Michael Flynn Associates Submission to the Review Group on State Assets and Liabilities

Transcription

1 Michael Flynn Associates Submission to the Review Group on State Assets and Liabilities Michael Flynn Associates 3 Howth Lodge, Howth, Dublin 13

2 Contents Summary... 4 CIÉ... 4 Bus... 5 Rail... 5 Limits of submission and further work... 5 Introduction... 6 Michael Flynn Associates... 8 About Michael Flynn Associates... 8 Michael Flynn Associates in Ireland... 8 Bus... 9 General characteristics of the bus industry... 9 Current environment in Ireland Options for reform Status quo Free market model London model Franchised routes Structure Society Mixed model Rail General Characteristics of the Rail industry Current environment in Ireland Iarnród Éireann RPA Options for reform Status Quo Sale or floatation as one railway Establishing an Infrastructure Company or Authority Division into parts based on geography; Division into business sectors or lines Key recommendations Córas Iompair Éireann (CIE) Bus Page 2 of 40

3 Regulation Operating without a franchise Operation of common assets Rail Rolling Stock leasing companies Passenger Franchises Operators...35 Infraco...35 Freight Operator Rolling Stock Maintenance Companies Infrastructure maintenance companies Rosslare Europort Regulation Safety Next Steps Contacts Page 3 of 40

4 Summary This submission is made in response to the invitation to interested parties issued by the Review Group on State Assets and Liabilities to provide input into the review process for consideration by the Review Group. In the submission we draw on our international experience to consider four options for reform of the operation of the bus industry and four for the reform of the rail industry. Each of these solutions are in use in various ways in other parts of the world and we believe that the State would benefit from consideration of adopting them, in part or whole, to deliver a more efficient and more customer focused transport sector, reducing the requirement for subsidy, and in many, though not all cases, releasing significant amounts of capital for the State. To these options we have added a brief analysis of the advantages and disadvantages attached to the system presently employed in Ireland. Options for reform of the bus industry The status quo The free market model The London model The franchised routes model The Society Mixed model Options for reform of the rail industry The status quo The single railway model The Infrastructure authority model Division into parts based on geography Division into parts based on business sectors or lines We go on to provide recommendations for possible structures for a reformed bus and reformed rail sector along with solutions for the other parts of CIE that we believe, at this preliminary point in the process, would be appropriate to Ireland. CIÉ We recommend that CIÉ is abolished and the currently centralised services of information technology, insurance management and legal be dealt with by the appropriate operating subsidiary, and later, if the State decides to reform the operating subsidiaries, of the appropriate part of the reformed public transport industry. The advertising sales business, CIÉ Tours, and the commercial property portfolio, we recommend are sold, the former two as soon as practical, and the latter when market conditions have returned to a position that allows a reasonable return for the State on its investment. Rosslare Europort, which is currently owned by the railway, we recommend is either sold or transferred to one of the other State owned port companies for management. Page 4 of 40

5 Bus We recommend that a series of bus operating companies are created with limited duration franchises for the operation of bus services. These we believe should then be sold to the private sector. At the same time as the operating companies are created we believe that a regulator should be created to:- Rail Set routes and the network Set fares Run franchise competitions Set service standards Set and enforce safety standards and regulation Make franchise payments and receive franchise premiums We recommend that the rail industry is reformed and divided into the following parts:- A State owned infrastructure company Four passenger franchise operators A freight operator Rolling stock maintenance companies Rolling stock leasing companies Infrastructure maintenance companies A regulator would be established which would:- Represent the public interest Set fares in consultation with the Department of Transport Set timetables, routes and standards Develop, let and manage franchise contracts Set Infrastructure access charges Collect franchise premiums and pay franchise subsidy Adjudicate in disputes between the Infraco and the Franchisees or Freight Operator(s) Safety would be managed and regulated, as now, by the Railway Safety Commission. Limits of submission and further work While we have offered a preliminary view into some of the possible futures of public transport provision in Ireland, along with some initial recommendations, we have due to the amount of work involved and the limited amount of information available publicly, not offered estimates of the amount of capital realisable by the State or the amount subsidy could be reduced by. We do however provide a general indication of the amount subsidy could be reduced or capital released for each option. It is clear that taking any proposal for reform further would entail a detailed financial analysis, option appraisal, and market consultation, all things that are also beyond the scope of a submission of this nature. Page 5 of 40

6 Introduction The Review Group on Assets and Liabilities has been established by the Minister for Finance and tasked with advising the Minister on the proper stewardship of state assets and on opportunities for their better use. Specifically the Commission has been requested to: consider the potential for asset disposals in the public sector, including commercial state bodies, draw up a list of possible asset disposals, assess how the use and disposition of such assets can best help restore growth and contribute to national investment priorities; and review where appropriate relevant investment and financing plans, commercial practices and regulatory requirements affecting the use of such assets. As one of the leading operators of public transportation assets and systems in Europe and an active participant in the Irish market we have provided this response in order to outline our view of some of the possible futures for the public transportation assets presently owned by the State. Specifically we have concentrated on explaining our view of the possible future of the rail and bus industries and the assets presently owned by CIE. For both the bus and rail businesses we have considered how the assets, operations and the accompanying regulatory system might be reformed as for both of these crucial industries how the public interest is most effectively represented is inevitably dependent on the structure selected. It seems to us unlikely that the level of subsidy that presently supports the provision of public transport will remain tenable, given the painful reductions in spending having to be made elsewhere in public services, in the medium and perhaps even the short term. This will present to the State the problem of ensuring a satisfactory level of public transport provision, at a realistic cost to the public purse, and at fares that remain affordable for the travelling public. Fortunately we believe that there is another way. By introducing real competition of supply into the public transport sector in Ireland, and taking advantage of the cost discipline and global experience of the private sector, we believe that it is possible to drive out inefficiencies that currently exist in the Irish public transport market and the State monopolies which presently underpin it, and thereby drive down costs, delivering a substantially reduced requirement for subsidy and generating significant capital receipts for the Exchequer. When contemplating the structures and reforms to be adopted it is important to remain conscious at all times, for political, economic, and social reasons, that there is always a significant public interest in the operation of public transport networks and infrastructure. The areas of public interest are many but include such items as: Page 6 of 40

7 routes served, service standards, timetables, frequency, and operating hours, quality of service, safety, and maintenance of effective competition. It is vital then that effective commercial reform of the public transport sector is accompanied by appropriate reform of the regulatory system so that the private sector is incentivised to reduce cost and innovate while at the same time ensuring that the service delivered meets the needs of the State and the travelling public. Around the world over recent decades public transport provision has increasingly moved away from the state controlled model still largely intact in Ireland. Needless to say there are countless ways that countries and municipalities have considered employing in an attempt to meet the generally shared goals of greater efficiency and improved service delivery. Each of the methods has advantages and drawbacks. In this submission we have grouped, based on our experience from around the world, the different models employed and considered by authorities into broad categories, five for bus and five for rail. For the operation of bus infrastructure these are: The status quo The free market model The London model The franchised routes model The Society Mixed model For the operation of rail infrastructure these are: The status quo The single railway model The Infrastructure authority model Division into parts based on geography Division into parts based on business sectors or lines For each of these possibilities, we describe briefly the structure that would need to be put in place in order to allow the model to function successfully, and then equally briefly describe some of the advantages and drawbacks of each system. Finally we describe, at a general level, a possible solution, including regulatory structure, which we believe may be appropriate for Ireland and will deliver both a reduced requirement for subsidy and significant capital contribution for the State. The proposals encompass recommendations for both Bus and Rail and also include suggestions for the resolution of the parts of CIE, Rosslare Europort, the property business, advertising sales, and CIE Tours, not presently involved directly in the provision of public transport. Page 7 of 40

8 Michael Flynn Associates About Michael Flynn Associates Michael Flynn Associates is an Independent transport consultancy focused on providing advice across all modes of public transport. We have extensive experience of providing specialist advice to politicians, Government Departments, and Local Authorities on the appropriate structures and methodologies to deploy in order to deliver the most customer focused and cost effective public transport services to the people who use them. Our expertise is firmly anchored in a set of strategically related capabilities that includes particular expertise in the procurement, construction and operation of intermediate mode systems such as guided buses, trams, light rail systems, and metros, ticketing systems, especially the development, implementation and deployment of smartcard and other cashless systems, and advanced journey planning and passenger information systems. We have over the years worked on projects around the world including as well as Ireland, the UK, France, Austria, The United States, Portugal, Spain, Mexico, Canada, Australia, Hungary, Russia, Norway and Sweden amongst many others. We believe that this international perspective means that we are well placed to understand, and help provide solutions for, the challenges that face the Irish public transport market in the future. Michael Flynn Associates in Ireland Michael Flynn Associates have had a presence in Ireland since 2006 and we are presently leading, on behalf of clients, a bid for the commissioning and operation of Metro North, currently the State s most significant infrastructure project. Page 8 of 40

9 Bus General characteristics of the bus industry The bus industry encompasses a broad variety of types of operation but can reasonably be divides into six general categories: Local public transport Long distance public transport School & Student transport Private Charter Tourism Specialist (Airport, car park, rail replacement, etc) To deliver a service in any of these categories an operator will require, in addition of course to the buses themselves, a place to park and maintain the vehicles (depot) and a supply of skilled labour to operate and maintain the vehicles. It is argued by some, that if completely unregulated, the industry may tend towards a natural monopoly with a strong and determined incumbent able to deploy a rage of predatory and deterrent behaviours in order to prevent new competitors from successfully entering into a particular market. Theses anti-competitive practices can include any of, or any combination of: Control of all available depot sites Flooding a route identified and serviced by a new competitor with vehicles Poaching skilled staff Temporally cutting fares in order to drive a competitor off a route or out of business completely It is important then, when considering any option for market reform of the bus market in Ireland, to note that when the Bus industry in Great Britain outside London was privatised and deregulated from the mid 1980s onwards, that it was expected by the British Government that the completely free market model adopted would serve to keep prices low and improve services. It was found however that competition did not occur in all instances, with only some services experiencing major competition. Page 9 of 40

10 Current environment in Ireland Although theoretically open to competition, bus operations in Ireland remain completely dominated by the two bus operating companies controlled by CIE: Bus Átha Cliath or Dublin Bus provides bus services in Dublin and the surrounding areas Approximately 150 million trips per year Passenger revenue of 203 million Operating Costs of 308 million Public Service Obligation subsidy 85 million Bus Éireann provides long distance services and local bus services in the rest of Ireland Approximately 179 million vehicle kilometres 47% subcontracted to private operators 53% operated with own vehicles Approximately 94 million trips per year Passenger revenue of million Operating Costs of 349 million Public Service Obligation subsidy 49 million Fleet upgrade capital subsidy 41 million Many private companies who have tried to compete head on with the State controlled businesses over recent years have exited the market again and few have made significant inroads. Many of those who have exited the market have sited anticompetitive practices of the State owned and subsidised companies as a reason for their failure. Whilst this may not have been the case in all instances, and there have undoubtedly been other factors at play, it is telling that, with the minor exception of First Group s operation of its Aircoach service, none of the major international operators have so far entered the Irish market in any meaningful way. There is a general lack of information and research on the state of the bus industry in Ireland but it is thought to invest sixty to eighty million Euro annually in vehicles and employ between six and nine thousand people. Estimates of mileage vary, but approximations of around 250m vehicle miles per annum appear credible. There are believed to be as many as 1,800 private bus and coach operators in Ireland holding a license, known as a Road Transport Operators License, entitling them to carry passengers for private hire or as a public transport service in a vehicle constructed to carry more than 9 people. There are presently some 617 route licences registered. Many of these route licences however are believed to be either private contracts, such as those serving business parks or schools services, or may not in fact be active at all. Estimated annual turnover for the whole industry excluding the CIÉ controlled companies of between 300 and 350 million appears to be credible. It is known that the top sixty operators contribute around sixty million vehicle miles and have a combined annual turnover of approximately 85 million. Page 10 of 40

11 Options for reform There are wide variety of structures that it would be possible for the State to adopt, each offering a differing potential for reducing operating subsidy or raising income, and realising capital, we have considered here some of the most common solutions employed in other markets in which we operate and from further afield. These are:- The status quo The free market model The London model The franchised routes model The Society Mixed model We have not attempted to give exact estimates of the amount of operating subsidy that could be saved or the capital that could be raised in the Irish context, as this would be a much larger piece of work than is possible here, and would also require that we had access to data that isn t readily available in the public domain. Rather for each solution considered we have tried to give a general indication of the amounts that could be saved or raised in general proportion to each of the other structures considered. Page 11 of 40

12 Status quo Structure The existing structure employed by the State for the operation of buses in Ireland is characterised by two large State controlled businesses and comparatively minute privately owned businesses which have entered the market with various degrees of success. All of the operators are regulated by the National Transport Authority with State controlled operators receiving operating and capital subsidies. Although there has been a global movement away from such structures in the past two decades or so, with most jurisdictions deciding that such arrangements are not the most efficient strategy that could be deployed to deliver the public benefits they require, there remain of course some advantages to such structures. Advantages The state can relatively simply control the ticket price along with the types of tickets which are made available both of which may be desirable for social and political reasons. It may make the payment of state subsidies, such as those currently paid to Dublin Bus and Bus Éireann more politically palatable than if such subsidies were paid to private operators Allows the State to reasonably simply set routes. It is possible therefore to plan and construct a network on the basis of social need rather than relying on bus operators recognising the demand. Allows the state to reasonably simply introduce new routes in support of wider development goals even though such routes may initially be loss making Disadvantages The inevitable inefficiencies of a state controlled monopoly typically allows per kilometre operating costs to rise significantly above those in jurisdictions with a more market orientated approach. This in turn requires the authorities to provide increasing subsidies to meet the gap between revenue and operating costs The state has a large amount of capital tied up in the rolling stock, depots, and the other assets of its bus companies, which it could probably deploy more effectively elsewhere The monopoly provides no real incentive to innovate or place the customer at the centre of activity often resulting in production led rather than customer focused businesses. Although dominant in their own market, local monopoly operators tend to be relatively small, and by definition their operations are locally focused. This can lead to international best practice and innovation being implemented either slowly or not at all. Page 12 of 40

13 Free market model Structure This model is similar to that which is presently implemented in the UK outside London. Most or all routes are left entirely to free market competition There may still be some forms of subsidy such as compensation for concessionary fare paying passengers A regulator is necessary in order to ensure, o that the vehicles used are safe, o that drivers are qualified and safe, o that bus companies actually operate the advertised routes and timetables, o that there is intervention in the case of predatory or anticompetitive behaviour. It is likely that any real world implementation of such a system would still include a role for the State or Local Authority to provide subsidies for routes that were deemed socially necessary but which no commercial operator was willing to operate on a commercial basis. Such routes would be tendered and the operator willing to serve the route at the required frequency for the smallest subsidy would be awarded the contract. The implementation of such a system in Ireland would take the form of a disposal by the state of individual garages, or in the case of smaller garages groups of garages in the same geographic area, either to their management or to third party bidders decided as part of an open tendering process. The successful bidders would then run them as commercial operations. Regulation of the fitness of vehicles and drivers would be undertaken by the regulator which in Ireland may be the National Transport Authority with the decisions on socially necessary routes being taken by the National Transport Authority in consultation with the appropriate Local Authorities for local services, and with the Department of Transport for long distance and interurban routes. On-street infrastructure such as bus poles, shelters, timetable displays, time to wait displays and systems, implementation of bus lanes etc would remain within the public sector and become the responsibility of the local authorities or the National Transport Authority. Page 13 of 40

14 Advantages This is the solution that is likely to deliver the largest immediate capital injection for the State with bidders prepared to pay a premium for acquiring complete businesses rather than simply a franchise It is the system that is likely to produce the lowest long term subsidy and the highest long term taxable profits It is the system that is likely to produce the greatest competition between different operators over individual routes By taking the revenue risk, the operator is incentivised to take a customer led approach. This in turn encourages greater innovation and a more market focused approach to attracting passengers and serving their needs If subsidy is used, for example for free or discounted tickets for specific social groups, there is much greater clarify over the purpose and use of the subsidy and it can be precisely targeted Disadvantages The degree of state control, and therefore the ability to specify ticket prices and service quality, is low Although the state may still be able to specify routes it can only do so where there is no commercial justification for the route or where no operator is prepared to operate it on a commercial basis. Its ability to control the development of a planned network is therefore very limited. The possibility of dominant or monopoly suppliers emerging and then abusing their position exists and must therefore be effectively managed. Even with strong regulation this may be no easy task and the regulation necessary to prevent abuse of a dominant position may itself prevent innovation Individual bus operators may not wish to take part in concessionary fare or integrated ticketing schemes proposed by the responsible authority, because for example they feel that the compensation that they are being offered is insufficient to be commercially attractive. This may lead to a situation where there is confusion over which individual bus services are accessible to those who qualify for concessions or hold integrated tickets and passes Page 14 of 40

15 London model Structure This structure was the one chosen for London when buses were deregulated in the mid 1980s. Unlike the rest of the country it was felt that the London market was too large and too complex for full deregulation so it was decided that London Regional Transport (now Transport for London), the transport authority for all transport in the London area, would retain responsibility for: the fare box risk setting of fares network and route planning provision of on-street infrastructure ticketing specification and fare structure specification and letting of operational contracts including o type of vehicles o frequency of service o performance criteria o timetable o operating hours on street infrastructure including o bus poles o shelters o timetable displays o time to wait displays and systems o implementation of bus lanes The implementation of such a system in Ireland would take the form of a disposal by the State of individual garages, or in the case of smaller garages groups of garages in the same geographic area, either to their management or third party bidders on an open tender basis. The potential operators would bid to operate defined groups of routes taking the operational risk, i.e. the risk of being able to deliver an agreed service to an agreed standard, the risk of ownership of the depot, and the risk of owning and maintaining the vehicles. Payment would be in the form of a regular payment from the public authority paid under a performance regime and varied with performance penalties and bonuses as appropriate depending on the operator meeting contractually defined performance standards. When a contract is won by a non incumbent operator, and thus changes hands the entire workforce, with the exception of the most senior management, transfers to the new operator under TUPE regulations. Page 15 of 40

16 Advantages This structure gives the Authority a great deal of control over the planning of the transport system and therefore the bus network can be more easily integrated with other modes of transport and used to support long term strategic goals, for example serving a new housing development or the development of an industrial site where it is hoped to develop sufficient patronage to make a service sustainable, but will take a longer time to develop than an entirely free market operator would be prepared to wait Competition is focused on reducing operating costs against a defined service offering ensuring that the winning solutions are likely to be close to the most economic possible for the service defined by the Public Authority As the Public Authority is taking fare box risk it is simple to implement network fare pricing and integrated network ticketing Public objectives such as operating a certain type or age of bus or ensuring improved frequency or hours of operation can, at a price, be simply achieved The capital realisation achievable by the State is likely to be substantial. It would be realised from the sale of depots and existing vehicles and the transfer of the reformed businesses to new owners, although this is not likely to be quite as significant as transferring these assets under the free market solution outlined above as future revenue is only guaranteed for the length of time remaining before any accompanying operational contract is rebid, the experience from other jurisdictions is that the difference in realised value may be small The competition for secure operating contracts will be focused on the reduction of operating costs while meeting the defined service standard, and therefore the amount of subsidy required from the State in excess of the revenue raised from the fare box should reduce over time Operating contracts could be let for a comparatively short period of time, typically 5 to 7 years, allowing an underperforming contractor to be removed relatively quickly and painlessly Disadvantages While there was a substantial saving in operating costs at least initially, the London experience in recent times is that these can disappear if the Public Authority prioritises improvements in service quality and bus fleet quality rather than targeting the most economic solution The Public Authority takes the fare box risk. Patronage may be lower than predicted and with the Authority tied into service contracts for a period of years it may not be able to respond to the changed circumstances as rapidly as it may wish Managing the network and the process of letting the contracts is not cheap or simple and will in itself represent a significant cost to the Public Authority Competition may not be as full as it first appears as the location of the depot, and thus the amount of dead running that an operator will have to undertake, is crucial to the economics of bus operation. If there is only one supplier that has an economically located depot facility it will be difficult to achieve the optimum level of competition for contracts when they are bid Unless incentivised through an appropriate performance regime, with no fare box risk the operator may become too operationally rather than passenger focused. Page 16 of 40

17 Franchised routes Structure Structure This is similar to the London model but instead of selling the depots to the private sector the Public Authority retains ownership of the depot infrastructure and vehicles, franchising the operation and maintenance of the assets to private sector operators for a period of time along with the routes associated with that depot. It is also possible to include the supply and / or the maintenance of the street infrastructure with the contracts let under this model. When a contract is won by a non incumbent operator and thus changes hands, the entire workforce, with the exception of the most senior management, transfers to the new operator under TUPE regulations. Advantages As with the London model this structure gives the Authority a great deal of control over the planning of the transport system and therefore the bus network can be more easily integrated with other modes of transport and used to support long term strategic goals. Competition is focused on operating cost against a defined service level ensuring that the winning solutions are likely to be close to the most economic possible As the Public Authority is taking fare box risk it is simple to implement network and integrated ticketing Public objectives such as operating certain types of buses or ensuring improved frequency or hours of operation can, at a price, be simply achieved There is likely to be a reduction in operating costs and therefore the amount of subsidy required by the state Operating contracts are let for a comparatively short period of time, typically 5 to 7 years, allowing an underperforming contractor to be removed relatively painlessly While it may create further complications at the interface point, it would be possible under this structure to have more than one operator running buses from a single depot as the depots will remain in the ownership of the Public Authority. This will enable the Authority to avoid the issue of creating a virtual monopoly due to non competitive depot locations. Page 17 of 40

18 Disadvantages While this structure offers a substantial saving in operating costs, at least initially, as with the experience from London in recent times these savings can disappear if the Public Authority prioritises improvements in service quality and bus fleet quality rather than simply providing the most economic solution The Public Authority takes the fare box risk. Patronage may be higher or lower than predicted and with the Authority tied into service contracts for a period of years it may not be able to respond to changed circumstances as rapidly as it may wish Managing the network and the process of letting the contracts is not cheap or simple and will in itself represent a measurable cost to the public authority Custody and operation of significant public assets by the contractors will be involved if this structure is adopted, and steps need to be taken to ensure that the asset is returned in satisfactory condition at the end of any contract period There is no instant capital benefit for the State under this model as no assets actually transfer to the private sector. The benefit is in a reduced operating subsidy or the creation of an operating surplus which may take some time to manifest itself. Indeed initially the costs of setting up a franchised system may outweigh the savings achievable Page 18 of 40

19 Society Mixed model The society mixed or mixed economy model is widely used in differing forms in continental Europe, especially in France and Italy. It attempts to merge the perceived efficiencies of private sector operators with the public service interests of the Public Authority in a coordinated and cooperative environment. Structure The precise nature of the Society can differ to suit local requirements, but in all instances the Public Authority will put either all public transport in an area or a substantial subset of it, for example bus operations, up for tender. The winning tenderer will then establish a company to undertake the services in partnership with the Public Authority with both the Public Authority and the private sector operator as shareholders and with Directors appropriate to their shareholding. As with the franchise model the assets and the infrastructure remain the property of the Public Authority and the workforce will transfer to a new operator if and when the contract, as a result of the retendering process will typically take place every 5 to 10 years, passes to a new operator. Advantages The Society Mixed model allows significant influence from the Public Authority to achieve its goals, both through the terms of the original tender and through its Directors of the Society, whilst leveraging the experience and discipline of the private sector The structure compels the contractor and Public Authority to work together and ensures an understanding of the challenges and problems faced by each in the execution of their respective tasks The competitive tendering to the private sector of the operating contract ensures value for money for the public authority The Public sector has close oversight of the operation and of its assets in its inside role and presence on the Operating Company s board Planning and integration of all modes is simplified as all assets remain within the ownership of the Public Authority Disadvantages No capital receipt is available as all of the assets and businesses stay in the ownership of the public sector The role of the private sector is limited by the Public Authority involvement and influence on the Operator s Board may not lead to the most efficient solution or lowest cost of operation which is potentially available There is a danger that the closeness of operator and client may lead to client capture causing the client to fail to manage the contracts as aggressively, efficiently, or proactively as it should in the public interest Page 19 of 40

20 Rail General Characteristics of the Rail industry The large investment in fixed assets required to build and operate a railway, and the high cost of building a competing system, makes the establishment of competing rail systems generally inefficient. This has traditionally led to the view amongst many economists and those involved in the management of public transport infrastructure that the railway industry tends towards a natural monopoly. This orthodoxy has however been challenged on two fronts in recent decades. Firstly, developments impacting the use of the railway including the improvement in road infrastructure, the growth in low cost flights, the growth in private car ownership, containerisation of freight,, means that the railway should not be perceived as a monopoly supplier of rail journeys, but should properly be considered as part of a transport market competing against a wide variety of modes which the traveller or shipper of goods may select from when making their decisions about how to travel or move goods. Secondly, the view has developed amongst many that while duplicating the infrastructure is generally inefficient and therefore is subject to natural monopoly conditions, once the infrastructure has been deployed, the cost of operating rail transport services and rolling stock can be efficiently covered by more than one company, either as actual or potential competitors. It follows from this that the infrastructure can be treated as a natural monopoly and appropriately regulated, but also as a potential provider of adequate access to any operator, as is the case for any other competitive economic activity that could potentially be provided by multiple competing operators, or by a single company under some form of concession, or license arrangement. Page 20 of 40

21 Current environment in Ireland Iarnród Éireann All railways in Ireland (with the exception of the Luas tramway) are operated by a State owned monopoly, Iarnród Éireann, which in common with the two large bus operators is a subsidiary of State holding company, CIE. Key metrics for Iarnród Éireann include: Approximately 43.3 million trips per year 13 routes Cork, Limerick, Galway, Waterford, Sligo, Westport, Tralee, Rosslare, Belfast, Northern, Maynooth, Heuston, Dart Passenger revenue of approximately million Operating costs of approximately million Public Service Obligation and safety grant subsidies million Fleet upgrade capital subsidy 41 million The subsidy per trip is especially startling at almost 5.5 per journey, as is the ratio of revenue to costs with costs almost twice passenger income necessitating a subsidy from the public purse roughly matching the revenue collected from the fare box. There is a separate body the Railway Safety Commission which is responsible for: o Granting operating licences o Auditing railway undertaking s safety management systems o Approving infrastructure and rolling stock o Investigating safety related incidents The operation of railways in Europe is supposed to be regulated by what is known as the First Railway Package, this encompasses EU directives 91/440, 2001/12, 2001/12, 2001/14, 95/18, 95/19 and 2004/51 which collectively govern the required structure of European railways. The directives require inter alia: The separation of infrastructure from operations Open access to the infrastructure for freight and passenger operators who wish to operate on a commercial basis Operator access agreement limits Setting of track access charges As of July 2010, the European Commission commenced action in the European Court of Justice against Ireland and other Member States which it perceived had failed to implement the requirements of the Directives. Page 21 of 40

22 RPA The Luas tramway is, and when it is built the Metro will be, owned by the Railway Procurement Agency, a separate state controlled body. The capital cost of the Luas infrastructure and rolling stock, which was conventionally procured, was supported by Government grant with extensions being procured and financed in the same way. The operation of Luas and the maintenance of its infrastructure and rolling stock is periodically competitively tendered and let to the most economic bidder. Presently the operating and maintenance costs of Luas are more than covered by fare box receipts and other income such as advertising, providing the RPA with a small surplus. The metro infrastructure, including maintenance for the first twenty five years is presently in procurement and is being procured by the RPA as a Public Private Partnership project. It will therefore be paid for on an availability basis, coupled with a performance regime which will penalize sub optimum performance, over the lifetime of the contract possibly with a lump sum at the commencement of the contract. A shorter operating contract of five to ten years, is being at the same time as the infrastructure contract. As with the infrastructure contract payment under this contract is coupled to a performance regime which penalises sub optimal performance by the contractor. In addition to operating revenue and grants received to construct new infrastructure, RPA receives a small revenue grant of approximately 15½ m covering its development costs for new infrastructure and overheads. Page 22 of 40

23 Options for reform As with the possible solutions for reform of the bus industry there are a wide variety of structures that could be adopted by the State, each offering differing results in the equation of reduced operating subsidy, income generation and capital realisation. We have considered here the main solutions employed in other markets in which we operate and from further afield: The status quo The single railway model The Infrastructure authority model Division into parts based on geography Division into parts based on business sectors or lines Again, as with the alternative structures considered for a reformed bus industry, we have not given exact estimates of the amount that subsidies could be reduced by, or for the capital that could be raised, as this would be a much larger piece of work than is possible here. To do so we would also require access to data that isn t readily available in the public domain. For each solution considered, we have endeavoured to give a general indication of the amounts that could be saved or raised relative to each of the other structures considered. We have also restricted our considerations to those railways operated by Iarnród Éireann. While not discounting completely the possibility that there are efficiencies to be achieved in the railways operated by the RPA, we consider that the RPA s railways are less in need of radical reform as their construction, operation and maintenance are all already competitively tendered on a periodic basis which should ensure that reasonable value is being achieved for the resources deployed by the State. Page 23 of 40

24 Status Quo Structure The present structure of the railways as a State owned strongly production led monopoly could be retained, owned either as it is now by CIE, or directly by the Department of Transport if CIE ceases to exist. Advantages It is difficult to see, at least in the short term, how Irish railways could be operated without substantial subsidy from the public sector. Given that situation, it may be that it is politically more palatable to pay this subsidy to a State owned entity rather than to a private for profit business Allows the state to simply control the ticket prices and structure which may be desirable for political or transport integration reasons Allows the state to reasonably simply set timetables and operating hours on the basis of social need and political expediency rather than strictly on economic and transport realities Disadvantages The cost of operating Irish railways has risen significantly above those with more market orientated approaches. The government has a large amount of capital tied up in the assets of its railway businesses much of which it may be possible to realise and deploy more effectively elsewhere The inevitable inefficiencies of a state controlled monopoly have resulted in the rail operations making continual and increasing operating losses rather than a surplus that can be taxed. Rail operations, without reform, are likely to remain a significant and increasing drain on the public purse The monopoly provides no real incentive to innovate or place the customer at the centre of activity, resulting in a production rather than customer led operating philosophy Although dominant in the Irish market, by international standards the state rail operator is relatively small with, by definition, operations that are Ireland focused. This can lead to international best practice and innovation to be implemented either slowly or not at all. It is difficult to see how the EU First Railway Package directives can be implemented without radical market reform to the present structure of Ireland s railways Page 24 of 40

25 Sale or floatation as one railway Structure This would maintain railway operations as one railway and one company, either as a single entity or as a holding company and series of operating and asset owning subsidiaries. This could be achieved by either simply selling the business as it is, or creating a single holding company and series of operating and asset owning subsidiaries and then selling them in one transaction to a new owner. This is the solution that is likely to find the most support, and the least resistance, amongst the present management of the network given that it is closest to what they already know. The principal difficulty however, is the enormous scale of subsidy paid by Government to the railway compared to the revenue it generates. It is reasonably safe to assume, given the known figures, although without a detailed analysis of the business it is of course impossible to be certain, that there will be an ongoing requirement for state support, at least for a significant time to come, and it may be politically difficult to provide such a subsidy to a privately owned enterprise. Also, private sector operators and investors may be understandably reluctant to invest in, and take full ownership of, an asset that was reliant for its future viability on the continued largess of Government. Advantages Simple and quick to execute, may raise a substantial amount of cash from the sale of the assets comparatively quickly if investors can be convinced that Government support will be maintained Maintains a single vertically integrated structure with infrastructure and operations within the same organisation reducing the chance of difficulties occurring at the interface of infrastructure and operations Disadvantages The requirement to continue to subsidise the railways for the foreseeable future may be politically unpalatable if it is paid to a private for-profit company Investors may be reluctant to enter a business financially dependent on the willingness of Government to continue to pay subsidies and its consequent ability to drive it into insolvency if it wishes The ongoing subsidies and the likelihood that Government will wish to reduce them if operating cost savings are achieved, provides little long term incentive for the new owner of the assets to reduce costs Implementation of the EU First Railway Package Directives while not impossible will be more difficult to achieve than for other structures considered below As the assets are owned outright by a single company it is likely to prove difficult or even impossible to remove a poorly performing company which is damaging the public interest without further radical reform Page 25 of 40

26 Establishing an Infrastructure Company or Authority Structure This solution would involve the establishment of an infrastructure authority or company which would, at least in the immediate future, stay within the public sector. The Infrastructure Company would own and maintain the fixed assets of the railway with separate private sector companies operating the services under franchise. Regular competition for franchises ensures that operating costs are kept competitive, encourages service innovation, and can be used to reflect the State s changing requirements for service quality and cost. It also provides the possibility for completely free market open access operators to enter the market and therefore enables relatively straightforward compliance with the requirements of European Union legislation. Advantages Openly tendered franchise competitions provide a strong and regular focus for competing operators to produce cost effective solutions and service improvements It is relatively straightforward for new operators to seek to enter the market Produces greater clarity for the Government of the efficiency of the businesses, where profit and losses are being made, and how any subsidies are being deployed Government can still define the service requirements in the public interest Subsidy to the network can be routed through the possibly state owned infrastructure company which may be more politically acceptable than appearing to subsidise a privately owned business Disadvantages Would produce little or no capital for the state unless it was decided that the infrastructure authority should be sold Separates the infrastructure and operations into separate business potentially creating an interface where none existed previously Page 26 of 40

27 Division into parts based on geography; Structure This structure would seek to produce vertically integrated railways based on regional areas with a single integrated railway in each. Train operators have access to each other s area via track access agreements which would require the formation of a strong regulator to enforce. This model is best suited to jurisdictions where there a number of relatively dense centres of operation. Ireland s single dense urban centre of Dublin and relatively sparse operations elsewhere means that this structure is probably not well suited to Ireland, although a case could perhaps be made for a Dublin and East network, a South and South West network, and a North and North West network. Advantages Maintains a single vertically integrated structure with infrastructure and operations within the same organisation It is possible to sell or franchise some areas whilst maintaining others within the public sector producing an effective comparator between the privately managed and state managed operations. This can in turn be used to drive down costs in the state operator Simple and quick to execute, it may raise a substantial amount of cash for the sale of the assets comparatively quickly Disadvantages It will be difficult to implement the European Union directives without substantial and effectively implemented regulation Extremely small regional companies would be created and these may not have the critical mass to operate efficiently The high level of subsidy which will be required for the less used areas outside Dublin may be politically difficult to pay to private for profit companies As the assets are owned outright by a company it is likely to prove difficult or even impossible to remove a poorly performing company which is damaging the public interest without further radical reform Page 27 of 40