The 4th Railway Package requires some big decisions

June 25, 2021
By Clara Lieverse and Geoff Jones

We are working towards a more integrated European railway system to meet big policy goals such as net zero carbon by replacing polluting short-haul flights. The 4th Railway Package, a new set of European legislation, plays an important role to reduce operational, technical and market barriers so that the European railway system can eventually be implemented. But before we get there, we have some big decisions to make regarding the delivery of Public Service Contracts.

To strive for a more integrated European railway system, European legislation is in place in order to reduce operational, technical and market barriers. Recently a new set of legislation, under the name of the 4th Railway Package (following the 3rd Railway Package) was published. During the transition phase, member states get the time to implement all rules resulting from the 4th Railway Package.

How to implement

The various Railway Packages and associated measures have progressively looked to put the railways in a position to harness competitive tension and service delivery. The 4th Railway Package includes the biggest challenge yet with the compulsory competitive tendering of domestic public service contracts in 2023. These services are at the core of why governments are involved in rail and is a key difference to other regulated utilities. Plenty of thinking and planning is required to work out how best to implement this requirement.

No one argues with the end goal – a vibrant and dynamic rail sector that is competitive with other modes and fulfils its role in the big policy goals like net zero carbon and Mobility as a Service (MaaS). Work we have done for ProRail highlights the potential carbon benefit if short-haul flights are replaced by rail. But there is still plenty of debate about how to achieve these goals.

Different policy solutions for competitive and non-competitive markets

All sectors have looked to create a distinction between the ‘competitive’ and ’non-competitive’ or ‘monopoly’ elements and have devised different policy solutions for each type. This means that some subsets of the rail market are more conducive to introducing competition than others. For example, longer-distance and/or highspeed rail journeys can often be provided on a commercial basis in competition with air and other transport modes.

Examples of competition

Italy has shown how it is possible to introduce competition in this market with multiple operators. The usual rule of thumb is that competition will tend to grow the market while providing service innovations and reduced fares – all benefits to the end user; the passengers. Eurostar is another example, an open-access operator competing on a commercial basis with airlines operating between London and other European destinations.

When the market doesn’t provide enough services, government does

For other services where there is significant government funding and hence a high degree of ‘Public Service Obligation’ (PSO), it is more difficult to introduce competition. By definition, the government provides services to meet wider social, environmental and other policy goals. It is hard (though not impossible) to reflect those goals in a system that allows governments to ‘leave it to the market’. The general view is that the market will not provide enough of these services.

Franchising arrangements in the UK

The inherent characteristics of rail as a natural monopoly with fixed rails also don’t lend themselves to competition ‘in the market’ – as opposed to, say, the ease of rival coach operators being able to serve the same origins and destinations. In the UK this has been addressed via competition ‘for the market’ and the extensive franchising arrangements. This has undoubtedly delivered many benefits like cost reductions, greater clarity around performance, service innovations, and ultimately significant passenger growth.

There is a downside

There has, however, been a significant challenge in the UK. The regulatory and contractual arrangements designed to incentivize the network benefits as if all parties were part of one happy family – even though they are not – are complex and can be administratively costly. And there has been growing discontent about how well the customers are being served. The Williams Review in the UK was established to achieve ‘revolution not evolution’ reflecting the scale of the challenges, and a particular type of revolution has been hastened by Covid.

Challenge is coming

All jurisdictions need to start now to prepare for the challenge coming in 2023. In the Netherlands the preparation of the next tender for the main concession network has already started. Challenges arise in how to meet the rules coming from the 4th Railway Package: it established a greater market opening, on the one hand, and it delivers customer service for an intensively used network with scarce capacity, on the other hand. Public Transport is a public interest, after all.

Recent work shows some surprising barriers to overcome

And of course, we need to make sure that there is a harmonious and supportive package of policies that enables all modes of mobility to fulfil their best role within the ideal European playing field. Recent work by Rebel highlights that some of the barriers are not the ones you may first think of. Openness in ticketing data and sales and cross-country booking platforms synchronize the capacity on international corridors and stimulate the entry of new players, by taking a corridor approach.

Navigating this path to achieve the potential we all believe in requires really untangling what it is we want from rail services, the best delivery methods, and how governments can create transport markets that make the most of the advantages of the different modes. The private sector has an amazing track record of innovation and delivering customer service where there is a private market. It is more difficult when the service is provided for public benefits – it requires governments to be clear about what is required, and clever about how to incentivize it. Avoiding the dreaded ‘unintended consequences’ is difficult, but critical.

 

Clara Lieverse is consultant at Rebel, with an expertise in public transport. In an area dominated by stakeholders with various interest, she brings an overall perspective on the actors involved in delivering high quality public transport.

Geoff Jones recently co-founded the Rebel London office. He works at the intersection of policy, regulatory and institutional design to create the right structures and incentives for efficient delivery in the rail and roads sectors.

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This publication is part of the series Rebels in Rail