to us.”

Denmark and Finland are other prospective markets that Ingulstad says NSB is monitoring closely. However, he is realistic about the company’s capabilities and rules out Britain as a target. “It would be like bringing a small platoon into battle,” he says. “We are too small and would be wiped out.”

Ingulstad adds that NSB’s Swedish experiences have exposed it to the potential competitors in its home market. While the identities of the prequalified bidders have yet to be confirmed, for many expansion across the border is a logical extension of their operations. Ingulstad is therefore anticipating a number of close competitions over the next few years, beginning with the South package when bidding opens at some point in 2017.

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