Optimal harmonization level

The promotion of harmonization policies by the European institutions and the resistances encountered so far at national level have fed the debate on what should be the optimal harmonization level¹¹ for railway regulation across the Member States. On the one hand harmonization may deliver benefits such as lower input costs, better operational efficiency or access to wider markets. Moreover, as stated in the rationale of the railway reform, it may facilitate the introduction of competition in the European railways, improving their performance against less efficient competing modes. On the other hand, customization is often a cost effective answer to particular domestic conditions, generally better than a one size fits all practice, but imposes costs on those users shifting from one system to the other. As well, inadequate or excessive harmonization relative to the geographical, operational and traffic needs can generate additional costs for maintaining and using the network.

The optimal harmonization level results from a trade-off between the benefits of both alternatives, and will certainly depend on the number of interfaces existing in the overall system, the number of real or potential users aiming to travel across national systems

11 Harmonization is not an absolute concept; more precisely we should talk about harmonization level as a compromise between customization and total harmonization.

and the local specificities of every system. In line with these arguments, an extensive report on railway harmonization from the Australian Bureau of Transport and Regional Economics (2006, pp.47-63) points out the dependency of this trade-off on market and geographical operating environments, as well as on financial and safety risks. It also underscores the relevance of the inherited historical decisions, which influence the future evolution of the system.

The problem remains in the quantification of the costs and benefits involved in the trades-off leading to a certain degree of harmonization. In a report to the European Commission, NERA (2000, pp.101-102) argued that such estimation would be unrealistic if conducted ex ante because of the indefinition of the alternatives to be compared and the relevance of indirect effects like greater flexibility or more competition. The distribution over time of costs and benefits was also pointed as an issue, given the temporal uncertainty of the benefits resulting from harmonization.

As regards the particular case of international rail services, Bassanini and Pouyet (2000, p.18) demonstrated that in the absence of any regulatory harmonization the vertical separation produces particular problems for international rail traffic. They identified the double marginalization problem¹² and the constituency effect¹³ and remarked that the natural output is suboptimal pricing of the rail system as a whole. Their result certainly suggests the need of some kind of harmonization of infrastructure charging, but should charges be harmonized? If yes, to what extent? These are questions without a clear practical answer so far.

On the one side it seems that heterogeneity has certainly contributed to the poor development of the international rail services observed in the last years, delaying relevant performance improvements as well as appropriate investments. On the other, diversity in charging levels and structures may be preferred to harmonization in several circumstances, including different availability of State funding or new investments. From this second point of view, only the diversity of levels and structures will be able to reflect the infrastructure and train operating economics and the requirements of the domestic goods and passenger markets.

Thus, there is no irrefutable evidence that charging levels and charging structures should be identical across the system, but it is still certain that harmonization can be promoted at different intensities and that a greater degree of harmonization seems to be desirable.

12 The double marginalization problem arises as the vertical enchainement of two monopolies, the second having as input the price set by the first.

13 The constituency effect results from the unilateral behavior of each infrastructure manager, that will ignore the effect on the welfare of the other of its own decisions.

The alternative to the efforts towards a greater level of harmonization has been clearly described by Nash and Niskanen (2000, p.4) in the following terms: “the result that the optimal approach to rail infrastructure charging varies so strongly with circumstances means that the prospects for the degree of harmonisation throughout Europe seen as necessary to promote international rail traffic may seem poor”.

2.6 Synthesis

From the beginning of the ‘90s, the European Union has undertaken a deep reform of the railway sector with the declared aim of revitalizing this mode, affected by a decreasing market share in spite of the significant raise in the overall transport demand observed during the last decades. This evolution has led to an unbalanced transport system, strongly relying on the road mode, in which increasing environmental and economic problems arise.

To address this situation, the EU has promoted a step-by-step market opening directed to introduce competition in a sector where national monopolies have constituted the main industrial structure. The core principle for the implementation of the reform has consisted in the vertical separation of the infrastructure management and the operation business, with the opening to competition of the latter and the introduction of infrastructure charges as main results. Although this reform is still ongoing, a preliminary evaluation suggests that its degree of implementation, the degree of competition introduced in the market and the final economic effects are evolving slow and with poor success so far.

Part of these shortcomes may be attributed to the failure in harmonizing the regulatory aspects of the reform across the Member States, together with the increased complexity derived from the reform itself. There is evidence that the combination of vertical separation and non-harmonized regulation may hinder the development of international rail traffic. This consideration is particularly appropriate in relation to the current diversity of railway infrastructure charges and has recently fostered the debate on what should be their desirable level of harmonization. The preliminary outcome of the ongoing discussion suggests the convenience of promoting a greater degree of harmonization.

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