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The economics of EU railway reform

Author

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  • L. Di Pietrantonio
  • J. Pelkmans

Abstract

This article inspects the main economic aspects of EU rail reform. After highlighting the dramatic loss of market share of rail since the 1960s, the case for reform is argued to rest on three arguments: the need for greater competitiveness of rail, promoting the (market driven) diversion of road haulage to rail as a step towards sustainable mobility in Europe, and an end to the disproportional claims on public budgets of Member States. The core of the paper deals respectively with market failures in rail and in the internal market for rail services; the complex economic issues underlying vertical separation (unbundling) and pricing options; and the methods, potential and problems of introducing competition in rail freight and in passenger services. Market failures in the rail sector are several (natural monopoly, economies of density, safety and asymmetries of information), exacerbated by no less than 6 technical and legal barriers precluding the practical operation of an internal rail market. The EU choice to opt for vertical unbundling (with benefits similar in nature as in other network industries e.g. preventing opaque cross-subsidisation and greater cost revelation) risks the emergence of considerable coordination costs. The adoption of marginal cost-plus pricing is problematic on economic grounds (drawbacks include arbitrary cost allocation rules in the presence of large economies of scope and relatively large common costs; a non-optimal incentive system, holding back the growth of freight services; possibly anti-competitive effects of two-part tariffs). Without further detailed harmonisation, it may also lead to many different systems in Member States, causing even greater distortions. Insofar as freight could develop into a competitive market, we also discuss the theoretically more attractive combination of Ramsey pricing (given the incentive for service providers to keep market share) and price ceilings based on stand-alone costs. The incipient cooperative approach for path coordination and allocation is welcome but likely to be seriously insufficient. The arguments to introduce competition, notably in freight, are valuable and many e.g. optimal cross-border services, quality differentiation as well as general quality improvement, larger scale for cost recovery and a decrease of rent seeking. Nevertheless, it is not correct to argue for the introduction of competition in rail tout court. It depends on the size of the market and on removing a host of barriers; it requires careful PSO definition and costing; also, coordination failures ought to be pre-empted. On the other hand, reform and competition cannot and should not be assessed in a static perspective. Conduct and cost structures will change with reform. Infrastructure and investment in technology are known to generate enormous potential for cost savings, especially when coupled with the EU interoperability programme. All this dynamism may well help to induce entry and further enlarge the (net) welfare gains from EU railway reform. The paper ends with a few pointers for the way forward in EU rail reform.

Suggested Citation

  • L. Di Pietrantonio & J. Pelkmans, 2004. "The economics of EU railway reform," Competition and Regulation in Network Industries, Intersentia, vol. 5(3), pages 295-347, September.
  • Handle: RePEc:sen:journl:v:5:i:3:y:2004:p:295-347
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    Citations

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    Cited by:

    1. Tomeš, Zdeněk, 2017. "Do European reforms increase modal shares of railways?," Transport Policy, Elsevier, vol. 60(C), pages 143-151.
    2. Jacques Pelkmans, 2006. "European Industrial Policy," Bruges European Economic Policy Briefings 15, European Economic Studies Department, College of Europe.
    3. Radim Ječný & Božena Kadeřábková, 2022. "Role státu ve výstavbě a provozu železnice od 30. let 19. století do 20. let 20. století v interakci s vývojem ekonomického myšlení v českých zemích [Role of State in Railway Construction and Opera," Politická ekonomie, Prague University of Economics and Business, vol. 2022(2), pages 235-254.
    4. Hörcher, Daniel & Tirachini, Alejandro, 2021. "A review of public transport economics," Economics of Transportation, Elsevier, vol. 25(C).
    5. Marc Ivaldi, 2005. "Restructuring Railways: In Theory and Practice," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 3(4), pages 3-9, 01.
    6. Mette Asmild & Torben Holvad & Jens Hougaard & Dorte Kronborg, 2009. "Railway reforms: do they influence operating efficiency?," Transportation, Springer, vol. 36(5), pages 617-638, September.
    7. Fumitoshi Mizutani & Shuji Uranishi, 2013. "Does vertical separation reduce cost? An empirical analysis of the rail industry in European and East Asian OECD Countries," Journal of Regulatory Economics, Springer, vol. 43(1), pages 31-59, January.
    8. Bai, Xuejie & Jin, Zeng & Chiu, Yung-Ho, 2021. "Performance evaluation of China's railway passenger transportation sector," Research in Transportation Economics, Elsevier, vol. 90(C).
    9. Feuerstein, Lisa & Busacker, Torsten & Xu, Jingjing, 2018. "Factors influencing open access competition in the European long-distance passenger rail transport — A Delphi study," Research in Transportation Economics, Elsevier, vol. 69(C), pages 300-309.
    10. Torben HOLVAD, 2017. "Market Structure and State Involvement: Passenger Railways in Europe," Departmental Working Papers 2017-04, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    11. Lehtinen, Jarkko & Bask, Anu H., 2012. "Analysis of business models for potential 3Mode transport corridor," Journal of Transport Geography, Elsevier, vol. 22(C), pages 96-108.

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