EVALUATING EUROPEAN RAILWAY DEREGULATION USING DIFFERENT APPROACHES

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1 EVALUATING EUROPEAN RAILWAY DEREGULATION USING DIFFERENT APPROACHES Pedro Cantos (Unverstat de Valenca and ERI-CES) José Manuel Pastor (Unverstat de Valènca and Ive) Lorenzo Serrano (Unverstat de Valènca and Ive) Abstract There has recently been a great deal of nterest n the mpacts of the deregulatng and restructurng measures n the European ralway sector. A vast amount of lterature s devoted to analyzng the effects of these deregulaton and restructurng measures on effcency and productvty and the results are not totally unambguous. However, whle most of the papers show that the ntroducton of competton wthn the sector (both n the passenger and the freght markets) has had a postve mpact n terms of effcency and productvty, the mpact of the vertcal separaton has produced dfferent results n the lterature. The contrbuton of ths paper to the exstng lterature s twofold. Frstly we estmate effcency levels derved from two alternatve approaches: a non parametrc DEA analyss and a parametrc stochastc fronter producton. We then compare the results of both technques n order to analyze the potental dfferences between these two approaches. Usng two dfferent approaches allows us to test f the heterogeneous results obtaned n the lterature are due to the dfferent approaches used to measure the effcency and productvty. Secondly, we update the sample ntroducng a panel data wth nformaton of 3 natonal ral systems, and coverng data from 00 to 008. In order to examne these measures, t s fundamental to use extended and updated data coverng the more recent perod and more countres, gven that most of the deregulaton measures have been mplemented n the last few years. Keywords: effcency, ralways, regulaton.

2 . Introducton Durng the past ffty years, the most common market structure n many countres ral sectors was a sngle, state-owned frm, entrusted wth the unfed management of both nfrastructure and servces. Despte some dfferences n ther degree of commercal autonomy, the tradtonal methods of regulaton and control of ths sort of company have been relatvely homogeneous. In general, t was assumed that the monopoly power of the natonal company requred prce and servce regulaton to protect the general nterest. In addton, there was an oblgaton on the part of the companes to meet any demand at those prces. The closure of exstng lnes or the openng of new servces requred government approval. Thus, competton was rare and often dscouraged, and the preservaton of the natonal character of the ndustry was consdered the key factor governng the overall regulatory system. The worldwde restructurng process of the ral ndustry began wth tmd reforms. Many countres began by replacng ther natonal ralways wth autonomous commercal bodes possessng ndependent, realstc balance-sheets, n whch only publc servce oblgatons could be explctly subsdzed by the government. Other countres opted to substtute ther old geographcally-based management wth a multdvsonal structure, defned by the companes dfferent lnes of busness or servces. The ral ndustry n Europe has been restructured on two levels: the vertcal dmenson, whch nvolves the relatonshp between nfrastructure and operatons, and the horzontal dmenson, whch covers the relatonshp between the varous servces that use the nfrastructure. In other words, the restructurng measures can be classfed dependng on the extent of vertcal separaton ntroduced after the change, and on the degree of competton (and prvate partcpaton) allowed n the ndustry after the reform. Wth respect to the frst dmenson, there are three man optons for the vertcal organzaton of the ralway ndustry: () vertcal ntegraton, () compettve access, and () vertcal separaton.

3 The frst opton corresponds to the tradtonal, hstorc model of ralway organzaton descrbed above, where a sngle (usually publc) entty controls all the nfrastructure facltes as well as the operatng and admnstratve functons. Many European countres mantan ths type of organzaton yet. Less frequent, compettve access s characterzed by the exstence of an ntegrated operator, who s requred to make ral facltes (tracks, statons, etc.) avalable to other operators on a far and equal bass through the tradng of, for example, crculaton rghts. Ths has the advantages of ntegraton (economes of scope, coordnated plannng and reducton of transacton costs), but ts overall effectveness may be jeopardzed f the ntegrated company has ncentves to leave out other operators. Ths type of structure s the less developed n Europe, and only Germany, Swtzerland and Italy mantan a vertcally ntegrated structure, where trackage rghts are used by operatng companes (manly freght operators). Alternatvely, n the complete vertcal separaton scenaro, the management and the ownershp of facltes s fully separated from other ral functons. Ths measure has been developed n many European countres. Ths s very attractve because although nfrastructure may reman a natural monopoly, t s separated from ral servces, where potental competton among dfferent operators s possble. In general, the man advantage of ths vertcal unbundlng s that ral transport s placed n a smlar stuaton as road transport, especally regardng the tarff system and nfrastructure plannng. However, the vertcal unbundlng of the ral ndustry also mples several dsadvantages. The man problem s the potental loss of economes of scope derved from the jont operaton of tracks and servces. The horzontal level reforms n Europe have been very moderate, and have conssted manly of new operators enterng the freght sector and of a franchsng system n passenger servces. The horzontal level reforms n Europe have conssted manly of new operators enterng the freght sector and of a franchsng system n passenger servces (see Cantos et al, 00 for a revew of the pros and cons of the dfferent restructurng measures n the European ral sector). 3

4 The results provded by the lterature are not totally unambguous. Recently, Frebel et al (005) carred out an analyss of some of the restructurng measures n the sector for the perod , focussng on measures desgned to separate the ndustry vertcally. Ther results suggest that, n general, the reforms have furthered more effcent behavour; however, these reforms must be carred out sequentally. Dressen et al (006) study the effcency of a sample of European companes for the perod These authors do not come to a decsve concluson on the mpact of vertcal separaton of nfrastructure and operatons. They fnd that vertcal separaton does not seem to be necessary to acheve an ncrease n productve effcency, although tenderng processes do appear to favour an ncrease n effcency. In all events, these authors acknowledge that many of the predcted effects may stll not have been n evdence, snce the sample perod ended n 00. More recently, Wetzel (008) analyse postve and negatve effects of regulatory reforms. At the same tme, separaton varable wthn her estmatons doesn t reveal a statstcally sgnfcant nfluence on techncal effcency, meanwhle the estmated results for thrd party access rghts dffer between passenger and freght transport as well as nternatonal and domestc servces. Access rghts for nternatonal servces and those for domestc ralways provdng passenger transport are found to negatvely nfluence techncal effcency whereas access rghts for domestc ralways provdng freght servces are found to postvely nfluence techncal effcency. Fnally, Cantos et al (00) suggest that the processes of vertcal separaton have had a postve effect on effcency for the European ralway systems. However, these gans n effcency become hgher when the process has been completed wth horzontal level reforms, especally f new operators are allowed entry n the freght sector. On the contrary, the measure of establshng franchsng n passenger servces does not seem to affect effcency. Our paper tres to solve some lmtatons of the aforementoned papers. We update and extend the sample, consderng 3 European countres and the perod At the Growtsch and Wetzel (009) fnd that for a majorty of European ralways economes of scope exst. 4

5 same tme we estmate effcency ndexes from dfferent methods, and we analyse the smlartes among them.. Methodology. We are gong to employ two basc dfferent methodologes. The frst one s a typcal non-parametrc approach, and the second one s based on the estmaton of a parametrc dstance functon. Model We follow the standard procedure n the non-parametrc approach, n whch t s assumed that for each perod t a set of N ralway systems ( =,...,N) produces M outputs (m =,,M) usng K nputs (k =,,K). The measurement of techncal cost effcency (nput-orented) under varable returns to scale usng DEA s obtaned by solvng the followng problem for each perod and each ralway system j: Mn s. t. θ VRS j λ y λ x λ LT m k λ 0; y θ VRS j LT jm j x λ = ; m jk k =,..., N () From the soluton of ths problem for each of the N companes of the sample we obtan N optmal solutons. Each optmum soluton θ VRS s the nput-orented techncal effcency measure of each company whch, by constructon, satsfes θ VRS. Those companes wth θ VRS < are consdered cost techncal neffcent, whle those wth θ VRS =, are catalogued as cost techncal effcent, snce they stand at the fronter. Gven the From an ntutve pont of vew, to analyse the effcency of the productve scheme of company j (yj, xj) the problem constructs a feasble scheme as a lnear combnaton of the schemes of the N companes of the sample whch usng θj xj nputs produces at least yj. Thus (-θj ) ndcates the maxmum radal reducton to whch the vector of nputs of company j can be subjected wthout alterng the observed levels of output, so that θj s the ndcator of techncal effcency. In the case where θj =, ths means that no lnear 5

6 partcular nature of the ralway busness, n whch companes operate wth very heterogeneous lengths of track (LT), n order to avod the bas that ths could lead to, the standard DEA problem has been adapted to the case of the ralway companes by addng the restrcton λ LT LT j. Ths mples that company j wll be compared wth a lnear combnaton of companes that operates n countres wth equal or lesser length of track. Wth ths restrcton we try to make comparsons between companes wth smlar network characterstcs, and therefore wth smlar nfrastructure characterstcs. Note that f the restrcton λ= s removed from the lnear programmng exercse defned n [5] we obtan the techncal neffcency under constant returns to scale (θ CRS ). Therefore, the nput-orented scale neffcency (SE I ) can be calculated by means of the followng rato SE I VRS CRS = θ / θ. Model. In ths case, to estmate the dstance functon we adopt a translog (transcendentallogarthmc) functon form. K k = ln D k o β ln x = α k 0 M m= K α ln y K m k = l = l m β ln x k M M n= m= α ln xl mn K ln y M k = m= m ln y km n χ ln x k ln y m () Where y m s the output m of the ral system, and x k s the nput k of the same ral system. Addtonally homogenety and symmetry restrctons are mposed. Then, as a partcular case the homogeneous functon of degree g must fulfl the followng condton: combnaton of companes can be found that wth less nput obtans the same amount of output, so the company s catalogued as effcent. In all other cases, θj<, ndcatng that the productve scheme of company j s neffcent, as there s a feasble alternatve scheme that obtans the same quantty of output usng θj xj nputs, ts over-use of resources beng quantfed by comparson wth the alternatve scheme as (-θj )xj. 6

7 D 0 (x, g y) = g D 0 (x, y) for g>0 (3) If we choose one of the m outputs we can rewrte the translog functon: ln( D K k = o β ln x k / y M k ) = α 0 K M m= K k = l = α ln y l m β ln x k * m M M n= m= ln xl K α M mn k = m= ln y km * m χ ln x ln y k * n ln y * m (4) In order to estmate the dstance functon we apply stochastc fronter analyss (SFA), a method smultaneously ntroduced by Agner et al. (977) and Meeusen and van den Broeck (977). SFA s a parametrc method whch estmates a producton functon wth a composed error term (ε t ) that ncludes a standard error term v t, accountng for measurement errors and other random factors, as well as a non-negatve random error term u t, representng techncal neffcency. Then the techncal effcency of the -th frm n the t-th tme perod s predcted by the condtonal expectaton of exp (-u t ), gven the random varable ε t. D 0 = E[exp(-u t )/ε t ] (5) To nvestgate the nfluence of regulatory and envronmental condtons on effcency, we follow two dfferent specfcatons. In the frst one, we use a typcal two stage approach where after the estmaton of the dstance functon, we estmate n a second equaton the determnants of the neffcency ndexes. Assumng that the envronmental factors drectly affect techncal effcency, the neffcency effect model s specfed as: J µ = δ 0 δ z (6) t j= j jt 7

8 where µ t s the mean of the truncated normal dstrbuted neffcency term; z jt denotes the j-th (j =,,..., J) envronmental or regulatory factor of the -th frm n the t-th tme perod expected to nfluence techncal effcency; and δ are unknown parameters to be estmated. In a second stage approach, equaton (6) s estmated once the effcency levels have been estmated usng the dstance functon approach. Alternatvely, Battese and Coell (995) suggest to estmate the dstance functon and the determnants of the neffcency n an only step. Ths one-step approach can provde more relable predctors of frm-specfc effcency than usng a two-stage approach. Followng to Coell and Perelman (999): µ t D 0= E[exp( u t / ε t )] = exp[ µ t, σ * ] Φ[ σ *]/ Φ[ µ t / σ *] (7) σ * where Ф( ) represents the dstrbuton functon of the standard normal random varable, µ t = ( γ ) [ δ J 0 δ j z jt ] γ ε t, σ * = γ ( γ ) / σ, j= σ u γ = σ σ v u (8) In any case, we must note that one-step Battese-Coell neffcences can be hardly compared wth neffcences obtaned wth the other technques. The reason s that these neffcences are the neffcences explaned by the set z of explanatory varables. The neffcences obtaned from the other technques are estmates of total neffcency. If neffcency s poorly explaned by the set z of explanatory varables, the levels of neffcency cannot be properly compared. Fnally, ths analyss requres to defne dfferent dummy varables assocated to the processes of vertcal and horzontal separaton to reflect the organsatonal and regulatory changes occurrng n each ralway system. To ths end, three dummy varables were defned that descrbe two dstnct levels n the reform process carred out n the sector. Informaton from the "Ralway tme-seres data" for 005 publshed by the UIC and from other relevant sources (Nash and Rvera-Trujllo, 004, Dressen et al, 006, and IBM and Humboldt Unversty of Berln, 004) was consulted n order to 8

9 reflect these changes. We dstngushed the followng levels of reform for the perod VERT: takes a value of for countres that, durng the years n whch ths stuaton was mantaned, separated at an organc level the ownershp of nfrastructure from that of operatons. The sector s thus charactersed by ts vertcal separaton nto two dfferent bodes: one beng the owner of the nfrastructures and the second consstng of all operatons. Ths type of separaton s defned as nsttutonal separaton. - FREEOPEN: takes a value of when the entry of new operators s allowed n the freght sector (competton n the market) regardless of whether the ndustry has been separated vertcally or not. - PASSTEND: takes a value of when a franchsng system has been ntroduced (competton for the market) n passenger servces. Ths varable takes a value of n the same way as the prevous dummy, regardless of whether the ndustry has separated at a vertcal level or not. Furthermore, we ntroduce the length of ral track and the densty of the country (populaton dvded by the area) as potental determnng factors of the neffcency. 9

10 3. Data The data correspond to a sample of 3 European ralway systems from 00 to 008. The nformaton was taken from the reports publshed by the Unon Internatonale des Chemns de Fer and, occasonally was completed wth data publshed n the companes' statstcal memoranda. Specfcally, the dfferent ralway systems establshed n each country are evaluated. We have a lot of heterogenety n the sample. There are ral systems run by one sngle company wth vertcally ntegrated nfrastructure and operatons, and horzontally ntegrated operatng servces. Over the last years, as many of the ralway systems began to be separated both vertcally and horzontally, dfferent companes took over the management of the ralway system. In ths case, the data correspondng to all the companes makng up the ralway system are aggregated for each varable. Two outputs and three nputs are consdered. The varables selected as outputs are the number of passengers-km transported (PKT) for passenger transport, and tonnes-km transported (TKT) for freght transport. In the case of nput varables, the followng are consdered: - Number of employees n all the ralway systems makng up the ralway system (EMP) - A representatve measure of the rollng stock calculated as the number of coaches, ralcars, locomotves and wagons and multple-unt tralers avalable (ROLL). - Number of km of ralway nfrastructure n each country (LLT). 0

11 Table. Average values for the varables (00-008) Pass-km (mllons) Ton-km (mllons) EMP (thousands) ROLL LLT (klom.) Austra 8,76 8,76 46,08 5,786 Belgum 9,04 8, ,44 3,50 Bulgara,538 5, ,39 4,5 Czech Rep, 6,749 6, ,967 9,49 Denmark 5,478,94 5,783, Fnland 8,07 3,87 5,64 5,87 France 7,307 45, ,555 9,456 Germany 68,707 75,50 0 3,844 34,90 Greece, ,36,476 Hungary 7,000 8,7 48 0,34 7,95 Ireland, ,5,99 Italy 47,58, ,333 6,538 Luxembourg , Netherlands 4,76 3, ,353,809 Norway,406,73 9 3,086 4, Poland 7,88 45, ,835 9,738 Portugal 3,59, ,93,840 Romana 7,895 3, ,50,007 Slovak Rep,,35 9, ,897 3,647 Slovena 778 3,39 8 5,00,9 Span 9,888,80 3 9,780,853 Sweden 6,04,945 9,466 0,004 Swtzerland 4,76,6 9 7,967 3,357 Total 4,934 5, ,53 9,03

12 4. Results The table presents the results for neffcency ndcators for the countres consdered n the sample. The one-step Battese-Coell estmates are not shown because the problems of comparablty dscussed n secton. Table. Ineffcency levels DEA CRS VRS BC Austra 0,960 0,975 0,468 Belgum 0,709 0,74 0,439 Bulgara 0,384 0,44 0,83 Czech Rep. 0,53 0,553 0,4 Denmark 0,8 0,953 0,797 Fnland 0,986 0,988 0,53 France 0,95 0,996 0,398 Germany 0,834 0,997 0,350 Greece 0,360 0,668 0,80 Hungary 0,456 0,484 0,56 Ireland 0,63,000 0,365 Italy 0,845 0,969 0,370 Luxembourg 0,477,000 0,46 Netherlands,000,000 0,785 Norway 0,78 0,90 0,358 Poland 0,74 0,93 0,88 Portugal 0,67 0,889 0,569 Romana 0,435 0,457 0,08 Slovak Rep. 0,559 0,605 0,9 Slovena 0,845 0,969 0,300 Span,000,000 0,606 Sweden,000,000 0,486 Swtzerland,000,000 0,953 The CRS results are broadly comparable for the common ralway systems to the ones obtaned n Cantos et al. (00) usng that same technque for the perod For example, n that paper Austra, Fnland, Netherlands, Span, Sweden and Swtzerland were at the fronter over the perod As for the new countres added to the sample, our results show that Central and Eastern European countres are not at the fronter, Slovena (0.845 usng CRS) beng the closest to t.

13 As t was only to be expected, the VRS results show an equal or hgher effcency level for each ralway system. The changes are especally notceable for small countres such as Greece, Luxembourg, Portugal and Ireland. The results from the two-step Battese-Coell method show much lower effcency levels than the CRS and VRS methods. The queston about to the senstvty of effcency results to the method used has a clear answer. There are dfferences between the results from each method and for some countres those dfferences are qute sgnfcant. However, the pont s how bg those dfferences are n general terms. Are those dfferences of such a magntude that the whole pcture of relatve performance among ralway systems changes? In partcular, we are nterested n the analyss of the dfferences among the rankngs obtaned from the dfferent approaches, nstead of the value of each ndcator. Then the Spearman s rank correlaton coeffcent s an approprate measure to do ths type of analyss. Table 3. Correlaton coeffcents CRS VRS BC ( steps) CRS VRS 0.74 BC ( steps) The Table 3 coeffcents show a postve and szeable correlaton between methods as far as rankngs are consdered. Each method gves ts partcular results for each ralway system, but the ranks are not too unrelated. Our man am s to consder the effect of deregulaton on ralway effcency and whether t depends on the partcular technque used n the analyss. Therefore n ths secton we analyse whether the vertcal or horzontal separaton processes have encouraged a more effcent behavour consderng each of the prevous effcency analyss (second stage analyss) and the Battese-Coell method n one step (whch estmates effcency and ts determnants at the same tme) 3

14 In order to carry out ths analyss, Table 4 presents the results where determnants of effcency are analyzed. The frst column obtans the results of a Tobt regresson where dependent varable s the effcency ndcator and the ndependent varables are the ndcated ones n table 4. VRS and BC ( steps) present the results of a Tobt regresson too. BC ( step) presents the effcency analyss drectly obtaned n the one step approach. Table 4. Determnants of neffcency CRS VRS BC ( steps) BC ( step) Coeffc. t-stud Coeffc. t-stud Coeffc. t-stud Coeffc. t-stud LLT -.5e e e e DENS VERT PASSTEND FREEOPEN CONST Log-lk Pseudo R N. observ 9 For CRS, VRS and BC ( steps) the dependent varable was defned as the logarthm of the nverse of the effcency shown on table. Therefore a postve sgn means that the explanatory varable has a negatve effect on effcency, a negatve sgn the opposte. For the BC ( step), gven that the neffcency term s negatve, the nterpretaton of the sngs of the varables s the same as n the other approaches. The results show that the vertcal separaton of the ralway ndustry (VERT) s not statstcally sgnfcant whchever method we use (although the sgn ndcates that vertcal separaton leads to effcency gans). However, the adopton of a franchsng system n passenger servces (PASSTEND) has a sgnfcant negatve sgn usng any of the four methods. Accordng to these results ths knd of deregulaton has a postve effect on effcency, ths mpact beng especally mportant n the BC ( step) estmaton (-0.954). Cantos et al (00) found the strongest effect on effcency n the case of the reforms allowng the entry of new operators n the freght sector. Table 4 shows that ths varable s only sgnfcant at 5% when we use the CRS approach. Ths result ndcate (- 0.09) a negatve mpact of ths knd of horzontal reform on neffcency (.e. a postve 4

15 effect on effcency). Ths effect would be smaller than for franchsng n passenger servces (-0-365) but stll qute relevant. Interestngly n Cantos et al (00) competton n the freght market was also sgnfcant but smaller (-0.4) and competton n the passenger servces market was not sgnfcant. Snce the technque n Cantos et al (00) was also CRS DEA the dfferent results could be attrbuted to the addton of new countres or the enlarged perod untl 008 nstead of 004. We must remember that t s only to be expected that some of the benefts from ths knd of reforms are acheved only after a perod of adapton. The results show that reforms of the ralway systems n Europe have contrbuted to rase ther effcency although the effect seems to depend on the specfc type of reform. However, the estmated sze of these effects and ther relatve mportance n each case depend on the partcular method of analyss. The process of separaton of nfrastructure from operatons by tself does not have sgnfcant effects on effcency. On the other hand, ntroducng or favourng competton nsde the ral markets has sgnfcant postve effects on effcency although ther magntudes for the freght sector and passenger servces vary wth the estmaton method. 5

16 5. Conclusons Ths study used both non-parametrc programmng technques and parametrc stochastc fronters to estmate the levels of effcency n a sample of 3 European ralway systems for the perod Results show that the partcular estmated level of effcency of each natonal system depends on the technque, though there s an apprecable degree of consstency between all those technques n terms of rankngs. The analyss of the determnants of effcency confrms that ts levels n countres that only adopted vertcal reforms are not sgnfcant dfferent from those n countres that have ntroduced no reforms. Therefore these results suggest that any postve effects comng from ths type of reform wll need the whole reform package ncludng also horzontal reforms. Favourng competton by franchsng servces or allowng new entrants has a postve effect on the levels of effcency although ts estmated sze dffers dependng on the technque used. Our results show that hgher effcency gans are produced when passenger servces are franchsed that when free entry s allowed n the freght sector. In any case, we can conclude that effcency gans are bascally produced when competton s promoted n the ral ndustry. In contrast, vertcal separaton process, by tself, does not produce sgnfcant mprovements n effcency. Ths result concdes wth recent emprcal evdence. 6

17 References Agner, D. J., C. A. K. Lovell and P. Schmdt, P (977). Formulaton and Estmaton of Stochastc Fronter Producton Functon Models, Journal of Econometrcs 6, 37. Battese, G. E. and T. J. Coell (995). A Model for Techncal Ineffcency Effects n a Stochastc Fronter Producton Functon for Panel Data. Emprcal Economcs 0, Cantos, P., J.M. Pastor and L. Serrano (00). Vertcal and horzontal separaton n the European Ralway Sector and ts effects on Productvty, Journal of Transport Economcs and Polcy, vol. 44 (), Coell, T. and S. Perelman (999). A comparson of parametrc and non-parametrc dstance functons: Wth applcaton to European ralways. European Journal of Operatonal Research 7(), Dressen, G., M. Ljesen and M. Mulder (006): "The mpact of competton on productve effcency n European Ralways", CPB Dscusson Paper #7. Frebel, G., M. Ivald and C. Vbes (005): "Ralway (De)Regulaton: A European Effcency Comparson", avalable at SSRN: Growtsch, C. and H. Wetzel (009). Testng for Economes of Scope n European Ralways: An Effcency Analyss. Journal of Transport Economcs and Polcy, vol 43 (), -4. IBM and Humboldt Unversty of Berln (004): "Ral Lberalsaton Index 004", IBM Busness Consultng Servces and Dr. Chrstan Krchner, Humboldt Unversty of Berln, Berln. Meeusen, W. and J. van den Broeck (977). Effcency Estmaton from Cobb-Douglas Producton Functons Wth Composed Error. Internatonal Economc Revew 8, Nash, C. A. and C. Rvera-Trujllo (004): "Ralway regulatory reform n Europe: prncples and practce", Insttute for Transport Studes, Unversty of Leeds. Wetzel, H. (008) European Ralway Deregulaton: The Influence of Regulatory and Envronmental Condtons on Effcency. Unversty of Lüneburg, Workng Paper Seres n Economcs # 86. 7