January 17, 2017

The Fourth Railway Package market pillar - a level playing field or more of the same?

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THE European Parliament (EP) voted to adopt the market pillar of the Fourth Railway Package at a plenary session in Strasbourg on December 14 in the final stage of a legislative process which is intended to open Europe’s railway sector to greater competition.

Following on from the approval of the technical pillar in April, the adoption of the market pillar now leaves the member states to transpose the legislation after nearly five years of discussion and debate.

 

Initially put forward by the European Commission (EC) in January 2013, the Fourth Railway Package seeks to improve the efficiency and competitiveness of rail in the European Union as part of the objective of establishing a Single European Railway Area. The package comprises six legislative proposals, three of which comprise the technical pillar with the remainder making up the market pillar.

The three proposals in the market pillar are:

  • opening of the market for domestic passenger transport services by rail
  • award of public service contracts
  • single European Railway Area
  • opening of the market for domestic passenger transport by rail and governance of railway infrastructure, and
  • common rules for the normalisation of the accounts of railway undertakings.

While there was broad support among member states for the Commission’s proposals in the technical pillar, which centralises safety approvals for operators and rolling stock with the EU Agency for Railways, reaching a consensus on the market pillar proved much more challenging.

One of the most controversial proposals was “unbundling” of train operations and infrastructure management, which encountered heavy resistance from some member states. The EC saw vertical integration as sustaining the natural monopolies of state railways and sought to eliminate it through the Fourth Railway Package.

EU BAldwinAn assessment by the EC in 2013 found that some infrastructure managers (IMs), particularly those in vertically-integrated railways, had sometimes set higher access charges for new entrants. It also observed that some incumbent operators retained certain advantages, such as favourable information flows and access to rolling stock that could be viewed as bad practice, while a lack of financial transparency increased the risk of cross-subsidisation.

In 2010 the EC took 13 member states to the European Court of Justice (ECJ) for failing to fully enact EU railway legislation. However, the ECJ rejected the EC’s case against Austria and Germany, ruling that neither The First Railway Package nor any other EU legislation required compulsory and complete separation between IMs and train operations. This case also confirmed that infrastructure managers existing within a holding company structure could be regarded as independent, a blow for the EC’s unbundling aspirations.

MEPs took this as a signal and in an EP plenary vote on the first reading of the six legislative proposals in February 2014, introduced amendments giving member states greater flexibility in the choice of governance model. Following this vote, the then transport commissioner Mr Siim Kallas complained of “the tenacity of the vested national interests that proved more appealing to MEPs than the balanced and well-reasoned compromises reached in December [2013] by the Transport and Tourism Committee.”

The market pillar therefore allows retention of infrastructure and operational functions within a single vertically-integrated holding company (variants of which exist in France, Germany, Austria, Italy, Slovenia and Luxembourg) but with safeguards to ensure independence of the infrastructure manager, particularly in relation to capacity allocation and track access charges. There is no provision for mandatory unbundling.

This has been welcomed by the Community of European Railway and Infrastructure Companies (CER), which represents 75 companies across Europe. In 2012 CER commissioned a study on the economic effects of vertical separation in the railway sector, which concluded that no particular railway governance structure outperforms any other and the effects of vertical separation depend on national structural characteristics of individual countries. The study also found that imposing unbundling universally across the EU would result in misalignment of incentives, incurring a €5.8bn annual increase in the industry’s costs “for no added benefits in any key measure of performance.”

“We have advocated flexibility in the choice of governance models because we’ve observed that the key obstacle to growing rail’s market share is actually the proper financing of infrastructure,” says CER director Mr Libor Lochman. “In Germany, there are hundreds of operators in a country where the holding company model persists. The key is having the right financing and properly-funded five-year plans for IMs.”

However, the European Rail Freight Association (ERFA) believes the compromises in the market pillar will stifle competition. “We wanted this to be used as an opportunity to create a level playing field for all rail companies operating in the European market, but there will still be competitive advantages for operators that are still linked to their infrastructure manager,” says ERFA secretary general Ms Julia Lamb. “The Chinese walls that were supposed to be put in place to safeguard against those unfair advantages have been heavily watered down.”

Mr Matthew Baldwin, deputy director general of DG Move, feels that the Fourth Railway Package largely achieves the clear separation of operating and infrastructure funding in vertically-integrated railways. “It’s a compromise, and while it falls short of what was hoped to be a wide-ranging regulatory framework, it is an important step towards achieving a single railway area,” he says.

Passenger competition

The market pillar will make it compulsory for member states to open the market for domestic passenger services by December 2019, while competitive tendering for Public Service Obligation (PSO) rail services will be obligatory in the majority of cases from December 2023.

Under the new PSO rules, member states will be obliged to guarantee non-discriminatory access to suitable rolling stock and ensure a level playing field between incumbents and newcomers, the residual value of rolling stock at the end of a contract will be borne by the competent authority. This means public authorities could purchase the rolling stock and make it available to the operator; provide a guarantee for the financing of new trains, or take over the fleet when the contract expires. Authorities also have the option of a mandatory transfer of staff from one operator to another when a contract expires, providing a degree of job security when changeovers occur.

Like the proposals on governance, there is a degree of flexibility in the PSO provisions. Direct award will still be permitted for smaller contracts, but any contracts awarded directly must include performance requirements specifying minimum standards for punctuality, frequency, transport capacity, and rolling stock quality. There will be a 10-year transition period for the entry into force of the regulation for PSO contracts directly awarded before December 2022 which do not comply with its requirements. This means some large-scale contracts will still be operating under a direct award regime well into the 2030s.

For some, these compromises go too far. “The political atmosphere has changed since the late 1990s, when a lot of member states wanted market opening, to the more cautious approach we see now,” says Mr Wim Van de Camp, Dutch MEP and rapporteur for the package’s PSO proposal. “In the Fourth Railway Package, that means that there are too many exemptions from competitive tendering for member states who want to resist it.”

With the need to achieve market opening of domestic passenger operations in less than three years, member states will need to transpose the provisions of the Fourth Railway Package into national law relatively quickly. The often-glacial rate of progress with the implementation of previous railway packages at a national level raises the question of whether the EU can achieve a meaningful degree of market opening under the timetable it has set. However, Baldwin is confident member states will now move forward with transposition. “Citizens are tired of seeing EU legislation not being transposed,” he says. “We will ensure this is transposed and we will be hawkish on enforcement.”

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