House of Lords - European Union

Select Committee on European Union Fourth Report

CHAPTER 3: Current Position of european Rail Freight

19. The evidence that we received demonstrated that there were a number of major problems for the European rail freight industry. In this chapter we:

explain what these problems are;
outline the evidence we received about each; and
explain how the Railway Packages have sought to address each problem.

Continued Domination by Large, Publicly-owned Operators

20. Large publicly owned operators continue to dominate the European rail freight market, not least because they are in many cases still vertically integrated and so the company which owns the infrastructure also has a rail freight operating arm. The First Railway Package demands that if these functions are part of the same organisation they must, at least, have separate accounts. Member States have satisfied this requirement in different ways.

21. In 1994 the United Kingdom placed the infrastructure in a separate organisation, Railtrack. The operation and the infrastructure management were privatised and access to the rail freight market was opened completely. In the United Kingdom there are now four competing rail freight operators - English Welsh and Scottish Railway (EWS), Freightliner, Direct Rail Services and GB Railfreight.

22. In 1997 operations and infrastructure in France were put into separate organisations but both remained in government ownership and, so far, there is no other operator on the national rail network.

23. In Germany infrastructure and operations are separate divisions of the same company, DBAG. But, as Mr Meyer of the European Rail Freight Association told us, "they talk about Chinese Walls between the infrastructure side and the operating side, but often our members asked for a slot and the next day the client informed the private company that the state-owned company had already tendered for this transport" (Q 198). The efforts made by the European Commission in the First Railway Package to ensure fair and open access to the rail freight network by splitting the operation and infrastructure arms of the organisations do not appear to be producing the required results.

24. Further consideration should be given to requiring Member States to put rail infrastructure and freight operations into separate companies.

25. Even where infrastructure and operations are split, the size and financial position of the dominant rail freight operator is often such as to discourage competition. This makes entry into the market by small, privately-owned firms even more difficult.

Quality of Service

26. Rail freight has to compete directly with the road freight industry and, in some cases, with the water-borne or air freight industries. If rail freight is to offer a viable alternative to the other modes of freight transport it has to be similarly reliable, economically comparable and deliver a quality of service which is at least satisfactory.

27. The evidence that we received from Ford, the motor car company, led us to believe that the reliability and flexibility of the rail freight industry did not meet customer demands. We heard that from July to September 2004, 39 per cent of the trains from Dagenham to Valencia carrying freight for Ford were more than four hours late and, of these, a considerable number were over 24 hours late and some were 48 hours late. The UIRR (International Union of combined Road-Rail transport companies) has recently produced figures for delays on its members' trains for 2001 and 2003 (see Figure 5). Although these figures show an overall improvement, they demonstrate that the punctuality of freight trains within the European Union still falls seriously short of standards required by commercial customers in a competitive environment. Road freight, on the other hand, showed a 92 per cent record for arrival within 15 minutes of the estimated arrival time (Q 4).

FIGURE 5 Delays to the freight trains of members of International Union of Combined Road-Rail Transport Companies

(UIRR)

	2001	2003
Total trains run by UIRR members	21,324	27,247
On time	43%	57%
Late	57%	43%
3 hours late	32%	24%
24 hours late	7%	5%

28. The lack of reliability of rail freight often results in customers being forced to use other modes of freight transport, such as road and air (Q 6). Many customers, despite being attracted by the use of rail to transport freight because they perceive it as being more environmentally friendly, easier to track en route (Q 4) and cheaper than road freight (Q 53), have turned away from or at least started to lose confidence in the rail freight industry.

29. With the growth of distribution systems based on "just-in-time" principles, it has become increasingly important that any commercial business must be confident that their goods are going to reach their destination on time if they are to continue to use rail. The evidence from Ford and UIRR appears to demonstrate that the rail freight industry is often not able to engender this confidence and this is one of the major factors in its loss of market share in recent years. However, it should be noted that, according to the Strategic Rail Authority, 95 per cent of domestic United Kingdom traffic does run on time.

30. The First Railway Package sought to address this problem through the introduction of open access for new operators in the expectation that this would encourage competition and therefore lead to a better level of service to customers. The Second Railway Package sought to further this through facilitating greater interoperability and extending open access to the rail network. The Third Railway Package attempts to deal with the problem head-on through its proposals for compulsory compensation to be paid to rail freight customers when specific quality standards are not met.

31. Much of the evidence that we heard would suggest however that compulsory compensation is unlikely to solve the problem of lack of confidence in the industry. As Mr Hall of the Community of European Railways (CER) put it, "the reality is the customer does not want compensation, he wants a quality service" (Q 178).

32. Mr Hall of CER was also concerned that imposing compensation performance regimes for operating companies risked sending a message at odds with that being given by the other Directives. In his view the First and Second Railway Packages made it clear that the rail freight industry should be an open and competitive market where the direct result of inefficiency would be a loss of custom and market share to competitors. The Third Railway Package on the other hand, would seek to impose compulsory compensation regimes which, in his view, seemed to indicate that competition was not a sufficient incentive to ensure that the operators delivered an efficient service (Q 178). This measure was also criticised in the written evidence from the Department of Transport (wr evi para 28) and from EWS (Q 4) who argued that it might - by adding unnecessarily to the costs of rail operators - actually hamper the growth of rail freight.

33. On the other hand, we heard evidence on the part of customers of rail freight that unreliability of services is a source of real concern. Data provided to us on late arrival of rail freight trains reinforce the view that this is not a marginal matter. Train operators oppose the introduction of a compulsory compensation regime but rail freight customers may well favour it and could be given the option. If the proposed Regulation COM(2004) 144 were to permit an opt-out from compulsory compensation for poor quality of service should a customer prefer to pay less for a rail freight service but receive no compensation in the event of problems, then this would meet some of the criticism noted above while giving the choice to the customer. A Regulation setting out the basis for compensation payments and an opt-out clause would require careful drafting and may require further consultation to ensure that the needs of customers, as well as operators, are met. Whilst recognising the difficulties involved, we come down in favour of the customer having the option of compensation. We therefore recommend that the proposed Regulation should permit an opt-out from a compulsory compensation regime and that the United Kingdom Government should support this recommendation.

Continuing Barriers to Open Access

34. The Commission's policy of opening access to the rail freight industry, which the three Railway Packages are aiming to achieve, was intended to give customers a choice of rail freight operator. However, we heard that there were still significant barriers in place which prevented this open access.

(a) Safety certificates and operating licences

35. A freight train operator who wishes to enter the international market must obtain an operating licence and safety certificate from the national authority of each Member State in which they wish to operate.

36. New rail freight operators are subject to repeated approval processes when entering the market, requiring the provision of evidence which is not then mutually recognised between Member States. Written evidence was submitted to us by the Commission stating that there was little indication of formal liaison between national certification bodies during the certification of international operators. Deutsche Bahn held the view that there should be "one set of European rules for rail safety, uniformly applied in all the Member States and leading to full mutual recognition of safety certificates" (DB w.evi). The Commission believed that the safety certification process should be in two parts, "one part is a European general safety certificate and a second part will always be needed at national level because you have to check whether the security structure . . . and the rolling stock fits for that particular line" (Q 93).

37. We were concerned to learn from UNICE (Union des Industries de la Communauté européene) that the safety requirements may "appear to apply disproportionately to potential new entrants to the market, thus reinforcing the dominance of the incumbent operator." An example of which we were told was that of the class 66 diesel locomotive. Both Mr Goundry (Freightliner) and Mr Smith (EWS) praised the Class 66 General Motors locomotives (Q 116 and Q 236) for their reliability, and they are in use in much of Europe. However, when new entrants wished to use this locomotive in France, it was not permitted.

38. The Commission pointed out that Member States are frequently very slow in issuing safety certificates. However, the Railway Safety Directive[6], part of the Second Railway Package which was adopted in April 2004, obliges Member States to grant safety certificates within 4 months of any successful application (Q 293). This Directive seeks to provide for a transparent, harmonised and non-discriminatory process of issuing the safety certification but, as it does not have to be implemented by Member States until 2006, we are unable at this point to pass judgement on its success or otherwise.

(b) Access charges

39. Furthermore, the structure and level of access charges to infrastructure are not transparent across all Member States and some charging regimes implicitly favour incumbent operators by the imposition of fixed charges or by significant volume rebates. We heard that RFF still operated a two-part tariff system which gave a significant advantage to the incumbent operator SNCF (Q 294). The EU Directive on rail access charges[7] does not explicitly disallow two-part tariffs but Article 8 (3) requires that equivalent traffic within the same market segment should face comparable charges. Mr Hilbrecht told us that he thought it would be very difficult to make a two-part tariff system compatible with Article 8 (3). Mr Falchi from European Rail Infrastructure Managers (EIM) told us that differential access tariffs could be defended if they were based proportionally on the number of paths being bought, "in any business you can have a price for a big buyer and a price for a small one." (Q 145).

40. Such charging structures can create affordability problems for new, privately financed companies competing with major, publicly-owned railway service providers that benefit from public funding support. This problem of charging structures was one of the central problems which the First Railway Package sought to address.

Physical barriers to interoperability

41. The rail network across the European Union is not physically interoperable. Mr Gurmin of Ford told us that harmonisation of the standards used in the international rail freight industry was a key goal if companies such as his were to continue to use rail rather than other modes to transport their freight (Q 12). The physical barriers to interoperability include differences in the loading gauge[8], axle-weight and train speed.

42. We understand that the loading gauge in the United Kingdom is a particular problem since it is more constrained than that elsewhere in the European Union. Ford told us that they could transport two Focus C-MAX cars on a double-deck car transporter throughout other Member States but that once the cars reached the United Kingdom, they had to be transferred to a single-deck flat wagon. This doubled the cost of transporting the cars within the United Kingdom and often caused delays because of lack of availability of wagons (Q 12).

43. Mr Smith from EWS explained that work was being done on rail freight lines from Felixstowe and Southampton to allow the movement of nine foot six inch high deep-sea boxes. He thought it essential that this work was also carried out on other lines in the future to allow these containers, which are becoming the standard international size, to be moved throughout Great Britain to major freight centres (Q 117 and Q 120). Both the Channel Tunnel itself and the new high speed route to London are of larger gauge than is normal in Great Britain, so this problem does not apply to them.

44. Crossing international borders remains a significant problem for rail freight operators as often the driver and locomotives have to be changed at that point. Transfesa pointed out that there is a similar problem within France as the railway is managed on a regional basis and therefore freight crossing France has to change locomotives four times and six different drivers will be used! (Q 45) Changeovers often cause major delays and an urgent solution to this problem is required. One solution would be to permit train drivers to drive trains for longer distances but we heard that this was being resisted by the French trade unions (Q 45).

45. On international routes the problems of differences in rules and technology, as well as language, are more acute. As CER points out, these problems cannot be solved by the railway companies on their own and the European Rail Agency, set up under the Second Railway Package, is tasked with "bringing together rail expertise and Member State representation to tackle the political and financial challenges presented by such widespread system change." (CER written evidence)

Competition from Road Freight and Water-Borne Freight

46. Rail freight has to compete with the other freight modes such as road, water and air. Road freight, in particular, provides a flexible and high quality service and carries much long distance traffic which in principle is suitable for rail.

47. The Commission's policy of opening-up access to the rail freight market has sought to ensure that rail infrastructure and operations are separate, and that each rail freight operator pays appropriate charges for use of the infrastructure. By contrast, the European Union has been unable to agree on an appropriate way of charging Heavy Goods Vehicles (HGVs) their full social, environmental and economic costs (Q309). Although a draft Directive on this was introduced in 2003, it fell short of fully taking external costs into account in charging, and in any case agreement on this has still not been reached.

48. Implementation throughout Europe of a charging system reflecting the full costs of road freight transport is urgently needed to ensure that rail is able to compete with road on equal terms.

Competition from Passenger Trains for Access to the Network

49. Across the rail network as a whole, the number of trains, both passenger and freight, is constrained by the capacity of the tracks and other rail infrastructure. In the absence of a network of dedicated rail freight lines, decisions have to be taken about which should be given priority. We heard that in the vast majority of cases passenger trains were given priority over freight trains perhaps because, as Lord Berkeley suggested, "passenger trains carry people who have votes" (Q 89). Passenger trains generally run at a higher average speed than freight trains and thus we do not believe that freight trains should automatically have priority over passenger trains. However the evidence that we heard led us to conclude that the bias towards giving passenger trains priority sometimes prevents the rail freight industry from delivering an efficient service. Although the first railway package requires infrastructure managers to publish clear criteria for the allocation of paths, and to consider the needs of international freight trains in this process, the evidence we received suggests that they are still given too little priority.

50. We accordingly urge the rail network managers of the European Union Member States to give greater priority to international freight in the allocation of paths over the network.

Risk of Over-Regulation

51. We share the concerns expressed by a number of our witnesses that some elements of the Third Railway Package might impose burdens on the rail freight industry whose costs exceed any benefits they might bring. As EWS put it, "sometimes the European Commission may go too far and create legislation that it believes will be helpful but which would increase cost (Q 99). Of particular concern in this regard to some witnesses are compulsory performance regimes for operators (we deal with this at paragraphs 30-33). Nearly all witnesses expressed concern about the international train drivers' licence.

52. But we are also mindful of the position of the customers of rail freight. Reliability of service is one of the most important elements of service for the customer. If they do not get a more reliable rail freight service, they will go to other modes and that is what has happened to much of freight movement.

International train drivers' licence

53. The Third Railway Package seeks to address some of the interoperability problems by introducing an International Rail Drivers' Licence which would remove the necessity of changing drivers at an international border. Whilst we recognise the advantages of such a licence, we have reservations about that Directive as currently drafted as it appears that all rail freight drivers, even those who only drive domestic freight trains, will have to have an international licence.