How to liberalise rail passenger services? Lessons from European experience

This paper studies the experience of Europe’s three most liberalised railways - Sweden, Germany and Britain - in opening-up rail passenger services to competition by means of competitive tendering, and seeks to draw lessons for countries that are just starting the process, such as France. It also comments on experience of competition in the market in these and other countries (this form of competition has been taken furthest in other countries - notably Italy and the Czech Republic, as well as on a single route in Austria). The paper fills an important gap in the literature - that has so far focused on econometric modelling of the impact of rail reforms - by considering how competition can best be introduced in practice. This investigation is important and timely given the requirements of EU legislation (4th Railway Package) which will require competition to be introduced into passenger rail services (by 2020 for commercial services, and 2023 for public transport contracts) across the whole of the EU. It finds evidence that competitive tendering has helped increase demand for and reduce subsidies to the rail passenger sector, but that there are many decisions that have to be taken as to how it is to be implemented. Short gross cost contracts may work well for regional services where the tendering authority takes the lead in planning and marketing such services. If services where ticket revenue recovers a larger share of costs – “more commercial services” – are to be tendered, long net cost contracts may make more sense. An alternative is to leave them operated by the incumbent but with open access for competitors to enter the market. Two particular issues face countries starting on the liberalisation process. Firstly, if existing rolling stock is owned by the incumbent rather than the franchising authority or an independent company; that remains a major barrier to entry. The second is the position of existing staff. If new operators are required to take them on at existing wages and conditions; that is a barrier to improved efficiency, but for new operators to recruit their own staff may also be problematic, particularly where the pace of change is fast.