European differences and similarities

Labour would pursue a slow renationalisation if elected on Thursday. Steve Medhurst looks at how other European countries operate their railways

In 2011, the European Commission instigated a new rail strategy, which ended up with a White Paper and a bill in 2016 that became known as the Fourth Railway Package.

This was a set of six legislative texts designed to complete the single market for rail services (Single European Railway Area).

Its overarching goal was to revitalise the rail sector and make it more competitive in relation to other modes of transport. This was through creating greater competition to help initiate a more efficient and customer-responsive industry.

EU rail legislation has consistently encouraged competitiveness and market opening, with the first major law in this direction dating back to 1991.

Legislation was based on a distinction between infrastructure managers who run the network and railway companies that use it for transporting passengers or goods.

Different organisational bodies must be set up for transport operations on the one hand and infrastructure management on the other. Essential functions such as the allocation of rail capacity (train paths that companies need to be able to operate trains on the network), infrastructure charging and licensing must be separated from the operation of transport services and performed in a neutral fashion, to give new rail operators fair access to the market.

Moreover, it must be guaranteed that public funds for infrastructure and for the payment of compensation for transport services (under public service obligations) may not be used to finance transport operations. This was to avoid distortions of competition and the unfair use of public money.

In addition, EU Member States must also have regulatory bodies in place to monitor railway markets, and to act as an appeal body for rail companies if they believe they have been unfairly treated.

Does this all sound familiar? In fact, it was a take on the UK’s approach of running the railway network.

Even though there was clear strategy from the bill, there was enough ambiguity for interpretation. And this does vary, depending on the government at the time within each member state.

One thing that is clear is that despite which interpretation is made, the number of railway companies across the European Sector is far greater than just the old state railway company running all passenger and freight services.

For example, according to the Railfaneurope.net website, there are: 50-plus in Germany; seven in Belgium; 17 in France; ten (but due to expand) in Spain; 31 in the Netherlands; 19 in Austria; six in Bulgaria; 18 (but nine owned by one company) in Denmark; and four in Latvia.

How this was interpretated varies between country to country and to some extent it depended on the government at the time.

For example: Norway, which had a centre right government, opted for three major franchise areas - South, North and Middle. Go-Ahead was awarded the south, and VY (ex-NSB, Norway’s State Rail owned by Swedish Rail), was awarded the other two, which included the lucrative Oslo to Bergen route.

However, the Norwegian Government insisted that all the rolling stock had to be leased from a state-run leasing company (Norske Tog). Therefore, while opening the system to private companies, it retains tight control in other parts.

In the Netherlands, there is a different view. Nederlandse Spoorwegen (NS), the Dutch state-owned railway company, is part of the Ministry of Finance rather than the Ministry of Transport, which runs ProRail (which is the Netherlands equivalent of Network Rail).

The current structure of NS running 95% of all rail services dates to the early 2000s, when Karel Noordzij became CEO and reversed many of the previous reforms (the aim had been to provide a competitive marketplace) to restore confidence in the company.

The state no longer considered competitive passenger services to be viable, and began granting concessions with the goal of one concession per line.

NS received a concession to run main line routes until 2025. The remaining 5% were minor secondary routes that were non-profit making. These are put out to tender and run by private companies.

Is this a strategy potentially being adopted by the current UK Government? Think about the announcement that Avanti will stop running trains to Shrewsbury, with a saving of roughly £1.4 million a year, but at the same time operate a new open access service from Shrewsbury.

More recently, NS has again (along with the Dutch Government) been shrouded in controversy, with the renewal of the concession from 2025.

The fact that the Dutch Cabinet is awarding NS the concession at all is controversial. The rail company’s competitors have filed various lawsuits against the award, accusing the government of violating European Union competition rules. The European Commission agrees and has started criminal proceedings.

However, at the same time, the Dutch Government is taking another step in liberalising the rail market. In the new concession, NS will lose the exclusive right to international destinations such as London, Paris and Berlin.

Turning to Germany, Deutsche Bahn (state-owned private company) is the main provider of railway services on a monopoly basis.

In recent years, several competitors have started businesses. They mostly offer state-funded regional services on a concession basis, but some offer long-distance services as well. Regional and local rail traffic is organised and funded (as the fares usually do not cover the running costs) by the federal states.

The usual procedure under EU legislation is to award the contract to the lowest bid, by means of a tender procedure. The respective states are free to announce short- or long-term contracts, as well as to stipulate further conditions such as on rolling stock.

In recent years, many bids have been won by private rail companies such as NordWestBahn or Arriva, although some states have awarded long-term contracts to local DB Regio subsidiaries.

In Spain, there is a similar situation. Most railways are operated by Renfe. Metre and narrow-gauge lines are operated by FEVE (both centrally owned Spanish state companies) and other carriers in individual autonomous communities.

In France, rail transport is marked by a clear predominance of passenger traffic, driven in particular by high-speed rail.

SNCF, the national state-owned railway company, operates most of the passenger and freight services on the national network, managed by its subsidiary SNCF Réseau.

There are also a significant number of private lines/operators, although these are predominantly mountain routes within the Alps and the Pyrenees, which SNCF does not wish to own or operate.

What is clear from these three major European countries is heavy state control and monopoly over the major passenger routes and services, but with openings for private companies to support the system.

In the majority of the rest of Europe (and especially in what we will call the old Eastern Bloc countries such as Latvia, Bulgaria and Slovakia), passenger services are operated by the old state railway company - albeit in a new state-owned format.

While it appears that in most European countries, the majority of passenger services are operated by one state-owned company, freight is one area that has really opened out.

Owing to the competitive nature of moving goods, the majority of state-owned companies have either sold off their freight operations or have sought external support.

The latest is Renfe’s loss-making freight business (Renfe Mercancias), with Swiss shipping giant MSC set to buy a 50% share in the company.

In addition, the European Investment Bank (EIB) has signed a €45 million (£38m) agreement with Medway ROSCO, a subsidiary of Medway Operador Ferroviário de Mercadorias (Medway OFM), the Iberian peninsula’s largest private rail freight operator and part of the Medlog Group.

The project supports the expansion of rail freight transport services in Portugal and Spain (including cross-border services), thus enabling more efficient supply chains in the two countries.

The new services offered by Medway OFM will predominantly target less developed or transition regions in Spain and Portugal, thus contributing to strengthening the European Union’s economic, social and territorial cohesion objectives and promoting sustainable transport.

The project will positively affect employment, as it is expected to create around 940 jobs during the implementation phase and 56 new jobs during operation.

Freight is less attractive to governments owing to the competitive nature of the business (running passenger services are more profitable). But what it does do is allow these companies to use their expertise and a lower cost base to maximise route options from the network/multi-territory services and thus maximise profit.

To summarise, Europe’s strategy is to open the network to more competition, which results in lower costs for the customer.

This appears to have been successful in freight. However, in the more lucrative passenger market, state control and monopoly of train services remains, making it hard for private companies to make an inroad unless the state government (such as in Norway) produces a plan to open up the market, leaving the unprofitable routes for the private opportunities.

So, while both of the UK main political parties are suggesting increased state control, this does appear to go against European Policy, although in fact the new approach will see us becoming no different to the majority of European countries.

Steve Medhurst is the Global Rail Practice Leader at RSA Insurance.