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Open Access: privatise profits, socialise losses

by DoDo Wed Jan 11th, 2012 at 04:58:02 PM EST

Last month I took on the subject of rail privatisation and deregulation in the EU in The Dawn Of Open Access (1/2) and (2/2). In the January 2012 issue of International Railway Journal, there are feature articles about two of the new private long-distance passenger operators bringing competition to the former state monopolists. In line with my gravest predictions, one of these articles includes a quote in which a manager calls for the privatisation of profits and the socialisation of losses. The other includes a quote providing some insight into why the most new ventures have it so difficult to launch.


The first article discusses RegioJet, the Czech open-access operator which competes with former state monopolist CD on its busiest line, from Prague to Ostrava, since 26 September last year (and reaches Žilina in Slovakia since December). The service, which offers locomotive-pulled trains with longer travel times but lower fares than the incumbent, is reported as a success, with near-full trains (no financial numbers given).

The article also mentions progress for the prospective third competitor I mentioned in my diary, Leo Express, which will operate modern EMUs now in production. The RegioJet manager asked by IRJ believes the market won't support three players – and thinks CD will be the one to bow out. Then adds this:

The CEO of CD has publicly declared that the need to focus resources on one route where there is competition can damage service quality elsewhere. If this is the case, we should question the role of CD. Is it to overservice one line with no evidence that this strategy will generate a profit, or is it to provide citizens with a consistent level of service over the whole country? The regions and the state pay a lot of money to CD for the services it provides, so they should think about what they want CD to focus on.

In other words: he tells the state to leave the busiest line to them to reap the profits, and subsidize CD's operations on less busy lines.

:: :: :: :: ::

Hamburg-Köln-eXpress (HKX) is a venture intent on competing with German Railways DB between the cities in its name (one of the busiest long-distance relations in Germany), with plans in perpetual delay. Last December was the third time they failed to launch at the announced date, and the second time they did so without any prior public announcement. Now the company COO discussed reasons with IRJ. The interesting part is that he sees three of the common problems I mentioned in the diary forming a catch-22 situation:

The real challenge is getting investors, trains and access rights converging at the same point in time. If one is missing, the others will not help you. We first evaluated possible routes and timetables with [infrastructure manager] DB Networks as we need track access rights as a guarantee for investors. To be granted a 15-year track access agreement, you have to start operations within 18 months. If you don't own trains, this is simply impossible. It takes around three years from ordering new trains to receiving them, and you need investors to help pay for them. But how do you convince investors to pay without a framework contract?

He then says that that's why they chose to refurbish used trains. However, I have my doubts about the business model of this venture. They want to offer a higher level of service than DB at lower fares. This includes layout: even the second-class cars were refurbished with 2+1 seating and more legroom than DB's, that means significantly less passengers for the same mass to be moved.

:: :: :: :: ::

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

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The owners of HKX include the U.S. rail investment company Railroad Development Corporation, the chairman of which was also interviewed. He provided a gross spin of what open access operators in the UK are about.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Jan 11th, 2012 at 05:02:53 PM EST
Is increasing competition on busiest routes necessary a bad thing? Cheaper prices on mainlines may attract passengers not only from monopoly train operator but also from cars, busses, and planes. Usually mainlines serve areas where other traffic is busiest and local pollution and noise problems largest.
by Jute on Thu Jan 12th, 2012 at 04:12:05 AM EST
My main problem with that view is that it looks at lines as if they are completely independent of each other, rather than being part of a network. On a network, trains may run on longer routes taking multiple lines (many trains on the Czech Republic's premier line are international), and high profits on the busiest lines help maintaining services on less busy routes (which also serve as feeders to the busier routes). When open-access train operators compete former state railways, there is the added obscenity that some costs are externalities for the new private company but internalities for the former state railway. In addition, a price war on rails is a short-term measure with equipment needing long-term return of investment. That said, it's not like I wouldn't be against the widespread policies to push premium services and cut back low-comfort but also low-fare services, but I don't think competition is a real solution to that.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu Jan 12th, 2012 at 04:44:50 AM EST
[ Parent ]
The RegioJet manager reminds me of the Murdochs saying that the BBC shouldn't do anything that would compete too keenly against commercial channels like Sky...
by Gag Halfrunt on Thu Jan 12th, 2012 at 05:39:08 PM EST
why rail services almost all started as private ventures and ended up as national or regional monopolies...

Looks like we have to relearn the same lessons we already learned a while back. Hmmm... that rings a bell.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Fri Jan 13th, 2012 at 05:57:25 AM EST
It's almost as if we're really bad at dealing with externalities.
by Colman (colman at eurotrib.com) on Fri Jan 13th, 2012 at 06:05:53 AM EST
[ Parent ]
Once a privately provided service becomes an integral part of people's expectations of a decent life, the service acquires an implicit state guarantee. On private insolvency, it gets nationalised. Therefore the EU's institutional arrangements are dangerous bollocks.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Fri Jan 13th, 2012 at 06:16:17 AM EST
[ Parent ]
Do you think mobile phone providers have an implicit state guarantee?

Wind power
by Jerome a Paris (etg@eurotrib.com) on Fri Jan 13th, 2012 at 10:58:07 AM EST
[ Parent ]
Do you think there would be popular pressure on the government to do something if one of the oligopoly mobile networks went down?

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Fri Jan 13th, 2012 at 11:01:07 AM EST
[ Parent ]
People would not lose any money if a network went down. Beyond the fact that someone else would probably take over the physical assets, and thus bankruptcy would not be an earth-shattering event, people can go to another operator relatively easily.

So, governments would certainly not spend money in that case. Lean on companies of the sector to sort it out, sure, but is that the same?

Wind power

by Jerome a Paris (etg@eurotrib.com) on Fri Jan 13th, 2012 at 11:06:51 AM EST
[ Parent ]
I would say regulate until it works or nationalise.

One case where nationalisation of mobile phone network would probably be considered would be if a company went broke because they had expanded operations into unprofitable, sparsely populated areas. Which then the competitors would not be interested in. We have areas in Sweden with only one operator - Telia, the former government telephone agency.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Jan 13th, 2012 at 04:48:50 PM EST
[ Parent ]
Speaking of pulicly owned mobile providers: reportedly, one of the latest ideas of Hungary's Fidesz government to push domestic capital was to organise the tender for the fourth mobile provider in the country in a way that it is won by a consortium of state-owned companies (the post, a bank and a power company). The tender result will be announced this month. Perhaps even more noteworthy is that Fidesz nationalised all mobile phone payment systems last month.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Jan 13th, 2012 at 05:21:42 PM EST
[ Parent ]
Do you think there would be popular pressure on the government to do something if one of the oligopoly mobile networks went down?

The mobile network of most countries is quote-unquote "overbuilt," both in terms of coverage and capacity, to the extent that loss of any individual carrier will not result in loss of coverage (exceptions perhaps being one of the former state monopolists in very rural areas), even if its assets are taken completely out of service for the duration of its bankruptcy resolution (which they wouldn't be). Ditto the American internet backbone. Less so the European internet backbone.

If the mobile network as a whole were to fail or be at risk of failing, then obviously the state would attempt to make good on the implicit guarantee. Just like the government would do its damnedest to make good on the implicit guarantee of food if the convenience store chains were to go out of business simultaneously. But the market structure in those sectors makes that risk negligible.

Incidentally, open access rules, by allowing entrants to piggy-back on incumbent physical networks, discourage this overbuild. Which has advantages in capital efficiency, but disadvantages in technological diffusion (because it disincentivises expanding the geographic scope of the network and upgrading the network to new technology) and obvious disadvantages in resilience. As an empirical matter, the disadvantages appear to outweigh the advantages for mobile telephony.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 15th, 2012 at 04:51:57 AM EST
[ Parent ]
At the end of 2002, German mobile phone provider Mobilcom received both direct help from main shareholder France Télécom (which took over debt) and state guarantees from the federal government when it was on the verge of bankruptcy. (Later the company head was sentenced for having created the bankruptcy situation on purpose.)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Jan 13th, 2012 at 11:28:54 AM EST
[ Parent ]
Wouldn't it be more accurate to say that railroads usually started as private ventures operating under the protective umbrella of government? Any big system required massive financing that usually required some sort of regulatory support or relief, and getting right-of-ways requires significant government support. Not to mention that a given route from A to B has a pretty strong natural monopoly flavor to it, which has to be mitigated by government control over shipping rates.

Similarly with cell phones, which are based on technology developed with public funds, requiring cell towers that require regional planning approval, using highly regulated radio frequency bands, and operating under near-monopolistic conditions, charging regulated rates and paying significant taxes.

Not to mention the whole oil/gas/coal industry, water supplies, electrical grid...

I suppose windmills are perhaps not at first glance a monopolistic sort of enterprise, but there is certainly a need for considerable regulation about how they connect to the grid, and it seems reasonable to expect that there will have to be some significant siting rules to prevent one company from stealing another company's wind. Maybe that latter point is already on the books--I haven't heard it...

It is interesting how we don't learn about this...

by asdf on Tue Jan 17th, 2012 at 11:12:34 AM EST
[ Parent ]


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