Rail 559: Freight pays the price of Europe’s rail paradox

The EU stresses the importance of rail integration in the face of competition – yet is increasingly fragmenting Europe’s railways. CHRISTIAN WOLMAR highlights a bizarre contradiction.

OVER the past couple of weeks I have travelled to Paris and Brussels for rail conferences and also been editing a couple of documents produced by international organisations for dissemination across the European Union.

The theme that emerges from these documents and from various conversations with foreign railway managers is clear: the importance of integration and the bizarre contradiction between the way that Europe is increasingly splitting up railways through its various ‘packages’ and yet still wanting the railways to be unified in the face of competition from other modes.

Take the senior rail manager from Norway I met in Brussels. Norwegian State Railways (NSB) was vertically separated a decade ago, with the creation of an infrastructure company, JBV, but both remain within the public sector. In 2000, there was a head-on collision of two trains on a single-line section of track (most of the railway in such a large, lightly populated country has only one track) resulting in 19 deaths. There were other serious accidents and the report into the accident was highly critical of JBV’s safety culture (sounds familiar, doesn’t it?).

The railway is now flourishing, with record receipts, but when I asked the manager whether the structure was satisfactory, he immediately said: “The separation causes us huge problems and expense. It would be much better to run an integrated business.”

Then take Eldon Horsman, a hugely impressive former boss of Canadian National, one of the biggest freight railways in North America. Horsman said how in 1995 he made a speech vowing never to run a railway in a vertically separated environment as it would be impossible to ensure continued profitability. He has a formidable track record as he helped transform CN from a loss-making basket case into a highly profitable railway. Now, he told me, “40 cents in every dollar of revenue is profit”, demonstrating the natural advantages of rail freight over long distances (indeed, suggesting just a hint of monopoly profits there!).

So it is rather strange that I met these interesting people at a conference on rail freight in Brussels where the whole emphasis was working in the new environment in Europe, which is all about maintaining and deepening the separation of the various European railways between infrastructure and operations. No one has yet gone as far as Britain in privatisation and separation but virtually all have moved to some extent towards separation, with the setting of track charges for operators and, in many cases, some tendering of passenger services, usually on less well-used regional lines.

The separation arrangement was, however, created largely with freight in mind. It was pioneered in Sweden with the idea of creating a level playing field between modes. The view at the time was that if the costs of access to road and rail were clear and transparent, the most economically efficient outcome would result.

Separation was then picked up by the EU for a different purpose, to drive through the break-up of the old entrenched state railways. That was quite understandable. They were not efficient or commercially minded, and needed shaking up through the injection of competition. Freight was the obvious area where the monolithic big players – with their strong unions, which imposed extra costs through restrictive practices, and weak managements that failed to impose themselves – were losing business every year to the roads.

Gradually, some independent freight businesses have emerged and taken advantage of the new open access arrangements. There have been great success stories, such as Sweden’s Green Cargo that has turned a loss-making sector into a profitable one. The UK, too, has done relatively well. But it has been a slow process and there are still restrictions and extra costs imposed by old-fashioned ways of working.

Many people at the conference, for example, complained that there were still enforced stops at borders between European countries – through which, of course, lorries drive unchallenged – because drivers were not allowed to work outside their home country or because unnecessary bureaucratic checks were being made on cargo.

‘Interoperability’ is the buzz word at these European wordfests but it can have a rather hollow meaning when the very way that the railways are being reorganised seems to ensure that they have less chance of bringing it about. Indeed, there has been a heavy price to pay for enforced separation because it has meant that some of the inherent advantages of the railways have been lost.

The new structures add complexity and cost to a mode that is already facing huge competition from the motor car and the lorry. Separation entails in its wake a panoply of complicating issues, ranging from the setting up of detailed contractual arrangements between the parties to the need to establish independent regulators to oversee this structure – something that is happening only very slowly in many European countries.

It is the rigidity of the structures imposed by the EU that causes problems. At the moment, various models of separation exist in the EU but now the Commission is intent on ensuring that everyone obeys the rules and those that do not face legal action and heavy fines. This was made clear in a strong speech from the Transport Commissioner, Jacques Barrot, at the conference.

Overall, despite these reforms, railfreight is still losing market share and the number of containers carried is stagnating. The railways are expected to make progress in introducing a new in-cab European signalling system (ERTMS) on the main freight network that will allow cross-border running but which will cost billions of euros and offer little immediate return. It is as if the road freight hauliers had to pay for a completely new road management system. The standard for the system has not even been settled upon, and yet railways are being expected to start spending huge sums on its implementation. It is almost as if the railways are being punished because of their history.

The story of Canadian National shows there is enormous potential in the railfreight market with the right management and the political will. However, it is not the imposition of unwieldy structures that will bring about similar success but, instead, better management and a genuine understanding of the market.

Indeed, all the fine words about increased cross-border traffic and interoperability must have seemed even more hollow to operators dealing with freight through the Channel Tunnel, an issue that was hardly mentioned at the conference.

It is a complex story but the decade-old agreement between the main rail companies and Eurotunnel, under which the tunnel company received a set amount of income irrespective of how many trains went through, ended in November. Now Eurotunnel is imposing prohibitively large charges and it is far cheaper for hauliers to load their containers on to lorries and use the shuttle service or the ferries.

Freight flows are being lost every week and there is hardly anything left, just a few loads such as steel and bottled water, and it is doubtful whether the tunnel will handle a million tonnes this year – far less than used to go by rail on ships before the tunnel was built. The issue has to be sorted out on an international level but there is little sign of that happening. Meanwhile, thousands of trucks are clogging up the Channel ports and a major resource is being unused because of the complexity and inflexibility of the system.

Eldon Horsman explained to me that the success of companies like Canadian National and Green Cargo had not been achieved through big changes to the structure, but by applying customer-focused business practices and cutting costs. For example, telling your customers where their consignment is and giving precise arrival times, something that is still impossible in most of Europe. CN is now operated through one major customer centre in Edmonton, rather than through hundreds of small depots. Green Cargo simply reduced delays by looking at their causes and ensuring that lessons were learnt. None of it is rocket science, nor the kind of massive upheaval of restructuring, but simply good management processes.

One can see why freight supporters like Lord Berkeley of the Rail Freight Group back the idea of vertical separation because they want to challenge the state monopolies. However, strong regulation, improved management and a more flexible structure would seem to be a better way forward than the unwieldy structures being imposed on European railways that add so much complexity and cost.

Vertical separation might help promote railfreight across Europe admits Wolmar but he argues that a flexible structure, improved management and strong regulation would be better. He cites Canadian National as a railway that has reversed poor fortune and shown that railfreight can be successful. CN 2594 leads a train of sulphur and potash through Libertyville, Illinois, USA towards Chicago on May 26 1999. JOHN DAY.