Liberalization of the European Railway industry: Does vertical separation work?Erasmus University Rotterdam

Erasmus School of EconomicsMSc in Economics & Business

Specialization: Urban, Port & Transport Economics

Supervisor: Peran van ReevenAuthor: Ioannis Kougioumtzidis

e-mail:gianniskougioumtzidis@gmail.comStudent No.: 358557

Rotterdam, August 2014

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“A developed country is not a place where the poor have cars.

It’s where the rich use public transportation”

Gustavo Petro, Columbian Politician & Economist

Acknowledgements

I would like to thank my supervisor, professor Peran van Reeven for his patience and the inspiring conversations we had. Without his guidance and valuable advice this paper would never be complete. I would also like to thank professor Martijn van der Horst for helping me structure the content of this paper, and transform my idea into measurable output. All errors are mine.

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CONTENTS

1. Introduction............................................................................................................................6

1.1 Background...........................................................................................................................6

1.2 Problem Statement...............................................................................................................8

1.3 Research Questions...............................................................................................................9

1.4 Thesis Outline.....................................................................................................................10

2. Literature Review......................................................................................................................10

2.1 European Union directives on railway reforms...................................................................10

2.2 Existing railway structures..................................................................................................14

2.2.1. Sweden........................................................................................................................15

2.2.2. Great Britain................................................................................................................16

2.2.3. Netherlands.................................................................................................................17

2.2.4. Germany......................................................................................................................17

2.2.5. Switzerland..................................................................................................................18

2.2.6. France.........................................................................................................................18

2.3 Lessons from the world, the ideal case of Japan.............................................................19

2.4 Pros & Cons of vertical separation..................................................................................20

2.5 Results of vertical and horizontal separation in literature..............................................21

3. Data & Methodology.................................................................................................................22

3.1 Sample................................................................................................................................22

3.2. Similar Research and Variable selection.............................................................................24

3.3 Data description..................................................................................................................26

3.3.1 Dependent variables....................................................................................................26

3.3.2 Independent variable...................................................................................................27

3.3.3. Controlling variables...................................................................................................28

3.3.4 Dummy variables.........................................................................................................29

3.3.5 Regressions..................................................................................................................29

4. Results.......................................................................................................................................31

4.1 Passenger Market...............................................................................................................31

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4.2 Freight Transport................................................................................................................33

4.3 Limitations & Discussion.....................................................................................................34

5. Conclusion.................................................................................................................................36

References....................................................................................................................................37

Appendix.......................................................................................................................................40

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AbstractPurpose of this assignment is to map the trends occurring in the railways in the European territory and particularly to identify the impact of the vertical separation of national railway companies on their performance and competitiveness. Railways’ competitiveness has kept on being worsened during the last three decades, a fact that dictated the adoption of reforming measures by the side of the EU in order for the industry to compete with other modes more successfully. The most drastic and widely met reform has been the vertical separation of the integrated national railway companies. By analysing the structure of 28 European railways over the period 2003-2011 we will try to conclude whether the decision of vertically separating a national railway system did manage to increase the modal share and ridership of railways. We find that in the case of passengers vertical separation has been quite an obstacle in their attempt to increase their modal share and ridership, once it has brought the opposite results from the ones expected. Regarding the freight market our sample has not been able to prove any causal relationship.

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1. INTRODUCTION

1.1 BACKGROUND

During the second half of the 20th century Europe has been dominated by publicly owned

railway regimes (Cantos et al., 2012). This can be related to the ‘natural monopoly’

characteristics that the railway industry was believed to present (Jupe, Crompton, 2006,

Laabsch, Sanner, 2012), a fact that discouraged the enhancement of competition in it.

However, the development as well as the competitiveness of the national railway networks

was found to be moderate during that period, compared to the other modes. Eventually, the

public governance regimes was accused of assisting the establishment of publicly owned

monopolies, that in most of the cases have been providing quite moderate services, followed

by poor profitability. One of the most prevailing explanations on that has been that an

insufficient growth in revenues led to sub optimum outputs (Cantos, Maudos, 2001). During

the rising of European Union on the 50's, the member states partly agreed on 'developing a

common transport policy in the Treaty of Rome'. Traditionally, the railway industry in

Europe has been nationally oriented, though, mainly because of the special features and

differences occurring between the states-markets (Marti-Henneberg, 2013). However no

significant initiatives, towards that direction, were taken before 1985.

The already disadvantageous position of the railways in comparison with other

transportation modes was to be worsened after the deregulation that followed in road and

air transportation (Barea, Dizy, Ruiz, 2007). The previously existing legislation regarding

those two modes of transport was reformed in order to facilitate the cross-border

commuting of goods and passengers. On the contrary the cross-border transportation by

rail was lagging behind, due to the different national railway regulations. This led to a

further reduction of the already small share of the railways regarding the intermodal

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competition (Stehmann, Zellhover, 2004). Eventually, during the past two decades the

European Union has tried to give incentives that will lead to the liberalization of the

national railway networks of its member states, through a number of reforms, the essential

legislative steps being taken after 1985 (Stehmann, Zellhofer, 2004). From then on, the

national railway networks in Europe started considering new governance regimes, in order

to render the industry more financially efficient, as well as in an attempt to face the

shrinkage of the market share of railways in the international traffic (Nash, 2008).

Core of those incentives have been the four railway packages introduced by the Union since

the eve of the new century, referring mainly to the freight market, and later also to the one

for passengers (3rd and 4th package). The simple previous national integrated structures, of

the one company responsible for the provision of the infrastructure as well as for the

railway operations, have been replaced by more complicated ones (Thompson, 2003).

Policies such as the vertical separation of the infrastructure provision and maintenance

with the railway operations have been widely adopted, as well as particular reforms in

order to facilitate competition and profitability for railway operators.

The rapidly changing environment in the European railways has attracted a lot of attention

during these two decades. A lot of scholars have tried to map the trends and investigate

whether there is a relation between the reforms and the relative efficiency and productivity

of the networks that they are applied into. However, we focus on the performance and

attractiveness of the railway industry rather than productivity and efficiency. Additionally,

the continuous evolution of the sector as well as the inclusion of even more countries to

those with reformed organisational structures, give a reason of existence to our research.

In this paper we will examine the impact of vertical separation on the performance of the

railways in 28 European countries over the period 2003-2011. The sample contains all the

European member states (except Malta and Cyprus once they have no railway network

established) plus Switzerland, Norway and Croatia.

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1.2 PROBLEM STATEMENT

Despite the numerous reforms even in big European countries (Germany, Spain, Italy,

France), the ownership of the railway operating companies, as well as the responsibility of

planning and regulating the network is still on the state. Beria et al. (2010), argues that the

conflicting interests that are being generated out of this regime, 'tend to slow down the

liberalization process', and harm the productivity of the businesses involved. This opinion is

found to be widely supported on the broad literature existing on the topic (Friebel,

Gonzalez, 2005). Most of the scholars vote for the liberalization of the market including the

privatization of the main railway operators. Nevertheless, in countries that have already

done so, like Great Britain, the academic community has been, in some cases, met to raise

doubts. Jupe and Crompton in their paper (2006) argue that when it comes to a highly

capital-intensive industry, which is dependent on governmental subsidy, privatization is

inappropriate. However, this is a subject that will not be covered in our analysis due to the

lack of available data.

What we will do examine here is the effect of dividing the responsibilities of the

incumbent railway companies in Europe, into at least one responsible for the provision and

maintenance of the network and another, independent, company responsible for the

railway undertakings, on the railways’ performance. This method for many countries

constitutes the essential reform adopted in an effort to comply with the European

directives, and it aims in an independent network provider, who will be willing to facilitate

that use of the network by new railway operators. The independent nature of the network

provider would, thus, ensure the minimising of discrimination against the candidate

Railway Operating Companies (ROCs) that want to use the network, and in favour of the

incumbent company. On the contrary, it would facilitate competition, increased quality of

services, as well as international commuting of cargo and passengers by rail.

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1.3 RESEARCH QUESTIONS

As referred previously the vertical separation of the integrated national railway companies

has been a core concern of the EU1, and one of the first steps that the member states have

adopted on their way of rethinking the structure of railways. Additionally the data available

regarding all the other widely met reforms like the introduction of competition, through a

range of measures, has not been enough for them to be included in a consistent econometric

model. Thus, we will try to measure the impact of the European directives on the

development of the railway industry in Europe, by measuring the impact of the most widely

met reform proposed, that being the vertical separation. And as two of the main goals of the

union in this procedure has been increasing the throughputs of the railways in terms of

cargo and passengers in one hand, and improving the railways’ competitive position

regarding the intermodal competition, on the other, we will try to give an answer to the

following questions:

What was the impact of vertical separation proposed by the EU, on the ridership of

railways over the period 2003 – 2011?

What was its impact on the modal share of railways compared to other modes, over

the same period?

In order to answer these questions we will apply a panel data analysis regarding all the

European Member States that have a railway network established, plus candidate members

(Croatia), as well as countries that have agreed to comply with the unions directives

regarding the railway sector (Switzerland, Norway). We then use vertical separation as our

main independent variable, and examine its impact on the two segments of railway

industry, that is passenger and freight transport. For the first research question we regard

ridership in terms of passengers-km and tonnes-km respectively, which we set as

1 A more extensive report on the European Union’s directives regarding the vertical separation will be presented in the next chapter

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dependent variables. Accordingly, in our attempt to answer the second research question

we replace the dependent variables with the modal share of railways for passenger and

freight market.

1.4 THESIS OUTLINE

The next chapter is dedicated to the existing literature on the structure of the European

railways at the moment, the legislation proposed by the EU and the results that it has

brought by now according to the academic community. A detailed presentation of some of

the most important national organisational structures is also presented there. In the third

chapter we present and analyse the data to be used, and in the forth the methodological

approach that will be followed in the paper. The fifth chapter presents our results, the

limitations of our research and a discussion on our findings and tips for future research.

Last, our conclusions are presented in chapter six.

2. LITERATURE REVIEW

2.1 EUROPEAN UNION DIRECTIVES ON RAILWAY REFORMS

The intention of the European Commission to revitalize the Union's railway network was

put in track with three directives2 in the first half of the 90's, aiming specifically on the

development of the community's railways, on the licensing of the Railway undertakings, on

the allocation of railway infrastructure capacity and the charging of infrastructure fees

(Holvad, 2006).

2 Directives 91/440/EEC, 95/18/EC and 95/19/EC

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Key elements in this respect have been:

The establishment of independent management for railway undertakings

The separation of accounts for infrastructure management and transport

operations

The dept restructuring for incumbent companies

Access provision to railway infrastructure for new companies

Amendments on those three directives, would later (2001) form the base where the first 1 st

railway package3 was built on. The package was presented in 1998 and adopted in

December 2000, and was mainly focused on the freight railway transportation. Its initial

purpose was to revitalize the international goods transportation by rail in the Community,

and to lead in a more integrated European railway network where the cross-border services

would be facilitated. It was meant to be transposed in the Member States until 15 March

2003 and its particular goals were:

the vertical separation of the basic functions of the railway industry, namely the

infrastructure provision and the actual railway operations

the establishment of an independent railway regulator in each Member State and the

reduction of the governmental influence in the sector

a reconsideration of the technical barriers between the different railway networks so

that the international freight movements would be eased

a gradual opening of the European rail freight network to all operators that have been

licensed according to the Community's regulations. Within seven years (as of March

2008) from the adoption of the Council Directive, the aforementioned operators should

have access to the whole international European railway freight network

3 The 1st railway package was consisted of the directives 2001/12/EC, 2001/13/EC, 2001/14/EC which respectively amended the ones mentioned above

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However, despite the efforts put by the Union, it appeared that this gradual opening that

would allow operators from all member states to use the ‘integrated European’ network

was not as easy as was initially believed. At the moment there are countries that still lag

behind and fail to follow the Union's directives regarding the international freight. (Holvad,

2006) Finally, an additional measure4 came to complete the 1st package in March 2001.

The 2nd railway package5 was proposed by the union on the 30st of April 2004, and

contained legislative proposals that, among others, pointed on:

Proposing a common strategy to guarantee a greater degree of rail safety6 and

establishing a European Railway Agency in charge of these issues

Enhancing the interoperability principles proposed with previous directives7

(safety and interoperability)

Accelerating the opening of the rail freight market8

Joining the Intergovernmental Organization for International Carriage by Rail (OTIF)

After the 2nd package, the new date agreed for the opening of the rail freight markets would

be the 1st of January 2007.

4 An additional directive regarding the interoperability of trans-European rail networks (Directive 2001/16/EC) was adopted by the European parliament on the 19th of March 2001, amending the Directive 96/48/EC adopted five years earlier on the interoperability of the trans-European high-speed rail system. It was meant to facilitate the implementation of the legislation proposed with the 1st package

5 The Directives consisting the 2nd package were the which established the European Railway Agency to provide technical support on safety and interoperability issues, mainly focused on the railway safety, Directive 2004/50/EC enhancing the interoperability regarding the trans-European high-speed as well as conventional rail systems, and on speeding up the opening of the rail freight market, as well as extending the infrastructure access rights of candidate rail freight service providers within a Member State.

6 Directive 2004/49/EC

7 Regulation No 881/2004

8 Directive 2004/51/EC

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Two more railway packages were adopted by the parliament during the years to follow, this

time mainly focused on the passenger market. The 3rd railway package (2007) aimed in the

opening of the passenger market to international services. In more detail, it proposed that

starting in 2010 all the passenger service operators that have a licence and meet the safety

preconditions should be able to provide international services in the Community9. Two

more particular legislative measures are included in this 3rd package, one on the protection

of the passengers’ rights when using international services, and the other on the

certification methods of the railway drivers.

Finally, the 4th railway package was adopted by the European parliament on 26th of

February 2014, and aimed to ensure the competitiveness of the railway sector and improve

the quality of rail services by:

enhancing competition

eliminating remaining market distortions and suboptimal structures

alleviating long and costly procedures

removing access barriers for new entrants, and

harmonising market access rules in the Member States10.

This last package is still to be confirmed by the European Council.

2.2 EXISTING RAILWAY STRUCTURES

Summing up the directives sited above we can identify three basic axes of restructuring

where the interest of European Union was focused on. That is the vertical, examining the

relationship between the infrastructure provision and maintenance in one hand, and the

railway undertakings on the other, the horizontal, examining the relationships between

9 Directive 2007/58/EC amending Directive 91/440/EEC

10 European Parliament

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railway operating companies (ROCs) functioning on the same network; and a third one,

regarding the existence or not of an independent regulatory authority, which would ensure

the minimising of the ‘free rider’ behaviour from the side of the national holding integrated

railway companies. Thus, it is obvious that vertical separation has played a very important

role in the restructuring Europe’s railways, and is considered as a necessary condition for

the industry to achieve a more competitive performance and minimize the negative effects

in terms of governance and ownership. However, despite the fact that those directives are

meant to be applied in the same way, significant differences can be identified in the way that

MS’s have implemented them (European Commission, 2006).

Hence, the implementation of the revised legislation on the railways in Europe has evolved

to give birth to a number of different, and sometimes unique, structures, with varying levels

of separation as well as induced competition, and a number of different policies adopted

regarding the governance and independence of the particular national railway regulatory

authorities. Table 1 (Appendix) summarizes the current situation in the countries of our

sample, regarding the three aspects of reforms mentioned above. As we see there, 13

countries in the sample have either retained the traditional integrated model, or have

adopted partially separated structures where two companies function under the same

holding, but with partial division of key powers (Nash, 2008). 13 countries have adopted the

fully separated model, while two countries have applied a hybrid model (France and Czech

Republic), which will be further analyzed later in this chapter. There are cases where there

is no vertical separation, but there is established within-rail competition11 (e.g. Germany,

Austria, Italy), by licensing new operators to function in the same network with the

incumbent company (Campos, Cantos, 2000). However, the enhancement of competition

hasn’t experienced the progress that EU might have expected, once only seven countries

(Netherlands, Germany, Austria, Italy, United Kingdom, Denmark and Sweden) have

managed to establish ‘high’ levels of competition according to IBM (2011). . In Italy 49 have

11 Competition as referred in this paper has a twofold meaning. That is in one hand the competition in the

market, where new operators are able to work in the same network with the incumbent company, and the

competition for the market where operators take over the incumbent ROC through competitive tendering and

function it in a commercial, profit making way. Both kinds are met in the European reality.

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been licensed, though only 16 of them are operating (2009). For France and Spain the

situation is pretty monopolistic, regarding the passenger market, once almost the absolute

number of passengers is still being served by the incumbent company. The freight market is

more promising, once in Spain the new entrants managed to serve 5% of the market by

2008, and in Italy 13% (Beria et al., 2010)

Finally, growing independence is recorded for the railway regulatory authorities, once they

are still directly controlled by governmental ministries only in six countries (Spain, Ireland,

Romania, Estonia, Lithuania and Slovenia).

After mapping the structures that can be met in a contemporary national railway network,

we can now proceed in presenting a more detailed description of some of the most

important national networks in Europe.

2.2.1. SWEDEN

Sweden has been the first country to separate its holding railway company in Europe in

1988 (Nash, 2008), that is even before any initiative was taken by the side of the EU. Thus,

the Swedish State Railways (SJ) was separated so that two companies were created, SJ, basic

rail operator and Banverket, responsible for the network maintenance. Since then a raw of

sequential reforms have developed the Swedish railway in what it is today. The vertical

separation was followed by the opening regional railway undertaking services one year

later (1989). The opening of interregional services was to follow in 1993 and the

deregulation of the freight services in 1996 (Alexandersson, Rigas, 2013). Particular policies

aiming mainly on inducing a greater degree of competition kept on being introduced by

2012.

2.2.2. GREAT BRITAIN

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The second country in Europe to introduce vertical separation was Great Britain in 1994.

The restructuring of the network at that point included also the opening of the market,

expressed in terms of competition for the market, through competitive tendering

(franchises). The incumbent British Rail, was thus fragmented to lead to the creation of

several operators that through franchising would provide regional and interregional

railway undertaking services initially through agreements that lasted for 7 to 10 years (the

franchising periods were later expanded), and a private infrastructure manager, Railtrack.

Seven years later though (2001), and after the failure of Railtrack to provide satisfactory

results in the management and maintenance of the network without receiving

governmental subsidy, the government decided its abolition. The new infrastructure

manager would be Network Rail, a non-for-profit organisation, consisted by several public

as well as private bodies, whose role was through governmental subsidies to fill in the gap

created by their predecessors. The independent regulatory authority, Office of Rail

Regulation (ORR) is supervising Network rail in a 5-year basis, to control its performance

and decide on the new infrastructure charges. The results and opinions on this

groundbreaking reform have been contradicting. The advocates of the reform underline that

the ridership and safety was substantially increased after the reform, while there was a

growth in rail services and significant modernization on the rolling stock (van de Velde,

Rontgen, 2009). The other side though quotes that investment in rail services has been

moderate, while there was no improvement in their quality, and that freedom of operators

has led franchises functioning not in the interest of passengers (excessive pricing), (Jupe,

Crompton, 2006).

2.2.3. NETHERLANDS

Van der Velde and Rontgen (2009) identify in the Netherlands the country that more than

any other in the European territory achieved to be in total conformity with the First railway

package that EC suggested in order to steer the European railway companies closer to

financial success, by changing the legislation according to which the railway companies in

Europe should function. Following a two step reform, Dutch railways are today vertically

separated into two major companies. An 100% state-owned infrastructure provider

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(ProRail), and an 100% state-owned railway operator (Nederland Spoorwegen, NS), though

organized according to private law (Van der Velde, 2009). Competition in-the-market has

been successfully introduced in both passenger and freight markets.

2.2.4. GERMANY

Since 1994 the railway operations in Germany are mostly being handled by Deutche Bahn

(DB). DB is a 100% state-owned non-subsidized company, organized according to private

law. DB operates under several brands (e.g. DB Fernverkehr provides long distance

transport), while other private companies also provide long distance passenger transport

services, though in a limited degree up to date. The infrastructure is owned and managed by

DB Netz, a company functioning under the same holding, though with separated key

powers. In comparison to the Dutch reality there are no contractual relations between the

infrastructure provider and the operating companies and DB Netz is obliged to allow

entrance to all competitors that are able to pay the infrastructure charge to be foreseen by

law. Thus, Germany had already licensed 350 rail operators in 2008, when 330 of them are

active. Though one of the most successful networks in Europe, a wide discussion has taken

place during the previous years, considering the partial privatization of DB. However the

procedure has been postponed for the time being.

2.2.5. SWITZERLAND

A special feature of the Swiss railways is the fact that despite the numerous reforms that

have taken place in the railway market of the country, the major railway operator and the

infrastructure manager are still integrated, although they have to maintain separate

accounting departments. Hence, the main rail operator, Schweizerische Bundesbahnen

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(SBB) is also the infrastructure manager, in order to avoid the need for contractual

relationships between the two aforementioned bodies and increase efficiency. The

department of SBB responsible for infrastructure is obliged to provide specific services

through contracts that they sign with the governmental organizations in charge for the

facility, safety and capacity provision (Bundesamt für Verkehr, BAV). SBB reports to BAV

twice a year regarding the level of realization of the goals that were set in advance,

according to 30 performance indicators that have been previously agreed. SBB is granted by

BAV a 10-year concession for long distance passenger transport and operates in regional

level as well. SBB, so as other small companies that operate in regional level, have to behave

as private companies, though most of them (including SBB) are 100% owned by the Federal

Government. What worth to be highlighted here is the introduction of competition in the

market without privatization. Much attention seems to be given to the emulation of

different companies' services, while further reforms are not to be expected (Van de Velde,

2009) once the network is functioning satisfactorily.

2.2.6. FRANCE

As mentioned earlier in this chapter France has adopted a very special structure regarding

the relationship between the different bodies in the railway industry. The infrastructure

management, maintenance and development is being held by The French Railway Network

(Reseau Ferre de France, RFF) which is a public company functioning with commercial

orientation. The railway undertakings are being held by a separate company, SNCF (Societe

Nationale des Chemins de fer Francais), while there are smaller organisations with specified

regulatory responsibilities, like general competition regulation (Conseil de la concurrence),

safety regulation (Etablissement public de securite ferroviaire), or network access issues

(Mission de controle des activites ferroviaires). However, despite the fact that there is

vertical separation introduced, RFF is expected to delegate some of its infrastructure

management tasks back to SNCF, rendering this way SNCF as a delegated infrastructure

manager. This feature underlines the uniqueness of the French model (something similar

can only be met in Czech Republic). SNCF has also a commercial orientation and is asked by

the State to generate profitability by the high-speed and the long distance services. But what

is important here is the legislation existing regarding the social fare obligations of SNCF.

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According to them, the company is being subsidized from the particular regions in order to

provide non profitable regional services that are necessary in social terms. Those amounts

paid by the regions are derived by the French State. Even though France is considered to be

lagging behind regarding the conformation with the European directives, according to the

IBM’s Liberalization index (2011), it seems to secure the social character of railway

transportation more than any other country. Also, despite the fact that the competition in

the French market is still in very low level, due to the opposition of the public opinion and

trade unions (van de Velde, Rontgen, 2009), there is evidence that French railways have in

recent years increased performance and ridership.

2.3 LESSONS FROM THE WORLD, THE IDEAL CASE OF JAPAN

The process of restructuring railways was not initiated in Europe. A long time before such a

need emerged here, same problems regarding moderate performance and reduced

attractiveness for the railways have occurred in many sides of the world (e.g. Japan, U.S.,

Latin America and Africa), resulting in in-depth reforming procedures aiming in an

improved performance as well as efficiency of the particular railway networks. However in

some cases the path to success has not been the one that the EU is following. A quite

representative example is Japan.

The Japanese National Railways (JNR) was in 1986 divided into six vertically integrated

companies orientated to provide regional services in six different regions of Japan. These

companies are obliged to create profitability and maintain the operations as well as the

infrastructure provision on their own cost, as it is prohibited for them to be subsidized by

the government. The only case where separate infrastructure companies can be seen is

when the network necessitated significant investments that was impossible to be held

without governmental support. The creation of those infrastructure companies helps the

government to indirectly capitalize on the operators and the needs they have on the

network.

After 28 years functioning under this regime the six operators (three private and three

public) have been performing under absolute success and there are no thoughts for further

reforms. Their concessions are not of limited time, and there is no competitive tendering for

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the creation of on the tracks competition (van de Velde, Rontgen, 2009), while there never

were thoughts of implementing vertical separation.

2.4 PROS & CONS OF VERTICAL SEPARATION

The increasingly wider adoption of vertical separation as well as enhancement of

competition in railways has been followed by a growing debate on the suitability and

efficiency of those reforms applied. We present here the basic points of the supporters of

traditional vertically integrated railway companies, opposed by those supporting the

vertical separation.

A basic advantage of vertical separation as mentioned in the literature is that it installs the

necessary preconditions for the enhancement of competition-in-the-market (Kurosaki,

2010), by establishing an independent infrastructure manager, who would ideally provide

equal opportunities to new ROCs. An incumbent integrated company is more likely to

discriminate against the new operators, basically by claiming unfair access charges in order

for them to be licensed for functioning on the network. Another opportunity for

discrimination from the side of the incumbent can possibly be pretentious delays in the

process of licensing. However, even in the case that actual discrimination does not exist, the

possibility of its existence alone might discourage new operators from entering the market

(Laabsch, Sanner, 2012). Following the logic of vertical separation supporters, competition

when enhanced will lead to lower prices and higher quality of services, thus revitalising the

attractiveness of railways. Furthermore, the externalisation of transactions will increase

transparency regarding the usage of governmental subsidies on infrastructure. However,

problems regarding the access rights and charges might still remain (Holvad, 2006).

Another advantage mentioned in the literature is that it promotes specialization, once when

fragmenting the market the bodies created have more space to develop on their own field.

Finally, it is argued that separation would bring the industry one step closer to another

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basic goal of the EU, which is the creation of a single European transport area, once

separated infrastructure managers would co-ordinate with each other more efficiently.

On the other end, the case of the integrated model creates undoubtedly a cost advantage by

exploiting synergies and lower transaction costs. Williamson (1981) discusses the creation

of cost advantages in the case of a holding company, while he underlines that co-ordination

between the different actors is also enhanced, when parts of the same company. Another

argument of Williamson is that in the case of separation the contracts to be created between

operators and infrastructure managers are pretty likely to be incomplete. The bounded

rationality which characterizes individuals makes it possible that there will be areas to

remain unlighted, a fact that can possibly create conflicts in a case of disruption later.

Additionally, vertical alliances could facilitate the achievement of high levels of efficiency, in

order for the railways to compete with, for example, road transport more effectively. That

would eventually render the railways more attractive and increase their market share.

As both sides claim an increase in the modal share of railways in the case of applying their

preferred model, it is interesting to examine in the following chapters the direct impact of

vertical separation in Europe on the modal share of railways itself.

2.5 RESULTS OF VERTICAL AND HORIZONTAL SEPARATION IN LITERATURE

The literature on the impact of vertical and horizontal separation on the performance of the

industry has been rather limited, while most of the studies examine their particular impact

on the efficiency of the railways. Its results have been contradicting, depending on the

period that is examined in each study, the number of countries included, and the concept of

efficiency considered (Cantos, Maudos, 2001). Cantos et al. (2012) conclude that horizontal

separation, in the sense of introduction of new freight or passenger operators, increases

efficiency, while their results about the impact of vertical separation are not clear.

Furthermore, their dataset supports the idea that countries that have adopted both

horizontal and vertical separation tools present the most efficient railway regimes, while

Friebel, Ivaldi and Vibes (2010) in their paper for evaluating the effects of railway reforms

23

in Europe for the period 1980 - 2000 conclude that in general these reforms have had a

positive impact in both passenger and freight market. In the same paper attention is also

being drawn on the way that reforms take place, suggesting that sequential reforms are

more likely to have positive results, than all-in-once reform packages.

On the contrary, Laabsch and Sanner (2012) conclude that vertical separation hasn’t had

any positive impact on the passenger segment, once countries that have retained the

integrated model perform much better in their sample. Regarding freight transport the find

no robust results, in an analysis that examines the performance of railways of nine

European countries for the period 1994-2009.

3. DATA & METHODOLOGY

3.1 SAMPLE

For analysing our research questions in the paper a dynamic panel data analysis will be

used. A panel of 252 observations from 28 countries will help us analyse the impact of

vertical separation on the performance and competitiveness of the European railways, as

analysed above. Our sample consists of all the European member states12 (excluding Malta &

Cyprus once they do not have an established railway network), plus Switzerland and

Norway, who have agreed to follow the European Union directives in an effort to be part of

the ‘single European transport area’ that the Union aims to establish. These countries are

analysed over the period 2003-2011, a period that represents the years of adoption and

implementation of the first three railway packages proposed by the EU, of which vertical

separation constitutes a significant component.

The initial idea was to analyze both reforming dimensions, those being vertical as well as

horizontal as presented in Chapter 2, in order to provide a more spherical insight on the

12 Croatia is expected to enter the Schengen area by 2015, so we consider it as a member state here. Croatia has already vertically separated its railway company since 2007.

24

impact of the reforming process on railway performance. However, the only consistent

dataset that would help us proceed with analysing the changes in horizontal terms (level of

liberalisation and induced competition), is the Rail Liberalisation Index conducted by IBM,

which is available only for the years 2004, 2007 & 2011. Using IBM’s index would mean that

we would have to reduce the number of our observations to 84 (now 252), thus reducing

significantly the validity of our results. Consequently, we preferred the complete exclusion

of the horizontal dimension from our analysis, in order to provide more solid and

consistent evidence on the impact of the reconsideration of vertical relationships in

the industry.

We will try to draw conclusions on the freight as well as passenger market, once they were

both affected by the vertical separation. By building two equations for each market, we will

examine vertical separation’s impact on: a) performance and, b) competitiveness of the

railways. The first by examining the variance of passenger-km and tonnes-km for passenger

and freight market respectively, according to the decisions taken in terms of vertical

separation, and the second by examining its impact on the modal split of railways, regarding

the competition with air and road transport (as well as inland waterways were applicable).

The data to be used in the analysis were taken from Eurostat, as well as World Bank and the

IBM’s Rail Liberalisation Index 2011. More details about the data sources can be found in

the Appendix (Table 2).

3.2. SIMILAR RESEARCH AND VARIABLE SELECTION

In this chapter we present the empirical research that has taken place on the very field of

railway structures and reforms by now, and we explain the approach we choose to answer

our research questions and the reasons why we do so.

25

The majority of the work done in the field has tried to examine the impact of reforms on the

railways’ productivity and efficiency. Friebel, Ivaldi and Vibes (2010) tried to measure the

impact of reforms in European railways on the technical efficiency of the railways. In order

to achieve that they use an input-output analysis, by applying a Cobb-Douglas function

which implicitly assumes separability between inputs and outputs. As inputs they use the

length of lines in the network and the number of employees, and as outputs the passengers-

km and tonnes-km for passenger and freight market respectively. Their sample regards 11

European countries for the period 1980-2003. In the physical data referred earlier, they

attach the three kinds f reforms met in Europe, namely the separation, the third party entry

(competition) and the existence of an independent regulatory authority. Their results

suggest that railway reforms have increased railway efficiency, and that reforms are more

successful when applied sequentially, instead of all-in-one.

Cantos, Monsalves and Martinez (2008) applied a Data Envelopment analysis to count the

impact of reforms on both productivity and efficiency, using a sample of 16 European

countries during the period 1985-2004. They find that both efficiency and productivity in

railways have been positively influenced by vertical separation, even though the effect

seems to be stronger when separation is accompanied be enhancement of competition. The

variable used here as inputs are length of lines and employment as before, as well as rolling

stock. As outputs we see again the ridership of railways in terms of passengers-km and

tonnes-km respectively.

Once again the same input and output variables are used by Driessen, Lijesen and Mulder

(2006). In this case there is a more detailed inclusion of the reforms, once separation is

divided to total or partial (separation of accounts), and competition to competitive

tendering (competition for the market) and free entry (competition in the market). A

dummy regarding the management independence from the government is also included in

the model, while among others they control for GDP per capita and population density. Via

the use of Data Envelopment Analysis, they conclude that competitive tendering has a

positive impact on the productive efficiency of the railway. As for the rest, results regarding

the vertical separation are not clear, while the introduction of in-the-market competition

and the managerial independence seem to have the opposite results.

26

While all the papers referred above are measuring the impact of reforms on either

productivity or efficiency, Laabsch and Sanner examine their impact on merely the ‘success

of rail’, that is their performance and attractiveness. Following the work of Drew and Nash

(2011), they use as dependent variable the modal share of railways. According to them

modal share measurement can take into account several reasons that can render the trains

more attractive, except the lower prices arising due to cost reduction in a network with

recently increased efficiency. Thus, the impact of higher quality of service can also be taken

into account when setting modal share as a dependent variable. In addition, both supporters

as well as adversaries of vertical separation argue that their preferable organisational

structures are going to increase the modal share of railways if applied. This is a fair reason

to examine the impact of the reforms directly on this measure. Their model also controls for

other factors that can possibly influence the success of railways, such as GDP per capita,

public budget contributions on railways, as well s share of rail in total transport budgets.

The latter can give a good insight about the tendency of the government to assist railways

on their effort to compete successfully with other modes. Interestingly, they conclude that

separation has a negative effect on the modal share of rail in the case of passengers, while in

the case of freight transportation their results are not reliable.

This paper has two goals. In the first place we intend to, in line with Laabsch and Sanner,

examine the impact of vertical separation on the attempt of railways to compete more

successfully with other modes. For this purpose we also consider modal share of railways

for passenger and freight transport as our dependent variables. Additionally, we want to

have an insight on the impact of vertical organisations on the trains’ ridership itself, and

that is why we run the same models, this time considering as dependent variables the

passengers-km and tonnes-km for the two market segments of railways. Admittedly, the

inclusion of public budget on railways and the share of rail in total transport budgets, as can

be met in the model of Laabsch and Sanner, would render our model much more

comprehensive. However, the lack of data did not allow us to do so. Consequently we expect

the explanatory power of our model to be limited. Instead, we include controlling variables

regarding the general economic coincidence, such as the GDP per capita. Finally, we control

for population growth, once it is beyond doubt that variances in population can cause,

though in a limited degree, similar variances in the ridership of rail.

27

3.3 DATA DESCRIPTION

3.3.1 DEPENDENT VARIABLES

Passengers_Km / Tonnes_Km

Represents the millions of kilometres travelled multiplied by the number of

passengers/tonnes (1 unit being: 1 kilometre travelled by 1 passenger/ tonne of product).

This will be our dependent variable in the model examining the performance of

passenger/freight railway market, once it manages to give a good insight on the variance in

the traffic of passenger/freight market over the given period. Its relevance comes to the fact

that increasing the usage of trains by passenger (and cargo) transporters has been of core

concern for the EU. Cantos, Monsalves and Martinez (2008) are using

passengers-km/tonnes-km, though in a different context, in an effort to measure the

productivity of the railways. We consider that an increase in the throughput of railways in

these terms is indicative of the successful (or not) implementation of organisational

reforms, while it has also been an explicit goal of the legislation proposed by the European

Union. As this variable appears in very big values, in our regressions we will use their

logarithm in an effort to shrinkage the values in order to ease the procedure. Thus,

passengers-km and tonnes-km in our models will be met as log_pas_km and log_tonnes_km

respectively.

Modal share of railways

28

So the supporters as the opponents of vertical separation argue that their preferred

organisational models will increase the modal share of the railways. In that sense it would

be interesting to examine how this measure fluctuates in countries that have adopted

vertical separation compared to those that have not done so. Furthermore, increasing the

modal share constitutes one more explicit goal of the EU. Laabsch and Sanner (2012) are

using the modal split of railways as a dependent variable in a similar research examining

the effect of vertical separation on the success of railways, regarding nine European

countries examined over the period 1995 – 2009.

3.3.2 INDEPENDENT VARIABLE

Vertical Separation

Vertical separation is included in our analysis in the form of a dummy variable, which takes

value 0 when not applied and switches to 1 when adopted by the given country. This

classification is proposed by the European Commission (Laabsch, Sanner, 2012), although in

our sample the countries adopted the ‘hybrid model’ (France, Czech Republic), are taken

into account as separated structures, once an elementary form of separation has occurred in

their organisational form. In part of our sample it can be found as time-invariant variable,

for the countries that have either adopted the separation before the period we examine, or

for countries that did not apply separation yet, at all. It is, though, time-variant for the

countries that adopted the separation during the period 2003 – 2011. Cantos et al. (2008)

have included vertical separation as an explanatory variable, in their paper examining the

effect of the two-dimension reforming process on productivity of the railways.

3.3.3. CONTROLLING VARIABLES

GDP per Capita

29

The lack of available data that could adequately control for factors which directly affect the

performance and competitiveness of the railways, forces us to control our results through

the general economic coincidence of the countries and period under examination. Laabsch

and Sanner (2012) in their paper on the impact of vertical separation on the success of

railways, control for GDP per capita, based on the assumption that ‘unemployment risk

differs between users and non-users of public transport, or because the production of

categories of goods that are more or less rail-affine is affected differently by a crisis’ . Other

reasons for using GDP per capita as a controlling variable could be the fact that an upward

trend in the economy could justify the reduction of attractiveness of the rail, due to a

possible increase in the car usage, or even contrarily that more developed economies can

possibly present a better capacity in implementing such reforms. In the same logic with

passenger-km and tonnes-km we will use the log of GDP per capita, from now on met as

log_gdpcapita.

Population growth

Another controlling variable that we include in our models will be the population growth in

yearly basis. The reason is to control for the small changes in railway demand that might be

caused by changes in population. We decide to include population in the form of population

growth and not in absolute values, after running a test for the existence of a unit root in our

variable. In order to achieve that we will use the Fisher- type unit root test, once it performs

well in unbalanced data, which is the case in our sample. Our null hypothesis is that

population has a unit root, which would be an adequate justification for non-stationarity.

Our results13 show that we cannot reject the null hypothesis so we accept that population

has indeed a unit root. Because of the fact that population is a non stationary variable, it

would be here inappropriate to use population in absolute values.

3.3.4 DUMMY VARIABLES

13 Appendix A, Table 3.

30

Finally we add a dummy variable (_Iyear_t) in order to account for events that possibly

cause a simultaneous variation in all countries across our sample. Such an event can be a

simultaneous downturn in the demand for cargo transportation due to the financial crisis of

2008 – 2010. We then have n-1 (8) new variables created, one for every year, having the

_Iyear_2003, which is the first year analyzed in our sample automatically dropped by stata.

3.3.5 REGRESSIONS

Regarding the fact that we use population in terms of population growth and not in absolute

values, it is impossible to take into account the individual heterogeneity in terms of the

population levels, as well as the other individual country-specific characteristics in our

sample. Thus, this can be achieved only by using the fixed effects estimators, which help us

account for individual heterogeneity.

We then have for equations created in order to answer to our research questions, which all

read under the form:

Yit = β0 + β1 vertical_separationit + β2 log_gdpcapitait + β3 d_population it + γn Σ_Iyear_t + uit

Where

Yit represents our four dependent variables, one for each regression that we

will run and those are:

-mod_sh_pas is the modal share of railways in the passenger market, where

i=country and t=year

-log_pas_km is the logarithm of passenger-km

31

-mod_sh_freight is the modal share of railways in the freight market, and

-log_tonnes_km is the logarithm of tonnes-km

β0 is the constant

β1- β3 are the coefficients of the independent and controlling variables

γn are the coefficients of the dummies created, and

uit is the error term

The descriptive statistics of our dataset are presented in the Appenidx A (Table 4).

4. RESULTS

4.1 PASSENGER MARKET

In this chapter we present the tables with the results of our analysis for both markets and

their interpretation in our view. In Table 5 we can see the results regarding the passenger

market. What we see there is that somewhat surprisingly the impact of vertical separation

on the performance and competitiveness of the passenger railways is not positive as

expected, but negative.

Table 5.Results - Passenger market

Variable log_pas_km mod_sh_pas

vertical_separation (P values) -0.070(0.018)** -0.008(0.000)***

log_gdpcapita -0.221(0.001)*** -0.027(0.000)***

d_population 4.19(0.017)** 0.100(0.417)

_Iyear_2004 -0.171(0.000)*** -0.0005(0.781)

32

_Iyear_2005 -0.122(0.000)*** 0.001(0.398)

_Iyear_2006 -0.06(0.019)** 0.006(0.003)**

_Iyear_2007 -0.011(0.624) 0.009(0.000)***

_Iyear_2008 0.021(0.349) 0.116(0.000)***

_Iyear_2009 -0.043(0.082)* 0.008(0.000)***

_Iyear_2010 -0.031(0.179) 0.010(0.000)***

_Iyear_2011 (omitted) 0.010(0.000)***

Constant 10.75(0.000)*** 0.330(0.000)***

Prob > F 0.000 0.000

R2(observations) 0.25 (207) 0.24 (252)

*/**/*** significant in the 10/5/1 per cent levels, respectively.

The results show that vertical separations’ impact on both passengers-km and modal share

of passenger railways is statistically significant in the 5% and 1% level respectively, with a

marginal negative effect. Even though the small absolute values of the coefficients show us

that the magnitude of the causality explained is not big, however the results verify that the

effort put by the union to give incentives for fragmentation of the integrated railway

authorities into smaller entities with more specialized responsibilities, has not brought the

results expected for the moment, at least in the sense of increasing the attractiveness of

railways. This could possibly be explained by the fact that the passenger market is rather

quality driven. In a separated structure the competition will eventually lead to lower prices.

Subsequently the quality of services is more likely to deteriorate than in a case of vertical

integration. Following that logic, if we take into account that passengers are quality driven,

they would possibly switch to another transport mode, e.g. private car usage, in case they do

not receive the desired service quality. It can be also caused by the fact that

communication and policy implementation can be facilitated by integrated responsibilities

under the same holding, when such tasks can be interfered by possible lack of

33

communication in a case of separated infrastructure management with railway

undertakings.

Accordingly, GDP per capita has also a negative and significant (1% level) impact on both

passenger-km and modal share in our sample. This makes sense if we think that an increase

in the population’s wealth could justify a switch from train to car usage or even air

transportation for longer-distance travelling.

On the other hand, population growth variations seem to be statistically significant only in

the case of passenger-km. As we expected population is positively correlated with the

creation of extra passenger-km, and statistically significant in the 5% level. It is also logic

that no significant causality is observed in the relationship of population growth and modal

share of rail, once there is nothing to indicate that newly settled population would make a

different choice than the one existing before, in terms of their preferable transport modes.

4.2 FREIGHT TRANSPORT

In the case of freight transport, vertical separation does not present any significant causal

relationship with tonnes-km generated or variance in modal share of rail freight

transportation. In both cases the coefficients are positive but not statistically significant.

That could mean that either the vertical separation has been unsuccessful, or that it is still

pretty early in the procedure for the results to be seen, in the sense that only 15 out of 28

countries of our sample have implemented the measure for the moment.

Table 6. Results - Freight Market

Variable log_tonnes_Km mod_Sh_freight

vertical_separation (P values) 0.024(0.641) 0.001(0.885)

log_gdpcapita 0.089(0.447) -0.181(0.000)***

34

d_population 0.603(0.852) 0.242(0.651)

_Iyear_2004 0.122(0.011)** -0.013(0.087)*

_Iyear_2005 0.097(0.044)** -0.009(0.231)

_Iyear_2006 0.120(0.016)** 0.004(0.639)

_Iyear_2007 0.126(0.019)** 0.014(0.115)

_Iyear_2008 0.055(0.319) 0.014(0.132)

_Iyear_2009 -0.150(0.004)*** -0.008(0.386)

_Iyear_2010 -0.053(0.322) 0.005(0.551)

_Iyear_2011 -0.024(0.671) 0.020(0.042)**

Constant 7.98(0.000)*** 2.004(0.000)***

Prob > F 0.000 0.000

R2(observations) 0.26 (238) 0.40 (251)

*/**/*** significant in the 10/5/1 per cent levels, respectively.

This fact, does not let us have a clear view of what the results would be in a case of complete

implementation of the measures proposed by the EU from all countries. However,

disregarding that vertical separation is reported as insignificant, its coefficients are positive.

This is in line with the fact that freight is more price-intensive, which means that any

reduction in prices, as the one caused by the enhancement of competition, can have a

positive impact on the ridership of freight trains, or their modal share. The population

growth is also not significant in both regressions, while GDP per capita presents a

significant, on the 1% level, negative effect on the modal share of freight railways. That

could be explained in the sense that ‘richer’ countries would be more willing to switch to

alternative transportation methods, in order to achieve the higher quality possible and

avoid operational difficulties that have been surpassed in other modes like road and air

transportation, but not in the case of railways.

35

It is worth noting here that, regarding our dummy variable, we can see in the year 2009 a

significant (1% level) and negative effect on the tones-km of products transported across

Europe. That is quite reasonable once 2009 follows the outbreak of the global financial

crisis in 2008, which caused a great reduction in the cargo transported globally.

4.3 LIMITATIONS & DISCUSSION

Even though modal share of railways represents a very good measure regarding what we

examine here, its variation can be rather small, especially regarding a short period like the

one in our sample. This might be caused by the fact that the habitual behaviour of users is

enough inelastic in the short term, so that does not represent the actual change that would

follow a structural change in railways.

On the other hand, in the right side of the equations, which remains unchanged in all four,

except the vertical separation we control population growth and the GDP per capita. Even

though these two measures represent two strong demographic features that can have good

explanatory power, there are no controlling variables directly related with the railway

performance. This can reduce the validity and explanatory power of our analysis. More

controlling variables that definitely influence the performance of railways and their path to

success could be taken into account, like the public subsidies given provided by the

government, but the inclusion of such measures has been impossible due to the lack of

available data.

Furthermore, an increase in ridership as examined here by using passenger-km and tonnes-

km respectively as dependent variables, does not represent an improved performance when

accompanied by a larger increase in public investment. Public investments constitute a

leading factor in improved performance of railways, and can lead to catastrophic results

when missing, as was the case of Railtrack in Britain during 1994 – 2001 (Jupe, Crompton,

2006). That is why their inclusion in a model like this is considered by the author very

critical.

36

Corrupted behaviour should also be taken into account in this point. The attitude of the

incumbent national companies can play a very significant role in the way that the proposed

reforms will be applied in a given country, and the effort that will be put in such a reforming

initiative (Quinet, 2006, Cantos, 2006, Beria et al., 2010). The level of corruption and the

‘free riding’ behaviour, have played a very important role in maintaining structures that

serve personal interests of the incumbents in the railways, while opposing to any possible

reforming initiatives that point on minimizing this kind of events.

The level to which the proposed legislation has been adopted by the union as a whole, is

very important for us to understand the concept of the European case. As we have already

mentioned in the second chapter, one of the long term goals of the European Union is to

establish a united rail area with similar legislation, were operators would be facilitated in

commuting passengers and cargo from one country to another. Taking into account the

special features of different modes of transport, one could assume, though not

unambiguously, that the value to be added in the attractiveness of railways, if international

commuting of cargo is facilitated, can be much larger than the one in the case of passengers.

And that is, in one hand because the cost effectiveness that can be generated in the case of

cargo can successfully compete the one of air transportation, due to the inability of air

transportation to commute large quantities, and on the other because in the case of

passengers it is very difficult for the railways to compete with air transportation in long-

distance travelling, in terms of pricing and travel duration. In that sense the results of

vertical separation could be better evaluated in a later stage, when the directives of the

Union will be adopted by more countries; at least in the case of freight transport where

international transportation can be more significant. For the moment the reforms may

occur in some countries, but this can only have a small impact on increase of cargo

commuted internationally, until the legislation is implemented in the majority of the

Member States.

5. CONCLUSION

37

This paper has evaluated the impact of vertical separation on the performance and

competitiveness of railways in the European context, by examining the extent to which

there is correlation between vertical separation and variations on passenger-km and

tonnes-km generated on one hand, and modal share of railways for passenger and freight

market respectively, on the other. In the case of passenger market we find that vertical

separation might interfere the generation of passenger-km as well as an increase in the

modal share of railways. This might be caused by the fact that reduced quality in services

due to lower prices encourages passengers to switch to other modes of transport. Another

reason could be miscommunication between the interested bodies that is less likely to exist

within the same holding.

In the case of freight we do not see any significant causality from the side of vertical

separation on neither generation of tonnes-km or variation on the modal share. The effect of

vertical separation might be more significant though, in the case of a wider adoption of the

policies proposed, which would lead somewhere closer to the integrated railway area that

the Union is dreaming. For the moment only 15 countries out of the 28 of our sample have

adopted vertical separation, while particular legislative differences still exist in the national

level, a fact that renders it difficult for international freight to develop in the way that EU

wants.

Conclusively, if we want to take a look on the canvas of our findings combined with the

findings of previous research on the vertical relationships in railways, we would say that the

procedure of reforming the European railways has still a long way to go until it achieves its

goals. Plus, the paths that are being followed in that direction are not necessarily the correct

ones. The vertical separation which has been fervently supported by the EU, does not seem

to be as socially desirable as expected, at least in regards with the passenger market. And

that is in line with the fact that European Union managed to include in their planning the

social responsibility of railway transportation only as late as the 4th railway package was

proposed (2014).

38

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40

APPENDIX

Level of separation Level of induced competition

Governance of Regulatory authority

Integration model

Hybrid model

Separation model

Low Medium high In the ministry

In the railway

authority

Separate regulatory authority

Austria Belgium Bulgaria Switzerland Czech Rep. Germany Denmark Estonia Greece Spain Finland France Croatia Hungary Ireland Italy

41

Lithuania Luxemburg Latvia Netherlands Norway Poland Portugal Romania Sweden Slovenia Slovakia United Kingdom

Table 1. Structures and reforms in Europe

Source: IBM – Rail Liberalisation Index 2011.

Variables Sources

Pass-km Eurostat [table (rail_pa_total)]

Tonnes-km Eurostat [table (rail_go_typeall)]

Modal split freight Eurostat [table (tran_hv_frmod)]

Modal split passenger Eurostat [table (tran_hv_psmod)]

Vertical separation IBM (2011) ‘Rail Liberalisation Index’, World

Bank (2011) ‘Railway Reform In South-East

Europe and Turkey On The Right Track?’

GDP per capitaEurostat [table (nama_aux_gph)]

Population Eurostat[table (demo_gind)]

Table 2. Data Sources

42

Ho: All panels contain Unit RootsHa: At least one panel is stationary

Number of panels = 28Number of periods = 9

AR Parameter: Panel SpecificPanel means: IncludedTime trend: Not IncludedDrift term: Not included

Asymptotics: T -> Infinity

ADF regressions: 2 lags

Statistic p-value

Inverse chi-squared(56) PInverse normal Z Inverse logit t(129) L* Modified inv. chi-squared Pm

63.63505.45145.15910.7214

0.22561.00001.00000.2353

Table 3. Stationarity test on population

43

Table 4. Descriptive Statistics

44

Variable Obs Mean Std. Dev. Min Max

country_id 252 14.5 8.094 1 28

year 252 2007 2.587 2003 2011

mod_sh_pas 252 0.0634 0.034 0.007 0.179

mod_sh_freight 251 0.2199 0.164 0.006 0.725

pass_km 207 14783.2 22770.520 193 93918

tonnes_km 238 15738.53 20834.810 79 115652

vertical_separation 252 0.515873 0.501 0 1

gdpcapita 252 2.45E+04 16667.850 2600 80300

population 252 1.82E+07 22300000 448300 8.25E+07

d_population 252 0.0025733 0.008 -0.02845 0.031359

log_gdpcapita 252 9.844645 0.7739397 7.863267 11.29352

log_pass_km 207 8.497741 1.617849 5.26269 11.45018

log_tonnes_km 238 8.909399 1.445568 4.369448 11.65834

_Iyear_2004 252 0.1111111 0.3148951 0 1

_Iyear_2005 252 0.1111111 0.3148951 0 1

_Iyear_2006 252 0.1111111 0.3148951 0 1

_Iyear_2007 252 0.1111111 0.3148951 0 1

_Iyear_2008 252 0.1111111 0.3148951 0 1

_Iyear_2009 252 0.1111111 0.3148951 0 1

_Iyear_2010 252 0.1111111 0.3148951 0 1

_Iyear_2011 252 0.1111111 0.3148951 0 1