Vertical integration in railways pro et contra

  • Vertical integration in railways pro et contra

    Author: dr. Nikola Popović

    Key words: Railways, network industries, market regulators, competition, vertical integration

    Different network industries, including railways, are questioned as whether and in which form the function of managing the network i.e. rail network should be separated from the function of providing the network services i.e. rail transport? What are the benefits of preserving these functions with one entity or dividing them among several entities? In the first case, that is vertical integration of the functions of managing rail infrastructure and providing rail services, it is presumed that a risk of distortion of competition or potential discrimination may arise. In the second case, that is vertical separation of these functions, it is assumed some loss of organisational and operational synergies may happen. The historical operator in railways is regularly a vertically integrated entity consisting of rail network and passengers and freight transport operations. The liberalisation of transport operations should allow free and equal right of access of competitors to rail infrastructure which represents to them an essential facility. Essential facilities are technically not easily replicated nor are financially viable to be built in parallel and are predominantly found in network industries as electronic communications, energy, transport, etc. The rail infrastructure manager active on a neighbouring rail transport markets, may be tempted to foreclose the access to competing undertakings to the essential facility, in order to protect its transport operations. Therefore, competition law and network industries sectoral regulation as well as enforcing public regulatory bodies have a goal to promote equal access to rail infrastructure and rail services necessary to compete for final consumers and clients. Hardly any discussion on railways  goes on without touching upon on its reduced presence and efficiency comparing to other transport modes over the last few decades in EU member states. Therefore in the focus of the railways sector are topics such as financial stability, sustainable financing, labour productivity, etc. Railways may not always be sufficiently attractive to business and passengers end users as a transport mode, they may be state aid depending and its cross-border attractiveness is rather slowly being built by harmonisation of technical standards and setting up of pan European transport corridors. One more objective reason for this historical stagnation lays in the availability of competing land modes of transport like buses, trucks and private cars, and additionally air and water borne transport. A second more subjective reason relates to the transport policy of EU member states in positioning railways vis a vis other transport modes, and the heritage position of the State as owner of the rail infrastructure and transport operators. Briefly, it may be alleged that the railway sector is traditionally seen as economically modestly efficient and as a consequence not competitive from the transport intermodal standpoint. The rail reform predominantly aims at raising funds on the competitive market and not on limited State resources. The structural changes depend on the model of competition available and regulations applied. One can differ competition among vertically integrated rail structures where a source/destination competition in the market exists, form the model of access competition in the market between rail transport operators and finally competition for the market among passenger transport rail operators. The first model of competition, developed in the USA, presupposes competitive parallel rail routes i.e. interchangeability of the same sources and destinations infrastructure. The second model can be found in EU along the liberalisation of rail freight transport. The third model is also found in the EU as a way of developing the passenger rail transport. The role of market regulation of network industries and of railways alike, that have come a long way from state monopoly to free market, is generally to enhance efficiency while guaranteeing availability of service of general economic interest. At the time of de jure or de facto monopoly in network industries, marked by economies of scale and scope, higher prices or lowered quality may be imposed to the final users. The role of market regulators is to prevent such risks by bringing in new competitors or alternatively impose incentive regulations to the monopolist or the dominant undertakings. At the level of EU it is expected that the common market for rail transportation developing across member states borders will support national structural reforms and revitalise rail transport in face of competing modes of transport. This is achieved by continuous legal harmonisation and technical standardisation of the railway system (interoperability) through several regulatory packages form 2001 onward. Collecting on the aforementioned, this article looks at the pro et contra of vertical integration of rail infrastructure managers and rail transport operators, as a mean of developing competition and rail transportation.