1. Study on Regulatory Options for Further Market Opening in Rail Passenger Transport Stakeholder Meeting 10 February 2010 Session 2A German Case Study Presented by Kay Mitusch

2. 1.Key Features 2.Structure 3.Experience 4.Points made by stakeholders 5.Conclusions 6.Discussion session Index

3. Railway Reform of 1994-1999:  Restructuring of national incumbent DB:  corporatisation: from government agency to stock corporation, owned by the government  separation / integration: several companies were founded by legal act (since 1999: freight, long-distance, regional, network manager), but are integrated by 100% ownership and a strong management holding  Open access in all segments of the railway market for national RU’s and international groupings  Basic Regulation: Setting up of agency EBA (technical oversight, licensing)  Regionalisation: Regional states (Länder) are responsible for Regional Passenger Services with massive refinancing by the federal gov’t (since 1996)  Infrastructure: Financial responsibility rests with federal gov’t 1. Key features

4. Financial developments:  Subsidies:  Total government support (Regional and Infra) rises with inflation,  now at about 10 bn. EUR per annum  Access charges:  account for about 40% of RU’s costs  recently have been increasing faster than inflation  structure quite stable 1. Key features

5.  The reform of 1994-1999 was always seen as an unfinished project  Railway Reform of 2006-ongoing:  Transport & Logistics companies of DB have been combined into a sub- holding (DB ML, 2008) that will be semi-privatised (25%) in the future  Economic regulation by independent “Federal Network Agency” (BNetzA) since 2006 (non-discrimination, cost-plus like regulation of access charges)  Multi-annual contract for rail infrastructure quality (LuFV, 2009)  Possibly incentive-regulation (price cap) in the future 1. Key features

6.  Regarded as not commercially viable  On average some 60% of RU’s income comes from public funding  Open access entry not viable against publicly funded traffic  Tendered services are point of entry for competitors (franchise competition), but direct awardings to DB have dominated the market so far  States’ authorities engage in consistent planning of rail and bus operations and joint ticket systems  RU operations are strongly determined by franchise contracts 2. Structure Distinction between regional and long-distance passenger markets  Regarded as commercially viable  No direct public funding to RUs  Almost no entry by competitors (with 3 exception), although legally possible (open access)  No direct regulation either – but several government interventions with DB Fernverkehr Regional Long-distance

7. All market segments have improved  Regional: improvement of quality and pass-km  strong improvement due to fresh gov’t money and – possibly – introduction of franchise competition  DB Regio nowadays “cash cow” of DB’s RUs  Regional: franchise competition is on the road  DB market share still 89,9% of pass-km Many large direct awardings to DB Regio in the years 2002 to 2005  But more than half of the open tenders go to competitors Share of open tenders: 29 % of all train-km performed in 2007 DB share in open tenders: < 50 % 1995-2007  Competitors some 15 to 20 % cheaper than incumbent (in terms of public support per km) 3. Experience

8. Total pass-km in regional (RRPS) and long-distance (LRPS) rail passenger services (million passenger km) Source: DIW (2009): Verkehr in Zahlen 3. Experience

9. All market segments have improved  Long-distance: stable pass-km with a changing structure  DB abolished trains connecting smaller cities (InterRegio) that were unprofitable  Some 30% of these cuts were replaced by publicly contracted services now counting as “regional” services  Spread of a high-speed transport network with increasing passenger volume  DB long-distance unit currently operating profitably, despite increased airline competition (but based on huge government financing of new high-speed infrastructure) 3. Experience

10. All market segments have improved  Long-distance: almost no entry by competitors  DB market share still above 99% pass-km.  3 exceptions: InterConnex (Veolia): Leipzig – Berlin – Rostock Berlin Night Express (Swedish SJ & German GVG): Malmö – Berlin Vogtland-Express (Arriva, partly publicly financed): Hof – Plauen – Berlin  Possible reasons for lack of entry:  lack of direct gov’t support  strong intermodal competition  discriminatory practices of the integrated incumbent  other difficulties like availability of rolling stock on secondary markets  scale and network effects  potential competitors distracted by more profitable regional and freight markets

11.  In regional traffic, public authorities define service requirements too tightly, leaving insufficient scope for entrepreneurial decisions  Views on awarding procedures for regional service contracts:  In addition to open tenders, the use of restricted or negotiated procedures can be part of an overall competitive and efficient market  The use of direct awarding should be abolished, since it favours the incumbent  The interplay between two regulatory agencies (EBA and regulator BNetzA) is not always coordinated and creates problems  The incumbent’s ability to discriminate against new entrants are still too strong - need for an incentive regulation and separation of infrastructure and incumbent’s transport branches. 4. Stakeholders’ views

12.  Neighbouring states’ railway systems are less open than in Germany. Thus, RUs in these states can use their protected market base as a source of cross-subsidy to compete with DB  The closed markets in neighbouring states threatens the political commitment to market opening in Germany  More money is needed for the infrastructure  Access charges are quite high in Germany – heightening the importance of a regulatory reform towards an incentive regulation (since the LuFV contract is silent on access charges) 4. Stakeholders’ views

13.  Regional:  passengers now benefit from a well-organised and quite dense service network with a modern fleet at moderate prices  Modal share has increased from 3.4% to 4.1% (a relative improvement of 19%)  DB’s market share fell from 100% to 90%, its success rate in open tenders is below 50%  Long-distance:  Fares for long-distance travel are generally viewed as quite high by the public  Lack of punctuality is also a public concern  Apart from recent irregularities (mainly caused by the rolling stock industry) the high quality of long-distance services is also acknowledged  Modal share has declined from 3.5% to 3.1% (a relative decline of 12%)  DB’s market share is still almost 100% 5. Conclusions Passenger Railway markets since the Railway Reform of 1994-1999

14. Overall, the Railway Reform of 1994-1999 has led to a more reasonable railway system  The incumbent didn’t vanish or topple after the introduction of competition – on the contrary, it reorganised quite successfully  Regionalisation is seen as a success – reorganisation, public planning & elements of franchise competition seem to go hand in hand – but the level of competition is still low  Development of long-distance traffic poses more questions and concerns, as does infrastructure management  For long-distance, alternative organisation models are currently discussed  At the same time, there seem to be chances for some more entry in the near future  For infrastructure management, an introduction of a price cap regulation is announced by the new government (incentives for efficiency, more reliability in future access charges) 5. Conclusions

15. Questions:  Do you agree with this analysis?  Are there any other issues of equal importance that need to be brought out?  What lessons can we learn from the German experience? 6. Discussion session