1. CHAIR OF NETWORK INDUSTRY MANAGEMENT 2nd Annual NGI Day on Coherence between Institutions and Technologies in Infrastructures Marc Laperrouza, Senior Research Associate Management of Network Industries (MIR), College of Management, EPFL EPFL, Lausanne June 12, 2009

2. CHAIR OF NETWORK INDUSTRY MANAGEMENT Program

3. CHAIR OF NETWORK INDUSTRY MANAGEMENT 3 Structure 1.Theoretical background 2.Case study on ERTMS 3.What do we need to move the program forward?

4. CHAIR OF NETWORK INDUSTRY MANAGEMENT 4 1. Theoretical background Source: Finger et al. (2005)

5. CHAIR OF NETWORK INDUSTRY MANAGEMENT 5 Institutions and Economic Performance Government Informal Institutions (Norms of Society) Formal Institutions (Laws of Society) Property Rights Technology Transaction Costs Transformation Costs Costs of Internal Production Costs of Exchange Economic Performance Contracts Source: Alston (2007)

6. CHAIR OF NETWORK INDUSTRY MANAGEMENT 6 Causality… If many parties with different objectives have to be aligned, it might be the least costly investment (in time and money) to solve incoherence by modernization of the system”. MJ “The modernization of the signaling system causes incoherence as many parties with different objectives have to be aligned”. ML “Is it the institutional framework or the technological constraint that shapes regulation in the water sector?”. AP

7. CHAIR OF NETWORK INDUSTRY MANAGEMENT 7 Definitions… Co-evolution vs. coherence? –Ce: Change of a biological object triggered by the change of a related object  systems depend upon each other and advance step by step through a kind of evolutionary process –Ch: Something stronger than mere consistency  institutions of the system are aligned with the critical technical functions of the system Institutions vs. technologies? –I: actors and games, formal and informal, institutional arrangements (contracts, alliances), formal institutional environment of socio- technical, systems (laws and regulations) and institutional environment (values, norms, traditions, and customs)  rules of the game –T: Relationship that society has with its tools and crafts and to what extent society can control its environment

8. CHAIR OF NETWORK INDUSTRY MANAGEMENT 8 2. Case study on ERTMS Development + deployment of a pan-European signaling technology – European Rail Traffic Management System (ERTMS) Hypothesis: despite similar external pressures (e.g. EU-mandated liberalization of railway market + ERA as system authority) national policy responses and outcomes differ owing to contrasting domestic institutions Demonstrate how the salient characteristics of one or more institutions affect specific political dynamics, in turn producing distinctive outcomes

9. CHAIR OF NETWORK INDUSTRY MANAGEMENT 9 Methodology Theoretical framework: historical institutionalism –Institutions argued to be most influential factor of domestic policies –Estimate the impact of variations in institutional forms and configurations on a particular outcome or set of outcomes  ERTMS deployment –Employ careful cross-period analyses (periodization strategies) within and across country units 2 steps approach –Building a case study “from the ground” around ERTMS –Comparative analysis (3 countries) of ERTMS deployment Testing historical institutionalist approach in railway sector

10. CHAIR OF NETWORK INDUSTRY MANAGEMENT 10 Data collection & analysis Secondary literature search –ERA reports –Stakeholder publications (CER, EIM, UNIFE, RUs, TOs, etc.) “High-level” interviews –Main stakeholders (ERA, associations, operators)

11. CHAIR OF NETWORK INDUSTRY MANAGEMENT 11 Type of conclusion or expected results In-depth case study of ERTMS development and deployment in the framework of EU Single Rail Market Comparative study of 3 institutional settings and their influence on ERTMS deployment in selected European railway markets (Switzerland, Germany and France) Extending HI by integrating the technology dimension

12. CHAIR OF NETWORK INDUSTRY MANAGEMENT 12 The paper examines railway standardization processes within an interoperable environment Case study on the development and deployment of ERTMS from interviews Paper illustrate the difficulties to coordinate a standardization process in a newly deregulated environment Question whether the current governance of rail standards is suited to the EU’s objectives of a competitive railway market The successful transition from a regulated to a liberalized environment causes and necessitates institutional transformations that go well beyond the creation of a regulator or a system authority Problem statement

13. CHAIR OF NETWORK INDUSTRY MANAGEMENT 13 Resurgence of interest in understanding how the interplay of regulation and institutions applies to network industries  performance Centered on measuring aspects of economic performance (Spychalski and Swan, 2004; Jupe and Crompton, 2006) Technical effectiveness of particular railway technologies is largely covered in the technical literature but the issue of system-wide performance (i.e. the economic-societal-technical nexus) of the railway system is seldom discussed Analyze the relationship between technologies and institutions  Finger, Groenewegen et al. (2005) Co-evolution between institutions and technology Literature

14. CHAIR OF NETWORK INDUSTRY MANAGEMENT 14 Directive 91/440 to make railway industry more economic and efficient  unbundle, compete and regulate Efforts dependent on interoperability  Directive 96/48/EC (HSL) and Directive 2001/16/EC (CR) EU railway interoperability is based on a triple-layer structure: – 2 interoperability directives – Technical specifications for interoperability (TSI) – EU specifications, e.g. CENELEC or ETSI norms Single European Railway Market and ERTMS 1/2

15. CHAIR OF NETWORK INDUSTRY MANAGEMENT 15 Studies and specifications 1989-1997 Final specifications 1998-2004 Roll-out 2004-2008 (till 2020) Technical level Class P to Class 1 SRS SRS 2.2.2 and 2.3.0 Work on 3.0.0 Institutional level Directive 96/48/EC Directive 2001/16/EC Directive 2004/50/EC Main stakeholders EEIG, ERRI, EUROSIG UNISIG, Railways, CENELEC, AEIF ERA, Railways EmphasisEngineeringPoliticsFinancial Various stakeholders (IMs, TOs, equipment suppliers but also government agencies) respond to different incentives Heterogeneous Automatic Train Protection systems (ATP) Single European Railway Market and ERTMS 2/2

16. CHAIR OF NETWORK INDUSTRY MANAGEMENT 16 The European Interoperability Directive mentions 3 points: facilitate movement of international rail, create a market for services and equipment and ensure interoperability Define standards and corresponding technologies that will allow the smooth usage of the European infrastructures by the various train operating companies  defines available capacity, possible safety levels, strategic options for both TOCs and IMs, and the overall costs of the European railway system “It is a significant challenge for liberalized infrastructures to align the mode of governance with the needs to safeguard certain critical technical functions” Individual objectives and preferences typically prevail against the technical needs of the system for safeguarding the reliability and technical integrity Interoperability

17. CHAIR OF NETWORK INDUSTRY MANAGEMENT 17 Critical institutional arrangements Technical interoperability refers to the purely technical interfaces between rolling stock and infrastructures Operational interoperability refers to the operational rules between railway undertakings Interoperability

18. CHAIR OF NETWORK INDUSTRY MANAGEMENT 18 Actual Deployment Technical coordination Mo U European Community (EC) Article 21 Committee European Railway Agency (ERA) Community of European Railways (CER) European Infrastructure Managers (EIM) European Railway Supply Industry (UNIFE) ERTMS Users Group (EEIG) International Union of Railways (UIC) Political and strategic coordination Declaration of interest Union industry of signalling (UNISIG) ERTMS domestic projects Corridor A project Corridor B project Corridor C project ERTMS Platform ERTMS ecosystem « Organizations are agents of institutional change »

19. CHAIR OF NETWORK INDUSTRY MANAGEMENT 19 Acts as the system authority for ERTMS European Railway Agency (ERA) is the institutional answer to standardization issues in the railway sector –Prepares the review and updating of TSIs and makes recommendations to take account of developments in technology or social requirements –Contributes to the development and implementation of rail interoperability – ensure that the TSIs are adapted to technical progress and market trends and to the social requirements; –Monitors progress with the interoperability of the railway systems –Examines from the point of view of interoperability, any railway infrastructure project European Railway Agency (ERA) 1/2

20. CHAIR OF NETWORK INDUSTRY MANAGEMENT 20 ERA does not have any decision-making (nor regulatory) powers  i t only submits opinions and recommendations to the EC The gap between technical coordination and actual deployment is hardly filled by ERA  the “reality of corridors” never reaches ERA Standardization process itself poses a problem  going back and forth between ERA and Member States Conflict between short-term (deployment via corridors) and long term sustainability (standards) Appointment of a European coordinator to facilitate the coordinated deployment of ERTMS  bridge the gap between ERA’s technical and political work, and the actual deployment European Railway Agency (ERA) 2/2

21. CHAIR OF NETWORK INDUSTRY MANAGEMENT 21 What explains that, unlike most other European network utilities (like telecommunication or electricity and gas), the railway sector does not have a European Regulators Group? Is ERA a hybrid solution between a sectoral agency and a European regulator towards which the EC wants to go in order to restrict the delegation of power (formal decision powers are with Art. 21 Committee)? Does the current institutional framework – and the creation of ERA – offer the optimal design to the technological and competitive shifts taking place in the railway sector? Discussion

22. CHAIR OF NETWORK INDUSTRY MANAGEMENT 22 Developing a pan-European railway standard in the era of liberalization Shift has taken place in railway systems during the 1990s  end of this “national rail market” equilibrium Supranational legislations started to impose new rules on domestic jurisdictions Different actors operating under different power relations, e.g. vertical separation of infrastructure management from train operations Difficulties in ERTMS standardization and the disappointing level of deployment questions what type of institutional setting could best enhance the changes for achieving a truly interoperable European railway market

23. CHAIR OF NETWORK INDUSTRY MANAGEMENT 23 Coordination is even more needed in the deployment of technology since further standardization takes place in parallel ETCS is as much related to operational than to technical aspects “You can only find all failures with [thousands of] runs” Further development can be jeopardized by one stakeholder’s losses (in this case: suppliers) Solution to locally optimize with dedicated supplier may not be the right one for the rest of the network Long time needed by the European Standardization Bodies to deliver a European standard Standardization takes place in parallel to the railway market’s liberalization which involved major re-definition of the stakeholders, including at the institutional level Broader findings1/3

24. CHAIR OF NETWORK INDUSTRY MANAGEMENT 24 Current organizational framework for ERTMS is not well suited to the railway sector’s evolution: At technical level: separate handling of GSM-R and ETCS At institutional level: lack of coordination between stakeholders (e.g. NSA and NB not included) Different policy at country level (framework is there but no Member-States took the step to transpose it)  discrepancy of national operational rules and a move towards defining them on a national basis rather than at the EU level Different strategy at company level  many undertakings want to buy off- the-shelf solutions – just a few companies (SNCF, DB) are willing to do the work + discrepancy of business cases for the various stakeholders (business cycles, type of operations, etc.) Broader findings 2/3 Problem is not a lack of regulation but a delay in meeting the new railway regime Single/shared railway system requires new institutional thinking

25. CHAIR OF NETWORK INDUSTRY MANAGEMENT 25 One should have started with operational rules (and not technical rules) Implementation round has most likely been premature (rush between the pilot projects and the lines) ERTMS means radical technical and operational changes but, given the history of railway, it will require a profound change in culture Issues compounded by the broader context of major institutional change Broader findings 3/3 CH attributes the successful deployment of ERTMS on 2 lines to strong cooperation with the Federal Office of Transport (NSA) but… the challenge posed by ERTMS goes further than the “correct” institutional setting: it requires strong leadership

26. CHAIR OF NETWORK INDUSTRY MANAGEMENT 26 Institutions, technology and performance for ERTMS System relevant functions: Interoperability Technical coordination: UIC (specifications) UNISIG (specifications) Institutional coordination: Commission ERA (TSI) Coordinators (corridors) Degree of coherence Infrastructure performance Cost /benefits of interoperability Seamless network Faultless technology Leave out interconnection, capacity management and system management Measuring issue… Time/cost to develop? Time/cost to deploy? Lines equipped (KM)? Performance=f(coherence) 1. Coordination mechanism: Centralized Decentralized Peer-to-peer Coherence between technical and institutional coordination occurs if they are based on the same coordination mechanism 2. Scope of control

27. CHAIR OF NETWORK INDUSTRY MANAGEMENT 27 Compatible time to react to signals of critical technical functions  outside scope of case study Compatible technological and institutional scope  EU-wide project but… Compatible of information flows  important effort to ensure “inside-out” (ERA) but weak “outside-in” Compatible incentives  dissimilar business cases for the actors (freight/passenger, rolling-stock/infrastructure) Compatible economic and technical agents  absence of slot allocator Compatible performance criteria  tension between economic, technical and social performance Compatible technical and economic preferences  emphasis on the former but realization that the latter prevails… Criteria for coherence

28. CHAIR OF NETWORK INDUSTRY MANAGEMENT 28 3. Discussion on how to move the program forward Additional theoretical papers  co-evolution and coherence in the theoretical approaches Detailed case studies  cross-country and cross- industry New constructs like micro-institutions?