Lesson 5 - The cost factor

Across the EU, the revenue generated from train tickets (€46 billion) and freight traffic (€20 billion) doesn’t cover rail’s operational costs, making the mode reliant on state support. The overall cost of rail operations and infrastructure management in the EU in 2012 was around €110 billion. As a result, Europe must invest every year about €35 billion in subsidies to maintain and build rail infrastructure. Part of the picture is the high indebtedness of larger firms: Deutsche Bahn is about €20 billion in debt while SNCF is about €40 billion in debt.

Rail is an expensive market to enter and a hard market to profit from, especially considering the competition from buses, car-sharing and planes on the passenger side, and from trucks and barges / short sea shipping on the freight side. However, there are ways to ensure good investment and reduce rail’s operational costs.

Freight receives less state support than passenger rail. This is justifiable as the latter accounts for about 80% of train kms in Europe. Also, the impact of such spending benefits all people, rather than only freight companies. The state does invest in rail infrastructure though so, given the fact that freight and passenger trains share the same infrastructure, freight benefits from state support in infrastructure. But it’s not enough to make rail freight competitive, especially compared to road freight.

Also, freight trains normally pay more than passenger trains for accessing rail infrastructure. This is why the revenue from freight (€20 billion) is disproportionate to the amount of train-km in Europe that are performed by freight trains (around 20%).

The German Transport Ministry (BMVI) announced that it will be spending €350 million in 2018 to reduce track access charges for freight companies. This state support is expected to increase the freight volumes on rail as operational costs will be reduced. Rail companies have long voiced their opinion that track access charges put them at a competitive disadvantage compared to road if you consider how little of the road infrastructure is tolled. Germany has an expansive road toll that applies to trucks on most primary and secondary roads. If the toll is maintained, and the track access charge is reduced, then the real impact of lowering rail’s operational cost  will be tested in 2018 when the support comes into effect. Put simply, all eyes are on Germany.

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Incumbent rail operators and infrastructure managers have historically been treated as a branch of national transport ministries. The EU’s efforts to open the railway market to competition have made such treatment unlawful, with the Commission developing Community guidelines on State aid for railway undertakings, limiting how and when government support can be granted to rail companies. Despite EU law, however, and depending on the country, many of the big legacy railway companies are still treated somewhat like extensions of the state. This is especially true for infrastructure managers (closed market) as the infrastructure is still state-owned across Europe.

The position that infrastructure managers (IMs) have in many European countries means oversight is vital. Regulators should ensure that IMs are treating all rail operators equally. Meanwhile, the aim of transport ministries must be that all operators  are doing the best job they can to maximise rail use on national infrastructure. Governments need to develop Key Performance Indicators to measure the success of infrastructure managers. Audits of IMs must also be carried out regularly to ensure they are working well – there may be a role for the EU here in benchmarking IM performance across the Member States.

International traffic is a particularly important area for freight: 50% of rail freight crosses a border (compared with only 6% for passenger rail). As a result, infrastructure managers need to communicate delays, construction works, and other relevant information to neighbouring countries. The EU’s initiative to establish Rail Freight Corridors lists such communication as a key objective. Member states must also assure the EU that they are pushing the national IM to deliver fair access to all trains, including those from another Member State.

The Combined Transport Directive is a unique means for the regulator to reduce rail freight costs. Combined transport is when a shipment is mainly done on rail (or barge) but requires a truck to perform the first and/or last mile. The Directive was first drafted in 1992 and promoted modal shift to reduce road congestion Decreasing the cost and restrictions for the road leg of a combined transport journey incentivises the use of rail for the majority of that journey (provided that the cost savings are passed on to the customer). This market segment has growth potential for transporting more containers and trailers by rail.- but, it requires the harmonious application of this Directive. And, as with all measures discussed to date, it requires good oversight so that road companies aren’t simply pretending to be part of a combined transport movement to avail of the reform.

Aside from infrastructure charges, there are  significant costs when running a rail operator. . Locomotives (engines) can cost about one million euro each while wagons and other rolling stock cost hundreds of thousands per unit. Three companies dominate rail supply in Europe: Siemens, Alstom and Bombardier. The high capital costs for railway “rolling stock” is due to the lack of economies of scale. A train normally is used for about 30 years once it is built and is specifically designed for the technical and legal specifications of a country.

The second hand market for trains is low due to the long lifespan of the technology, as well as the lack of companies willing to sell to their competitors. China and Japan both produce trains and are looking to expand more into the European market. The European manufacturers will find it hard to compete with Chinese prices but the competition may reduce costs to operators in the EU.Insufficient research has been done on the capital costs of rail, something that can and should be redressed by the European Commission.

The European Union Agency for Railways was established in 2004. Its task is to improve the interoperability of trains across Europe and create a common approach toward railway safety. Such standardisation can improve the efficiency of international rail and help to bring down rail costs if different companies can order similar equipment across borders. The Agency has also removed some red tape as it has the power to grant certain certificates EU-wide. This one stop shop can reduce costs by €70,000 for train operators hoping to get European clearance for a locomotive. Harmonisation of technical systems and safety standards need to be centralised if hopes for a single european railway agency are to be realised. The Agency is making progress in achieving that.

Rail is less carbon intensive but requires significant investment. Making sure that European railways are functioning as efficiently as possible is an important public goal. The EU and Member States need to ensure that unfair practices that hinder the growth of rail are removed while defining Key Performance Indicators to ensure that rail performs well. These KPIs need to be established as soon as possible on the EU’s Rail Freight Corridors, as well as at national level. This may seem like pressure to perform but an industry that receives so much state support, and has so much potential to reduce the climate impact of transport, needs such pressure. Rail will be better for it.