INTRODUCTION

18 OCTOBER 2004

  It is the intention of English Welsh and Scottish Railway (EWS) to demonstrate to the Sub-Committee that the liberalisation of the European rail freight industry is essential for its survival and for its ability to thrive and provide an attractive and viable alternative to crowded and increasingly congested roads for the movement of freight. As the UK's leading rail freight operating company, EWS has first-hand experience of trading successfully in a liberalised corporate environment. We understand the conditions necessary for liberalisation to succeed—and through our dealings with continental operators, we understand the extent to which the right conditions are in place yet for a liberalised freight railway to flourish there. It is clear to EWS what remains to be done, both on the continent and in the UK.

  English Welsh & Scottish Railway (EWS) is a private-sector company and the UK's leading rail freight operator, running 8,000 trains every week and hauling over 100 million tonnes of freight per year. EWS is the only rail freight operator to provide a full nationwide service—and it links the UK with the continental European railway network via the Channel Tunnel. EWS is a national employer, with 5,800 staff based across the whole of Britain, and has a fleet of nearly 500 locomotives and over 14,000 wagons.

  EWS was founded in 1996 following the liberalisation of the UK railway industry under the Railways Act 1993, itself based on the principles of the European Union's Directive 91/440. Today, EWS regards freight as one of the successes of railway liberalisation. As well as the £500 million committed by EWS, a further similar amount has been invested in rail freight by the other private-sector players including operators and end-user customers. Since 1993-94, the volume of freight moved by rail has grown by over 50 per cent and rail's share of the UK surface freight market (ie road + rail) is now close to 11 per cent—the best performance for 20 years. EWS has identified further substantial opportunities for growth in both existing core market sectors and also in parts of the market where rail has modest presence.

  Key activities include the movement of bulk commodities such as coal, construction materials, petroleum products, iron-ore and steel to meet the needs of UK heavy industry—and of a wide range of high-value, non-bulk products ranging from new cars and newsprint to mineral water and premium parcels. For non-bulk customers, EWS operates 800 trains every week, many conveying goods for several clients. Services for premium parcels customers are run at 110 mph to ensure short journey times.

  EWS is the only UK rail freight company to operate through freight trains linking the UK and the continent directly via the Channel Tunnel. These trains convey a wide variety of goods including mineral water, automotive components, steel slab, china clay, new cars, perishable foodstuffs, furniture and almost any manufactured products that can fit in a container.

THE EWS EXPERIENCE OF RAILWAY LIBERALISATION IN THE UK

EWS is convinced of the benefits of railway industry liberalisation:

—  UK industry: in place of a single supplier of rail freight services are now four private sector operators offering a wide choice of services at competitive prices. Two more companies have indicated their intention to enter the market and should give further choice, all helping to make rail an attractive alternative to road haulage.

—  The wider community. Rail is a safer and more environmentally-friendly mode of transport than road for the movement of freight. By offering an efficient and competitive alternative to lorries, rail can reduce road congestion and free capacity for other users.

—  Freight train operators: Freight is often a minority user of rail routes: the separation of rail infrastructure ownership and control from train operation has made capacity allocation unbiased by any tie with an incumbent and enabled fair conditions of access. This has given EWS the confidence to invest in the long-term future of rail freight and has encouraged customers and suppliers to do likewise.

  Vital to the process of liberalisation is (i) full independence of infrastructure capacity provision and train operation and (ii) the presence of an independent Rail Regulator to ensure that players in the industry are fair in their dealings with each other and that no one company exercises undue power or abuses its position. EWS wishes to register its support for the Government's intention—as set out in the Rail Review—to retain these features of the industry's organisation. EWS hopes that the SRA's (Strategic Rail Authority) Capacity Utilisation Policy will be retained and that the Rail Regulator's powers and independence will not be undermined.

RAIL LIBERALISATION ELSEWHERE IN EUROPE

  EWS regards the liberalisation of international rail freight as an important issue.

  EWS's international freight business operates traffic between the United Kingdom and mainland Europe via the Channel Tunnel. This business is conducted in partnership with the other European railways although the transit through the Channel Tunnel is just in partnership with the French Railways (SNCF). Volumes are currently increasing again as the market steadily recovers from the near collapse of operations due to the illegal immigrant problem, and now approach two million tonnes of cargo moved through the Tunnel by through freight train per year.

  EWS believes that the European rail freight market represents a significant growth opportunity, encouraged by the European Union's pro rail freight policy and the opening of all European networks to open access operation in 2007. Through Channel Tunnel freight has the potential to grow substantially. In the medium to long-term there may be opportunities for EWS to operate on mainland Europe in its own right or in partnership with one or more of the public or private European rail hauliers. A further option would be to form an alliance with a mainland European customer.

  The recent enlargement of the European Union reinforces the attractiveness of the market given the market share enjoyed by rail freight in the accession states. In the markets for non-bulk freight, rail is particularly competitive over the longer distances that trade flows between the UK states such as Poland and the Czech Republic offer.

  Sight should not be lost of the fundamental logic that underpins the European Union policy of rail freight liberalisation. For decades, rail has steadily lost market share to alternative modes, in particular road. The inherent flexibility of the heavy lorry (HGV), the enterprise shown by hauliers, the development of improved roads, legislation allowing larger, heavier and faster vehicles and the European Union's own measures to remove barriers to international trade have all helped make road more competitive. In contrast, many state-incumbent, monopoly rail operators have been slow to respond by matching road's service quality, speed and price.

  The increased use of road has created its own problems such as environmental damage and traffic congestion delays. The latter in particular has grown to become a threat to the European Union's overall economic efficiency and its ability to compete with other world trade blocs. The reversal of rail freight's decline is regarded as essential if EU industry is to have a viable alternative to congested roads and if the wider community is not to suffer adversely from road's environmental impact. By the late 1980s the European Commission formed the view that rail freight providers would only improve their offer to the market if spurred to do so by on-rail competition.

  The First, Second and Third Rail Packages of legislation are intended to open up first the international and now the domestic EU rail freight markets. The liberalisation process has worked and is delivering its aims in the UK. The Committee should seek to understand the extent to which on-rail competition elsewhere in the EU freight market really is making rail more attractive to end-users and thus helping rail to increase its market share again.

THE EWS RESPONSE TO THE COMMITTEE'S QUESTIONS

1.   What are the current barriers to entry in the international freight market?

  The relatively limited extent of new-entrant operation across the EU as a whole suggests that liberalisation is proceeding slowly and that new-entrants remain deterred from competing in the market. In France for example there is virtually no competition with the SNCF. Across the border in Germany there are several small freight operators, a few of which (such as Connex Cargo Logistics and Rail4chem) have grown through acquisition or merger to offer services across the country and across borders. Even in Germany, the state-owned incumbent, DB Cargo, retains just over 90 per cent market share. EWS estimates that less than 10 per cent of all the EU's international freight is operated by new-entrant companies.

  From its experience and observations, EWS finds that a number of barriers remain which serve to deter entry. Together these create a level of risk and uncertainty which may prevent private-sector operators from entering the international rail freight market.

  The current barriers include the following:

—  Regulatory: the absence of an effective independent body in each Member State able to curb uncompetitive behaviour by dominant operators or by the infrastructure provider.

—  Infrastructure capacity allocation and management: the lack of true independence of these activities from the interests of the dominant operator when both are state-owned.

—  Technical: the prevalence of different signalling and electrification systems which require the provision of specially-equipped locomotives for through cross-border operation.

—  Operational: the existence of different standards for train operation such as length, axle-weight and speed.

—  Bureaucratic: EU Member State customs procedures give "fast-track" clearance to established state-owned incumbent operators but insist on lengthy checks on private-sector new-entrant trains.

—  Cost: the application of common standards requires the re-equipment of existing motive power or its complete replacement. The benefits of common standards may be outweighed by the expense of meeting them.

—  Risk: new-entrant operators regard the uncertainty over the cost and time-scale of implementing liberalisation measures as a risk in itself which only adds to the commercial risks already faced when entering the market.

2.   To what extent are these barriers a result of a failure to implement existing EU Directives in all Member States?

  Some of these barriers should erode over time as EU liberalisation measures are introduced and take effect. International timetable pathways have been established on many key axes, common technical standards have to be agreed and implemented, administrative bureaucracies have to be re-organised and experienced staff put in place. Others—such as the variations in infrastructure design (axle-weights, signalling and electrification systems)—will take many years to remove or may only be overcome through the use of expensive multi-purpose locomotives. However, EWS remains concerned that the provisions of existing EU Directives are not yet being implemented sufficiently to achieve the entry of new operators into the market and thus the creation of on-rail competition. In particular:

—  In many Member States the rail freight market remains dominated by a single state incumbent operator and a single state infrastructure provider. Unless there is true separation of management between the two, the risk remains that bias will occur in the allocation and control of track capacity which disadvantages new-entrants. In the UK, this separation has been achieved thoroughly and successfully by the complete abolition of the state incumbent railway organisation and total separation of ownership, control and day-to-day management of train operation and infrastructure provision. The existence of large, dominant rail freight operators is in itself not necessarily a barrier to new entrants. Small companies can co-exist with larger incumbents—whether state-owned or not—provided that competitive activity is subject to effective regulation, so that a dominant market position is not abused. In the UK, the Office of Rail Regulator has performed this role successfully and has intervened promptly when uncompetitive activity may have taken place.

—  A similarly effective regulatory body is vital to protect the interests of smaller operators in each Member State—the more so where state-owned incumbents may enjoy financial support not available to private-sector companies. The regulator should be competent, adequately resourced, capable of prompt action, able to enforce its rulings through the use of coercive measures if need be, and free of state interference when freight operators are still in state ownership. Rulings should be fair and consistent both within each Member State and between states. EWS does not believe that there is yet the equivalent of the UK's Office of Rail Regulation in all Member States. In the case of accession states it is not always clear that even the concept of an effective regulatory body outside direct state control is yet accepted.

3.   Is further action needed at European Union or Member State national level to ensure enforcement of EU Directives?

  In the light of EWS concerns expressed above, action is required at both EU and Member State levels to ensure that true separation of infrastructure provision and train operation is achieved and effective independent regulation put in place. Private-sector risk capital is unlikely to be available to new entrants and to ensure that rail freight is suitably resourced unless track access allocation and control are carried out equitably and the competitive behaviour of dominant companies is subject to independent scrutiny.

4.   Is further European legislation necessary to make the policy of introducing competition into international rail freight effective?

  EWS believes that the achievement of fully liberalised rail freight need not require significant further legislation, although there may remain the need to adjust existing measures in the light of experience. Some features of the legislation in the Third Rail Package are unnecessary and will prove counter-productive, if well-intentioned. Examples include:

—  Mandatory Performance regimes

This Directive seeks to establish compulsory clauses in each contract between rail freight operator and customer relating to minimum service levels. The UK experience shows that rail freight's growth is the result of competitive market forces which allow each customer to negotiate freely its own conditions with the rail freight operator of its choice. These contracts may cover a range of issues such as price, journey time and value-adding services and may or may not include a performance regime as such. When quality of service conditions are included, they are constructed to meet the precise requirements of the customer concerned, are almost always confidential and will vary from one contract to another.

Making such a requirement mandatory would damage rail freight's competitive position since (i) those customers that chose not to include performance regimes in their contracts will be penalised since rail freight operators must then protect themselves against potential payments for poor performance and face little alternative but to increase their prices, (ii) an imposed performance regime may not be flexible enough to match precisely the conditions of those contracts that have been negotiated freely between customer and rail freight operator, and (iii) to distort the cost-base of one part of the transport market is discriminatory: there is no similar requirement placed on the road haulage industry. That would have the effect of deterring private sector investment in rail freight.

—  Interoperability

Measures to improve barriers to open access by encouraging interoperability have formed part of the EU's Second Railway Package. These involve the creation of new European Technical Standards for Interoperability (TSIs) and a uniform approval process. Throughout the Community these standards would replace existing national standards on the lines selected by Member States to form part of the Trans European network. EWS accepts that the intention here is well founded: greater standardisation and uniform approval processes should result in lower costs of production of equipment such as locomotives, wagons, track components and signalling systems for the industry.

Through our participation so far in the establishment of TSIs, it is clear to EWS that the standards may be set unrealistically high and that this may oblige the use of equipment that is costly to purchase. Unless careful analysis of the relative costs and benefits of each TSI is undertaken with the full and active participation of those who must purchase the equipment—ie the train operators—there is a risk that in seeking these standard arrangements, costs may be unnecessarily increased. If the cost base for rail freight operators is raised without full justification then rail will be less price-competitive with road haulage and business will be lost from rail rather than attracted to it. This issue is particularly important to those Member States such as the UK where geography means that through international freight will always and inevitably remain a small proportion of the total amount handled.

—  Driver Licensing

The EU regards the lack of harmonised standards for driver management as a barrier to opening the rail market to competition and seeks to address this through measures in the Third Railway Package. At present it is seldom possible for drivers to operate a through freight train from one railway administration across a border to another. This enforces a change of driver which causes a delay and can prevent the efficient utilisation of staff and undermines the benefits of through operation of locomotives and other measures such as reductions in border bureaucracy. It is also difficult for drivers to move their employment from one administration to another without the need for sometimes lengthy and expensive retraining.

However, the EU now proposes to extend a common set of driver competency standards to all such staff—including those employed purely on domestic duties. Given that standards inevitably vary between administrations, such an extension of new requirements will result in an extensive and expensive programme of training. It is not at all clear to EWS that these costs are—or ever would be—outweighed by the benefits that the EU feels would be obtained. Furthermore, EWS has undertaken its own study of the safety benefits that would be obtained if all its drivers had to be trained to meet a set of competence standards for international freight trains. This study failed to find any significant benefit.

  5.   What action should the United Kingdom Government consider to ensure that the United Kingdom takes full advantage of the potential growth of international freight as a result of this policy?

  EWS has two specific concerns about the Government's role in facilitating growth in international freight business:

—  The UK railway network

International freight trains require appropriate capacity on the UK rail network. Train and freight terminal operators, rolling-stock suppliers and lessors and end-users all risk their own capital and require the assurance that the conditions and extent access on Network Rail's infrastructure will not change adversely in the future. The recent Rail Review does much to give EWS and these other parties the confidence needed for investment to continue. However, significant concerns remain and must be resolved by discussions between the Government and the industry. EWS will not be able to expand its international freight business unless there is capacity for additional freight trains between the Channel Tunnel and the principal UK industrial centres such as the West Midlands, West Riding, North West, North East and central Scotland. A "steady-state" railway with finite capacity would not meet these needs.

—  The Channel Tunnel

There is the need for agreement to be reached by the parties involved on the future level of Channel Tunnel tolls paid by international rail freight. The charges for the UK portion of international rail freight are paid by the residuary British Railways Board (BRB)—an obligation created when the Channel Tunnel opened. These charges comprise three elements: (i) variable tolls relating to the volume and type of freight traffic conveyed, (ii) a contribution to Eurotunnel's operating costs, and (iii) a top-up fee known as the Minimum Usage Charge (MUC). Together these elements amount to around £26 million a year and last until 30 November 2006. Thereafter the MUC element falls away, leaving an annual charge of around £17 million a year should traffic remain at the current levels.

At present, the BRB (in practice the Strategic Rail Authority (SRA)) is not seeking reimbursement of these charges from EWS, an arrangement approved by the European Commission at the time that EWS acquired British Rail's international business. This arrangement ceases on 30 April 2005 and if no agreement is reached EWS will have to pay £26 million a year to access the tunnel.

Unfortunately international rail freight cannot bear this level of charges, in part because traffic levels have not reached expected levels as a result of the Asylum Seekers problem of recent years. Therefore EWS would have to cease international freight services if it was obliged to pay Channel Tunnel tolls.

EWS is in active discussion with the SRA and Department for Transport to extend the existing arrangement on tolls. Should we reach agreement we would need to gain approval from the European Commission—further evidence of the importance of the European Union to the development of international rail freight.

August 2004