1
Do European Reforms Increase Modal Shares of Railways?
Zdeněk Tomeš
Department of Economics, Faculty of Economics and Administration, Masaryk University, Brno, Czech
Republic. E-mail: tomes@econ.muni.cz
Abstract: The transport policy of the European Union aims to increase modal share of railways. Its
principal reform measures are vertical separation and competition entry. However, there are other
possible reform strategies and it is not clear whether European reforms actually increase railway’s
modal shares. Based on the analysis performed on 27 European countries in the period 1995–2013,
there is no proof that vertical separation and competition entry increase modal shares of European
railways. The horizontal separation of the freight and passenger division of the incumbent and
subsequent privatisation of the freight division seems to be a more promising strategy. There are also
important differences in long-term developments between countries of Western and Eastern Europe,
which should be controlled for.
Keywords: railways; modal share; vertical separation; horizontal separation; competition.
1. Introduction
The European Union (EU) has decided to adopt a resource-efficient transport system that will enable
a decrease in emissions, and therefore the European Commission (EC) has set ambitious goals for
modal shares of railways. Specifically, 30% of road freight travelling over 300 km should shift to rail
and water by 2030, and more than 50% by 2050. The majority of medium-distance passenger
transport should go by rail by 2050 (European Commission, 2011). These goals are underpinned by
concrete initiatives. Ensuring effective and non-discriminatory access to infrastructure through
vertical separation of the industry and opening market to competition are the key initiatives
(reforms) in the railway sector (European Commission, 2011). The idea is that rigid structure and the
absence of competition were the reasons behind the decline that railways experienced and that
vertical separation and introduction of competition, together with infrastructure investment and
stable government financing, can bring about revitalisation of railways and increase of their market
shares (European Commission, 2001).
However, there is an argument that there are many more reasons for the long-term disappointing
performance of railways (United Nations 2003). The long-term structural decline of railways has been
caused by many interconnected factors, and they may be classified as exogenous (transformation of
other industries, policies, and investment that favoured road) and endogenous (limited attention to
customer care, weak reliability, limited flexibility, fragmented cross-border services, lack of service
integration, lack of competition) (DiPietrantonio–Pelkmans 2004). When assessing chances of success
for European railway reform, it is critical to assess whether reforms are targeting the most important
problems. It is not clear whether vertical separation and competition entry can be powerful enough
to increase market shares of railways. Some exogenous factors can be hardly reversed (changing
structure of economy to low weight, just in time production) and some endogenous problems can be
better targeted by privatisation than by competition.
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Some scholars also questioned the net benefits of vertical separation and competition introduction
for the railway industry, arguing that they are moderate due to high intermodal competition
(Seabright et al, 2003), high share of fixed costs (Pittman 2005) and inducement of coordination costs
(van de Velde, 2012). This argument is supported by the fact that when reforming their railway
sectors, other countries—with the exception of Russia and two Australian states—have chosen
different paths than vertical separation and intramodal competition. These approaches included
horizontal separation of freight and passenger operations of the incumbent (United States, Canada),
privatisation (Japan, New Zealand), or long-term concessions (Latin America) (Gómez-Ibáñez - de Rus,
2006, Drew 2011).
The assessment of European reforms is further complicated by the fact that they were applied on
very heterogeneous groups of countries. Differences between Western and Eastern
(postcommunistic) European countries are particularly important. European railway reforms were
designed basically for Western European countries in the 1990s. After having joined the EU, many
postcommunistic countries started to apply these reforms on their railway systems, too. However,
both their economies and their railway systems were in conditions that differed significantly from
those of their Western European counterparts. Their economies were poorer, their railway systems
unstable and underfinanced (Tanczos - Bessenyie 2009), and their regulatory capacities were on a
much lower level than in their Western European counterparts. Eastern European railway systems
have been suffering from many structural problems (Carbajo-Sakatsume 2004; Amos 2005) and it is
questionable whether vertical separation and the introduction of competition are actually targeting
the most relevant problems in these countries (Friebel et al 2007; Pittman et al. 2007).
In some countries, European railway reforms were implemented as early as the 1990s. Other
countries were much slower in implementation. This different pace of reforms among European
countries gives enough scope for analysing the impact that European reforms had on modal share of
railways. The aim of the article is to identify whether European reforms increased modal share of
railways in 27 European countries in the time period of 1995–2013. The structure of the paper is as
follows: Section 2 reviews relevant literature, section 3 provides methodology and data, section 4
states results, section 5 provides their discussion and, finally, section 6 concludes.
2. Previous studies
There is substantial literature concerning the effects of European reforms on the efficiency of
railways. Their main conclusions are that entry of competition results in an increase of efficiency
(Asmild et al. 2009; Friebel et al. 2010; Cantos Sánchez et al. 2010;Cantos Sánchez et al. 2012) and
horizontal separation increases efficiency (Cantos Sánchez 2001; Cantos Sánchez et al. 2010;
Mizutani–Uranishi 2013; van de Velde et al. 2012). There is less consensus about the effect of vertical
separation on efficiency, as some studies identified positive effects (Driessen et al. 2006; Friebel et al.
2010; Cantos Sánchez et al. 2010), one study found a negative effect (Growitsch–Wetzel 2009), but
the majority of studies identified insignificant or unclear effects (Cantos Sánchez 2001; Wetzel 2008;
Asmild et al. 2009; Cantos Sánchez et al. 2012; Mizutani–Uranishi 2013; van de Velde et al. 2012;
Mizutani et al. 2015). Besides differences in estimation methods and time periods, there were other
differences in the samples of countries. Some studies included postcommunist countries (Wetzel
2008; Asmild et al. 2009; Cantos Sánchez et al. 2012;, Mizutani - Uranishi 2013; van de Velde et al.
3
2012; Mizutani et al. 2015) but some studies excluded them (Cantos Sánchez 2001; Driessen et al.
2006; Friebel et al. 2010; Cantos Sánchez et al. 2010)
There is substantially less evidence about the impact of reforms on railways’ modal share. DrewNash
(2011) analysed descriptive statistics of 25 European countries in the period 1998–2008 and
identified no significant correlation between vertical separation and modal shares of rail transport.
They acknowledged that there are other factors influencing modal shares of railways, especially
effectiveness of regulation, the financial situation of the incumbent operator, under-compensation
for mandated public service provisions, and government support for investment in infrastructure.
They point out that these factors are particularly significant in some countries of Eastern Europe
where vertical separation and market opening on rapidly deteriorating infrastructure reduce
competitiveness of all operators, and suggest that a solution that suits Western Europe with
adequate financing for infrastructure may not be adequate for Eastern Europe. Another empirical
study by Laabsch-Sanner (2012) analysed whether vertical separation influenced modal share of
railways. They carried out a panel regression on a sample of nine Western European countries in the
period 1994–2009 and identified a negative effect of vertical separation on passenger modal shares
and no significant effect on freight modal share. From control variables, higher public subsidies have
surprisingly no effect on passenger modal share; however, there were significant positive effects of
GDP and liberalisation index. Authors argue that different effects of vertical separation in the
passenger and freight sectors may be caused by the different scope of competition in both sectors.
Van de Velde et al. (2012) analysed a sample of 26 European countries over the period 1994–2010
and concluded that in the passenger sector both vertical separation and competition entry had a
negative effect on railways’ modal share. However, the cross term of vertical separation and
competition entry was positive and significant here. The authors also used more detailed indicators
of vertical structure and competition, and claimed that there was no statistically significant
difference between vertical separation model and holding company when the passenger market is
open to competition. In the freight sector, no significant effects of structural or competition
indicators were found so the author concluded that they had found no evidence that vertical
separation was superior to vertical integration in its impact on rail’s modal shares. The most recent
study by Kougiomtzidis (2014) provides an analysis on 28 European countries in the period 2003–
2011 and claims negative effects of vertical separation on passenger modal share, arguing that this
result can be explained by the fact that the passenger market is quality driven. Competition in the
vertically separated market can decrease prices with negative impact on quality of services, inducing
passengers to switch to other transport modes. There was no significant effect of vertical separation
in the freight sector which is explained by higher sensitivity to price and lower to quality.
Based on these studies, there seems to be consensus that vertical separation decreases market
shares in passenger sector and has no significant effect in freight sector. Less clear are the effects of
competition entry and horizontal separation which were analysed only in van de Velde et al (2012);
therefore, the impact of reforms on modal share of railways is still not a deeply analysed theme.
Moreover, some important research questions were not targeted in the existing empirical studies.
Only Drew-Nash (2011) explicitly analysed differences between development in Western and Eastern
Europe; however, they analysed only descriptive statistics and therefore they could not utilise
control variables. Different impacts of reforms in Western and Eastern European countries are
4
important when interpreting results of empirical studies conducted on a sample of only Western
European countries, such as Laabsch-Sanner (2012).
3. Methodology and data
There are two principal railway reforms in the EU: vertical separation and competition entry. The
main task was to measure the impact of these reforms on the modal shares of railways. Therefore,
reform indicators had to be constructed. They were captured by binary variables that received value
1 when country made this reform, and 0 if otherwise. The reform variables were constructed in the
following way:
• VERTICAL SEPARATION variable measures whether or not a country has carried out a
complete institutional separation of infrastructure manager and incumbent operator.
• COMPETITION ENTRY variable measures whether there was significant competition entry
into railway market. The benchmark for competitive entry was chosen as 1% and more of
market share of nonincumbent operators. There were two variables: one for freight, and one
for passengers.
The source of information for reform variables were primarily IBM (2011, 2007, 2004, 2002), Steer
Davies Gleave (2012), RMSS (2014, 2012, 2010), and national resources. When the reform took part
in the second part of the year, it was recorded from the next year. Vertical separation was
understood as complete institutional separation of infrastructure operator and incumbent operator
into two separate entities. Holding structures where infrastructure manager and incumbent
operators remained under one ownership umbrella were counted as vertically integrated.
Competition entry was recorded when it was substantial (reaching at least 1% of market share) in
order to capture significant entries to the market and to omit the negligible entries. As competition
entries were counted only when the new entrant entered the existing market and challenged the
incumbent on the same network. There are some cases where two different networks with two
different vertically integrated operators exist in one country (Gysev and MAV in Hungary; SBB and
BLS in Switzerland; EVR and EER in Estonia; OBB and small integrated operators in Austria). The
historical existence of two separate networks with different incumbents inside one country cannot
be regarded as competition entry, only when one of the incumbents’ networks was entered by a new
entrant was competition entry acknowledged.
Besides vertical separation and competition entry, some countries have also added horizontal
separation of the freight and passenger operations of the incumbent. This process was very often (in
7 out of 10 cases) followed by the privatisation of the freight operator. Therefore, two other reform
variables were added:
• HORIZONTAL SEPARATION measured whether a country made a complete institutional
separation of the freight and passenger operations of the national incumbent operator.
• FREIGHT PRIVATISATION measured whether a country privatised horizontally separated
freight division.
Horizontal separation is counted when the passenger and freight divisions of the incumbent are
separated into two institutionally separate entities. Almost all horizontal separations are
preparations for freight privatisation; in Slovakia and Romania these plans have not materialised yet.
Latvia is an interesting case where passenger operations but not freight were carved out of a
5
vertically integrated incumbent. The so far realised freight privatisations have been exclusively into
hands of other European incumbent railway operators.
Table 1 Railway reforms in European countries
Vertical
separation
Competition
entry
freight
Competition
entry
passenger
Horizontal
separation
Freight
privatization
Austria - 1999 - 2012 - - Belgium
- 2007 - - - Bulgaria
2002 - 2006 - - - Czech
Rep. 2003 - 1995 - 2012 - - Denmark
1998 - 1999 - 2003 - 2001 - 2001 Estonia
- 2000 - 2006 - 1997 - 2001 Finland
1995 - - - - France
1997 - 2007 - - - Germany
- 1995 - 1996 - Great
Britain 1995 - 1995 - 1996 - 1996 - 1996 Greece
2010 - - - - Hungary
- 2004 - - 2009 - 2009 Ireland
- - - - Italy
- 2002 - 2004 - - Latvia
- 2003 - - 2009 - Lithuania
- - - - Luxembourg
- - - - Netherlands
2002 - 1998 - 2000 - 2001 - 2001 Norway
1997 - 2005 - - 2002 - 2002 Poland
- 2003 - 2005 - - Portugal
1997 - 2008 - 1999 - - Romania
1998 - 2002 - 2008 - 1998 - Slovakia
2002 - 2004 - 2012 - 2005 - Slovenia
- 2011 - - - Spain
2005 - 2007 - - - Sweden
1995 - 1995 - 1995 - 2001 - 2001 Switzerland
- 2000 - - Sources:
IBM (2011, 2007, 2004, 2002), Steer Davies Gleave 2012, RMSS (2014, 2012, 2010)
and national resources
The sample consisted of 27 European countries. There was no inclusion of non-European countries
because they operate in a different environment; and, when compared to European railways, they
have very different operational indicators. The analysed period was 1995–2013, which should
capture a time period as long as possible. The year 1995 was chosen as a start of analysis because
data for many countries are available starting that year, and, also, it is the date when Eastern
European countries recovered from the most drastic shocks to their economies and their railway
systems. There is an important difference between railway systems of countries in Western and
Eastern Europe. Therefore, there have been explicit divisions between these two groups of countries.
They were defined as:
6
• WEST– Austria, Belgium, Denmark, Germany, Ireland, Greece, Spain, France, Italy, Finland,
Norway, Sweden, UK, Luxembourg, Netherlands, Portugal, Switzerland
• EAST – Bulgaria, Czech Rep., Estonia, Lithuania, Latvia, Poland, Romania, Slovenia, Slovakia,
Hungary.
The reason for this approach was that there are clearly different trends in the development of modal
shares of countries of Western and Eastern Europe—with the latter continuously falling. The
research strategy was to allow two trend variables, one for the Western and other for Eastern
European countries, to accommodate differing trends in the development of their market shares.
There were three other control variables:
• GDP per capita (GDP_pc), which was meant to capture the effect of different economic levels
among countries. It is expected that a higher economic level should induce lower modal
shares of railways. To cope with widely different levels in the sample, it was used in
logarithmic form.
• INFRASTRUCTURE measured as length of railway lines to the sum of length of railways lines
and highways in the country. This variable should control for different conditions for railway
transport in countries, especially in the freight transport.
• EMPLOYMENT RATE measured as ratio of employed people in total population. The reason is
that more employed people should increase demand for passenger rail transport.
Online database of Eurostat was the source of the data of all these control variables.
Table 2 Descriptive statistics
Variable Unit Mean Min Max St.dev.
MODAL SHARE FREIGHT % 24.17 0.6 84.9 18.40
MODAL SHARE PASSENGER % 6.87 0.6 26.5 3.73
VERTICAL SEPARATION Binary 0.39 0 1 0.49
COMPETITION ENTRY FREIGHT Binary 0.51 0 1 0.50
COMPETITION ENTRY PASSENGER Binary 0.26 0 1 0.44
HORIZONTAL SEPARATION Binary 0.24 0 1 0.42
FREIGHT PRIVATIZATION Binary 0.17 0 1 0.38
WEST Binary 0.63 0 1 0.48
EAST Binary 0.37 0 1 0.48
TREND 10 1 19 5.48
GDP p.c. thous. EUR 22.03 1.90 70.54 14.92
ln GDP p.c. 2.79 0.64 4.26 0.86
EMPLOYMENT RATE % 54.34 38.40 72.00 6,87
INFRASTRUCTURE % 79.96 45.96 100.0 13.81
7
4. Results
The estimation method was fixed effect in panel data regression and it was chosen because it
accommodates different starting conditions for development of modal shares in different countries.
The analysis was divided into separate estimations of modal shares in the freight and passenger
sectors. Promotion of competition is the main advantage of vertically separated structures, and
therefore there were two specifications in each sector with and without cross term of vertical
separation and competition entry (VS x CE). This should control whether there is a significant
difference between competition effects in vertical separated and vertical integrated structures. As
for horizontal separation, the total effect of horizontal separation (HS) on the modal shares was
estimated. Following, it was differentiated between cases of horizontal separation with and without
subsequent privatisation of the freight operator in order to separate the effects of horizontal
separation and privatisation.
Table 3 Fixed Effects Estimation Results on Railway’s Modal Shares.
MODAL SHARE
FREIGHT
-------------------------------
(1) (2)
MODAL SHARE
PASSENGER
-----------------------------------
(3) (4)
Const 58.90*** 59.68*** 7.78* 8.34*
VERTICAL SEPARATION -3.10*
(1.74)
-1.18
(1.64)
-1.59**
(0.75)
-1.36**
(0.60)COMPETITION ENTRY -1.70*
(0.98)
-0.39
(1.25)
-0.53
(0.63)
-0.37
(0.67)Cross term VS x CE -3.46**
(1.49)
-0.67
(0.98)HORIZONTAL SEPARATION 2.62*
(1.42)
0.30
(0.56)HS with privatization 3.41**
(1.54)
0.93
)HS without privatization 1.88
(2.21)
-0.72
(1.44)WEST*TREND 0.31***
(0.12)
0.30***
(0.11)
0.18***
(0.04)
0.17***
(0.04)EAST*TREND -0.86***
(0.23)
-0.86***
(0.23)
0.04
(0.09)
0.04
(0.10)ln GDP_pc -13.67***
(3.58)
-14.22***
(3.06)
-6.91***
(1.94)
-6.96***
(1.89)EMPLOYMENT RATE 0.24**
(0.12)
0.23**
(0.10)INFRASTRUCTURE 0.08
(0.07)
0.08
(0.07)
0.06*
(0.03)
0.06*
(0.03)R2
(within) 0.75 0.76 0.55 0.57
# observation 513 513 513 513
# countries 27 27 27 27
* significant at 10 % level ** significant at 5 % level *** significant at 1 % level (based on robust standard errors)
The principal result is that vertical separation and competition entry do not increase modal shares of
railways. The impact of vertical separation was negative in the passenger sector and insignificant in
freight. The impact of competition entry was insignificant in passenger and weakly negative in
freight. Even controlling for cross effects did not change these results. Why do vertical separation
and more intensive competition not lead to higher modal shares? The reasons may be different in
each sector. The freight sector consists of the full train market and wagonload market. Higher
efficiency induced by competition entry can lower prices and stimulate output in full train traffic;
however, at the same time, it can stimulate further decline of wagonload traffic with total negative
impact on modal share in freight. The competition entry in the passenger sector was mainly in the
form of competition for the market. If public authorities are not willing to use competitive tendering
to increase the total scope and frequency of services, it will not lead to an increase of modal shares.
8
On the other hand, horizontal separation is a more promising strategy in increasing modal share of
railways, especially in the freight sector. The separation of freight and passenger operation of the
incumbent eliminates internal cross-subsidies with positive impact on railway’s efficiency and
freight’s modal shares. Controlling for cases with/without subsequent privatisations, the freight
privatisation is the key factor in stimulating rail market shares. The new owners of sold freight
divisions were very often rail incumbents from another European country (DB in the case of the
Danish and Dutch cargo; OBB in the case of Hungarian cargo; and Swedish Green cargo in the case of
the Norwegian freight). But it seems that privatisation into the hands of publicly owned foreign
operator have beneficial effects, probably because they are under less pressure from domestic
authorities to pursue other goals than economic efficiency.
From control variables, the effect of ln GDP p.c. is negative and strongly significant. Higher economic
levels transform into lower usage of rail because of higher car ownership and more service oriented
economy. Also, countries with high rates of economic growth have a higher frequency of structural
changes. These changes are not prospective for railways that are bound by their expensive and
inflexible infrastructure which can only hardly accommodate new spatial developments of housing,
mobility, production, and trade. The infrastructure control variable was significant only in the
passenger sector, probably because of its crude construction, which was length of rail lines to the
sum of length of rail lines and road highways. An indicator measuring quality of infrastructure
differentiating between countries with competitive and neglected rail infrastructure would probably
be more appropriate. Data were lacking for such an indicator, and in future research it could be
possibly replaced by an indicator measuring level of infrastructure investment and/or subsidies. The
control variable employment rate was positive and significant in the passenger sector. It can be
inferred that higher employment in the economy stimulates more rail commuting.
There are clearly differing trends in the development of rail modal shares between Western and
Eastern European countries. There is a significantly positive trend in both freight and passenger
sectors for the West, and negative in freight for the East. Western European countries are richer;
they are able to allocate sufficient funds to infrastructure investment (high-speed rail, dedicated
freight corridors) and to financing public service obligations. Their governments and public opinion
understand that a functioning railway system has to be supported by significant government
subsidies. In Eastern Europe, though, such stable financing is lacking, infrastructure is in poor
condition, and the finances of the national incumbent are in long-term decline. Therefore, vertical
separation and competition entry in these countries may have adverse effects on modal shares
because new competition is attacking the most profitable of the incumbent’s operations and without
sufficient public grants, less attractive segments of rail markets are neglected (wagonload traffic,
regional traffic, infrastructure investment). The decline of modal shares in Eastern European
countries is further stimulated by the fact that postcommunistic countries have high rates of
structural changes in the economy, with many vanishing companies and many new enterprises
established on brand new locations. These new establishments are close to road, and rail with its
inflexible infrastructure can hardly compete. It is a paradox that Eastern European countries have
very high rates of growth in the total transport market. In the period 2000–2011, the total transport
freight market grew in the East by 75% (the West saw a decline of 1%), and in passenger market it
grew by 24% in the East and only by 12% in the West (European Commission, 2012). However,
railways in the East were unable to participate in this growth and it was captured almost entirely by
road transport, which resulted in drop of market shares for railways.
9
Graph 1: Change in rail freight modal shares (percentage points) 1995–2013
Graph 2: Change in rail passenger modal shares (percentage points) 1995–2013
-60,0
-50,0
-40,0
-30,0
-20,0
-10,0
0,0
10,0
20,0
BG*
PL*
RO*
EE*
LT*
LV*
CZ*
SI*
HU*
SK*
IE
NO
LU
FR
ES
PT
GR
SE
FI
IT
NL
BE
DE
DK
CH
UK
AT
-25,0
-20,0
-15,0
-10,0
-5,0
0,0
5,0
10,0
RO*
PL*
BG*
LV*
LT*
SK*
EE*
PT
CZ*
HU*
GR
IE
LU
SI*
FI
NO
IT
AT
DE
ES
BE
FR
NL
DK
SE
CH
UK
10
The disaggregated analysis shows that modal shares of rail went down in every single Eastern
European country, both in passenger and freight. Apart from Eastern Europe, the disappointing
development in the progress of rail modal shares could also be observed in Greece and Portugal for
passenger and in Ireland, Luxembourg, Spain, and Portugal in freight. This may support the
hypothesis (Nash 2013) that good results of European reforms may be concentrated in the
geographic core of the EU; however, the results are much weaker on the periphery. Core countries of
the EU can better utilise the benefits of vertical separation and competition entry whereas periphery
countries may be left only with higher transaction costs. This may support conclusions of many
authors (Finger 2014, Friebel et al. 2007) that say that there is no one solution for all countries, and
those reforms should be more targeted to the needs of individual countries.
It is possible that the regression analysis could be influenced by some outliers, especially by Romania
in the passenger transport sector and by Bulgaria and Poland in the freight transport sector. These
countries’ trends were included in additional regressions in order to control for these outliers and
the basic results of the analysis were not changed. However, there is a point at which the presented
results could be influenced by idiosyncratic factors especially when the number of countries is small.
The group of countries that made horizontal separation but not freight privatisation consists of only
three countries, all of them in Eastern Europe, and therefore more cases would be helpful for
identifying more robust relationships.
The regression analysis could be enhanced by including more control variables that have not been
included due to lack of complete and consistent data. Especially helpful and promising would be
inclusion of variables controlling for level of subsidies, level of prices, and quality of infrastructure.
Further possible improvement of this analysis could be more detailed construction of a competition
entry variable. Mizutani et al. (2015) constructed a composite indicator for competition entry. The
other possibility would be to create more competition dummies according to the type of competition
entry. The competition entry can occur by open access, competitive tendering, or direct awarding. It
would be interesting to control for different types of competition entry, because there is some
evidence that recent full-scale open access competition entries may actually increase ridership
significantly (Cascetta-Coppola 2014, Tomeš et al. 2016).
5. Discussion
The vertical separation and competition entry in the railway industry may be a way to create more
open and integrated railway markets in Europe; however, according to regression results, these
reforms are not increasing modal shares of railways on the transport market. The possible reason for
this is that they probably do not target the most important factors causing the long-term decline of
railways in Europe. The highest impact on modal shares had GDP per capita with strong negative
effect (especially in freight). This effect suggests that long-term structural trends in the railway
industry may be hard to reverse because higher levels of income per capita lead to shifts from a
product-based economy to a service economy and to a higher preference of individual transport. The
main advantage of vertical separation (Deville-Verduyn 2012, Kurosaki 2008) is the support of
effective functioning of competition. However, the effect of competition on modal share of railways
seems to be insignificant, too. Therefore, this supports the opinions that stress disadvantages of
vertical separation such as increased transaction costs and misalignment of incentives (Nash et al.
11
2014, Pittman et al. 2007, Pittman 2005). There is substantial evidence that vertically integrated
structures without significant competition entry can perform reasonably well both in terms of
efficiency and output as a result of strong intermodal competition (Desmaris 2014, Seabright et al.
2003). The main advantage of such integrated structures lies in the better timetabling, coordination
of investment, and long-term planning. There are also better incentives to coordinate investment
and operational needs of the whole railway system. Moreover, in vertically integrated structures, it is
also possible to ensure the non-discriminatory entry of competitive operators.
Based on regression results, horizontal separation generates better economic results than vertical
separation and/or competition entry. What are the possible reasons? Basic economic reasoning
would suggest that common operation of passenger and freight operations should lead to cost
synergies and better outcomes than in the case of horizontally separated units. But the situation is
not so simple. The operation of passenger rail transport is unprofitable in almost all developed
countries and is a heavily subsidised from public budgets. The politicians are willing to subsidise rail
transport but they want to see cheap and reliable passenger transport, because it can be sold to
voters as a result of successful economic policy. There is a risk that in the decision making process of
horizontally integrated structures the needs of passenger transport will dominate over the needs of
freight transport. The preference of passenger transport in European railways can be observed in
many aspects, starting with prioritising and allocating infrastructure capacity and attractive timetable
slots to passenger trains, massive investment into passenger HSR lines in Western Europe, and crossfinancing
of passenger transport losses from freight profits in Eastern Europe.
Under such arrangements, horizontal separation of passenger and freight operations of the
incumbent can bring about many advantages. In horizontally separated structures, the freight
transport is no longer dominated by the needs of passenger transport and it could be more freely
developed due to higher managerial and financial independence. These arguments are strengthened,
when horizontal separation is supported by privatisation. Even if the privatisation is into hands of
another European incumbent, it may be very helpful. The strong owner from a foreign country is not
so much connected to domestic political representation and labour unions and can develop its
freight division without substantial concessions, with better results for efficiency and demand. The
horizontal separation and privatisation of freight can have positive effects on passenger operations,
too. The impossibility of cross-financing pushes for clarification of public service obligation and calls
for their stable long-term financing.
The conclusion that horizontal separation of the railway incumbent may be a more promising reform
strategy seems to be supported also by the experience of other non-European countries. The
horizontal separation used to be part of some successful railway reforms. The railway reforms in
Japan, United States, and Canada (Gómez-Ibáñez - de Rus, 2006) all included horizontal separation of
passenger and freight operations and these reforms can be considered as a success. The principal
advantage of horizontal separation is the fact that it enables clear division of commercial and public
service activities and each division can fully concentrate on its core business. Also the privatisation of
rail freight operations (unlike passengers and infrastructure) usually brings about successful results
worldwide.
Postcommunistic Eastern Europe is in a special position for the assessment of reforms. The railways
of this region are in chronic financial deficit, infrastructure is falling apart and advantages of rail
12
transport are not fully utilised. The European reforms in these countries were usually understood as
the way to solve railway problems of falling outputs and rising debts. However, it is not always
appreciated that also necessary is an allocation of sufficient funds to infrastructure and public service
obligations financing. These funds are lacking in these countries and even an inflow of European
structural funds has not been able to change the situation. Without sufficient public funding, it is not
surprising that vertical separation and competition entry are further weakening shaky domestic
railway incumbents with adverse effects on modal shares of railways. Moreover, many Eastern
European countries are geographically and economically small and it is questionable whether they
are big enough to host competition. Also their share of freight in the total railway system is higher
than in their western counterparts and therefore horizontal separation and privatisation may be an
especially promising strategy because they transfer the ownership of freight division into the hands
of a more experienced and capitally stronger owner. The infrastructure and passenger operations are
in need of stable government financing. The governmental support for railways is crucial and vertical
separation and competition entry alone cannot increase market shares of railways.
6. Conclusions
There is no proof that principal European reforms (vertical separation and competition entry)
increase modal shares of European railways. The impact of vertical separation was negative in the
passenger sector and insignificant in freight. The impact of competition entry was insignificant in the
passenger sector and weakly negative in freight. A more promising strategy is horizontal separation,
especially when followed by privatisation of freight operations. This policy eliminates internal crosssubsidies,
gives higher independence to freight, and lessens political pressures with a positive impact
on freight’s modal shares. There are also striking differences between trend developments in
Western and Eastern European countries. There is a significantly positive trend in both the freight
and passenger sectors for Western countries, and a negative trend in freight for Eastern countries.
Many Eastern European countries have small internal markets, low infrastructure quality, lack of
public funds, dynamic structural changes and weak regulation. The vertical separation and
competition entry do little to target these problems and other reform packages may be more
suitable to stabilise market shares of railways in these countries. Such reform packages could include
horizontal separation and privatisation for freight and long-term commitment to stable public
financing for infrastructure and passenger public service obligations.
13
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