Economic trade-offs in rail transport
In this study, we derive economic trade-offs between the vertical organisation of rail transport and efficiency. For this purpose, we reviewed the academic and industry literature, screened available market statistics, assessed the experience from exemplary European countries and other network industries, and carried out interviews with industry experts.
We provide a brief summary of the report here. A link to the full version can be found below.
Policy insights
Railway policy across Europe shares common long-term goals
A common long-term goal of railway policy is to provide an efficient, high-quality service for end-customers connected with the best end-user experience regarding availability, speed, punctuality, and service.
Further common goals are the increase of the modal share of rail in the transportation of freight and passengers, and keeping costs as low as possible.
There is no one single policy solution
Countries differ with respect to their railway networks, political and economic systems, topography, population density or urbanisation factors. This is why there are diverse national railway policies among European countries. As a result, different forms of horizontal and vertical market organisation can reach the same long-term goals.
This conclusion is supported by efficiency score estimates from the economic literature (details in the full report). Spain, Sweden and Estonia reached a high average efficiency score with a vertically separated market model.
Germany, France and Latvia reached a comparably high efficiency score with a model of organizational separation. Switzerland also attained a top efficiency score based on a fully integrated model.
Complex railway system requires a holistic approach – Systemgedanke
The rail system is caught between the conflicting priorities of long-term investment and short-term end-customer needs. In addition, there are interdependencies between the different business segments and the interaction of many stakeholders.
Given this complex situation, there is a need for a holistic view of the system that takes all the diverse aspects into account and internalises externalities and conflicts. In particular, the fact that in Germany the same railway network is used by freight, regional and long-distance passenger trains poses a huge coordination challenge.
Economic theory predicts that vertical integration can be a partial solution to address possible coordination failures and contracting problems.
Take aways on economic trade-offs
- Infrastructure managers and rail operators have different incentives
- High train density favours vertical integration
- Shared infrastructure favours vertical integration
- Vertical separation may harm investment incentives
- Different vertical systems require different regulation
- Infrastructure requires some form of regulation and government funding
Pitfalls in policy debate
Political debate on the topic of railways is often on the search for quick and easy solutions, which results in severe oversimplifications. Ignoring more balanced and nuanced considerations can lead to mistakes.
Check out the report below to find a detailed description of pitfalls in the current policy debate in Germany.
Contact
For more insights or any questions, please contact the E.CA’s experts.