Rail freight is set to play a larger role in the movement of goods in the UK and internationally; its use is steadily increasing, with the total volume of rail freight moved rising by three per cent year-on-year…
The question is, how can the Williams Review of rail help deliver continued freight growth? To support this work, FTA has recently submitted its five priority issues we would like the Review to address; summarised below.
Unlock rail capacity
FTA is calling for improvements to the way in which access to rail capacity is allocated. There are cases where new passenger services entering into contracts with public bodies are allocated paths that have previously been allocated to freight operators. This ‘double counting’ should end by providing better clarity to bidders on what paths are available.
There should also be a more effective way to resolve competing bids for capacity. The government should establish a policy that ‘best use’ must be made of the network. The regulator would then be tasked to develop a transparent methodology to deliver the policy, which looks not only at access charges and passenger revenue but broader economic and social issues: rail freight generated economic benefits for the UK of over £1.7 billion in 2016 and contributes more than £0.5 billion of externality benefits by reducing congestion, air pollution and road accidents.
Offer contractual flexibility
FTA is also calling for greater contractual flexibility in contracted passenger services. If a regulator rules that a competing bid would make better use of the network, flexibility is needed to enable changes to access arrangements. Together with the new duty to make best-use, this would allow freight operators to bid for, and where appropriate take over, some paths that are currently held by passenger operators.
Uphold national network integrity
Network Rail has restructured to give greater autonomy to its regions, putting the management of rail closer to the people it serves. Scottish and Welsh governments, plus major English city regions such as London and the West Midlands, already have a significant role in the contracting of passenger services, a trend which is likely to continue. Given these trends, FTA is asking the Review team to ensure that national network integrity is preserved. Specifically, we are calling for a strengthened ‘System Operator’ function to support freight operators in securing workable, national routes.
Maintain corporate independence
FTA is asking for reassurance that Network Rail will remain corporately independent from regional passenger operators, while having high levels of operational cooperation.
This separation is vital to avoid systemic bias: without it there would be strong financial incentives to favour passenger operators in service recovery following disruptions and scheduling possessions, for example. There would need to be iron-clad regulatory protection to ensure fair treatment for freight.
Incentivise regional growth
FTA is also calling for strong corporate objectives to be put in place that incentivise Network Rail to actively grow freight in each geographic area. This is working well in Scotland, where our members report that a new target to grow freight has led to a marked improvement in activity and engagement.
For the reasons outlined above, FTA is calling on the government to publicly distance itself from a comprehensive Japan-style full regional vertical integration; this would be disastrous for freight. It would damage the overall national network and create institutional bias in favour of the regional passenger operator. We look forward to working with the Review team as they develop their proposals.
Freight track access charges: time for a rethink?
The European Commission has recently announced that it has approved under EU State aid rules a total of €70 million (£82 million) support scheme to encourage the shift of freight traffic from road to rail in the Netherlands. The funding will be spread over the period from 2019 to 2023 and will be open to all railway companies operating in the Netherlands that have an access agreement with the Dutch rail infrastructure manager, ProRail.
The support will take the form of compensation payments to railway companies to contribute to the cost of track access charges, and the rail freight companies benefiting are expected to pass on the benefits of the aid to their customers through lower prices.
The Dutch are not the first government providing subsidies to cover the high cost of rail freight infrastructure charges. Germany has a significantly larger scheme: approved by the EU Commission in December 2018, the scheme has a yearly budget of €350 million (£383 million) and will run from 2018 to 2023. Rail freight operators will be compensated for up to 45 per cent of their track access charges. As with the Dutch scheme, it is expected that German rail freight operators benefiting from the scheme will pass on the benefits of the aid through lower prices. In addition, beneficiaries are obliged to inform their customers of the fact that their track access charges have been significantly reduced.
The UK also has a scheme designed to cover some of the costs of modal shift from rail to road; since 2014 the scheme has disbursed around £90 million to rail freight operations. Currently under review by government, the scheme will need State Aid approval to continue beyond 2020.
These government subsidies have strong cost-benefit ratios and provide excellent value for money. Rail freight has very high economic, social and environmental benefits. However, to the outside observer, it seems a little odd that governments are on the one hand allowing their rail infrastructure managers to set unaffordable access charges, while on the other hand providing grant funding to support rail freight operations. It seems more logical, some would argue, to simply reduce track access charges to an affordable level.
However, with detailed requirements set out in EU regulation it is not that simple. A recent comprehensive report by the think-tank the Centre on Regulation in Europe (CERRE) looked at track access charges in Germany, the UK, Sweden and France. The report notes that EU Directive 2012/34 established a requirement for a minimum charge to cover direct (or marginal) cost of train operation; combined with additional fees or ‘mark-ups’ for full cost recovery and reductions or surcharges to allow for noise costs, time flexibility and other factors.
Looking through the case studies, the sheer complexity of how charges are calculated is extraordinary, and far beyond the scope of this article. There are extremely detailed calculations on routes, and in the case of freight the type of goods carried. There are, no doubt, small armies of extremely smart economists working hard to produce the overall charging models and totals for each control period. It must be galling when, in the cases of Netherlands, the UK and particularly Germany, the national government steps back in and nullifies some of that work by providing subsidy funding to cover some of the costs.
A final comment: after making detailed recommendations on ways to improve the access charging systems, the CERRE report concludes that: ‘charges for rail infrastructure are only economically optimal if other transport modes are appropriately charged. Efficient pricing cannot be addressed for one transport mode in isolation.’ This is undoubtedly true, and the root cause of further government intervention.
Until rail access charges are dramatically simplified and, frankly, reduced to a sustainable level, we are likely to see governments stepping in to provide subsidies to support crucial freight operations.
Alex Veitch is Head of Multimodal Policy at FTA