The Fourth Railway Package: All change?

As with many other industries and sectors, the recent trend in EU rail policy has been towards greater liberalisation. The reason for this move towards liberalisation is because the opening up of passenger rail services to competition is often associated with benefits such as improvements in quality and frequency of rail services, more innovation and greater overall passenger satisfaction. 

Despite this, the majority of rail passenger services in Europe have, until recently, remained largely in the hands of state-owned operators (and many still are). The reasons for this are closely tied to the legislative framework and the industry structure, which impose obstacles for new entrants to the market. Key issues which have historically prevented a liberalised railway market in the EU include:

• differing national technical and safety rules and authorisation processes, which create access barriers;
• the ability of EU member states to award certain rail contracts directly, without going through competitive procurement processes; and
• the close relationship between those who operate passenger rail services (train operators) and those who manage the track, stations, signalling systems and other infrastructure on which the trains run (infrastructure managers). 

Since 2001 the European Commission has enacted a series of "Railway Packages" to address these issues, with the aim of enabling privately owned train operators to access the European rail market on a competitive basis. 

The separation of train operators and infrastructure managers is often considered to be a prerequisite to the true opening up to competition of passenger rail operations.  This separation ensures that access to rail infrastructure is not restricted by discriminatory measures imposed by infrastructure managers: for example, by granting preferential train paths to train operators within its corporate group. This separation has been instrumental in liberalising (or, in some cases, part-liberalising) passenger rail operations markets in a number of EU member states, although the degree of liberalisation so far actually implemented varies significantly between member states.

However, it is interesting to note that the latest step in the EU legislative process, the Fourth Railway Package, does not make the final leap of requiring full separation between train operators and infrastructure managers, as had been anticipated by many. It also comes at a time when the Government in the UK (which has one of the most liberalised rail markets in Europe) has begun to make noises about the possible combination of train operations and infrastructure management (known as "vertical integration"), with the recent announcement of plans to develop a new rail line between Oxford and Cambridge which could be run by a single-entity train operator and infrastructure manager, in sharp contrast to previous government policy. 

These developments present both opportunities and challenges for players in the EU rail market. 

Previous Railway Packages

The First Railway Package, introduced via three EU directives in 2001, focused on opening up the European rail freight network by providing international freight service providers access to the Trans-European Rail Freight Network (from March 2003) and to the entire EU rail network from March 2008. 

The First Railway Package laid the foundations for liberalisation by requiring operational separation of the functions of managing infrastructure and providing train operations. 

The Second Railway Package (2004) and the Third Railway Package (2007) brought further incremental steps towards full liberalisation. 

The Fourth Railway Package

Since the provisions of the three previous Railway Packages have not yet been fully implemented in all member states, the extent of liberalisation in each member state varies significantly. Despite this, at the beginning of 2013, the European Commission proposed a Fourth Railway Package, originally intended to remove the remaining legal, institutional and technical obstacles to creating a single European railway area.

When it was initially presented in 2013, the Fourth Railway Package set out far-reaching measures to enable new entrants to access the market, including a requirement for member states to competitively tender all public service contracts and a proposal to "unbundle" train operators and infrastructure managers to ensure fair access to infrastructure for all operators. These reforms, in their initial drafts, were not well received by all EU member states, most notably Germany and France. After some debate, the original proposals of the Fourth Railway Package were "diluted", with the result that member states may keep a "vertically integrated" structure which combines train operators and infrastructure managers, provided certain legal, financial and operational separations are put in place.

The Fourth Railway Package consists of six legislative proposals, split into a "market" pillar and a "technical" pillar, to amend a number of European directives. The technical pillar relates to rail safety and interoperability, while the market pillar concerns the governance of railways and the opening up of the passenger market. The technical pillar of the Fourth Railway Package was approved by the European Parliament in April 2016 and came into force in June 2016. 

The European Parliament voted to adopt the market pillar of the Fourth Railway Package at a plenary session in Strasbourg on 14 December 2016.Of particular interest in the market pillar are the amendments that the Fourth Railway Package proposes to Directive 2012/34/EU (the 2012 Directive).These amendments include additional requirements regarding separation between train operators and infrastructure managers. 

The original 2012 Directive and management separation

The 2012 Directive establishes a Single European Railway Area and makes clear that the roles of the train operator and infrastructure manager have to be managed separately. 

To implement this, member states must ensure that train operators and infrastructure managers have separate profit and loss accounts in respect of a train operator and an infrastructure manager (Article 6). In addition, certain "essential functions" must be entrusted to bodies which do not themselves provide rail transport services, so as to ensure equitable and non-discriminatory access to infrastructure (Article 7). These "essential functions" relate to decision-making on: (i) train path allocation; and (ii) infrastructure access charging. Keeping these "essential functions" separate from bodies that provide train operations is seen as a prerequisite to enabling competition and avoiding market distortion. 

Amendments to the 2012 Directive and vertical integration safeguards

The amendments to the 2012 Directive retain the concept that network capacity (i. e. train path) allocation and responsibility for setting the charges for access to infrastructure must be kept separate, but expressly acknowledge that the required separation can be achieved within a vertically integrated structure. This concession was the product of a hard fought battle by a number of member states. Vertical integration is therefore permitted rather than outlawed, but with a clear set of safeguards.  

Some key issues addressed by the proposed amendments include:

• Legal independence: Infrastructure managers must be legally distinct from train operators, and cross-shareholdings are prohibited. 

• Funding: An infrastructure manager’s income may not be used to finance other legal entities within a vertically integrated structure. The infrastructure manager must keep detailed records of any commercial and financial relations with other legal entities within a vertically integrated structure, and make them available to a regulatory body upon request.

• Independence of staff and decision-making powers: An infrastructure manager must have effective decision-making powers, independent from any other entities within a vertically integrated structure, and no other legal entity can influence the decisions of the infrastructure manager. Equally, the members of the management board and senior staff members of the infrastructure manager cannot hold similar senior positions within other legal entities in the vertically integrated structure. 

Current state of EU rail liberalisation

Even in its diluted form, the Fourth Railway Package represents an important opportunity for liberalisation in Europe. Many member states will need to make changes in order to meet the requirements outlined above, particularly those which have not yet complied with the separation requirements of the first three Railway Packages and the 2012 Directive. The degree of EU liberalisation completed to date in the various jurisdictions varies enormously, with the UK and Sweden currently among the most liberalised, and France and Spain among the least (according to a recent IBM index of liberalisation). Accordingly, the impact of the Fourth Railway Package differs across the EU, depending in part upon the current state of liberalisation in the relevant member state. 

France

France has implemented the series of EU directives aimed at liberalising the European railway market. However, France’s implementation of liberalisation legislation has been slow, and it did not initiate the liberalisation of passenger rail operations before being obliged to do so by the Third Railway Package of 2007 (in relation to international passenger services only). 

France’s national railway services operator, SNCF, currently enjoys a monopoly over national and regional passenger services_¹. This will only change with the implementation of the Fourth Railway Package, which will require the opening up to competition of long distance commercial passenger services in 2020 on an open access basis, and of national and regional services from 2023/2024 on a "franchise/ concession" basis. 

The tradition of railway services being provided by SNCF as a monopolistic operator still seems to be deep rooted in France. The concessions provided in the Fourth Railway Package have been welcomed by French authorities and, accordingly, it may be the case that the French domestic passenger market is not significantly opened up to competition in the short to medium term. 

Spain

The effective liberalisation of passenger rail operations in Spain has not yet taken place. From 2013 to 2015 the Spanish Government introduced significant legislative reforms to create the legal framework for liberalisation. However, no tender processes for specific lines have yet commenced (although the Valencia corridor was announced in 2014). 

The liberalisation process was put on hold by the Spanish Government in 2015, on account of the national elections and political discussions around the privatisation and liberalisation of public services. At the moment, passenger services are operated almost exclusively by RENFE (an entity controlled by the Spanish Government). Despite limited private sector operation to date, given that the legal framework has already been modified and a number of private companies have obtained licences to operate passenger services, future liberalisation remains a real possibility. 

In December 2016, the Government confirmed in an official statement in the Spanish Parliament that, by 2020, passenger operations would be liberalised. It therefore appears likely that significant opportunities for private sector rail operators will arise in Spain in the coming years. 

Germany

The German rail passenger operations market is a legally liberalised sector with opportunities for private train operators. In recent years, competitors of the state-owned Deutsche Bahn have acquired a share of the regional rail market. In fact, by 2015, competitors of Deutsche Bahn were operating almost one-third of the German regional rail passenger transport (SPNV) market. 

The infrastructure manager in Germany remains a subsidiary of Deutsche Bahn, a position which the German Government has been keen to protect. The infrastructure manager is split into two parts: one responsible for the rails, the other for the station infrastructure. With over 33,000 kilometres of track under its control, DB Netz AG owns and manages the longest rail network in Europe. Meanwhile, DB Station & Service AG operates the station infrastructure and some of the station buildings at almost all of the passenger stations in Germany. Access to the rail infrastructure on a non-discriminatory basis is supervised by the German Federal Network Agency (Bundesnetzagentur). DB Netz AG and DB Station & Service AG are subsidiaries of state-owned Deutsche Bahn AG, but they do not operate passenger transport services. Within the Deutsche Bahn group, passenger transport services are operated by separate group subsidiaries, such as DB Fernverkehr AG and DB Regio AG. 

The German regional rail passenger sector has developed into a competitive market. Competitors of Deutsche Bahn have steadily increased their market share by winning passenger rail tenders and winning contracts which were previously operated by Deutsche Bahn. Although Deutsche Bahn is still the transport operator with the largest market share in the German passenger rail sector, it is steadily losing market share to private competitors. It is likely that this process of liberalisation will continue with the implementation of the Fourth Railway Package. 

UK

The UK has one of the most liberalised rail markets in Europe, with a number of operators owned by foreign entities competing successfully for franchise awards alongside fully domestic operators. Separation between infrastructure managers and train operators has been in place since the privatisation of the rail network in the 1990s, well before EU legal requirements to do so had been enshrined. The main infrastructure manager, Network Rail, is a separate government body which is independent of the train operators. 

One might therefore assume that the impact of the Fourth Railway Package in the UK is likely to be less significant than in other member states where there is currently less separation. However, proposals recently announced by the Transport Minister, Chris Grayling, for a fully privatised rail line from Oxford to Cambridge signal a possible move away from the principles of separation. In a speech in December 2016 Mr Grayling set out plans for a new entity to be responsible for track and infrastructure, as well as the operation of train services, on a new Oxford to Cambridge line. If these plans are implemented, it will be the first integrated heavy rail operation in Britain for many years. Mr Grayling also outlined proposals for franchises, as they are re-competed (starting with South Eastern and East Midlands), to have integrated operating teams between train services and infrastructure. Depending on the extent of this integration in practice, it may well require careful navigation of the separation between infrastructure manager and train operator stipulated by the Fourth Railway Package. 

It is perhaps worthy of note that the government of the most liberalised rail system in Europe, which has lived with this separation of wheel and rail for the longest time, is now keen to point out the technical and operational difficulties which can arise from such separation: "When things go wrong, a lack of a joined up approach can make things much worse for the passenger ... Our railway is much better run by one joined up team of people. They don’t have to work for the same company. They do have to work in the same team".²

While the UK Government has made clear that, until the process of withdrawing from the EU is complete, it will continue to meet its obligations as a member state, withdrawal from the EU could allow the reintegration of infrastructure management and train operations in the UK without fear of contravening the Fourth Railway Package. 

Conclusion

It is clear from the range of levels of liberalisation existing in the various EU member states that the impact of the Fourth Railway Package will depend largely on the extent to which each European country implements the Fourth Railway Package. The extent of liberalisation will depend on a number of factors, such as the political will of the domestic government and domestic fiscal considerations. Given the relatively slow pace of liberalisation since the First Railway Package was introduced, it seems unlikely that the Fourth Railway Package will achieve all of its original goals. Indeed, although at the time of writing details are thin on the ground, the UK may well be coming full circle in its approach to rail liberalisation.