SUCCESS FACTORS AND PROBLEMS OF RAIL FRANCHISING: A FRESH ASSESSMENT OF THE GERMAN CASE Heike Link, DIW Rico Merkert, Cranfield University

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1 SUCCESS FACTORS AND PROBLEMS OF RAIL FRANCHISING: A FRESH ASSESSMENT OF THE GERMAN CASE Heike Link, DIW Rico Merkert, Cranfield University 1. INTRODUCTION An important measure of the German rail reform was the so-called regionalisation which implies that since 1996 the federal states have been responsible for procuring regional rail passenger services from transport companies and for financing them within franchise contracts. The intention of this measure was twofold: First, to achieve a clear distinction between cost-covering (or even profitable) services (commercial services), and subsidised services to be operated in the public interest (PSOs). Second, to ensure that PSOs are procured according to the needs at the regional level and that companies operating PSOs are adequately paid for these services. Depending on the region, the franchising approach led in many cases to competition for the market by means of competitive tendering, however in some cases competition has not increased. In general, there is no competition in the market. This has only developed in the German rail freight market. Meanwhile, the German regionalisation approach looks back at a 12 year s experience. This paper analyses the development of franchising regional rail passenger services in Germany during that period and identifies the success factors as well as the problems with the approach. It is based on an analysis of publicly available sources such as reports of the relevant authorities in the market (Federal Railway Board, Network Agency, Commission on Monopolies), recent data and a series of in-depth interviews conducted by the authors with PTA s, various train operating companies and the key infrastructure manager. The paper is organised as follows. Section 2 provides an overview on the relevant framework conditions of the German rail market and on the franchising framework. Section 3 summarises the development of transport performance, the market entry of non-deutsche Bahn companies and the market structure for regional rail passenger services. Section 4 and 5 are dedicated to the success factors of the approach and to the problems and obstacles for market entry of non-db companies. Section 6 concludes. 2. THE ORGAISATION OF THE RAIL SYSTEM IN GERMANY The institutional framework for rail transport in Germany is illustrated in figure 1. It is important to note that the German rail sector is characterised by the existence of a large incumbent company, the still state-owned national rail company Deutsche Bahn AG (DB) with a network of km, and a considerable number of smaller, regionally operating rail companies with a network of 7200 km. In 1994, a comprehensive reform of the National rail companies DB and DR (the Association for European Transport and contributors

2 Service Provider Asset Provider DB AG Holding Transport Regulation Clients former East German rail company) was introduced. In the following, we briefly summarise the reform measures that are most relevant for the topic of this paper. Figure 1: The German rail system in 2009 Federal Ministry of Transport, Building and Urban Affairs Regional authorities (PTAs and state governments) Passengers Freight customers Federal network agency (BNetzA, economic regulation) Federal railway office, (EBA, safety/licenses/unbundling) Federal cartel office (Bundeskartellamt) DB Mobility Logistics AG Holding DB passenger train operators (DB Fern-, Regio- and Stadtverkehr = all incumbents) DB Schenker Rail (freight train operator =incumbent) Other non- or part-service contracted passenger train operators Other freight train operators Other service contracted passenger train operators DB Station & Service DB Netz AG DB Energie Other rolling stock companies Other individual infrastructure manager DB Services Corporate Division (DB Fuhrpark, DB Services, DB Systems, DB Telematik and Vehicle Maintenance) Other service providers Other light vehicle maint.. Source: based on Merkert et al. (2008). public private Separation between infrastructure and transport Germany has vertically separated the train operation/ rail infrastructure interface in so far, that the tracks of DB (which represent 83% of the total German rail network) are organised within a separate company DB Netz. However, DB Netz is connected with the other DB companies by contractual relations for profit-loss transfers and is managed under the roof of the DB Holding. Therefore, to some extent the DB group still enjoys the features of a vertically integrated monopolist. Opening up of the rail network to third parties against payment of track charges In terms of operated traffic, Germany has realised the most comprehensive opening up of a rail network in Europe. Since 1994, DB Netz AG and all other urban and interurban rail infrastructure and train operating companies offering public rail transport services have opened up their infrastructure and other facility networks against the payment of usage charges. Regionalisation of regional rail passenger services The railway reform was aimed at a clear distinction between cost-covering (or even profitable) services to be provided at DB s (or any market entrants) own entrepreneurial risk (commercial services), and those services which are non- Association for European Transport and contributors

3 profitable but have to be operated in the public interest and therefore to be subsidised (PSOs). While all long-distance rail services were defined as commercial services being not eligible for explicit subsidies, regional passenger services (RPSS) were classified as services to be subsidised 1. Since 1996 the federal states have been responsible for procuring these services from transport companies and for financing them. 3. THE REGIONALISATION APPROACH AND THE FRANCHISING FRAMEWORK IN GERMANY Since 1996 all RPSS have been subject to franchise contracts and have been procured under the responsibility of the Federal states (so-called regionalisation). In order to procure and finance RPSS, the federal states receive transfers from the federal government. These transfers origin from the fuel tax revenues, collected by the Federal Government. The financial volume required to provide RPSS was originally based on a cost estimate per train-km in 1993/1994 provided by WIBERA Consult and has been frequently assessed by the same consultancy. During the period from 1996 to 2008 the amount of regionalisation funds fluctuated between 6.1m Euro and 7.1m Euro (table 1) while from 2009 up to 2014 annual funding increases by 1.5% have been agreed. It is worth mentioning that several stakeholders such as BAG-SPNV² (2010) argue that these 1.5% increases are not sufficient to cover for the forecasted passenger growth and cost increases (particularly for the use of infrastructure and energy, +3% p.a.). Table 1: Regionalisation funds (bn Euro) Year Financial amount Source: Mofair et al. (2009), BAG-SPNV (2010). In contrast to other countries such as the UK, only regional rail services which are eligible for subsidies are franchised. Theoretically, this follows the idea of obtaining the most efficient service delivery by introducing bidding procedures for the right to serve lines or networks as a monopolist for a pre-defined franchise period. Association for European Transport and contributors

4 Currently, there are 33 regional authorities (PTAs) responsible for procuring regional rail passenger services. These PTAs are characterized by considerable differences regarding the area to be served, and there are also differences in the number of PTAs within the federal states. The legal framework leaves high degrees of freedom to PTAs, allowing to award service contracts by using i) open tenders, ii) non-open tenders and iii) negotiations. Furthermore, service contracts have different contractual forms and different degrees of service specifications, varying contract durations and refer to different network sizes (ranging from single lines up to whole regional network bundles). In general, all regional rail services are awarded as public service contracts on a non-exclusive basis. The decentralised institutional set-up implies a lack of a general standard for regional rail service contracts. PTAs rather adapt contract features to regional conditions and experience Contract duration Contract duration varies considerably and ranges from 2 years to 15 years. Contracts awarded by open tenders appear to have a longer duration (10 years 3 ) than those awarded within negotiations (on average 8 years, see Peter 2008). Meanwhile, several PTAs prefer contracts between years in order to account for the fact contracts should be in line with the leasing contracts for new rolling stock for the procured services 4. Access to the rail network is reportedly not an issue, as the PTAs back the operators in negotiations with DB Netz. The fact that the framework agreements for slot contracts can be only agreed every 5 years is seen as an entry barrier, but primarily in the long distance passenger and freight transport Service specification Franchising authorities use rather tight service specifications (although the degree differs across PTAs). This concerns the need to incorporate regional rail services into synchronised and coordinated timetables, service frequency, operating hours (first and last train), through ticketing, acceptance of the DB tariff and requirements with regard to type and quality of rolling stock. According to an analysis of a set of available contracts, Peter (2008) reports that in almost three quarter of cases minimum standards were to be met, in 29% even exact specifications were set by authorities. The German franchising model can thus be characterised as rather planning based whereby planning is seen as the task of regional authorities. A number of operators, including DB, argue that there is a trend of too tight specification of RPSS-contracts lacking of sufficient freedom for service improvements and innovations. PTAs increasingly bear operator risks but also take away decisions on key value adding production parameters, for which operators would be better positioned. Association for European Transport and contributors

5 3.3.3 Risk allocation and type of contract PTAs use both net and gross contracts. The majority of regional rail service contracts 5 are on net basis, e.g. the revenue risk has to be borne by the operator. As a consequence, larger operators usually have to operate a mixed portfolio of contracts. However, analysing the situation within the federal states or within PTAs separately, there appears to be a strong tendency to use only one type of contract. Furthermore, while there has been an initial preference of PTAs towards net contracts meanwhile a trend towards gross contracts (with strong incentive components) can be observed 6. This trend is driven by two advantages: First, market entry for new entrants is easier because in most cases only the incumbent has knowledge of profit/revenue expectations which are essential for an economically viable bid. Second, the fact that PTAs receive all the revenue eases the revenue sharing schemes within the so-called Verkehrsverbünde (large PTAs). This is of particular importance where there is cross-federal traffic. The incumbent DB reports to have slightly more net contracts than gross contracts but also experienced a trend towards gross contracts 7. Most of the existing contracts as well as all recently awarded contracts contain a bonus-malus regime. Net contracts appear to be more often combined with pure malus regimes whilst gross cost contracts usually contain full bonus-malus regimes. Contractual penalties are usually treated separately from malus payments. Most RPSS contracts include clauses that allow adjustments for the case that changes in fuel prices or collective agreements with unions result in unexpected and unmanageable cost increases. Hence, the risks are often with the PTAs. In return, the contracts also include clauses for the case that the regionalisation funding available to PTAs should be for any reason reduced (PTAs can cancel 10% of the traffic). In general, all contracts contain a clause specifying that both contract partners are supposed to negotiate for the case that for one party the contract becomes financially unbearable. According to the PTAs, there is in any case scope for adjustments as long as it is in the interest of the passengers (e.g. bus replacements whilst lines are upgraded etc.). In terms of proactive service adjustments net contracts have reportedly much more incentives to scope for adjustments while in contrast, gross contracts are much more rigid in that sense. 4. OUTCOMES OF FRANCHISING A systematic impact assessment of the German franchise model suffers first and foremost a lack of sufficiently detailed and disaggregated data. Quantitative data is available for global performance indicators such as train-km and passengerkm, however there is no data on the financial volume of contracts. Furthermore, a second issue appears to hamper an impact assessment too and needs to be considered. The position of the PTAs has strengthened considerably since the reform, and as our description has shown, the degrees of freedom in franchising RPSS are considerable. For a full understanding of the impacts of franchising in Germany, it would be, therefore, necessary to do a full interview Association for European Transport and contributors

6 programme and a number of case studies. Since no longitudinal data on many key performance indicators exists for the period of 1994 until today, we have focused our analysis mainly on qualitative arguments (partially provided by interviewees and partially taken from other reports) and the few quantitative data that has been collectable. 4.1 Transport performance Currently, there are more than 120 franchise contracts in operation with a volume of about 630m train-km p.a. As table 2 shows, the major outcome of the regionalisation has been an increase of service delivery in terms of train-km by almost 12% from the base year 1998 until 2008, compared to 1993/1994 (before regionalisation) the increase amounts at even 28% (Mofair 2009). This increase, however, is not necessarily a result of competition but rather an outcome of the sound financing of RPSS which led to an increase of services ordered and paid by regional authorities. Nevertheless, given that the funding did not increase very much and given that patronage in terms of passenger-km has increased by 43%, regionalisation appears to be a success. Table 4: Passenger-km in regional rail passenger transport Year Train-km total (m) Train-km (m) Pass-km (m) Share of DB (%) Operated by DB Operated by non-db companies 1994 n.a. n.a. n.a n.a. n.a. n.a n.a. n.a. n.a n.a. n.a. n.a n.a. n.a n.a. n.a n.a. n.a. Sources: Mofair 2009, figures for pass-km taken from Peter 2008, sources quoted there: Progtrans 2005, : DB AG Association for European Transport and contributors

7 The share of RPSS awarded to non-db companies, mostly by means of competitive procurement/tendering procedures was 4% in 1998 and has increased continuously since then. However, the overwhelming majority of services have been granted to DB by direct awards without any competitive procedure. Overall, in 2009 the market share of non-db companies made up 20% in terms of train-km but only about 12% in terms of passenger-km. This is due to the fact that the tendering procedures focused mainly on low-occupancy lines. Although the non-exclusively public service contracts leave some scope for additional on-track competition, in practice no commercial operator makes use of the opportunity to compete with the operators on public service contracts on their routes. Apparently, competitive tenders attracted a sufficient number of bidders. Beck (2010) reports a range of bids per tenders between one and eight (with one single tender which did not receive any bid at all), based on an analysis of 30 tenders during 1997 and Market structure The non-db companies operating RPSS in Germany can be grouped into three types: - internationally operating (usually bus and train) companies which are either listed at the stock exchange (Veolia, Arriva) or where private investors represent a large share (Keolis with more than 50%, BeNEX with 49%) or which are completely state-owned (Transdev) - Rail companies of Federal States or municipalities - Foreign National rail companies (for example SBB, NedRailways which took over Abelio) Table 3 shows that almost two thirds of train-km operated by non-db companies relate to the group of internationally operating companies. Whilst these companies often have big and often state owned parent companies or shareholders, the PTA s are reportedly still pleased that these firms are in the market, because they still increase the level of competition. 4.3 Cost savings Data on the financial volume of RPSS contracts on the contract level is not publicly available 8. This section is therefore based on findings from other studies (though they cannot be verified due to the lacking access to the underlying data) and on global figures for the development of regionalisation funds in relation to transport performance. Association for European Transport and contributors

8 Table 3: Market structure for RPSS by type of company 2009 (in train-km) Company Type of company m train-km DB Regio German National rail company 503 Veolia Internationally operating rail company 29.4 Arriva Internationally operating rail company 21.5 Municipal rail companies Municipal/federal State rail company 8.9 BeNex Internationally operating rail company 7.7 Keolis Internationally operating rail company 7.4 AVG Municipal/federal State rail company 7.4 HLB Municipal/federal State rail company 6.8 NedRailways National rail company 5.1 EIB Municipal/federal State rail company 4.2 SWEG/HzL Municipal/federal State rail company 3.6 Transdev Internationally operating rail company 2.9 SBB National rail company 2.1 AKN Municipal/federal State rail company 1.3 Rurtalbahn Municipal/federal State rail company 1.0 Rhenus Municipal/federal State rail company 0.4 Others 0.1 All non-db companies Total Source: Mofair et al. (2009). Mofair 2009 has analysed 118 contracts RPSS contracts covering about 60% of all first-round tendered contracts during the period They found average cost savings of 26% compared with the pre-regionalisation unit cost of DB 9 which appear to be a result of competitive tendering. Not only have the competitors of DB offered services at lower unit prices, but also the competitive pressure has led to DB offers with lower prices both in open tenders and in nonopen tenders and in direct contract awards without tendering (see Monopolies Commission 2009) 10. This is also confirmed by our interviewees. For example, the federal state of Rhineland-Palatinate reports cost savings of on average 15-20% (which resulted in fewer subsidies or in more awarded train-km for the same disposable funding). There are two trends that are worth mentioning. Firstly, the cost savings in the first round of tendering have been substantially higher than in the second round. Since funding of rolling stock appears to be an issue during the current recession, there has been also a decline in the numbers of bidders for RPSS-contracts (which is reportedly also attributable to not sufficient preparation time). Secondly, some lines have seen much higher cost savings of up to 80% in terms of subsidy paid per train-km than the average figures. This is supported by Mofair (2009), where cost savings are given for different types of RPSS services 11 and by case study evidence reported in Beck and Kühl (2007). In the first case study, the so called Marschbahn competitive tendering led to a decrease of subsidy from Euro 8.48 per train-km originally paid to DB to Euro Association for European Transport and contributors

9 4.37 per train-km paid to the new operator Nord-Ostsee-Bahn GmbH (NOB - Veolia Group). This decrease by 44 % enabled the federal state to reduce its expenditure by roughly Euro 140m Euro over the 10-year contract. In a second case study, the Odenwaldbahn operated under a gross contract, Beck and Kühl (2007) found stable subsidies for this service, however, improvements of service quality after the competitive tendering. Figure 2: Regionalisation subsidies per transport unit, at 2005 prices 12 - in Euro per train-km in Euro per passenger-km Source: VDV, Transport in figures, own calculations. Figure 2 shows that the overall financial volume spent for RPSS decreased both in relation to train-km and passenger-km, indicating a more efficient use of funds, provision of RPSS by non-db companies at lower production costs and increases in productivity of DB as a result of competitive pressure Quality of trains and services As a result of franchising, competitive tendering and private sector participation there have been quality improvements and a number of innovations, although the scope for such innovations is somewhat limited by the degree of pre-specification of the RPSS-contract by the PTAs. Quantitative information on service quality is rare and is, if available at all, restricted to single federal states. Some federal states have started to establish Association for European Transport and contributors

10 quality reporting systems as part of their contract controlling, indicating also an increasing customer orientation. The limited data that is available suggests that there have been improvements. For example, the quality reports of the federal state of North-Rhine Westphalia suggest that at most lines where competitive procedures were used to award contracts, fewer trains were cancelled, trains were cleaner and punctuality as well as security in the trains has increased. This holds also for lines operated by DB from not-tendered contracts, obviously due to competitive pressure and the risk of losing contracts. Longitudinal data on punctuality is regularly collected by DB; however this data is not publicly available. Stiftung Warentest, an organisation which conducts quality tests of all sorts of products and services in Germany, reports in its latest punctuality report for 2007 (see Stiftung Warentest 2008) for RPSS a share of 56% of trains being on time, a share of 20% being 2-3 minutes too late and a share of 24% being too late between 4 to more than 30 minutes too late (all figures based on a sample of regional trains analysed between 23 September and 31 October 2007). These figures are better than for long-distance trains where 38% of trains were late with 4 to more than 30 minutes (based on a sample of trains in the same period. The quality of rolling stock has increased, mainly because of the substantial amount of new rolling stock. For example, over the period of 1994 until 2004 DB managed to reduce the age of their rolling stock by 17.3 years down to 7.5 years. Also the non-db operators generally use new rolling stock which is usually air conditioned, more energy efficient (which again reduces costs) and better accessible for handicapped people. Table 5: Examples of innovations for two types of tendered RPSS-contracts Odenwaldbahn (gross-cost contract: PTA bears revenue risk) Marschbahn (net-cost contract: TOC bears revenue risk) Source: Beck and Kühl (2007). Selected improvements/ innovations, ordered by PTA -New rolling stock with sprinting capabilities -Rolling stock pool from PTA -Low floor vehicles -Handicapped accessible -Air-conditioning -Low noise level within vehicles -Minimum service level -New rolling stock -Low floor vehicles -Handicapped accessible -Seat reservation -Minimum service level -Strong passenger rights Selected improvements/ innovations, initialised by TOC -Workshop concept resident entrepreneur -Optimised operating procedures -Air-conditioning -Low noise level within -Audiosystems -Catering service -Additional service -Expressbus for feeder -Workshop concept -Optimised operating Procedures Beside rolling stock innovations there have been also product innovations, for example new services to the sea side for which TOCs used new marketing Association for European Transport and contributors

11 approaches. The service in general has seen innovations such as ticketing, onboard computers (PDAs) or the selling of food and drinks by the conductor. Furthermore, operation and timetabling have been improved leading to reduction in round trip times and hence in reductions of required rolling stock. Table 5 shows for the two afore mentioned case studies from Beck and Kühl (2007) substantial innovations in both cases which were initiated by both the TOCs and the PTAs. 5. PROBLEMS AND OBSTACLES FOR MARKET ENTRY Compared to other sectors, the dynamics and the progress of opening the RPSS market in Germany can be regarded as rather low. The major reason for this is a lack of competitive tendering, which would allow new entrants to offer their services. Considering an estimate from Mofair et al. (2009) of 200m train-km out of 630m train-km which will have been awarded within a competitive tendering procedure for at least once since the start of regionalisation, it has to be stated that this share of 32% implies an annual average of only 2% of total train-km during the 15 years period of regionalisation. In the following paragraphs, we, therefore, refer only to roughly 30% of the operated train-km in Germany, since the other 60% are still attached to big (negotiated) DB contracts. However, considering the more decentralised level of the federal states, there are more positive examples such as the federal state of Rhineland-Palatinate (which ranks with roughly 33m train-km at the second place of federal states in Germany), where in 2009 about 45% of train-km were awarded within competitive procedures. In the following paragraphs we briefly analyse the in our view key reasons for the still low share of tendered services. 5.1 Legal and regulatory framework A major reason for the rather low share of competitive tendering is the uncertainty and ambiguity of the legal framework. PTAs have the choice between different forms of procurement which has caused conflicts with other laws. In 2002, the voluntary opportunity of tendering was replaced by a series of court decisions (VK 2002, OLGD 2002a, OLGK 2002) committing the regional authorities to competitive tendering (based on the Competition law) followed by proposals for a stepwise tendering approach over a period of 13 years 13, objections by DB and an exhaustive process of political lobbying and pressure 14. Finally, DB achieved an amendment of the Regulation on Awarding Contracts which allowed PTAs to award contracts for regional rail passenger services without any tendering, provided that the contract lasts between 6 and 15 years and defines sufficient shares of train-km which will be tendered during the contract s duration. After complaints of Connex against the awarding of a large contract in Berlin- Brandenburg to DB Regio (the key RSSP operating wing of the DB AG holding), the European Commission has introduced an infringement procedure against five Federal states in The proceedings were closed with a compromise between the EU Commission and the Federal States which obliged the Federal States to take several steps towards more transparency in awarding RPSS- Association for European Transport and contributors

12 contracts. A second legal procedure is the ongoing state aids procedure introduced by the European Commission regarding the assumed overcompensation of DB with expected outcomes during the course of Until the final decision has been made, there is therefore reportedly significant uncertainty in the market. A further basic problem has been the long-lasting lack of regulation which has only changed in Since then, the Bundesnetzagentur (BNA - the regulatory body for the utility sectors such as electricity, gas, telecommunications, postal services) has been responsible for supervising the rail market, in particular non-discriminatory access to rail infrastructure. However, the important field of unbundling regulation is not under responsibility of BNA but of EBA, a body which is actually in charge of the technical supervision for rail transport. Furthermore, BNA still lacks the necessary legal right and power to request data and information from the incumbent. Track access charges are regulated regarding their average level which has to be based on total cost, however, German rules for allocation of common costs are complex and do not allow regulatory bodies to force a transparent and verifiable design for track access charges (see Commission of Monopolies 2009). The BNA has recently suggested a price-cap regulation and the debate on this is ongoing (see also Commission of Monopolies 2009). 5.2 Vertical integration of DB As discussed in detail by Merkert (2009), institutionally, the key difference between Germany and other countries such as such as Sweden and Britain is that most German rail transport and infrastructure interactions are governed by the DB holding structure. This has advantages for the DB family (for example, joint functions and IT-systems, escalation of disputes) but creates uncertainty for other operators on the German network and disputes that often involve courts. The problems for the regional rail passenger markets arising from the vertical integration of the DB group concern three main areas: i) Access to essential facilities, ii) profit shifting within DB from overcompensated RPSS contracts, iii) Tariff monopoly of DB. Access to facilities To start with access to facilities, one has to bear in mind that non-db companies not only need access to DB tracks and stations, but also need to purchase services such as access to service facilities, workshops, information systems (announcement of trains operated by non-db companies at timetables) and traction at DB. Several cases of disfavouring non-db companies by DB Netz, DB Energie and DB Station & Service are documented in the report of the Bundesnetzagentur (see Bundesnetzagentur 2007, Mofair et al. 2009) and are criticized in Commission of Monopolies As mentioned above, access charges are not sufficiently regulated in detail and enable DB Netz to raise particularly high chares for RPSS (see Link 2004 for a detailed discussion on Association for European Transport and contributors

13 access charges). Until a decision of BNA from May 2010, DB Netz levied regional surcharges for RPSS, in particular at low-occupancy lines which are often operated by non-db companies. This caused problems for PTAs which had finally to pay for this within the franchise contracts. Overcompensation of DB From 2002 to 2004 where PTAs negotiated the large contracts with DB Regio without competitive tendering, the unit price for RPSS per train-km estimated by WIBERA was taken as basis for the contracts. This was also due to a lack of experience with contracts and possible cost savings by competitive tendering. Meanwhile, there is an ongoing debate on overcompensation of DB, supported by the cost savings achieved since then (see paragraph 4.3) and by the extraordinary high profit margin of around 11% of DB Regio. The Commission of Monopolies (2009) discusses this in detail and the state aids procedure of the EU Commission suggests that rather a profit margin of 7% seems to be adequate. A consequence of overcompensation is that DB Regio can transfer profits from some of these profitable contracts to other RPSS contracts or even to other companies within the DB holding and introduces thus a bias to the market. Revenue risk due to the Tariff monopoly of DB In Germany, transport associations offer tariffs within their area of responsibility. Apart from this, there is a country-wide tariff for RPSS. According to 12 of the Railway Act, rail companies are obliged to cooperate in these tariffs schemes in order to enable through-ticketing to travellers. A tariff association (TBNE) acts as coordinator for this tariff cooperation. DB dominates historically the TBNE and enjoys information and size advantages within the tariff scheme and the related sales and distribution activities. As a consequence, tariff cooperation usually implies the use of the DB tariff and in a next step DB usually requests other rail companies then also to join a cooperation in the sales and distribution field. The reported disadvantages for non-db companies are threefold: First, non-db companies cannot influence the tariff structure but are bound to the DB scheme. Second, non-db operator distribution fees to be paid to DB for ticket sales on lines served by non-db are higher than those for ticket sales of DB companies. Third, revenue sharing is based on claims of rail companies, e.g. they have to prove their revenue requests are based on traveller counts conducted in a twoyear s frequency. In general, DB does not provide information on total revenues or relation-specific sales figures. 5.3 Staff costs So far, there has been no federal collective agreement for rail staff in Germany (but company exclusive collective agreements with the rail unions). o Commission on Monopolies (2010, p. 414) highlights that several unions try to establish a tariff for all staff working for train operators that run RPSS. If such a tariff would be implemented, a key element of competing in running these types of train services would be eliminated and the increased staff cost passed on to the PTA. In the case of DB operators it is likely that this would happen through higher subsidies (Commission on Monopolies 2010, p. 418). Association for European Transport and contributors

14 5.4 Rolling stock problems Most contracts oblige the rail companies to provide rolling stock, and mostly at least minimum requirements on the age, type and furniture of trains have to be met. Rail operators have, therefore, to manage the risk of financing rolling stock since the contract duration is usually shorter than the lifetime of rolling stock. This risk is more serious for new entrants than for DB Regio. Options to deal with the rolling stock problems are i) leasing, ii) train pools of PTAs, iii) guarantees from PTAs for taking over rolling stock after contract termination, combined with guarantees to take over at the residual value of rolling stock. DB operators usually own their operated rolling stock (but do not provide it to non-db operators) while non-db passenger train operators generally lease the rolling stock from leasing firms such as Angel Trains. In rare cases train operators can rent rolling stock from PTAs, as metronom Eisenbahngesellschaft (30.7 per cent Arriva) does from the PTA Landesnahverkehrsgesellschaft Niedersachsen. 6. CONCLUSIONS The huge diversity across the different states and PTAs hamper a systematic impact analysis as the lack of centrally hold and publicly accessible data does. Nevertheless, it can be concluded that the German regionalisation approach with the agreed sound financing of RPSS in Germany and in particular competitive tendering had positive impacts on service provision, patronage, customer satisfaction, service quality and costs. Most beneficial have been PTAs (more train-km and quality for the same funding), passengers (better quality and more customer services) and rolling stock companies (due to the considerable increase in demand for rolling stock). We have identified several problems which can hardly be attributed to franchising per se, but which are mostly due to failures in the institutional set-up, mainly the vertical integration of the DB group and a lack of a sufficient regulation for a long time, and to some extent also due to lack more experience of PTAs, in particular during the first years after regionalisation. Overall, with improvements in these fields competitive tendering appears to bear still potential for further cost savings and quality improvements, although for already competitively awarded contracts not as much as in the first round. Association for European Transport and contributors

15 Notes 1 On average, fare revenues make up 40% of the total costs in providing RPSS (see Mitusch 2009, p.9). 2 BAG-SPNV is the association of German PTAs. 3 Lalive and Schnmutzler (2007) report for a set of 77 tendered contracts between 1996 and 2007 an average contract duration of 8.7 years. Beck (2010) reports for a set of 30 tenders an average contract duration of around 9 years. 4 Those PTAs report that bids are better due to reduced depreciation costs for rolling stock. 5 Peter (2008) reports a figure of 61% of net cost contracts and 29% of gross contracts with some form of incentive contracting (the remaining 10% are revenue sharing contracts). 6 However, in a number of federal states such as for example Rhineland-Palatinate, net contracts are still the preferred contract type and gross contracts are only used where revenue forecast is virtually impossible or if contracts cover services operated in more than one federal state. However, these federal states intend to use the options of the new EU 13/70 directive. This would imply to have an indicative phase (in which TOCs could come forward with interesting and innovative ideas, instead of being obliged to meet the characteristics of existing contracts) before the actual awarding stage. 7 Whilst gross contracts might be beneficial to PTAs and new entrants, DB prefers net contracts as they provide more flexibility and incentives for growing the business. They feel, that they could bear more risks (currently the PTAs bear most risks and with the increasing number of gross contracts that will get more apparent) but in return they want to get some of the powers on key decisions, such as rolling stock, back. Interestingly, also the interviewed non-db operators prefer net contracts. 8 For tendered RPSS services there is information on the expected financial volume, however, these are usually ballpark figures with considerable deviations from the finally negotiated contract volume and can therefore not be used for a quantitative analysis. 9 These are the costs necessary to sustain service supply at the level of 1993/1994 and were estimated and adjusted by WIBERA in 1995 and Monopolies Commission 2009, p. 24 gives the example of the Munich-Passau line served by DB Regio originally at a price of 8.50/train-km. After the determination of the contract the line was tendered and won by DB Regio at a price of 0.75/train-km. 11 They report for S-Bahn systems cost savings of 23%, for RB services 15%, for RE/RB services 33% and for RE (Regional express) services even 47%. 12 DB reports that its labour productivity (staff per train-km) has increased between 1994 and 2000 and has further increased by 40% from 2000 to Since an immediate tendering of all regional rail passenger services with a volume of almost 600 million train-km was not practicable and would have disfavoured the smaller non-db companies, an interim phase of 3 years, and a succeeding phase of 10 years was suggested with defined annual shares of train services to be tendered. 14 DB argued that as a result of this legislation rolling stock investments of 4.3bn would be jeopardised (Schwager 2002). The lobbying process included letters of the DB management to the federal state ministries with a threat to lower rolling stock investments and abolish regional repair facilities, DB initiative for amendment of the VgV, see for example Schwager (2002), FTD (2003). 15 During the period from 1994 up to 2005 non-db companies which experienced discrimination by DB when running trains at DB s network could either claim against the Antitrust Commission or against the Federal Railway Office (Eisenbahnbundesamt - EBA). Both institutions, however, were not entitled to active market regulation, e.g. they could only react on the basis of received claims. Association for European Transport and contributors

16 References BAG-SPNV (2010) Die Finanzierung des SPNV sichern - nachhaltige Mobilität ermöglichen, Bundesarbeitsgemeinschaft der Aufgabenträger des SPNV e.v., Berlin. Beck, A. (2010) Barriers to entry in rail passenger services: Empirical evidence for tendering procedures in Germany, CNI Working Paper, No Beck, A. and Kühl, I. (2007) Germany's contrasting approaches to competitive tendering, Railway Gazette International, Issue: 012/07. Bundesnetzagentur (2008) Tätigkeitsbericht 2007 für den Bereich Eisenbahnen, Bonn. Commission on Monopolies (2009) Bahn 2009: Wettbewerb fordert Weichenstellung, Bonn. Commission on Monopolies (2010) Mehr Wettbewerb, wenig Ausnahmen, Achtzehntes Hauptgutachten der Monopolkommission, Bonn. Lalive, R., Schmutzler, A. (2007) Entry in liberalised railway markets: The German experience, Working paper No. 0609, University of Zurich, Zurich. Link, H. (2004) Rail infrastructure charging and on-track competition in Germany, International Journal for Transport Management, Merkert, R. (2009) The organisation of European Railways A transaction cost perspective, unpublished PhD-thesis, University of Leeds, Leeds. Merkert, R., Nash, C. A., and Smith, A. S. J. (2008) Looking beyond separation - A comparative analysis of British, German and Swedish railways from a new institutional perspective, Proceedings of the European Transport Conference 2008, Netherlands. Mitusch, K. et al. (2009) Wettbewerbsaussichten im Schienenpersonenfernverkehr, Study commissioned to IGES Institute on behalf of the Commission on Monopolies, Berlin. Mofair et al. (2009) Wettbewerber-Report Eisenbahn 2008/2009, Berlin. Peter, B. (2008) Railway reform in Germany: Restructuring, Service Contracts and Infrastructure Charges, unpublished dissertation, Technical University of Berlin, Berlin. OLGD (2002a) Beschluss vom 17. Juli 2002, Verg 22/02, Düsseldorf. Association for European Transport and contributors

17 OLGD (2002b) Berufungsurteil des OLG Düsseldorf, 19/03/2003, U (Kart) 20/02. OLGK (2002) Beschluss vom 5. September 2002, 1 Verg. 2/02, Koblenz. Schwager, M. (2002) Kundenfreundlicher Wettbewerb, Fairkehr, 4, FTD (2003) Bahn muss beim Wettbewerb noch Hausaufgaben machen, Financial Times Deutschland, 13/02/2003, VK (2002) Beschluss vom 6. September 2002, /07 VK 050/2 MD, Vergabekammer beim Regierungspräsidium Magdeburg. Association for European Transport and contributors