The European Commission’s plans for rail market liberalisation are sure to divide opinion, with the UK’s pioneering break-up of British Rail cited as an example of why unbundling is a bad thing.
When it comes to sensitive issues in Europe, few are as controversial as market liberalisation. The European Commission’s upcoming proposal on liberalisation of the passenger rail market will be no exception.
Those opposed in principle have already positioned themselves for the argument – ready with examples of how past liberalisation of crucial sectors has had negative effects. A favourite example is that of the United Kingdon, which in the 1990s unbundled state monopoly British Rail into several different companies and privatised the rail system. Given that a political consensus has emerged in the UK that the rail system has some serious problems, the British experience is already being used as a warning by those opposed to liberalisation.
Last year, the British government commissioned a report to determine the effect of privatisation, and the headline figures were not encouraging. The report found costs had rocketed since privatisation – the UK’s rail infrastructure costs are now 30% higher than those in the rest of Europe. Far from lowering ticket prices for consumers as promised, it would appear that unbundling and privatisation have driven up the cost of tickets while delivering little in the way of new infrastructure.
But is that what the report concluded? Its author, Roy McNulty, argues against such crude generalisation. At an event at the European Parliament earlier this month (1 February), organised by the Community of European Railway and Infrastructure Companies (CER) and the UK’s Association of Train Operating Companies (ATOC), McNulty said claims that his report concludes that the unbundling of British Rail was a failure were greatly exaggerated.
“If we had thought the unbundling was the problem, we would have recommended reversing it,” he told the audience. “Our conclusion is that the cost problem can be fixed.”
McNulty stressed that liberalisation had, on the whole, produced noticeably beneficial effects. For instance, it reversed a 50-year trend of reduction in rail passenger traffic. Since the unbundling, rail journeys have increased by 84%, despite a decrease in the network. This is largely the result of the great increase in train frequency that resulted from privatisation, because train operators saw greater opportunity for profit in having shorter trains run more often. “The UK now has among the best frequencies in Europe,” said McNulty.
“Some people have used the report to say that the privatisation model is broken,” says Michael Roberts, chief executive of ATOC, the organisation that co-ordinates private British rail operators. “The model may have picked up some bad habits in its adolescence, but it is not broken.”
Keir Fitch, deputy head of cabinet for Siim Kallas, the European commissioner for transport, said at the event that the Commission does not see the report as a condemnation. “Our conclusion is not that this report says that British privatisation has been a failure,” he said.
Brian Simpson, a centre-left British MEP and chairman of the European Parliament’s transport committee, says that the report’s conclusions on rising costs should not distract from the main issue. “We shouldn’t use the efficiency problems in the UK as a way to divert attention from the basic market-entry problems in Europe,” he said. State rail monopolies, which still exist in most EU member states, are impeding competition and shutting out new entrants, he claimed.
But the liberalisation experience in Britain is likely to be central in informing the Commission on the big decision it has to make – to push for unbundling or not. A central question will be this: did unbundling the track-owner from the rail operators cause the cost increases in Britain, or are other factors to blame?
Fitch suggested that the cause is more complex. “A close read [of the report] shows that most cost increases have nothing to do with unbundling; they have to do with frequency and also the cost of compensation,” he said.
Increasing the number of trains to attract new customers has resulted in cost increases of £800 million (€900m). The total increase has been £1.7 billion (€2bn), much of that attributed to rises in staff pay.
But critics of unbundling point out that the separation of infrastructure from operations is the core reason for increased costs, because incentives are misaligned.
The report finds evidence for this in Britain, noting that the incentives for Network Rail, which manages the infrastructure, and the train-operating companies are “almost completely different”, with no link between the revenue received by operators and the costs incurred by Network Rail.
“The system of incentives overall appears to have a bias towards capital expenditure rather than making better use of existing capacity,” the report concludes.
The fragmentation of the rail operators has also made it more expensive to purchase equipment and services. Individual train-operating companies have had to pay more because they cannot procure at the volumes once enjoyed by British Rail. The many layers of overlapping private entities created from what was once British Rail have resulted in a confusing array of organisations that do not always work well together.
Under the 1993 Railways Act, British Rail was broken up into more than 100 separate companies – with 25 passenger rail franchises.
“The principal cause of the cost increase is the numerous interfaces you need to manage in the unbundled system,” says Libor Lochman, CER’s executive director. “It is more costly compared to the integrated system.”
Ironically, the end result of all the confusion created by the unbundling is that the British government is now more involved in the rail sector than ever. “What surprised me the most was the extent to which the government is involved,” says McNulty. “People told me that the government has more control today than it had when the railway was a national entity. That is a strange kind of privatisation.”
The UK is not the only country to have liberalised its rail market. The British reform was inspired by Europe’s first rail liberalisation, the break-up of Sweden’s state railway in 1988. The EU’s first railway package, in 1991, required member states to separate the accounts of railway operation and infrastructure, but left it up to national governments to decide whether to separate the organisational and institutional aspects.
The Czech Republic and the Netherlands decided to break up the monopolies. But other countries, including Germany, Ireland and Italy, have left them integrated. France has nominally separated rail operations from infrastructure. The second railway package could make unbundling obligatory.
A study conducted last year by the University of Leeds compared those member states that have separated their infrastructure and operations with those that kept them integrated. It found mixed results. In the states that were part of the EU before 2004, vertically-separated railways have grown faster than vertically-integrated ones, with the UK having the fastest-growing passenger numbers.
But in rail freight, the accumulated growth has been higher for railways that remained integrated than for those that separated, with Germany dominating the field. The report found that the effects of unbundling have varied greatly and that “there is no evidence to support the view that all member states should be required to fully separate infrastructure from train operations”.
CER shares that view. It says it does not consider the British unbundling experience to be a “failure”, but adds that the experience has shown that solutions need to be tailored to reality. “Unbundling is not a panacea,” says Lochman. “We are not against unbundling in certain situations, but you can’t apply it everywhere. What is important is to have a strong regulatory body that is able to oversee the competition.”
CER is recommending that, instead of a mandate for unbundling, the Commission should give member states three options: to separate fully the infrastructure from the operations; to separate only the essential functions of path allocation and charge-setting; or simply to monitor independently these essential functions.
But the Commission has indicated that it may see these two latter options as insufficient for a full solution to the problems in the rail market. “A strong independent regulator does not solve everything,” says Fitch.
The Commission is conducting an impact assessment, expected to be finished in the middle of this year. This analysis of how well unbundling has worked in those countries where it has been tried may indicate which way the Commission will go.
But if the analysis comes back with something like the McNulty report, the results could depend on interpretation.
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