Wednesday, March 2, 2016

As One Rail Freight Behemoth Rebrands, European Track Borne Cargo Attracts Criticism

Ongoing Flaunting of EU Regulations Under Attack
Shipping News Feature
EUROPE – As the UK prepares to vote in June on whether it wishes to leave the European Union there is news regarding rail freight which perhaps illustrates some of the divisions which exist between member countries when individual organisations seem to take a very different view on the regulations which they are supposed to conform to. Deutsche Bahn has rebranded its rail freight business, renaming DB Schenker Rail AG to DB Cargo AG, using the DB logo going forward but is still reaping a whirlwind of criticism over its alleged flaunting of the rules of operation.

First that name change, Deutsche Bahn's rail business, specifically its passenger and rail freight transport business units, were combined in the new Traffic and Transport Division in August 2015. Going forward, both passenger transport and rail freight transport will use the DB logo, which will serve as a visual reflection of that partnership. DB also hopes that the logo change will also make its brand profile more straightforward and unite all its rail activities under a single brand.

Deutsche Bahn also announced a structural change with the rail and logistics activities having been separated in organisational terms. Global logistics will use ‘DB Schenker’ going forward, while rail freight transport will use ‘DB Cargo’. It is over two years since we published the open letter from a cornucopia of stakeholders to Members of the Transport and Tourism Committee of the European Parliament accusing DB, and others, of unfair transferral of funds between different elements of the group to sustain loss making areas and therefore giving a financial advantage which could not be matched by competitors due to the illegal subsidy.

Last month Lord Tony Berkeley again spoke out frankly giving his view of the current state of the European rail freight market. As a Board Member of the European Rail Freight Association and Chairman of the UK Rail Freight Group, Tony Berkeley’s statement is a comprehensive attack on what he considers is an affront to EU rules. Here we publish an abridged version of his personal opinion:

“Five years ago the Network Rail Board was attacked for giving its senior managers over 100% bonuses even though train performance was poor and people were being killed on level crossings due to the company ‘hiding’ incriminating safety reports. We argued that such levels of bonuses were not appropriate either because of the company’s performance or because, even though it was not technically government owned, it received over £4 billion of government funding a year and could not, in practice, go into liquidation with the managers at risk of losing their jobs.

” Five years on, the UK Government listened and put NR onto the government balance sheet, took control and now managers get a much lower bonus for having achieved a greatly improved quality of network, more capacity and investment, and with train performance greatly improved.

”DB is also a government owned monopoly but is even more generous with its bonuses to senior management than Network Rail ever was. According to the German press, the bonuses of DB’s senior management tripled from €2.6 to €6.8 million in 2014. DB CEO Rudige Grűbe earns a total of €2.6 million, of which €0.9 million represents the annual salary, giving a bonus of nearly 200% of base salary. One quarter of the bonuses are related to punctuality, at a time when there is serious public criticism of DB’s performance; freight arrivals on time are reported to be only 50%. So if the trains ran on time, Dr Grűbe’s bonus would be even higher!

”In spite of losing some regional franchises to newcomers (whilst preventing them from taking over rolling stock bought with public money), DB is resorting to desperate measures to hold on to its monopoly of the lucrative car train service between the holiday island of Sylt and the German mainland. It is attaching a ‘clapped out’ old passenger DMU to its car train services and having this passenger part section detach upon reaching the mainland and extend onwards to a small village located further inland called Bredstedt. Virtually nobody is using this extension, it is both slower and more expensive than the proper regional passenger trains that operate in parallel to it.

”Why is DB going through this costly farce? It is openly taking advantage of an archaic rule that states that, the further car train services extend to, the more slots that operator will receive. Initially, new entrant RDC won a judgement last year to gain the right to operate numerous car train services between Sylt and the mainland, competition that would likely bring down fares and improve service quality. But taking advantage of the archaic rule, DB has been able to greatly reduce the number of new RDC services by running its own empty trains, which only a monopoly could afford to do!

”In France, SNCF plays the same game of trying to keep out competition but with different ways of achieving their objective. SNCF now comprises three EPICs, which are companies that cannot go into liquidation. This is useful for SNCF Fret (part of the EPIC SNCF Mobilités) which has accumulated €4 billion losses in the last 10 years, and now needs recapitalising. There is an interesting precedent with La Poste, where the European Court of Justice ruled in April 2014 that the EPIC structure of La Poste was incompatible with the European internal market. The European Commission judged that the EPIC structure was similar to unlawful state aid. The same might well apply to SNCF Fret, if the French Government bails it out.

”More recently, comments in the French press quote the rail regulator ARAF expressing concern that SNCF has appointed one person to be in charge of rail security for both the Railway Undertaking SNCF and the infrastructure manager SNCF Reseau. In addition, the PDG (CEO) of SNCF Reseau resigned two weeks ago, apparently because of too much interference from SNCF EPIC in his company’s activities, and bad relations with the regions and the independent freight operators!

”Frequent concerns have already been voiced by ARAF regarding the compatibility of parts of the French reform with the existing EU principles established in legislation regarding financial transparency and independence of the infrastructure manager. Independent passenger and freight operators have serious concerns about the French government project to impose a social law (Décret Socle) requiring them to implement new working regulations very much less favourable than the existing UTP regulations used by the private rail sector. The reason is to hamper the competition in favour of SNCF.”

In December 2014 Centre on Regulation in Europe (CERRE) published a report into the development of rail freight in France which found that ‘in no other Western European country have traffic flows fallen back so much in just a few years’ time’ and which also highlights in France ‘the inability to realistically address competition and organisational changes in order to increase the system’s efficiency.’ Hardly a recommendation that the authorities are ready to embrace the promised opening of the market to more competition!

Tony Berkeley goes on to ask the obvious question, how much the infamous French rail reform, seeking to integrate track and train in one massive monopoly, has actually cost? Has the public budget stabilised, has the rail quality improved or will the high charges and bad service be of interest to French voters in future elections? It appears the French rail market is underperforming and constantly losing competitiveness to the detriment of customers, passengers and of course those others wishing to operate international trains to or through France.

Now at last it appears that the European Commission may be stirred into the sort of action it has showed such a zeal for in other areas of the logistics industry. It has recently announced action against Member States for not transposing the Recast Directive (Directive 2012/34/EU), which contains many basic market opening requirements, into national law. The Member States concerned are Germany, Luxembourg, Bulgaria, Czech Republic, Latvia, Romania and Greece.

Of course actions against member states, or indeed state controlled industries, rarely have the personal impact which can affect companies, particularly when shareholders are hit in the pocket. Nevertheless Berkeley has urged the Commission to ramp up their actions against those states who ignore the rules under the incoming 4th Railway Package, something specifically aimed at promoting more competition in the market. Meanwhile there has been an upturn of anti-competitive actions with SNCF selling cheaper tickets on its French Language website and facing accusations that it has obstructed the trade of other operators.

A case in point is multimodal operator Combiwest, now operating under Court protection having entered administration last month, amongst suggestions that the allocation of poor slots and generally sub-standard service caused the crisis in the company to some extent. The accusation is that SNCF Reseau used the ‘obstacles’ to protect Fret SNCF, its cargo carrying subsidiary.

In Austria the National Rail Company OBB, was apparently subjected to a dawn raid by sixty or so officials at the end of last year, a matter of some embarrassment for CEO Christian Kern, a keen supporter of degrading the rules appertaining to transfer of funds between those who control the tracks and the train operators. In Lithuania last year an investigation began after Lithuanian railway incumbent AB Lietuvos geležinkeliai closed the track between the country and Latvia, afterwards removing the rails, leaving it open to accusations of breaching EU antitrust rules and abusing its dominant market position.

As stated previously both Austria and Germany are currently under investigation for failing to comply with the separation of accounts and, as Britons consider their position with regard to continuation of membership of the EU, the perception of widespread double standards such as illustrated above will do little to enthuse any undecided voters.