1. Baku, 18-19 June 2008 Views of a railway operator on the liberalisation process, adjustments made to prepare the rail sector for competition Lucio Lanucara, LL.M. Trenitalia S.p.A. - Legal Department Deputy Director, EU and International Affairs

2. 2 Structure of the presentation A summary of the EU acquis in the rail sector since the early 1990’s -Initial framework developed in the 1990s; -The White Papers and the Three Rail Packages; -Latest developments Trenitalia’s experience -The challenge of transformation from EU and Italian law; -Changes in organization and culture; -Challenges for the future.

3. 3 A summary of the EU acquis in the rail sector since the early 1990’s

4. 4 Historical background Railways as the first of the modern mode of transport, with an unprecedented success during the 19th century and the first half of the 20 th century. Decline in the second half of the 20 th century (motor cars and commercial aviation became increasingly popular and successful). In order to reverse decline and favour modal shift, European Community adopted a number of legislative measures aimed at gradually creating a competitive “railway area” integrated at a European level: - Liberalisation; - TEN; - Technical harmonisation; - Common rules on RU-customer relationship.

5. 5 Main legislation adopted in the 1990’s Basis of EU regulation in the railway sector laid out in the 1990’s: Directive 91/440/EEC (and later amendments): Gradual granting of access to the infrastructure to licensed railway undertaking; Begins from international associations and intermodal freight transport; Separation between RUs and IMs. Directive 95/18/EC: Regulates licensing regime; Licenses issued in a Member State valid throughout the Community. Directive 95/19/EC (infrastructure allocation, repealed and substituted by Directive 2001/14) Directive 96/48/EC (interoperability of high-speed systems)

6. 6 White Papers and Railway Packages - 1 White Papers of 1996 and 2001 Established EU transport policies until 2010 (update in 2006); Impulse for acceleration of legislative production. First railway package (“infrastructure package”, adopted in February 2001) By building on EU legislation of the Nineties, it enabled licensed RUs to access railway infrastructure on fair, non ‑ discriminatory terms and began liberalisation of freight transport. Directive 2001/12/EC on infrastructure access (amends Regulation 91/440/CEE. Freight international: TERFN by March 2003, fully by March 2008); Directive 2001/13/EC on licenses; Directive 2001/14/EC on charges, infrastructure allocation and safety certification. (Directive 2001/16/EC on interoperability of conventional systems)

7. 7 White Papers and Railway Packages - 2 Second railway package (adopted in April 2004) Further liberalisation of freight transport (full liberalisation by January 2007) and introduced important reforms in the field of safety. Directive 2004/49/EC on railway safety, Directive 2004/50/EC on railway interoperability (related to ERA institution); Directive 2004/51/EC on freight liberalisation (amends Regulation 91/440/CEE); Regulation (EC) 881/2004 establishing a European Railway Agency. Third railway package (adopted in December 2007) Focused on passenger services: introduces liberalisation on international services by January 2010 (including cabotage) and rules on passengers’ rights. Certification of rail drivers to improve competition (proposed Regulation on Quality of Freight Transport rejected by the EP). Directive 2007/58/EC on international passenger liberalisation; Directive 2007/59/EC on certification of train drivers; Regulation (EC) 1371/07 on passengers’ rights. (Regulation (EC) 1370/2007 on public service obligations, repelling Regulations 1191/69 and 1107/70)

8. 8 Latest Developments Dangerous Goods Directive aimed at unifying rules on rail, road and inland waterways (consensus reached, formal approval expected in June). State Aids to the Rail Sector Adoption of Commission guidelines establishing specific rules, in various points derogating from general regimes and clarifying a number of issues. Interoperability Adoption of the new directive, unifying Directives 94/48/EC and 2001/16/EC in first reading, 14 May 2008, yet to be published

9. 9 Trenitalia’s experience

10. 10 The challenge of transformation Ferrovie dello Stato (Italian State Railways), as most other EU incumbents, has been part of the public administration for most of its history: –Funded in 1905 by nationalizing of pre-existing private lines; –Becomes Ente pubblico (intermediate status) in 1985 (Law no. 210/85); –Still a single entity → becomes a joint-stock company (entirely State-owned) in 1992; –Company separation between IM (R.F.I.) and RU (Trenitalia) in 2000/2001 (at the same time of opening of access to the market). Even before opening of the access to infrastructure, FS/Trenitalia was not the only rail operator in Italy, as Regions owned (and still do) several local companies.

11. 11 The challange of transformation Italian domestic regulation on liberalisation has been particularly virtuous compared to European standards: –Legislative framework developed in the early 1990s has been fully implemented through Legislative Decrees No. 277/98 and 146/99; –Law 388/2000 established full liberalisation, subject to reciprocity for foreign owned RUs and their controlled companies; –Regional services: from 1997 possibility to assign through competitive procedures; –Legislative Decree 188/2003 (Railway Act) confirms and strenghtnes full liberalisation (lifting reciprocity for international freight services, way before liberalisation under Directive 2004/51/EC effective). Slower implementation of Safety Directive (infraction procedure): –Institution of National Safety Agency through Legislative Decree No. 162/2007 (plus Ministerial Decree for interim management)

12. 12 The challenge of transformation Implementation of EU legal framework forced several transformations Legal/organisational changes: –Licensing regime; –Break away from the State; –Splitting between RU and IM; –Need to stay on the market without State aids, thus more downsizing of personnel and more efficiency; –Clear contractual relationships with all public and private stakeholders; –Liberalisation of prices for services out of public service contracts. Cultural changes –Gradual shift of objective from “making trains” to “sound management” –Thus today, RU is a service company providing transport: To passengers/freight customers under market conditions; To the State as public service (public services not compensated by the State will not be performed).

13. 13 Challanges from full liberalisation of freight - 1 RUs active in the freight markets can face two fights: The fight to survive: EU’s full freight liberalization dramatically alter the landscape domestically, from the challange by niche new entrants to the clash between big State owned RUs trying to enter each other’s own markets; The fight to sell more value: The most recent trend is for private operators to be bought by foreign incumbents. In Italy this is how SNCF, SBB and DB entered the freight market. This does not always determine an increase of competition: In the case of smaller States, where their freight State operator or branch might not be sufficiently big to “stand the fight”, the latter might end up being acquired by bigger operators. In these cases, a local monopolist is substituted by another monopolist.

14. 14 Challanges from full liberalisation of freight - 2 Trenitalia’s situation: The current challange for companies like Trenitalia is to be able to expand in other countries, as its domestic market share will fatally shrink on the most profitable routes (cherry picking from new entrants); Losses cannot be simply covered through State aids, unless a restructuring plan is submitted to the European Commission (experience of SNCF Frêt in 2005), but hard to comply with the plan; The strategic answer to these needs has been the purchase of TX Logistik in 2005, thus increasing competitiveness and acquiring new traffic mostly on the north-south axis.

15. 15 Challenges from partial passengers liberalization Entry in passenger markets: –Much more difficult, because of technical-industrial characteristics (normally need a network and a regular service: point-to-point typical of freight niche competitors can’t work); –Requires relations with sufficient traffic and expansion potential to justify more than one operator. Entering otherwise possible only through acquisition of incumbent (thus not increasing competition). In Italy, major private investors have already announced that they will enter the Milan- Rome-Naples high speed market in 2010, introducing a revolutionary novelty in the European transport landscape; Trenitalia must be able to do the same on profitable routes in other countries: –Most countries have not opened up yet their passenger markets (France, for instance); –“Level playing field” is a necessary condition for market to really work (this is why reciprocity has been recognized as a possibility in the Third Railway package).

16. 16 Conclusions European liberalization process completed for freight traffic and began for passengers traffic. Thus, not only niche private operators but also big groups are entering markets. Incumbents have no choice but to enter other markets or be condemned to decline or takeover. The challenge for EU legislation and institutions is to ensure level playing field, avoiding that some publicly owned operators take unfair advantages from protectionist policies from their Governments.