GERMANY’s railway market is widely perceived to be one of the most open in Europe, where competition has brought choice, innovation and investment. According to the German Federation of Regional Passenger Rail Authorities (BAG-SPNV), DB Regio’s share of the regional rail market fell by 4% to 67% last year and regional transport authorities procured 673 million train-km from more than 60 train operators.

DB’s competitors have also gained ground in the freight market - according to DB’s 2016 Competition Report, DB Cargo’s share of the German rail freight market dropped from 74.8% in 2014 to 68.6% last year.

Reg trainsBy October 2016, 452 railway undertakings were licensed with the Federal Railway Authority, compared with 398 in 2011. This includes 163 freight operators, 124 regional passenger operators and 20 long-distance operators.

However, competition seems to be having little tangible effect on rail’s share of the overall transport market. Rail’s share of the freight market has hovered at around 17-18% for the last decade, while the passenger market has also seen little change with rail holding on to a 7-8% share in 2011-2015.

Meanwhile, track access charges have continued to rise significantly faster than benchmark indicators such as the consumer price index and the producer price index for industrial products. According to the Federal Network Agency’s 2016 Railway Market Analysis, track access charges rose by an average of 13% for freight, 14% for regional passenger, and 15% for long-distance passenger. The consumer price index increased by just 5% over this period, while the producer price index for industrial products fell by 3%.

The trend towards increasing prices was mirrored in station charges, which rose by around 10% between 2011 and 2015. The Federal Network Agency says important benchmark indices indicate growth rates of 4-5% and producer price reductions of 3%.

Against this backdrop, profit margins in all three sectors declined year-on-year between 2013 and 2015, falling from 0.2% to -4% for freight, and from 8.2% to 6.7% in the regional passenger sector.

A report by the Monopolies Commission, which was published on August 3, indicates that the German government still has a lot of work to do in addressing competition deficits in the rail sector, and warns that recent legislation may fall short of providing a level playing field for Europe’s largest rail market.

The federal Railway Regulation Act, which came into force in September 2016, transposes the provisions of EU directive 2012/34/EU (Establishing a Single European Railway Area) into German law, giving the Federal Networks Agency and the Monopoly Commission a more prominent role in monitoring competition and fair access to the network. The legislation mandates the Monopoly Commission to carry out a review of the competitive position of Germany’s railways every two years, makng recommendations on how the rail sector can achieve compliance with the provisions of the act.

The key objectives of the legislation are to improve competition within the rail market and strengthen the industry’s position against other modes. To this end, the act introduced price caps for track access charges with the aim of improving the efficiency of the infrastructure manager. These savings would then be passed on to the customer, which would help to make rail more attractive and stimulate modal shift.

However, in its sixth special report on the railway market, the Monopoly Commission concludes that the act will not generate the anticipated efficiency gains because the incentives for improvements are inadequate. The commission argues that this could only be achieved by including the performance and financing agreement (LuFV) between DB and the federal government as well as station charges in the regulation.

To minimise the risk of discrimination, the commission recommends that the legislature should issue clear guidelines to DB Station & Service, which operates around 5000 stations, on charges for using stations. It is also argued that DB retains too much control over ticket sales and claims the incumbent impairs competition because it still sets the conditions for cooperation on tariffs. “Strengthening competitors in the decision-making process and concerning tariff rates and the distribution of revenues could reduce impediments to competition,” the commission states. “In long-distance passenger transport, the few competitors of DB do not even have the possibility to compete on tariffs and ticket sales,” the commission states. “Since, however, using the distribution channels of DB is crucial for its competitors, DB should not be allowed to unilaterally refuse co-operation.”

Costs and benefits

The report suggests that the federal government currently has little idea what impact lower track access charges would have on modal shift or stimulating growth in the rail market. The commission recommends that Germany should follow the lead set by Switzerland, where the Federal Statistics Office has carried out a comprehensive cost:benefit analysis of different modes and the cost and financing of transport, which is used as a basis for policy decisions. This would enable the German government to achieve a fairer and more balanced allocation of costs across the overall transport system and ensure public money is spent where it generates the highest gains.
It would also allow the government to fulfil its legal mandate of ensuring fair competition between modes.

“Currently we do not have sufficient knowledge about the effects factors such as the funding of road and rail construction, road vehicle taxation or a toll for buses would have on competition,” says the commission’s chairman Mr Achim Wambach.

The report recommends that legislators should be looking to tackle these weaknesses by amending the Railway Regulation law.

The commission says it believes the Fourth Railway Package, which was approved by the European Parliament last December, will be positive for competition in the German market. Germany fought hard to ensure that the market pillar of the Fourth Railway Package would allow the retention of operator and infrastructure manager within a single vertically-integrated holding company. Interestingly, however, the Monopoly Commission does not appear to favour the status quo. “In implementing the rules on the independence of the infrastructure manager, the German legislature should go beyond the new European requirements,” the report states. It goes on to argue that while progress has been made in achieving some degree of institutional separation between DB Network and the operating units of DB, the potential for discrimination will be extremely difficult to eradicate in a vertically-integrated holding structure, even with comprehensive organisational separation and full transparency of financial flows within the organisation.

The commission therefore restates the recommendation proffered in its 2015 rail report - ownership of infrastructure and operations should be separated. It suggests that this process could begin with the separation of DB Schenker and DB Cargo from the holding as these global companies derive fewer benefits from vertical integration than those subsidiaries operating solely in Germany. The commission also claims it is difficult to justify state ownership of an international logistics firm.

The federal government’s master plan for rail freight has acknowledged the need to bring down access charges and introduces a host of other measures that should help to boost the attractiveness of rail. But the implementation of the Fourth Railway Package in the coming years raises the question of whether it will be possible to achieve a level playing field in the presence of a such a powerful and influential incumbent.