Historically, rail transport systems in Europe have been running as per national standards through the monopolistic and vertically integrated state owned operators. Most of the railway network in Europe is designed for different technical and operational standards of the member states, which makes it impossible or expensive for rail transport across borders. With a vision of achieving a single European railway network, in 1991, the European commission adopted a policy of revitalizing the railway sector to harmonize the technical and operational standards across the member states. This policy promotes a single set of Technical Specifications for Interoperability (TSIs)todefine common railway system architectureanda common approach to railway safety management. The long-term objective of such a policy is to open up the rail passenger and freight market for competition and promote the rail transport as sustainable means of transportation. The future of the rail supply industry in Europe is linked to the creation of sustainable transport system, which can only be achieved by increasing the competition in the industry to provide cost effective solutions. Harmonization of the railway networks in Europe will be one of the important driving forces in shaping the rail supply industry in Europe.
This paper analyses the current structure of the German rail supply industry and how the industry may evolve given the current drive for interoperability through harmonization of standards and technologies. The policies of interoperability were conceived during the early 90s, but the impact of such policies are yet to be seen due to the lack of co-ordination between the manufactures, the regulatory mechanism, insufficient funding and the political will. Though the rail supply industry of Europe is in favour of achieving the common technical standards, the resulting market dynamics due to the common European market remains unanswered.
The purpose of this paper is to analyse the effects of harmonization of railway infrastructure in Europe on the rail supply industry in Europe with focus on Germany. Various directives and regulations of European commission have set off a series of dramatic changes in the European railway sector. The liberalization process has seen unbundling of the vertically integrated state owned operators. The directive of interoperability is enforcing the member states to transition from the existing signalling systems to common rail traffic management systems across Europe. Besides the control systems, there is significant thrust by the European commission to harmonize the technical and operational standards of the other components of the railway infrastructure like the tracks, electrification, power supply substations etc. These would render common product characteristics across the infrastructure segments with some exceptions in the stations and tunnel construction as the nature of these requirements varies depending on the local needs and resource restrictions and also these components doesn’t contribute to the desired interoperability. Thus the harmonization process would increase the size of the accessible market for companies in rail supply industry. Hence harmonization is bound to have a significant effect on how the industry is structured and the competition within the industry.
The German railway infrastructure is the key component of the entire railway transport industry, where in the state owned operator and Logistics Company, Deutsche Bahn AG owns the entire infrastructure. Deutsche Bahn AG (DB) has a monopoly on the upstream of the value chain of German railway industry and at the same time DB exists as a monopsony at the downstream of the value chain. Thus, DB is a single buyer of the infrastructure services and products with very high bargaining power over their suppliers. The processes of harmonization and liberalization in the European railway sector have been shaping the complete value chain of industry. The increasing competition among the railway operator has brought in many benefits to the consumers and also to all other stakeholders involved in the industry.
The German rail supply industry is highly fragmented with small to large companies involved in different segments of infrastructure services. The Fragmented nature of the industry has given rise to aggressive competition in the industry with many large players trying to claim their stakes in the market. The presence of only a single buyer, Deutsche Bahn, has defined the competition as price oriented, with many infrastructure companies trying to innovate on the technology and process to provide the infrastructure as per the national standards and at lower costs. This paper will discuss the benefits of the standardization in the industry and would also discuss how the rail supply industry in Germany may restructure to the changing market dynamics once the single European market is in place for the railway sector.
Chapter 2 of this paper presents entire value chain of the German railway transport industry. This will be followed by the description of the key stake holders of the industry and the interaction mechanism between them. Further the analysis will focus on the railway infrastructure part of the value chain. The analysis in this section will try to evaluate the forces that drive the industry and the bargaining power of the decision makers.
Chapter 3 of the document discusses process of harmonization through the EU directives of interoperability and safety. The analysis here will try to explain the various regulation, time frames and governing bodies involved in the process. The discussion will also highlight the progress of harmonization and the issues and obstacles to achieving the desired targets of interoperability.
Chapter 4 will discuss the benefits of harmonization to the industry and chart out the current strategic environment of the German rail supply industry. This section will include a note on the key causal factors and actors influencing harmonization and will develop and discuss few scenarios as to how the industry may evolve post harmonization of the railway infrastructure in Europe in general and Germany in particular. The analysis in this section will draw inferences from the views of some opinion leaders and academics who are involved with the industry.
Finally the conclusions of the study will be presented in the chapter 5 which will summarize the findings and hypothesis of chapters 3 and 4 respectively. The conclusion will highlight the limitations of this research paper and will also suggest further research options concerning the rail supply industry.
2. The Value chain of German Railway Industry
2.1. Over view of value chain
The German railway industry is composed of various players along the value chain. A brief overview of the Railway industry value chain is as shown the figure1.
The first link in the value chain of German railway industry is the infrastructure construction, which includes the building and maintaining various infrastructure components that support the railway network. The infrastructure components can be track, electrification, power supply substation, electro mechanical works, signalling and command control, railway stations, maintenance and upgrade of tracks and public announcement, displays, ticketing devices etc. Many private companies as well as the subsidiaries of DB are active in this part of the value chain.
The second component of the value chain is the infrastructure management, which is driven by many stake holders, but is controlled mainly by DB Netze, which owns the complete mainline and high speed railway network in Germany. The infrastructure for the urban transport is usually owned by the urban transport operators. The governing bodies like Federal Railway Authority of Germany and the Public Transport Authorities of the various states are the key decision makers for infrastructure management.
The most important component of the value chain is the network operation and logistics. This segment of the industry caters to the rail transport market, by providing services to the end customers. The main players in this segment are the Deutsche Bahn, which is a monopoly with around 85% of market share in Germany. The liberalization process has led to the advent of few private operators, who lease the infrastructure from the DB Netze. The urban transport operators are active players in the metro/ tram segment of the railway transport market.
The last link of the value chain includes the end customers, which is constituted of both the passenger and freight transport market. Customers are the central focus for the various reforms in the industry as the growth is dependent on the ability of the industry to provide the transport services at affordable prices in comparison with other alternatives like road and air transport. The details of different segments of the rail transport market and the related statistics are provided in Appendix 1.
As seen from the figure 1, the intensity of the competition increases as we move up the value chain from the network operators to the infrastructure suppliers. The process of liberalization has induced competition amongst the operators, but the very high sunk costs involved, have erected a strong barrier for new entrants. Further up the value chain, there are many players involved in infrastructure management and infrastructure construction due to the attractive market size. Though the liberalization process has contributed to the opening up of this market, historically many small and big players are involved in this part of the value chain leading to an increased competition.
2.2. Key players of German railway infrastructure management
To understand the rail infrastructure industry in Germany, It is essential to understand the various stakeholders in the industry and their contribution and importance in driving the market dynamics. Figure 2 is a schematic of the industry structure with a focus on infrastructure management.
2.2.1. European Commission
European Commission is a governing body which is one of the important demand drivers for the infrastructure market. The federal and local governments of the member states in the European Union are obligated to adhere to the regulations and policies devised by European Commission. European commission reviews and responds to the transportation needs of the member states of EU, which has the construction of modern, safe and integrated railway network in Europe as priority to fuel the growth of intra and international trade among the EU members. Hence, the reformatory regulations and their periodic reviews lie within the gamut of European commission’s functions.
European Commission has set up the European Railway Agency (ERA) to oversee the creation of integrated European railway network by enforcing and implementing safety and interoperability through standardizations and harmonization. ERA works as a coordinating body between the railway sector companies, national authorities, European Commission and other concerned parties. ERA’s main task is to develop common technical standards and approaches for the European railway systems and infrastructure. ERA is also the system authority for the implementation of the European Rail Traffic Management Systems (ERTMS) project.
Source: Adapted from the article separation of operators from infrastructure
The German government oversees the overall transport sector through the Federal ministry for Transport, Building and Urban affairs. The Federal Railway Authority (Eisenbahn Bundesamt: EBA) is the supervisory authority for 30 railroad traffic operators and for 5 infrastructure companies – mainly for the Deutsche Bahn AG. The functions of EBA include issuing licenses for infrastructure companies, providing investments and funding for infrastructure projects, making railroad access discrimination free, facilitates innovation within the accepted safety standards, ensures value creation for customers and also checks for unfair competitive practices.
The supervisory authority of the urban transport lies with the 31 Public Transport Authorities (PTA) in the different federal states of Germany. The duties of the PTA are similar to those of EBA, but within the context of urban transport. PTAs work in conjunction with EBA for the infrastructure planning and funding activities at the local level.
The political decision makers own the responsibility to define the legislative framework to fully integrate the European railways, in terms of enhanced market access, interoperability and safety rules. A sound legislative framework that works in tandem with the EU commission is expected to accelerate the harmonization process.
2.2.3. Network Operators/ Owners
In Germany most of the mainline and regional rail networks infrastructure are owned and operated by the DB Netze AG , DB Regio Netz Infrastruktur GmbH, DB Station & Service AG, DB Railionand the DB reise und touristik , who are all directly owned by the Federal Government.
The DB Netze AG is responsible for track installations, coordination of network usage time tables and pricing. The DB Station & Service AG operates, maintains and develops the passenger stations and also ensures the provision of services to travellers and railway undertakings. The DB Regio Netz Infrastruktur GmbH is responsible for local and regional traffic operation and infrastructure management. DB Railion is responsible for operation of freight traffic and DB Reise und touristik is responsible for long distance traffic operation. Besides these many new private traffic operators like Veolia Transportation, TX logistics, AKN Eisenbahn AG, Ostdeutsche Eisenbahn GmbH, S-Bahn Hamburg GmbH, etc have entered the German railway market.
Railway operators are responsible for improving the quality of services in terms of information accessibility, customer comfort, reservation and ticketing, network accessibility, availability of services, punctuality and reliability. The infrastructure managers or the network owners are responsible for optimising the capacity utilization of the available network infrastructure; ensure fair and non discriminatory access to network for all railway undertakings and also to ensure operational efficiency and safety.
2.2.4. Infrastructure providers
Infrastructure providers are the companies that supply the railway transport industry with various infrastructure services like the rolling stock, track, electrification, maintenance etc. The infrastructure providers can also be termed as rail supply industry focused on the infrastructure development as per the standards and regulations set by the other stakeholders listed above.
The rail supply industry is responsible for organising themselves to provide the ready to use equipment and infrastructure needed by the railway undertakings and infrastructure managers. The research and development of new products to promote the process of harmonization depends on the capabilities of rail supply industry.
2.2.5. Associations and Organizations
Many organizations and agencies of the railway industry in Europe work closely with the EU and the national governments of the member states to support and promote the rail transport by setting technical standards and promoting fair competitive practices in the industry. Some of the important associations and agencies that are relevant to the rail supply industry are UNIFE, ERRAC, UITP, UIC, CER, EFRTC etc. Details of these associations are provided in the Appendix 2.
2.3. Overview of German rail supply market
Worldwide, total rail supply market volume exceeds € 120 bn. Of which, the size of the rail supply market in Germany is estimated to be around € 6.3 bn. Based on the railway network type and usage characteristics, the rail supply markets can be further classified as High speed and very high-speed lines, conventional and regional rail lines and the urban rail transport networks. While Deutsche Bahn is the single customer in the high speed and very high speed lines and the conventional and regional lines segments, the different public transport authorities are the customers in the urban rail infrastructure market.
- High speed and very high-speed lines: These are usually the rail networks that spans across the borders to enable faster connectivity across Europe. The high speed lines between the important cities within the country also fall into this category, as they have the future potential to be integrated with cross border traffic. In Germany, this segment is currently small in size and is expected to grow especially due to the increasing need of cross border traffic.
- Conventional and regional lines: These are usually referred to as main lines and consist of the rail networks that connect the different regions with in a country. So, the entire regional rail transport networks that support the intra train transport with in a country and the freight transport networks can be grouped into this category. Currently this segment is built and operated as per the national standards set by the Federal railway authority and the volume of this network is very huge and is highly heterogeneous and is also operationally underutilised.
- Urban rail networks: This market segment consists of metros and the commuter/sub urban rail networks which support the public transport with in a city. The product requirements within this segment can vary depending on the local geographical characteristics and funds availability. This segment is mostly independent of and incompatible with the other segments and so provides many avenues of differentiation for the companies that are active in this segment. As of now there are no regulations enforcing harmonization of these networks.
2.4. Structure of rail supply industry in Germany
The rail supply industry in Germany is classified into four segments namely; Rolling stock, Infrastructure, Signalling and control system and services. Figure 3 represents a schematic of the different segments of the German rail supply industry.
- Rolling stock: The products in this segment are characterized by all the vehicles that run on the railways like locomotives, railroad cars, coaches and wagons. Due to the high capital investments, this segment usually consists of large companies like Bombardier, Siemens and Alstom.
- Infrastructure: This segment is characterized by the infrastructure components like tracks, electrification and stations. Many companies with diversified products serve in one or more of the components of this segment.
- Signalling and control systems: The infrastructure components like the track side signal installations, on board control equipment, control stations etc are grouped as signalling and control systems.
- Services: This segment includes the service and maintenance for all the other segments. This segment also comprises the project management and turnkey solutions. In Germany most of the maintenance and project management is carried out by the subsidiaries of Deutsche Bahn.
2.5. Segmentation of the German rail supply market
Putting the rail supply market and the rail supply industry segmentation together will provide a complete segmentation matrix, which will help in the better understanding and analysis of the market. The segmentation matrix is provided in figure 4.
High Speed and very high speed lines
Conventional and regional lines
Urban rail transport lines
Signalling and control systems
Figure 4: German rail supply Market Segmentation matrix
In the above matrix, the shaded regions indicate an overlap of product and service similarities in the different infrastructure components and the market segments of the railway industry.
For a successful, larger and integrated Europe, the availability of efficient transport systems is essential for supporting sustainable economic growth and social development. Passenger and freight transportation by rail is a potentially effective instrument to combat congestion, pollution, global warming and traffic accidents. These negative externalities undermine the capability and efficiency of European economy and the health of future generations.
The growing European Union and the globalization of the world economy have necessitated an international transport market, to support the outpacing economic growth. Today, the rail sector faces an ever increasing demand of accommodating higher transport volumes, a result of transport growth, and of policies favouring competition in the sector. Rail transport in Europe is a future-oriented industry, striving to offer attractive, affordable, safe, clean, competitive and reliable transport mode.
Harmonization is the process of standardization of infrastructure components like types of track gauges, different types of power supply, speed control systems, train safety systems and technologies as well as the job profiles of drivers. The objective of harmonization is to achieve interoperability between the heterogeneous railway networks of the member states with in EU. Harmonizing products and technologies through innovation is a necessity for the rail supply industry to deploy its potential, and for its stakeholders to deliver cost-effective services for intermediate and final clients.
3.1. Need for harmonization
Prior to the formation of European Union, the railway systems in Europe were run at the national level and were managed and operated by vertically integrated state owned companies. These railway systems were designed under different national operational rules, policies and standards. This resulted in the lack of interoperability in the railway transport sector which hampered the goal of growth in European economy through increased trade activities amongst the member states. The EU thus envisaged a goal of unified railway transport network across the EU member states to promote the trade and thus foster the economy. This goal transformed into a number of directives and regulations to achieve a Trans European network.
3.2. Components of harmonization
To transition from the heterogeneous railway networks to a homogenised railway transport infrastructure across Europe, different components of harmonisations were evaluated by the European commission. European commission defined the homologation process in terms of interoperability, safety and signalling systems.
Interoperability of the rail systems renders a safe and uninterrupted movement of trains, while accomplishing the required and specified levels of performance. Interoperability rests on all the technical, operational and regulatory conditions that must be met in order to satisfy the essential requirements.
Interoperability has been mandated by several EU directives. The first one is the Directive 96/48/EC, which was passed in 1996 and is only concerned with the interoperability of the Trans- European high speed rail system. The second one is the Directive 2001/16/EC, which applies interoperability to lines within the trans-European transport network and other infrastructure facilities. Both these directives were later modified by the directive 2004/50/EC along with the corrigendum for the former directives. Most recently the directive 2008/57/EC was passed to include the community railway systems within the scope of interoperability. A consolidated history of regulatory framework evolution concerning interoperability in European railways is provided as Appendix 3.
To overcome the technical fragmentation of rail networks, the interoperability directives provided that the Community legislation is gradually establishing mandatory so called Technical Specifications for Interoperability, commonly referred to as TSIs. The European Railway Agency owns the responsibility to draw up and revise the TSIs, on the basis of inputs provided by the member states and other stakeholders of the railway sector.
Several subsystem constituents of interoperability of railway transport for both conventional and high speed lines are as below:
- Infrastructure( track works, tunnels, bridges and stations) and energy (electrification system)
- Operation and telematic application for passengers: related equipment and procedures to enable a coherent operation of different subsystems and also the requirements of professional qualification for the skilled labour involved in operations.
- Rolling stock: vehicle dynamics, superstructure, on board command and control system equipment, current-collection devices, traction units, energy conversion units, braking, coupling and running gear and suspension, doors, man/machine interfaces, passive or active safety devices.
- Maintenance: procedures and processes, technical documentation, related equipments, logistics centres for maintenance work.
Safety is one of the important components of the railway systems which is highly regulated at both national and EU level. Safety is one of the prime concerns of the customers of rail transport and hence there is a special focus on the safety standards which have to be designed in line with the interoperability directives. Hence common safety standards, practices and targets have to complement interoperability to successfully achieve the desired homologation of the trans-European railway network. The European commission issued many directives to mandate the safety methods to support the harmonization process. These directives include Directive 2004/49/EC, Directive 2007/59/EC, the directive on certification of train drivers and other relevant EU legislation.
ERA acts as a supporting organization to the European commission to develop the further implementation plans for the EU directives by networking with the national bodies of the member states. ERA has structured four different business sectors concerning railway safety and provides central support to the stakeholders involved in the complete process from formulation of regulation to implementation and periodic reviews. The four different segments are:
- Safety Assessment: developing common safety methods for risk evaluation and assessment and common safety targets according to articles 6 and 7 of the Directive 2004/49/EC. This unit assists each member state to define their safety targets and develop a methodology for calculating and assessing the achievement of those targets. This unit also collaborates to define safety requirements for TSIs and to support technical opinions to be given to European commission.
- Safety Certification: define, develop and evaluate implementation of common safety methods for certification of railway undertakings as well as certification for train drivers and authorization of infrastructure managers. The objective of this unit includes proposing a migration strategy towards a single Community Safety certificate.
- Safety Reporting: Monitors and analyzes the development of safety on Europe’s railways and disseminates information, reports biennially on the safety performance of railways within the European Union. Functions also include developing and maintaining public databases of safety related documents such as safety certificates, licenses, national safety rules, investigation reports and indicators. Responsibility of coordinating with the national investigation bodies concerning safety and facilitating information exchange between them lies with this unit
- Safety Regulation: Functions include, validating the notification of national safety rules, register and notify the national safety rules accepted by the commission, analyze the way in which the national safety rules are published, maintain the communication protocol between the member states and the responsible organizations for railway regulation.
The command control and signalling systems is an important instrument that should also be harmonised to support the much required interoperability of the trans-European railway network. ERTMS is considered to be a first major step in fostering the creation of single European railway market. ERTMS would also address the increasing costs of operation due to the incompatible and obsolete signalling systems across Europe. Currently around 20 signalling systems are in place across Europe, most of which are adopted by the network operators of the member countries as stipulated by national standards. These different signal systems impose a restriction on the rail transport across the borders of the member states of EU, as the costs of incorporating compatibility with the international networks increases. A common standards and systems for intra as well as international rail traffic management in the EU member countries would enhance the attractiveness of rail transport making it affordable and environment friendly.
The idea of common traffic management systems for European railways was conceived during the late 1980s, but the process of drawing up technical specification was started during 1998, following the interoperability directive of 1996. The ERTMS specification was approved by EU in 2000, followed by which, between 2005 and 2008, the implementations plans were charted out for the six freight corridors across Europe and the memorandum of understanding was signed between the EU, member states and the other railway stakeholders. The implementation plan was devised considering the national implementation plans of the member states, which was then consolidated taking into consideration the priority for the freight corridors connecting different member states. The proposed completion of implementation of ERTMS across Europe is by the end of 2020. UNIFE and a consortium of railway signal equipment manufacturers are working closely with the European commission and the infrastructure managers of member companies for the development and implementation of cost effective technical solutions concerning ERTMS implementation.
3.3. Process of Harmonization
For successful harmonization of European railways, close cooperation of the institutional bodies, political representations and also commitment of the railway operators and rail supply industry are required. The harmonization and standardization process to achieve European railway interoperability can be grouped into two stages:
3.3.1. Directives to Standards
The directives of the European Commission are transformed into the TSIs by ERA, which are then validated against the standards requirement at the national and the EU level by relevant standardization organization like CEN, CENELEC and ETSI. At the end of this stage a detailed documentation of the standards, while adopting the TSIs are produced. Figure 5 provides and illustration of this process.
Source: Dealing with standardization in liberalized network industries by Dr Marc Laperrouza
3.3.2. Standards to Products
Once the directives are turned into standards, the next challenge is to transform the standards into the products. The standards are again reviewed by the ERA and then passed over to the European Union for the legal process. Once the compliance with legal process is established, the standar
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