Integrated or non-Integrated railway, an infinite debate

The question is often described as technical, when in fact it is political. The railways are indeed sometimes the first employer of the State. It is therefore not easy to make reforms.

Since the nationalizations of the years 1900 to 1947 (UK), the public railway companies were neglected as the train became less and less essential to the society (the oil revolution…). These companies then evolved into a closed administrative environment and in the 1980s, a public money ocean was used primarily to maintain the railway management system. If many people say that we have not invested enough in our railways, there is no one who has wondered whether it is possible to make the railroad cheaper. Until Europe, endowed with legislative tools, takes the question more seriously.

Some politicians and experts therefore have intended to separate the infrastructure for several reasons:

  • to allow other operators to enter the market, who had other ideas to revitalize this transport;
  • to allow the industry to offer international locomotives, what was not wanted by public companies (it was not their mission);
  • to facilitate railway flows on both sides of the border with a single type of train, in the perspective of a single european area (at the beginning, this was not wanted by public companies either);
  • have a view of the reality of the costs of the railway infrastructure, independently of the train service.

Why so much resistance?
In many countries, it seemed unthinkable that non-state companies come on the rail network. The main argument was that the railroad was to be seen as a vast, single and global factory, where all elements fit together. The political argument was that the coming of other operators might show that it was possible to manage the railway differently. This would undermine the social policy that has prevailed for over 100 years.

The entire railway operated under the system of state obligations, while the State is often deemed to be a very bad industrial manager, because he inserts political balances unrelated to the transport function. That’s why it took so much public money to run these businesses. Europe wanted to tidy up these national messes.

Did Europe want to kill the railroad?
In the 1990s, the European Commission asked to moving  from a  mixed system of  obligations imposed by  the State  and of public service contracts, to an application of  contracts negotiated between the State and the railway  operator to all types of public service, including the  urban,  suburban and  regional.  They  would clearly  specify  both  the service to be provided and the compensation to be paid. The idea was that the railways should no longer be public money pumps, without anyone knowing exactly what was being done with that public money.

It soon became clear that entering into contracts with incumbent companies did not encourage them to change their managerial culture. Why ? Because they were alone in their railway discipline, they had no reason to change anything. In addition, they enjoyed the monopoly of fine knowledge of the railway system, which enabled them to hold any speech in front of politicians.

Nevertheless, many countries undertook to amend the statutes of their railway company:

  • on the one hand with the conclusion of periodic contracts where the State guarantees conditional subsidies;
  • on the other hand, by making railway companies more responsible towards users (punctuality, reimbursement, permanent call center, …)

At the same time, under the pressure of better allocation of public finances, states split what is public service and what is commercial service. All the historical companies then changed their structures and began to segment their activities by different sectors:

  • infrastructure;
  • subsidized regional services (daily commuters trains);
  • non-subsidized services related to leasure, business and industry.

The transformation of the railway is not therefore an exclusive action of Europe, but a bargain for certain States which could not be clean up the railway sector without provoking political troubles.

Düsseldorf, on station, but many operators (photo

Germany is probably the best example of this policy. In 1994, Chancellor Kohl agreed to take over the entire debt of the old Deutsche Bahn, under conditions:

  • to become a holding company with distinct sectors;
  • to accept other operators on the network;
  • to modify the conditions of recruitment.

German policy was described as revolutionary at the time and aroused a lot of fears in the Latin countries. Since, as everyone knows, things have changed significantly …

In 2001, 2004 and 2007, three legislative ‘railway packages’ were adopted to open up national markets and make railways more competitive and interoperable at EU level. Despite the new EU legislation stemming from these rail packages, the modal share of rail in intra-EU transport has remained modest (6%).

During the preparation of the fourth legislative package in 2014, the most emblematic package because very political, the European Parliament (EP) underlined that the infrastructure manager should have effective decision-making powers and be independent from other entities within a vertically integrated undertaking, with respect to essential tasks such as train track allocation and infrastructure charges.

It was felt that it was easier to request more cost-effective operational train services for train operators than for infrastructure, which remains a highly capital-intensive sector. This is roughly what has happened in all the countries of Europe, each with its particularities.

Directive 2012/34 / EU
It lays down rules for the management of railway infrastructure and rail transport activities of railway undertakings. Section 2 of this directive, including Articles 6 and 7, sets out the principles of a separation of infrastructure management and transport operations and of different types of transport operations. All EU railway undertakings must comply with it.

Each Member State is free in choosing its own separation regime, as long as the EU Directives conditions are met and countries needs to check that the European targets get met. Seven EU countries have completely separated the infrastructure from the old historical company, the others have opted for different kind of holding.

Nevertheless, dam attempts…
Dozens of private companies have nevertheless been able to access the rail network, but it was very hard in some countries. Some historical companies took advantage of the legal uncertainty around the competition:

  • NTV-Italo saw its perron totally fenced in Rome-Tiburtina and the schedule service had forbidden it in Milan-Central station;
  • Westbahn was never able to gain access to Innsbruck under pretext of saturation of the infrastructure;
  • Freight operators in France had to go through SNCF, which did not fail to relay the confidential parts of the contracts to its own freight subsidiary;
  • Many hassles have been noted, such as the unavailability of a room for staff and ticketing in the station, high parking fees, lower rates below operating costs to kill competition, etc …
Non-discriminatory access to those who have other ideas for running trains (photo Rob Dammers via license flickr)

The necessity of a strong regulation
These examples demonstrate the relevance of having a railway infrastructure independent from the incumbent. In the meantime, most countries have put in place stricter laws and introduced a regulator with injunctive power. Much of the hassles mentioned above is nothing more than a bad memory, except for access to essential facilities, which is still a black point (access to train stations, workshops, …)

A strong regulator is needed to ensure that capacity allocation and charging is managed in a fair and transparent manner to allow other operators to access the tracks. Originally, these regulatory bodies worked with … personnel from historical companies, because there was no expertise available, which created some turmoil in the railway policy. Subsequently, the expert staff working in regulatory institutions came from outside.

Financial questions
In the case of a vertical separation, the challenge is to offer a national rail network, paid for by the taxpayer, but usable by everyone, not just a monopoly company. This is how the road, river or air sectors operate: a state infrastructure, but multiple users.

When the infrastructure is clearly separated, with its own budget, politicians can better control where the public money goes. This is not the case when the subsidies go to a big and autonomous company: there is a great risk that this money will not be spent wisely, and when Parliament realizes it, it is often too late.

Infrastructure is the only railway sector where there are not many opportunities to save money. It is here that many vertically integrated companies were trapped by their own management: the money received from the state was spent more for trains or new stations than for routine maintenance of the track. Even Switzerland has fallen into this trap. The problem is that with the sharp rise in traffic in the 2000s, the wear of the track has accelerated, which required more monitoring and, therefore, more money to provide. But there was no extra money to receive from the State! Many integrated companies have postponed infrastructure renovation to the last limits. This is how Germany finds itself today with nearly 2000 bridges to replace, some of them must be immediatly replaced…

Problems of interpretation
The difference between maintenance and renovation is sometimes blurry and poses legal problems. For example, European funds can be used to renovate a railway line, but not to pay maintenance teams or an internal corporate social policy.

In some countries, maintenance has to be financed by the incumbent  (whereas extensions or renovation of the network are paid by the state).

The solution is at least to separate budgets. Infrastructure management must be guided by national political visions that decide where large-scale work needs to be done. It is therefore necessary to distinguish between routine maintenance and renovation or capacity increase investments. Indeed, routine maintenance involves railway teams who are paid by state subsidies, while the heavy work is done by private contractors for which the state pays only the concrete, but not the wages of the workers on construction site.

Renovation or reconstruction, distinction is not easy because that impacts on the type of subsidy (Bickley Junction, Grande-Bretagne, Network Rail)

Opposing objectives
Arguments for an integrated company often point to conflicting goals. The best example is the ERTMS / ETCS signaling system: Europe wanted it at the political level, but this did not interest railway undertakings because of the costs of renovating the signaling that this would entail. Europe then conceived a policy of « trans-European corridors » on which it concentrates its subsidies, both on renovation work and the installation of the new ETCS system.

Today, infrastructure managers seem to be more accepting of the ETCS installation because it allows them to eliminate existing signaling that is becoming increasingly obsolete and very expensive to maintain. This objective is in contradiction operators, who must spend mountains of money to change rolling stock safety systems. Many operators still feel that ETCS is not necessary. Objectives opposite …

We can bet without difficulty that in the executive committee of an integrated company, this type of question would have had a favorable response to the arguments of the rolling stock: do not touch anything, as long as it rolls well!

The bad side of integration
In Germany, as long the DB AG owns operations as well as the track, as a consequence of such a price rise the “left pockets gets what is taken out of the right pocket”. In case of increase of tolls, the DB AG doesn’t lose anything, in contrast to the competing private operators. The possibilities of the regulation authorities to control the abuse of such a natural monopoly are in fact limited. The same problem remains in France, Italy, Switzerland or Austria.

When you subsidize an integrated company, you subsidize everything, including the salaries of employees. This poses a problem of equity vis-à-vis other rail operators. But the risk is high that subsidies are more a wage policy than a policy focused on rail transport. For some public enterprises, almost two-thirds of the subsidies were based solely on wages. How does this improve transportation to the citizen?

Integreted companies tries to minimize the infrastructure expenditures and preffer to invest in beautiful trains. It’s like to roll with the most beautiful BMWs on a cobblestones road. The traveler is the big loser of such a policy while the traffic will undergo over time decreases of speed.

The State is also a big loser. From the incumbent point of view, the excessive wear and tear-strategy makes sense, in order to alert some years later the Parliament with the « real state of infrastructure », and to provoke an increase of the expenses for the track directly from the state. A good strategy: these companies invest in what is more visible, the trains, the stations, the marketing, and leave the losses of infrastructure to the State. It is true that a separate infrastructure enterprise could also use the same strategy …

Finally, the integrated railways managed « like a big factory » is an elephant that often becomes unmanageable, and that above all must take into account national political balances without any relation with the wishes of the local citizens. The « integrated plant » argument no longer works on the technical side. Nowadays, competing manufacturers supply innovative rolling stock which is necessarily compatible, with a certain number of tests. This avoids the construction of small quantities of « home-made » but expensive locomotives. An integrated railway company could favor a single electronic equipment supplier, which would drive up prices.

Some examples
We can say that when the infrastructure is a division in the same headquarters (or nearby), it facilitates decision-making and synergies. However, recent events have shown that this was not the case with Deutsche Bahn, SNCF Réseau or SBB (Switzerland). Despite their integration, these three networks have shown significant gaps in the renovation. Security has of course never been questioned, but the integration has never favored a match between the needs of works, the need to have some open lines and the increase in traffic recorded in recent years. These companies have clearly indicated that, under their public service obligation, their respective dominant passenger traffic would have priority over the heavily liberalized freight sector. This demonstrates that:

  • governemental supervision has any authority over this kind of decision;
  • the infrastructure integrated into a dominant operator is never an independent entity as it is proclaimed too often.

A final solution would be to move the allocation of train paths and access to essential facilities in a business structure totally independent of any railway company. The infrastructure would retain only its main business: maintenance and renovation. This solution, however, will not prevent the lack of synergy in an integrated group, particularly as regards the planning of works, sources of serious discords with operators.

Five rules for an optimal railway

  • It is the role of the state to provide an optimal infrastructure accessible to all, with the aim of making the country’s economy grow. It is the role of operators to make the best rail service possible without absorbing an ocean of public money;
  • Priority must be placed on clear rules regarding both the ownership of the infrastructure and its financing. The law must also define who pays compensation for any internal problems;
  • A cheaper infrastructure do not means giving less money. Infrastructure managers have already been able to demonstrate that there are important opportunities to manage the network in a more optimal way. The state must respond to investments that increase traffic and promote modal shift. A bridge that needs to be replaced is an investment for fifty years;
  • The state must guarantee non-discriminated access to the network, railway stations and essential facilities, so that rail traffic can flourish for the benefit of the economy. The protection of confidential business data must also be guaranteed;
  • From the moment that there are now various rail operators on the same network, the State can also subsidize part of the tolls as it subsidizes air fuel and the harmful effects of the road.

It is important for the railway to be oriented towards its users rather than remaining a costly politics business and do not encourages the modal shift.

Only one italian network, RFI, but two operators in the beautiful station of Milan-Central (2017, photo