Railway (De-)Regulation – A European Comparison Guido Friebel, Marc Ivaldi, Catherine Vibes November 2003 Railroad Conference, Toulouse

Subject of the study  Intensive reform discussion: how to increase European railroad efficiency?  Three types of reforms (Directive 91/440): Separation infrastructure/operations Independent regulatory body Third-party access  Large variation across time and countries in adopting these reforms  Main question: What does the experience in EU countries teach us about the effect of reforms on railway efficiency?

Approach  Production function  Measure of efficiency: closeness of a given railway firm to “production frontier”?  Efficiency = residual that is not explained by: Technological elements Reforms in the law book  For instance: quality of management, implementation of reforms...  Our specific interest: what is the impact of reforms on productivity trends?  Approach allows to look at Effects of reforms Efficiency of railways: over time and across countries

Main results  Reforms increase output  More reforms are not necessarily better than less reforms  It depends on sequencing: packages of reforms are neutral or even bad sequential reforms improve efficiency  More favorable efficiency development for smaller countries than for larger countries,  except for Sweden and Germany.

Data  Worldbank: information about physical inputs and outputs  Inputs: route kilometers, staff  Outputs: total kilometers (freight and passenger), passenger kilometers  Reforms: date of adoption of three reforms: Separation Regulatory institution Third-party access

Data strengths and weaknesses Strengths:  Physical data: most comprehensive data set available  Institutional data: variation over time and across countries Weaknesses:  Lacking data of UK during reform period: clearer (better) results without UK  Institutional data: Problem of compatibility across countries Very different types of reform implementation

Deregulation events, three main aspects

The model  Cobb-Douglas production function  After log-linearization  Country fixed effects and time trend  y=output, K=Capital, L=Labor  OLS Estimation, robustness check: LISREL

Result 1: Reforms increase productivity

Distinguishing reforms  Result 1 does not take into account: Intensity of reforms Type of reform  Regression on quantity of reforms only: more than one reform does not improve efficiency   Distinguish sequencing of reforms: Partial Sequential Package

Result 2: Sequencing matters

Efficiency measure Global efficiency : Passenger traffic efficiency:

Efficiency development over time, total traffic, larger countries

Efficiency development over time, total traffic, smaller countries

Efficiency development over time, passenger traffic, larger countries

Efficiency development over time, passenger traffic, smaller countries

Relative efficiency among larger countries, five-year periods, total traffic

Relative efficiency, larger countries, five-year periods, passenger traffic

Summary and implications  First detailed test of effect of reforms on railroad efficiency  Reforms help increase efficiency  More reforms are not necessarily better: sequencing seems to matter  Additional result: Institutional/full separation of infrastructure do not score better than organizational reforms (when including UK)  Much need to dig deeper into differences in implementation

Backup slides

The mean-and-covariance structure analysis: the LISREL model  Advantage of the method: it allows to solve the potential problem of correlations between input quantities and individual effects.  The theoretical model: η= latent variables z=observed variables Estimation of the model entails choosing values for the parameters so that the predicted covariance matrix fits the empirical one.

Efficiency comparison, total traffic

Intensity of reforms

Separation of infrastructure from operations