TWENTY years after its reform, the German railway sector is facing substantial challenges. While demand for rail transport is surging, questions remain over whether there will be enough money to fund the boom as all sources of public funding for rail are about to undergo major renegotiation.
This combined with reforms to market regulation, consolidation of public budgets, and competition with other public services for funding in an increasingly partisan political environment due to upcoming parliamentary elections, means that Germany is facing an unprecedented situation which is likely to lead to a major shakeup in the market.
Although most outcomes remain uncertain, the market players need reliable information. Our latest study, The German Rail Market - Facts, Figures, Players, Trends, assesses all the relevant segments comprising the passenger and freight rail operators on one side and the product and services suppliers on the other.
In 2011, the total revenue from operating passenger and freight services in Germany reached €21.5bn, while the market for infrastructure, systems and rolling stock goods and services is forecast to grow by 5% per annum from €8.3bn today to €10.6bn in 2016.
Rolling stock is by far the largest and most dynamic segment, accounting for 60% of the German market and growing by 5.9% a year. The trend-setting products within that are emus for regional and commuter transport, the demand for which is growing at 11.2% per annum and should reach €1.62bn in 2016.
Regional and commuter passenger rail accounts for 42% of total rail revenue in Germany. Ridership rose by 400 million journeys to 2.4 billion between 2000 and 2011, mainly due to the rising cost of motoring, worsening road congestion, and growing concern about the environment.
Growth has also been aided by an influx of new trains as a result of the concessioning of rail services which began in 1997, and an expansion of services which saw the number of train-km increase from 591 million in 2000 to a record of 641 million in 2011.
German Rail (DB) currently generates 86% of total passenger-km, but only operates 74% of train-km, suggesting that its competitors need to convey passengers over longer distances.
Tenders for concessions remained fairly constant between 2008 and 2011, but started to increase last year (Figure 1). They will grow significantly this year, with tenders for up to 265 million train-km expected to become operational between 2014 and 2016.
However, the average number of bidders per tender has decreased from a high of seven in 2000 to an historic low of 2.4 in 2010. Notably, some of the large companies which are active in other areas besides public transport are becoming increasingly critical of rail concessions when they compare the margins achievable in rail with those of other industries. The cost of bidding for a German passenger concession ranges from €300,000 to €500,000 depending on the size and nature of the concession.
Most concessions in Germany are what are known as gross contracts, where the client collects the revenue and pays the operator a management fee for running the service according to the client's specification. Some clients experimented with so-called net contracts whereby the operator collects the fares and is paid a much smaller fee. But clients have now reverted to gross contracts because they want clear control of the services they are paying for.
Germany's regional passenger rail fleet is among the youngest in Europe (Figure 2). The trains currently in service will determine the operators' choices in the next two decades, leaving very few opportunities for the introduction of new types.
Additionally, many variations in tailor-made onboard equipment and accessories prevent the development of a secondary market for used rolling stock, which could stimulate competition.
Some of the 27 client bodies responsible for specifying, letting and managing concessions, have taken over additional entrepreneurial functions such as rolling stock leasing. This is causing concern among some operators which are questioning what is left for them to manage if they have no control over revenue, timetables, and rolling stock.
These developments show clearly that the sector is in dire need of readjustment. This would involve bold discussion of the present challenges, securing the required funds, revising fund channelling, establishing consistent guidelines, preserving entrepreneurial freedom to negotiate, and diversifying risks.
Regional transport operators are currently handing over one third of their turnover to infrastructure managers, accounting for two thirds of the turnover of these infrastructure managers. This puts regional rail and infrastructure side-by-side in the focus of the upcoming discussions.
Issues which need to be resolved include:
• Regionalisation funds: as stipulated in the Regionalisation Act, the federal government assigns public funds from its budget to the 16 states to enable them to order regional and commuter transport services. But the total available funding and its precise distribution between the states have been revised several times in discussions conducted behind closed doors. The last revision in November 2007 determined this for the 2008-2014 period (Figure 3). Current talks are being strongly influenced by substantial socio-economic trends, such as demographic and climate change, and the move away from fossil fuels. Market players will be forced to look for short to medium-term solutions to reduce costs while continuing to offer attractive transport services.
• Investment grants: the Municipal Transport Financing Act, which has been the principal source of funding for regional and urban public transport investment since 1971, was replaced by the Unbundling Act in 2007. Up to 2019, the federal government will assign €1.3bn annually to the states, but from next year these funds will no longer be dedicated to transport, and will instead be available for any kind of investment. Before the end of this year, the federal government and the states are legally obliged to assess whether the total amount will cover all future investment needs. After 2019, public investment will be comprehensively reorganised. In the meantime, the implementation of urban and regional rail infrastructure projects is problematic, due to a lack of planning certainty.
• Debt brake: in order to comply with the stipulations of the European Union's (EU) Maastricht Treaty, the German constitution was amended in 2009 to reduce public debt. Public budgets at all levels have to be balanced without additional borrowing, which in some cases is likely to require drastic reduction. But we are still awaiting its impact, so it is difficult to say what the effect will be.
• Fourth Railway Package: the EU aims to separate infrastructure management from transport operation to the greatest possible extent. However, a recent study by SCI Verkehr on behalf of the European Academy for Environmentally-Sensitive Transport (EVA) revealed that this separation does not necessarily lead to better quality railways.
• The Railway Regulation Act, which will not come into force until sometime after national elections in September, is intended to define the competencies of the Federal Network Agency (BNetzA), responsible for regulating the telecommunications, postal, electricity, gas, and railway markets. However, it has caught the attention of a wide range of railway stakeholders prompting discussions about the opportunities and limitations of railway regulation.
• The current federal transport infrastructure plan, which dates back to 2003, will be completely revised and amended by 2015. Although the states have been asked to name their priority projects, their selection rests with the federal government. The plan will have to be passed by the federal parliament, but the implementation of the projects is linked to available public funds, which hampers precise forecasts of their effect on the market.
The future of regional passenger rail and infrastructure will determine the future of the entire German railway market. The diverging interests of the various stakeholders raise concerns that real debate on a fundamental redesign will be side-lined in favour of simply cutting expenditure and a "business-as-usual" attitude. Instead, finding a new, sustainable financial framework to develop the market is crucial. From a functional point of view, this task is more extensive and complex than ever before - and at the same time it is of great political sensitivity. Providing certainty and orientation for all stakeholders is the main objective.
"The German Rail Market - Facts, Figures, Players, Trends" study is available from SCI Verkehr at: www.sci.de