1. The Future of Rail transport in Europe Marc Ivaldi Toulouse School of Economics

2. Directive 91/440/CEE Basics Integration versus separation On track competition  Freight: January 1 st 2007 Reforms National versus international markets  Passengers: 2008 or 2010 Financing the USO Outside the scope: Competition for the track

3. Integration versus Separation

4. Unround wheels The longer a wagon is operating, the more irregular the shape of wheels becomes It increases the wear-and-tear on tracks, and hence the risk of accidents Use of novel technologies sensors, transponders Requirement Investment below and above the wheel Standardized data

5. Integrated utility Infrastructure Rail services Vertical integration Infrastructure manager Firm A Firm B Vertical separation Integrated “competitor” Challenger Partial disintegration

6. Commission’s view Through separation all firms on an equal footing  same rules of access to tracks transparency about performance  incumbents and entrants  prerequisite for a competitive and sustainable solution

7. Dilemna Contra: Infrastructure under the control of the incumbent depress competition (risk of entry discrimination) be costly for consumers Pros:Transferring infrastructure to state property expensive to implement reduce the efficiency of incumbent (coordination) reduce the competitiveness of rail vis-à-vis other transportation modes

8. Dilemna Strong need for coordination Integration Strong need for competition Separation

9. Experiences In most countries, integration Separation UK Japan The Netherlands France Germany

10. The US case Integrated firms Infrastructure & freight operations No passenger services Competition law year # firms HHI 198523837 1990141290 1995111363 200082246

11. Projected CostsIntegrated Firm Separated FirmsDiversified Firms Fixed Cost169,067338,134169,067338,134 Infrastructure217,410 Operations Bulk823,799 General Freight 984,802 Subtotal1,065,2921,808,601 Total1,150,8601,451,7691,620,8362,195,0802,364,147 Empirical findings

12. Economies of scope between infrastructure-related activities and train operations Economies of scope among various type of freight services Conclusion: we should expect big firms

13. The investment problem Rail versus Air New routes in air transport is a good signal for congestion  Decentralization and competition In railways, network investment leads rather than lags new route  Coordination

14. Transaction costs The hold-up problem Williamson, 1985 Reason for the failure to invest  Investment creates a specific asset  Example -A track specific to HST with only one operator -The operator has an incentive to ask for a lower price by threatening not to make its own share of the investment Solution  Long term contracts  Coordination

15. Complementary view A regulatory agency Independent from  Government  Rail industry Monitoring the industry to ensure efficient entry and fair competition Yardstick competition Sharing of information among national regulating agencies

16. What to do next? ”one solution clearly better” is wrong Use subsidiarity??? Main test: Effectiveness of competition

17. On track competition

18. Features Low short-run cross elasticities Competition cannot provide rapid profits Large economies of density Competition can be tough

19. Implications Stable but fierce on track competition is rare Firms are looking to strategies to soften competition Non-interchangeability of tickets, non- cooperation on schedules, etc Intermodal competition can be efficient The role of internet

20. Likely outcomes of competition Questions Many firm? Symmetric market shares? Replies Degree of differentiation between services Switching costs  Higher for business than leisure travelers Difference in terms of cost efficiency  Incumbents vs Entrants

21. Possible outcomes Case Incumbent operates a network  Additional cost: opportunity cost on connecting routes Entrant competes on point-to-point routes Network 1 / 2: connecting traffic is a large / small fraction of network No too much entry / cherry picking Germany / France

22. Possible outcomes (Contd) Mohring effect The opportunity cost for incumbent increases as frequencies decreases since value of frequency of service diminishes

24. Conclusion Intermodal competition can be important Delineation of the relevant market Competition can be tough with asymmetric market shares More polycentric networks favor asymmetric market shares The level of market shares is not the right measure for competition

25. The freight market

26. Questions Is rail freight sustainable? Is intermodal competition in freight market welfare enhancing? What is the impact of Eurovignette? What is the correct level of road charge?

27. Replies Is rail freight sustainable? YES, BUT INTERMODAL FREIGHT COST STRUCTURE CREATES A MARKET FAILURE THAT NEEDS A REMEDY What is the impact of Eurovignette? SIGNIFICANT, EUROVIGNETTE IS A POTENTIAL REMEDY

28. Intermodal Freight Cost Structure COST (€) VOLUME (T-Km) ROAD RAIL

29. Intermodal Freight Cost Structure COST (€) VOLUME (T-Km) ROAD RAIL

30. Intermodal Freight Cost Structure COST (€) VOLUME (T-Km) ROAD RAIL OPTIMAL SOLUTION FOR THE SOCIETY

31. Sustainable freight market How to implement the optimal solution? Economic textbook says: A TAX SYSTEM IS NEEDED TO SOLVE THE MARKET FAILURE Question? IS A ROAD CHARGE A POTENTIAL SOLUTION?

32. A simple model of the freight industry Competition analysis As for analyzing competitive concerns Three hypothetical firms “Rail” “Road” “Others”  Sea, Waterways, Pipelines, ….  ReLocalisation of shippers and customers Strategic behaviors of firms Competition in price

33. Impact on modal split French level Swiss level

34. Impact on consumer surplus (example) DIRECT EFFECT INDIRECT EFFECT (reducing congestion & external effects) NET EFFECT Road Charge & Efficiency Gains on Rail +4.5%+9.0%+13.5% Road Charge & Efficiency Gains on Rail & Road +1.5%+6.0%+7.5%

35. Implications and questions Road charges have an effective impact on modal split Substitution to alternative modes and choices? Technological progress? Railway efficiency programs and road charges are complements in enhancing rail's competitive position Link between road charges and efficiency gains?

36. Further open questions Road charges could affect consumer surplus positively by reducing congestion and external costs Precise evaluation? More on the design of road charges To check the cost structure of transport systems Transparency To know more about marginal costs To do European research on road usage

37. Financing the USO

38. Universal Service Obligation A definition The obligation of an operator to provide all users with a range of basic services of good quality at affordable rates A call for an integrated framework Content Cost Financing

39. Universal Service Obligation Economic justifications Remedy for network externalities Redistribution policy instrument Means to supply a public good Instrument to conduct regional policy Outcome of a political economy process

40. Universal Service Obligation Costs Profitability cost of the USO  Loss in profits incurred by the operator dues to the USO  Measure: compare profits with & without USO  Critics: not easy to implement Welfare cost of the USO  Loss in welfare (consumer & producer) surplus  Redistribution: Equity versus efficiency cost

41. Financing of the USO The monopoly case Assumptions  Regulated firm (balanced budget)  different costs for providing the service to different customers  linear prices Cross-subsidies: High-cost customers pays a lower price (implicit tax on low-cost customers) Efficiency loss  Versus the benefits in terms of the objectives of USO (redistribution, public good, etc…)

42. Financing of the USO The liberalized sector case Two issues of inappropriate USO financing mechanism  Efficiency losses (as before)  Market distortion: -Obstacle to entry to more efficient operators -Inefficient entry Requirement:  The USO financing mechanism must be competitively neutral

43. Financing of the USO Two settings The operator(s) is/are designated outside the USO The designation of the USO operator is part of the mechanism used to implement the USO

44. Financing of the USO USO imposed to single operator The USO operator is solely responsible for its financing  Cross-subsidies / transfers (as before)  Risk for the viability of the operator -cream skimming  Solution? -Reserve sector  Main problem -As the tax base is restricted there are welfare losses

45. Financing of the USO USO imposed to single operator All operators contribute to the financing of the USO  Creating a universal service fund  Implicit or explicit taxes on operators to finance a transfer to compensate the USO operator  Well designed taxes allow for efficient entry  Different systems -Taxes (ex: specific feed on competitors’ sales) -Access surcharges -Lump sum entry fees

46. Financing of the USO Franchising of the USO Attractive system  Most efficient USO operator  Avoiding cream skimming, bypass, inefficient entry  Reducing transaction costs Drawbacks  Outcome depend on the number of bidders -Collusion  Investment, expropriation, etc

47. Universal Service Obligation Financing The monopoly case A liberalized sector

48. Conclusion

49. The need of a political agenda Investment in transport infrastructure Environmental issues