POLAND is the second largest railfreight market in the European Union after Germany, and it is also highly competitive. A healthy contingent of independent operators vies for business with the incumbent PKP Cargo, whose market share has fallen from 96% in 2003 to around 54% with the onset of competition, but it remains one of Europe's largest railfreight operators.

PKP Cargo's competitors emerged from diverse backgrounds. German Rail (DB) subsidiary DB Schenker entered the market through the acquisition of PCC Rail in 2009 and is now the largest open-access operator in Poland. CTL Logistics was set up by a chemical transport company and diversified into other types of freight. Lotos Kolej is the rail subsidiary of a major chemical company, which has steadily expanded its railfreight business, while Freightliner Poland (FPL) has been arguably the most successful start-up, growing its market share to 2% since its launch in 2007.

Yet the apparent vibrancy of the Polish railfreight scene belies some major structural challenges. Contrary to the situation elsewhere in Europe, the opening of the market to independent operators did little to improve rail's competitiveness with other modes. Between 2000 and 2008, a period of sustained economic growth, road freight volumes more than doubled from 75 billion tonne-km to 164.9 billion tonne-km, while railfreight fell slightly from 54 billion tonne-km to 52 billion tonne-km.

External factors such as the sluggish economy suppressing road haulage prices and the steady expansion of the trunk road network, do not auger well for railfreight. Last year the government proposed diverting €1.2bn in European cohesion funding for rail investments to road construction, a suggestion that while flatly rejected by Brussels reflects a lukewarm attitude to rail among Polish policymakers. Poland's Association of Independent Rail Operators (ZNPK) argued that if the government was unable to disburse EU funds to major rail projects it should consider diverting the money to small or medium-sized enhancements that could deliver significant benefits in a shorter timescale.

The international Union of Road-Rail Transport Companies said in a letter to European Transport Commissioner Mr Siim Kallas: "Polish hauliers already control the largest European truck fleet, for good reason, as rail services are not competitive mainly due to infrastructure quality deficits and very high track access charges, which Poland justifies by the 'high costs of running and maintaining an outdated network' and 'high investments costs' which have not yet materialised. The gap between track access charges and the quality of the network is widening each year."

The level and structure of track access charges in Poland has long been a source of deep contention among freight operators, and remains controversial. The three-year contract for infrastructure operation and maintenance between infrastructure manager PKP PLK and the state is based on annual budget allocations, and access charges are set accordingly on a yearly basis. A variable charge is placed on each train-km, which takes into account the gross weight of the train.

Two years ago a report by the National Audit Office (NIK) concluded that successive governments had failed to ensure a stable basis for calculating track access charges, and that annual changes to the formula used for calculating fees meant operators were unable to plan services or develop long-term strategies with their customers. The NIK also noted that access charges make up 25% of the operators' total costs. PKP Cargo says in its case the figure is now closer to 30%.

A further report last year by the World Bank noted that in 2009, freight traffic accounted for 33% of train-km but contributed 60.5% of PLK's track access revenues. It also showed that in 2007, the average infrastructure usage charge for road freight was 0.0081 Zlotys ($US 0.0024) per tonne-km, while the equivalent cost for railfreight was 0.0326 Zlotys per tonne-km, four times higher.

"Access charges tend to change year-on-year, sometimes very materially," says Freightliner's European business development director Mr Konstantin Skorik. "Access charges are based on train weights boundaries, but charges within the boundaries keep changing. In 2010 PLK introduced a big change that benefited PKP Cargo because of the type of trains it runs, at the expense of independent operators, which run heavier, more efficient trains." Last year ZNPK wrote a letter to the Polish prime minister warning that failure to radically reform PLK's "unpredictable and unstable" pricing policy would lead to dire consequences for the industry.

PKP-cargoPKP Cargo says it has suffered complete loss of margin on some multi-year contracts as a result of unforeseen hikes in access charges. "Prices must become more predictable, we need a stable basis to allow us to plan effectively," explains PKP Cargo board member for strategy Mr Daniel Ryczek. "You can't set five-year budgetary targets if one year you are hit with a 20% rise in infrastructure costs out of the blue. Track access charges are 30% of our costs, and operators cannot bear these sudden increases without passing at least some of the burden onto customers, who ultimately have a choice between rail and road. If they switch to lorries, the infrastructure manager loses revenue and it's a vicious circle."

Freight operators also contend that high costs are not reflected in the quality of the network, which Ryczek suggests is a symptom of years of underinvestment. "We pay the highest prices for the worst infrastructure in Europe," he says. "The reasons for this situation are obvious, but there is no correlation between product and service."

This view is echoed by Freightliner. "Because of neglect and inability to run efficient modernisation projects, the quality of infrastructure has deteriorated over the years," says Skorik. "PLK has concentrated on the glamorous large-scale projects that please politicians, rather than tackling bottlenecks and improving infrastructure needed for railfreight. There are lines with a mixture of 21-tonne and 20-tonne allowable axleloads which is not logical. There are bottlenecks where freight trains sometimes wait for 5-10 hours for a path. Small scale targeted upgrades could make a big difference in these situations."

Fair access?

A characteristic feature of the Polish railfreight scene is the concentration of open-access operators on bulk markets, in particular minerals and chemicals. Few independent operators have entered the intermodal sector, which is still dominated by PKP Cargo. In Europe's most liberalised markets, such as Germany and Britain, competition is fierce in the intermodal market, which is an important driver of railfreight growth in these countries. So is this evidence of anti-competitive behaviour?

Independent operators claim that they cannot gain fair access to intermodal terminals because most are controlled by PKP Cargo and its affiliates. DB Schenker Rail Poland CEO Mr Hans Georg Werner said in a recent interview with Poland's daily Puls Biznesu that PKP Cargo had prevented his company from accessing its Malaszewicze terminal near Lublin. Freightliner claims a combination of high access charges and difficulty accessing terminals have effectively excluded it from the intermodal market. "The reason we are not running intermodal trains, despite our experience in running this type of train in Britain, is that we don't have proper access to terminals," says Skorik. "Historically most terminals were connected with PKP Cargo, and run either directly or through joint ventures and subsidiaries. We have applied for access to intermodal terminals, to be told they can only handle five wagons on a Saturday. Even with a reach-stacker one can handle an average-length intermodal train in 6-8 hours, so it's hard to believe there was no spare capacity at a terminal handling a handful of trains per week."

Open-access operators also claim that PKP Cargo leases sidings from PLK to block private operators from loading or unloading trains, and charges excessive fees for transhipment operations between standard and 1520mm-gauge networks on Poland's eastern borders, where facilities are mostly controlled by the incumbent. "The whole eastern border represents a substantial market which is not properly liberalised," says Skorik. "This is a bastion PKP Cargo defends even more vigorously than intermodal terminals. Poland imports about 10 million tonnes of Russian coal, and large volumes of other materials. Arguably the lack of free access may have a macro-economic effect on trade between Poland and its eastern neighbours. Coal is shipped to Gdansk, adding transhipment at the port, just to avoid the problems of going by rail."

Ryczek refutes claims PKP Cargo is limiting access to sidings and terminals. "We've been accused many times by our competitors of monopolising access to these facilities," he says. "Over the last few years we have returned about 500 sidings to PLK, and the number of locations where access is an issue is now vastly reduced. All we ask for is to be treated equally with other operators, and that means being allowed to freely use our assets in accordance with the company's strategy. We are always open for discussion with partners who want to use our facilities, but the argument that there should be open access to terminals because they were once state property is not reasonable, because open-access operators are also using facilities that were originally paid for by the state."

On the German border, where there is no break of gauge, the situation is more stable, and Polish operators have been proactive in expanding their activities into Europe's largest railfreight market. Several including PKP Cargo, CTL Logistics and Freightliner have operating licenses for the German network, while others are cooperating with German operators to deliver cross-border services.

PKP Cargo has now been operating its own trains in Germany for over a year and in March was granted a license to operate in Austria. It is also seeking certification in Hungary, the Netherlands and Belgium. In January it began operating its own intermodal trains in Germany with the launch of a new service from Poznan to Ruhland in Brandenburg. PKP Cargo already operates as far as Hamburg, and is keen to extend its reach to Rotterdam, a port already served by rival CTL Logistics. "I think it's necessary for incumbents to accept they need to be present in foreign markets, and that's a natural progression. If you look at the significant players in the German railfreight market, most are connected in some way to the incumbent operators of other European countries."

Regulation is another contentious issue, and private operators are calling on the government to grant the Office of Railway Transport (UTK) broader powers over the industry. "UTK is becoming more proactive, and it is putting PLK under pressure to improve efficiency and normalise access tariffs, but it fundamentally lacks the regulatory capacity its counterparts have elsewhere in Europe," says Skorik. "The government is not doing enough to strengthen UTK's regulatory capacity. UTK is reporting to the Ministry of Infrastructure, meaning UTK and PKP Group are managed by the same ministry, whereas EU rail directives envisage independent regulation."

The European Commission's 2011 White Paper set a target of shifting 30% of road freight travelling 300km or more to rail or water transport by 2030 and more than 50% by 2050. Rail currently has a 26.4% share of the overall Polish inland freight market - significantly higher than the EU average of 10.7% - so the EU's target should be attainable. But this figure masks a steady loss of market share that will not be abated without a concerted focus on infrastructure improvements that benefit freight, and tackling the structural problems that inhibit growth. Ultimately, only policymakers in Warsaw can ensure that happens.

PKP Cargo privatisation edges forward

LAST March PKP Group invited expressions of interest for the sale of 50% plus one share in PKP Cargo, with the aim of attracting a single strategic investor. However, the sell-off has been disrupted by what PKP Cargo describes as "external factors," including last October's parliamentary election.

Nonetheless, Ryczek is keen to stress the process is moving forward. "We are formally in the phase before due diligence, and we are currently negotiating an agreement regarding employee guarantees," he explains. "The shortlist of investors has not yet been approved by the transport minister, but we are ready for the next stage, and the company is prepared to open our books to potential investors."

PKP Cargo has been transformed over the last five years, as a programme of extensive restructuring targeted inefficiencies, cut the workforce by almost 40%, and steered the company back to profitability. Last year PKP Cargo carried 130 million tonnes of freight, a 9% increase over 2010 levels, and generated net profits of Zlotys 400m.

"2011 was PKP Cargo's best year as an independent company, our results were well above expectations" Ryczek says. "Volumes weren't that impressive compared with pre-recession levels, so it's the result of building sales activity, improving performance, and reducing costs."

However, PKP Cargo forecasts volumes will fall slightly to 127 million tonnes this year and Ryczek expects net profits to dip to around Zlotys 200m. "I'm certain this year won't be a repeat of 2011," he says. "It's not our ambition to achieve a record every year, we're focusing on sustainable development. Assuming we are able to maintain our market position, we expect to achieve 2% annual growth in the period to 2016, so we will be growing in parallel with the market."

Freightliner PL: the first five years

THIS year British freight operator Freightliner celebrates its fifth anniversary in the Polish market. Freightliner Poland (FPL) began running coal trains from Bogdanka in Silesia to Kozienice power station near Warsaw in September 2007, and it has steadily expanded its operations into other sectors, notably aggregates, while extending its reach into Germany and Ukraine.

"It didn't help that the economic crisis happened early in FPL's life, with railfreight demand falling off a cliff," reflects Skorik. "Eastern Europe was hit hard because rail has a higher market share than in most western European countries, but we pulled through and managed to achieve some growth between 2008 and 2010. Support from the group has played a pivotal role in FPL's general development, because collectively we were able to secure better access to leasing markets, manufacturers and financing. The energy and passion of the people on the ground was supported by resources and experience from Britain."

Last year Freightliner PL achieved a turnover of more than Zlotys 15m. It has a fleet of 25 locomotives, around 1000 wagons, and almost 200 staff.