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A bumpy road into the abyss: German Railways privatisation

by DoDo Sat Sep 22nd, 2007 at 09:03:27 AM EST

Recently, German transport minister Wolfgang Tiefensee (SPD) presented plans for the privatisation of the German Railways (DB).

But this was only the latest step in a saga on-going at least since 1991, which I can only describe as tragic. And despite a sadly wide consensus in the political elite on privatisation, and a similar EU policy, it seems to be endless.

The privatisation plans just presented faced considerable opposition not only from employee and traveller associations, but the governments of the Federal Republic's states, which see hidden costs heading their way.

Now the Christian Democrats also issued a paper demanding severe modifications to the proposed privatisation law, which will only ensure more squabbling over details.

An interesting discussion on railway privatisation, worth a revisit - promoted by In Wales

The free-market ideal

The idea is (or has become) the same as that behind the EU's rail privatisation drive: state monopoly means no competition, so let there be competition between private companies on rails, just like there is competition of lorry companies on roads, and there'll be Efficiency and Capital and there'll be Competitiveness with road!

The centerpiece of this reform would be the separation of infrastructure and operations. And just that was the big clincher for a decade now. The main opponent of Separation was the management of DB AG itself – even if they had little knowledge of railways, they sensed danger. The negotiations about if and how to do it were an endless bickering about details.

In the political arena however, there was near unison about the 'need' for Separation. All problems were and are just blamed on the monopolistic tendencies of the state railways, and those in government were criticised for not pushing it enough or pushing it in the wrong way, whether the traffic expert was from the FDP, the CDU, the SPD, or from the Greens. Even most pro-rail groups seem to have swallowed this line – the problem is never the privatisation drive, only the how and when of it.

The road to privatisation covered so far

In 1991, Heinz Dürr, a former AEG CEO, was made boss of the West German state railways by the conservative government of then chancellor Helmut Kohl. This was the beginning of the rule of managers taken from the private economy. The idea was that they shall make the giant as fit as a big German private corporation, a questionable task even without considering the problem that they lacked prior experience with railways, and had no idea of their complexities and interdependencies.

In 1994, Re-unification was completed in the railway world with the fusion of the former West and East German state railways into Deutsche Bahn AG. The AG stands for Aktiengesellschaft, that is a company by shares. But it is only nominally: 100% of the shares were (and still are) owned by the federal state, but the idea was that once the managers succeed in making the company fit, the shares could be sold on the market.

The managers were trying and not succeeding ever since. I mention two significant reforms: one was to divide the company into semi-independent branches (passenger, express, freight, infrastructure), the other was the infamous "MORA C", the 'rationalisation' of freight transport by closing off a lot of loading points producing small volume.

Meanwhile, other steps were taken. The rights for private railways to use state railway tracks were expanded, and those railways grew rapidly, again boosted when they saved part of the freight transports kicked by MORA C. The states got the right to order (and duty to subsidize) passenger train services. Later competition for such orders was first allowed, then made the rule.

How it didn't work out

If you don't have or expect that you won't get capital and want to run for profit, you can do two things: be more efficient or cut costs.

Cost-cutting as a loss-reducing measure has some very direct results obvious for and discouraging passengers: reduced services, weedy tracks and platforms, stinky dark abandoned station buildings.

But indirect effects are worse. A passenger no more able to board trains on a branchline station is likely to be lost as express train passenger, too. This is even more true for freight. Why the managers believed that customers would want to transport freight on lorries for 80 km and then re-load on trains, and a few hundred kilometres later again load on lorries, is beyond me – but there was for example the infamous project of such a loading station near Erfurt back in the Dürr years, which received practically zero traffic.

So cost cutting was also income cutting. What about efficiency?

The most expensive part of rail track is switches. So the DB managers thought, let's remove as many as possible during line upgrades!

The result: increased delays.

On one hand, the options for slower trains to make way for faster trains reduced, so the choice for traffic controllers was either small delays cascading down to other trains, or small delays becoming big ones. On the other hand, if there was some exceptional situation, be it an accident blocking the tracks of track works forcing diversions, there was less spare capacity and chaos ensued.

Cutting up the railway into branches, as well as giving the states control of passenger transport, was meant to reduce centralised decision-making. However, if a transport or train or technological reform concerned more than one branch, or if a railway line led through more than one state, there was now trouble...

Where the effects of separation into branches were the most hilarious is locomotives. Initially, they were to be in a separate branch, that lends its services to the operating branches. But that wasn't too convenient for the latter, so the locomotives went over into the passenger, freight and express branches' ownership.

Now on one hand, this was done at a time the decades-long dream of railways, the universal locomotive became a reality: electric locomotives that are equally fit for slow and heavy freight trains, lighter and fast express trains, and light passenger trains with frequent stops; and thus a railway could make do with a few types in large numbers, reducing purchase and maintenance costs with economies of scale. So instead, every branch had to care for itself, meaning either locomotive shortage or more locomotives, and more types in smaller numbers.

On the other hand, locomotives also need regular checks and maintenance – and maintenance shops were divided between the branches, too. So either distances for shop runs increased greatly, or capacities had to be doubled, expertise was lost, and say express locos that could be sent out again for a night freight run sat idle more. What efficiency!

And what customer friendliness. In the eighties, the West German railways created the InterRegio brand: lower-quality, lower-frequency long-distance express trains, above limited-stop local trains but below the IC/EC express and ICE high-speed trains. They proved very popular – but not with the heads of the new branches: they felt it draws away customers from core business. The service was slowly killed and partly replaced with slower long-distance local trains (which are a treat on longer distances), despite loud passenger protests.

Competition with the new privates, as suggested before, was marked by use of monopolistic power that only hurt the rail sector overall. High track use charges at critical points, removal of infrastructure a private would have used were the more obvious moves. Another notorious practice was to send all old locomotives immediately to a scrap metal trader, to prevent competitors from purchasing cheap rolling stock that already has permit to run on German tracks.

The current plans and their criticism

After DB AG at last achieved some profits, the current Grand Coalition government finally got itself to put Separation into a law proposal. But that only nominally: the federal state would be the nominal owner of railway infrastructure, but for 15–18 years, the privatised DB AG would continue to manage it – where of course the main issue is money, money collected from train operators for track use.

And money is the reason that the states rebel. They ordered a study of the plan, which also notes that a private DB AG's drive for high yields will lead to more branchline closures and service reduction, but what made a splash is the issue of track use charges. DB AG plans to continue to raise those with an annual 2.4%. But in the current construction, that won't be the problem of train operators: they can pass on the costs to the states subsidizing passenger trains!

Meanwhile, the parliamentary faction of the CDU made modification proposals to the SPD-led ministry's plans, sensing problems:

  • What if DB AG uses its infrastructure management powers to kill off lines by lack of maintenance or overpriced track use charges, even against government plans? So let's give the federal state the power to command execution of its plans! Sensible, but then why privatise at all?

  • Can we trust the managers to keep promises? Let them first present financial and service plans, and see if they can keep them in a one-year test period! Sensible, but wasn't just that what DB AG did for fourteen years now?

...and some similar points. These were also expounded on in the German parliament a week ago. To which a Left Party member of parliament responded:

CDU/CSU Fraktion im Deutschen Bundestag | Aktuelles

Roland Claus (DIE LINKE): Herr Kollege Königshofen, gibt es auch Teile des Privatisierungsgesetzentwurfes, die Ihre Zustimmung fin­den könnten, und womit wollen Sie letztendlich der ge­neigten Öffentlichkeit die irgendwann zu erwartende Zustimmung erklären?Roland Claus (Left Party): Dear colleague [Norbert] Königshofen [CDU/CSU], are there also parts of the [state railway privatisation] draft law with which you can agree, and with which you could finally explain your sometime to be expected support for the law to the inclined public?

Why it was bound to not work out and won't in the future

...or some considerations on the level of principles.

Did railways suffer from lack of competition? I think that is a silly question. Railways were exposed to competition: road, also air and river barges. Railways aren't a market, just a market share.

The position of rivals on the transport market is influenced by taxes, subsidies, effects of past subsidies, accounted and unaccounted externalities, rules to abide by. Changing those takes state intervention.

Are railways like roads in operation? No. Railways is transport in large amounts. Trains have to be scheduled to follow each other efficiently. Instead of one car all the way, trains are changed, which calls for coordination and similar standards and rules for users.

Most importantly, infrastructure and rolling material is deeply inter-dependent. You install a new lineside signal, trains have to be fitted with detectors and drivers re-trained. You save money spent on new vehicles by sparing maintenance-intensive suspension elements, you get higher track wear, and from that worse ride quality for all trains. You can't run through services with your shiny new electric train if a different system or none is maintained in the middle, you can't access a certain terminal station if a certain switch is missing. I already mentioned maintenance shops and sidings.

So, in my opinion, separation of infrastructure and operation (and also separating operation into different branches) can only lead to more short-sighted decisions, more breakdowns of cooperation, and much more attempts to shove off costs – and investments even more so – as externalities. The latter practice may lead to overall increased costs and increased neglect at the same time, see British example.

Not that the standard for stupid decisions is high with managers from elsewhere, who, say, don't even know that force and power aren't the same (and order powerful freight locos whose wheels would slip at much less than full power on a climb in a rain).

Now this only considers the desired end state. But one would have to get there. But the way there on one hand involves a frantic effort to save money that is bound to deteriorate service, on the other hand, counter-forces generated by the process itself.

I mean, if you let private companies suck off profit from a busy mainline, the less you can maintain a branchline. I mean, the folk sport of shoving off costs as externalities will get opposition from those who are supposed to pay the bill, see present reaction from the states. I mean, how can you expect anyone to gladly give away market share, wasn't it to be expected that DB AG will fight the new rivals tooth & nail with every trick it can find?

:: :: :: :: ::

Check the Train Blogging index page for a (hopefully) complete list of ET diaries and stories related to railways and trains.

I could rage on but...

In one German railfan journal, there is a ragular Now & Then feature. It almost always shows the spread of weed and the abandonment of fixed installations, even at modernised stations.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Tue Sep 18th, 2007 at 10:06:04 AM EST
I could rage on

...say about the drive to reduce staff.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Sat Sep 22nd, 2007 at 09:32:44 AM EST
[ Parent ]
which will only ensure.

Which will ensure what?
by nanne (zwaerdenmaecker@gmail.com) on Tue Sep 18th, 2007 at 10:28:42 AM EST
Oops... unfinished sentence now finished.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Sep 18th, 2007 at 11:04:45 AM EST
[ Parent ]
Thanks for this great diary!

It's funny to see how MSM and economists rush to international comparisons for nearly all topics but for rail (and electricity), big silence.

by Laurent GUERBY on Tue Sep 18th, 2007 at 03:13:26 PM EST
Do you have any comparison of the lessons that should have been learnt through the privatisation of the British railways?

It's disappointing that the benefits of good investment in infrastructure are dismissed for shorter term gains.  Privatising doesn't mean that they will get the mess off their hands, by any means. The impact will spread to other areas that will land on state budgets if privatisation doesn't work effectively.

by In Wales (inwales aaat eurotrib.com) on Sat Sep 22nd, 2007 at 09:48:03 AM EST
Basically, a lesson not learnt :-) Or :-(

A lesson though that came in late, as the German process started already before Britain realised rail privatisation. But rail privatisation true-believers will always say that

  1. the British failure was just one example, let's do it better!

  2. is the British example really a failure, with the jump in passenger numbers?

One difference with the British process is though that even through privatisation, the German federal State spent big sums on the infrastructure. But that spending was not well thought-through,  assymmetric and focused on big projects -- high-speed lines, renewals of major stations, electronic switch centers, those freight terminals; while other parts were left to rot or were disused.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sat Sep 22nd, 2007 at 10:10:12 AM EST
[ Parent ]

The Fates are kind.
by Gaianne on Sat Sep 22nd, 2007 at 05:35:13 PM EST
[ Parent ]
Privatisation is DEFINED by the sale of the assets to a "joint stock limited liability company" which issues shares to investors.

But, as we are increasingly seeing - and I am getting a really good hearing for this unconventional approach here (Scotland) particularly from the minority SNP government - you don't need to sell the assets in order to sell some of the revenues from the assets.

Blackstone recently did just that when they cashed in soome of their chips using a Limited Partnership structure and the Chinese bought in to their future revenues.

It really isn't that difficult: virtually the entire Canadian (listed) capital market is now configured in this way, as between conventional shares on the one hand, and (trust-based) units in listed Companies' GROSS revenues on the other.

Trust law is complex and costly, but it works nonetheless.

There is no reason why a parallel solution short of privatisation should not be implemented in Germany.ie the railways stay in public ownership, but German pension funds invest in "units" of the railways' GROSS revenues.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Sep 22nd, 2007 at 10:42:19 AM EST
... in New South Wales, resulting in problems that they eventually fixed by leasing the country rail network to the Australia Rail Track Corporation for a dollar a year and re-joining the Cityrail (operating) and Rail Infrastructure Corporation (infrastructure) companies to form a single metropolitan rail corporation for the electrified system centering on Sydney.

The reason for the lease to the ARTC was the political hurdles in approving commercially viable works in areas without a lot of political clout.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Sep 22nd, 2007 at 04:37:54 PM EST
When I consider the many, many items of news that make up our world, such as this one here, I feel I see a pattern--a trend or direction--that is generally consistent.  

It is consistent across categories.  For example, in the physical category, stories of global warming and peak oil show that our civilization is about to be physically stressed beyond its design limits.  But an item such as this one--yours--which is more political-economic, we see that our civilization is ceasing to function even WITHIN its design limits.  

Between these over-determined tendencies, our fate is both plain and unavoidable.  

I write from the US, and read with interest what others are doing, and with great curiosity about how they will fare, especially since there is not everywhere the same commitment to American mistakes.  

Yet, the poison is everywhere.  Sadly, it is clear:  Europe, too, will not be spared.  

The Fates are kind.

by Gaianne on Sat Sep 22nd, 2007 at 05:31:13 PM EST
where the privatization of a railroad system has actually worked, in the sense that it improved the service to the public and/or made it more affordable? Is anybody aware of one successful privatization of a railroad anywhere in the world? It's a serious question.

If you can't convince them, confuse them. (Harry S. Truman)
by brainwave on Sun Sep 23rd, 2007 at 10:33:37 AM EST
I thought that in Japan it was supposed to be OK. Of course, they did not do separation there.
by nanne (zwaerdenmaecker@gmail.com) on Mon Sep 24th, 2007 at 04:07:07 AM EST
[ Parent ]
I would also be curious about comments from a train rider perspective from Sweden. There, privatisation of the operating part of the state railways isn't yet finished (there is Green Cargo, but there is still SJ), so it can't be viewed as a full model either. On the other hand, viewing what happened so far, there have been some ugly bankrupcies and service problems, and the state still has to spend the big bucks on infrastructure. But I wonder how it looked for passengers.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Sep 24th, 2007 at 04:37:20 AM EST
[ Parent ]
Seems similar to the situation in the Netherlands, I guess (cargo: privatised, passenger + railway stations: state-owned company to be perhaps privatised, infrastructure: state owned company).

Can't say that the result is ideal, but then it never was.

by nanne (zwaerdenmaecker@gmail.com) on Mon Sep 24th, 2007 at 05:12:13 AM EST
[ Parent ]
In Sweden however, private rail operators took over much more of the passenger services than in the Netherlands. The currently still existing state-owned SJ is a rump.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Sep 24th, 2007 at 05:34:14 AM EST
[ Parent ]
There is Japan, and Switzerland doesn't do separation/competition on the same track either. (There is significant parallel service on some lines, say BLS and SBB on the Lötschberg line on which the new base tunnel is, but that is based on agreements between the railways.)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Sep 24th, 2007 at 04:41:37 AM EST
[ Parent ]
Hail to the InterRegio - I loved it...even have a door sign from the Berlin-Eisenach InterRegio that I "borrowed".

The shift over to IC was even obvious to me as a foreigner as a blatant money grab.  And the fact it became difficult to figure out in your head how much a ticket would cost (so many Pfennig per km was so easy).

This coming from a guy who rode the SW Ticket across the country - Kassel to Freiburg (Brsg), Dresdent to Kassel and Salzburg to Mainz.

"now this is not the end, it is not even the beginning of the end. But it is, perhaps, the end of the beginning." W. Churchill

by Thor Heyerdahl (thor.heyerdahl@NOSPAMgmail.com) on Mon Sep 24th, 2007 at 02:44:36 PM EST

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