Impact of on-track competition on public finances - the case
of the Czech Republic
Monika Jandova1
, Tomas Paleta1
Abstract
The European Commission presumes that competition in the passenger railway market will motivate
railway operators to become more customer-led companies. Competition forces should lead to an
improvement in the quality of services provided and thereby increase demand for rail transport and
cut budget burdens.
This paper aims to assess the budgetary impacts and development of public spending efficiency in the
context of on-track competition in the Czech Republic. The paper illustrates what impact the increase
of the number of passengers (including passengers entitled to state-imposed discounts on commercial
lines) had on public funds, and public spending efficiency as measured by the ratio of public
expenditures to rail transport performance.
The general results indicate that the situation regarding the budgetary impact is more complex than
the original ideas considered. While both the length of subsidised railway lines and the number of
subsidised train-kilometres have decreased, the fiscal burden has not dropped but increased as a final
consequence. It turns out that an introduction of competition need not result in a reduction in budget
entitlements nor an increase in the efficiency of public resources spent. The efficiency of public
resources remained unaffected despite the introduction of on-track competition on the main routes.
Keywords
On-track competition; railway operations; public budget contributions; public spending efficiency;
compensation; Czech Republic
1. Introduction
Railways have been a significant burden on finances for a long time. Decreasing labour productivity,
the rigidities of state monopolies, and a decline in both freight and passenger demand have led to
growing fiscal demands and declining rail industry efficiency. These long-term fiscal, social, and
competitive pressures have resulted in gradual reforms that have been institutionalised in the form of
the European railway packages aiming at revitalising the rail sector. An introduction of competition is
one of the proposed measures. Railway liberalisation may lead to benefits for railway passengers and
public finances (Pietrantonio and Pelkmans, 2004; European Commission, 2008; Beria et al., 2012). As
Nash et al. (2011) summarised, economic theory forecast that an increase in competition may lead to
improved services, lower costs, and, simultaneously, growth in transport performance and a fall in
subsidies paid.
The European railway industry receives substantial amounts of public funding, for both financing
investments into infrastructure and subsidising non-profitable operations and supporting the
restructuring of railway organisations (van de Velde et al., 2012). The rationale for providing public
support to railways is to provide services beyond those a commercial railway would offer (ECMT, 2005).
department of Economics, Faculty of Economics and Administration, Masaryk University,
iandova(5>econ.muni.cz, paleta(5>econ.muni.cz.
Governments face a number of choices in determining the level of public support they should provide
for railways (Di Foggia and Arrigo, 2016), but generally the main objectives of the policies adopted at
the EU level may reduce budgetary expenditures (Pietrantonio and Pelkmans, 2004) and ensure better
value for money (ECMT, 2005).
Despite the significance of the public spending issue, public expenditures on railways are largely
unexplored in Europe (Di Foggia and Arrigo, 2016). Analyses of the budgetary implications of
introducing on-track competition are not common at all. When on-track competition is introduced, it
is assumed that the removal of subsidies and provision of railway operations at commercial risk will
have a positive budgetary impact. This simple assumption is complicated by the fact that cherry-picking
may take place when on-track competition is introduced, and, together with state-imposed
compensation for commercial operating companies, there is a much more complicated view of the
impact of on-track competition on budget spending and its effectiveness.
The aim of this paper is to assess budgetary impacts and the development of public spending efficiency
in the context of on-track competition in the Czech Republic. Impacts on public budgets are focused
exclusively on two categories of expenditures for railway operations - subsidies for provable losses
and compensation for state-imposed discounts - and we abstract away from the revenue side. In
dealing with the aim of the paper, we use a public spending efficiency indicator that is measured by
the ratio of public expenditures to rail transport performance.
Within the aim of the paper, we will focus on two main questions:
• What was the impact of an increase in the number of passengers caused by on-track competition,
including passengers entitled to state-imposed discounts, on public funds?
• How has the on-track competition introduced into the long-distance railway operation segment
affected public spending efficiency?
This paper is structured as follows. In Section 2, we review the relevant literature on both on-track
competition effects and budgetary issues concerning passenger railway operations. Next, in Section 3,
we present a methodological approach that represents the basis for answering the question of the
budgetary impacts of introducing on-track competition. In Section 4, we focus on the organisation and
characteristics of long-distance passenger transport in the Czech Republic and selected aspects of its
funding. Section 5 provides an overview of long-distance passenger railway performance and a
budgetary impact assessment based on the established indicators. And finally, Section 6 summarises
the obtained results, discusses conclusions, and identifies potential directions for further research.
2. Literature review
In connection with reforms of the European railway market, the introduction of competition to
passenger rail transport, and pressures to solve the issue of public funding of railways, there are a
variety of studies, both theoretical and empirical, that can be considered.
For a long time, it was true that there was very little experience with on-track competition. The smaller
extent of on-track competition on rails was, among other factors, given by the risk of cherry-picking
practices (e.g., in Great Britain), which may be applied by potential competitors entering only the most
lucrative markets. This practice may lead to: a) an increase in debt for or subsidies to the incumbent,
or b) a cut in unprofitable services (Beria et al., 2012). The situation has changed significantly with the
development of this kind of competition in passenger railway transport in a few European countries in
recent years. What, therefore, are the impacts of introducing on-track competition into passenger rail
transport? AsCrozet (2016) stated, there is not an easy answer to this question. Simultaneously, so far
there have been only limited studies on the impacts of competition showing a mixed picture as to
possible effects (UNECE, 2017).
The initial literature assessing the impacts of on-track competition was built on simulation models.
Preston et al. (1999) answered the question of the desirability of on-track competition in the British
passenger rail industry. They were the first to use a PRAISE simulation model to assess the desirability
of more or less competition on the Ipswich-London route. Then, Johnson and Nash (2012) presented
the results of simulating the effects of introducing on-track competition to a long-distance
international rail passenger route coexisting with strong domestic high-speed services. They pondered
the effects, including benefits to customers (specifically, fares and services), the profitability of the
incumbent, and the revenues of the entrant, also using a PRAISE model. A similar paper by Mancuso
(2014) offered a simulation based on the discrete choice model with limited data on the Milan-Rome
route, with their analysis taking into account the market shares of both incumbents and newcomers,
consumer surplus, and environmental costs. In addition, Alvarez-SanJaime et al. (2016) developed an
ex-ante analysis of the introduction of on-track competition in Spain based on a simulation and
identified the socio-economic conditions under which a newcomer's entry would be viable. Finally,
Broman and Eliasson (2017) focused on market dynamics in an on-track competitive market and
studied duopoly behaviour through simulations. Their conclusions predicated total welfare and the
conditions necessary to achieve a total welfare surplus.
The first real effects of on-track competition were dealt with in Nash et al. (2011), but there had only
been marginal entries into niche markets, especially in Sweden and Germany, at the time.
Alexandersson and Hulten (2009) analysed the deregulation process in Sweden in view of the problem
of how to dismantle the incumbent's remaining profitable services and how to reorganise the sector
into a unified market structure.
Some studies have addressed directly and in detail the question of the impact on prices and the pricing
policy pursued by both incumbents and newcomers in terms of on-track competition. Bergantinoet al.
(2015) was one such work that empirically explored the development of prices (in both intra-modal
and inter-modal competition) and the effects on capacity in Italy. The Italian case is the most elaborate
example that deals with price effects. The study by Beria et al. (2016) confirms this statement because
it is a very detailed study on price reactions by the incumbent after a new entry and generally the price
strategies of the two operators. Regarding the Swedish case, Vigren (2017) investigated what effects
the on-track entry had on market prices using ticket price data from the operators' websites. A study
by Cascetta and Coppola (2014) had a wider focus, concentrating on price effects and also supply and
demand. Their analysis was based on legal regulations; the operators' business plans, timetables, and
prices; and surveys and interviews. In addition to exploring past data, they forecasted the mentioned
indicators.
Other studies have addressed effects influencing the supply side. Froidh and Nelldal (2015) analysed
the effects of market opening on the supply of long-distance services in Sweden. Their aim was to
answer the question of the extent to which the new services competed with the incumbent's services
and how this affected the incumbent's supply. Related to the supply side, the issue of sector
concentration has appeared and been studied (e.g. in the comparative UNECE, 2017). Demand-side
effects have been monitored independently as well. The Italian case is discussed in Beria and Grimaldi
(2016), who following their previous work applied a cost-benefit analysis and extrapolated to reach
conclusions on customer benefits. In addition, Froidh and Bystrom (2015) examined customer
preferences in Swedish passenger transport. Their research was grounded in a stated choice study
together with a multinomial logit model and they investigated how preferences differed among
different categories of customers. The feasibility of on-track competition in Great Britain was
addressed in CMA (2016), which opened this question aiming at evidence for the potential passenger
benefits and efficiency gains for train operators.
As regards the examination of competition in the Czech case, a paper by Tomes et al. (2014) was the
first comprehensive survey of competition on the Czech rail passenger market. This paper focused on
both the long-distance and regional railway passenger markets and their organisation. Subsequently,
Tomes et al. (2016) analysed the market impacts of on-track competition in the Czech Republic
between 2011 and 2014 focusing on market categories - price, product, and marketing strategy.
An interesting picture has been suggested in comparative studies, even if it is very complicated to
generalise any national experience. Bergantino (2015) studied market changes in the EU and derived
factors determining the penetration rate of newcomers and their form (whether they are subsidiaries
of existing national operators, owned by other operators, or private without any experience in the
transport sector). Next, she focused on a review of the evidence within the EU concentrating on the
form of input, the quality of rolling stock, and services. In addition, Perennes (2017) evaluated the
potential consequences of on-track competition at the European level based on the consequences of
on-track competition in the seven forerunner countries. The output of this paper was a summary of
the standard profiles and financial strategies of new entrants. A comparison in the wider context of
Central European countries was provided by Tomes and Jandova (2018). They compared the impacts
of on-track entries on the development of a particular national railway market while covering entry
barriers, business models, market developments, and regulatory challenges.
The academic literature on industry-efficiency effects in the case of railways is scarce (Casullo, 2016),
and in the case of on-track competition completely marginal, despite its importance. It is important to
keep in mind that there are different levels of efficiency. Jensen and Stelling (2007) focused on the
development of Swedish railways and explored whether and how deregulation has affected cost
efficiency with an analysis based on a longitudinal econometric approach. Another study dealing with
the issue of efficiency was conducted by Driessen et al. (2006), who explored the link between the
form of competition and productive efficiency in the railway industry using data envelopment analysis
in order to construct productive efficiency scores. A very inspiring paper was Desmaris (2014) who
focused on the Swiss reform of railway passenger market and also answered the question what results
for public finances have been obtained, measured by public fund use efficiency. In addition, Casullo
(2016) attempted to measure the operational efficiency impact of on-track passenger operations
measured in terms of operating expenses per train-kilometre (train-km) using a difference-indifference
estimator for the study group of Austria, the Czech Republic, and Italy compared to a group
of similar rail networks.
In CMA (2016), the question of the way in which on-rail competition may threaten government funds
was also marginally processed in the context of the expansion of on-track competition on the British
passenger railway market. The study claimed that greater on-rail competition could result in an
increase in the level of government subsidies required.2
On the other hand, it is necessary to bear in
mind the very special nature of the British railway sector, which is organised on the franchise principle,
which is very different from the Czech case.
If we now look at literature dealing with public expenditures on rail services, two groups of studies
appear. One group is descriptive studies with the aim of conducting a large international comparison,
possibly finding a trend and its determinants, and the other is studies evaluating the impact of state
aid on the railway industry or efficiency.
The large number of descriptive studies is due to the complexity of the possibilities of exploring the
issue and the lack of relevant data. The NERA (2004) study is usually considered one of the first, most
important, and most detailed studies on public funding of European railways. This study reflected the
EU obligation from the 1996 White Paper3
to report on the progress made by EU countries in regularly
decreasing the debt and improving the finances of the railway sector. Obviously, their conclusions were
based on the period when the railway reforms had just begun and when almost all of the countries in
the EU had passenger services funded by contract and very few services operating outside of the
2
An expansion of on-track competition may reduce franchised operators' revenues, which requires an increase
in governmental funding or lowers governmental revenues from franchises (CMA, 2016).
3
Meaning the 1996 White Paper: A Strategy for Revitalising the Community's Railways.
framework of public service obligations (PSOs). The study pointed out the significance of large hidden
support for railways that had been persisting (NERA, 2004). Afterwards, Schäfer and Götz (2018)
updated and expanded the NERA (2004) database on public contributions to railways and identified
two main models for public funding in connection with the amount of access charges and operating
contributions paid.
The issue of how to estimate the actual value of subsidies that go to the transport sector was dealt
with in a European Environment Agency (2007) report as well, with summarised data on the size,
structure, and distribution of transport subsidies in Europe. Later, a paper by Beria et al. (2012) within
research into railway regulation and liberalisation in four EU countries (Italy, France, Germany, and
Spain) focused marginally on PSO funding. In terms of scope and focus on estimating subsidies directly
and exclusively to European railway operators, there have been more significant studies (e.g. Arrigo
and Di Foggia, 2013; Di Foggia and Arrigo, 2016). This research supplemented the significant lack of
information and enabled a comparison of government spending on railways in three large EU countries
(Italy, France, and Great Britain; see Di Foggia and Arrigo, 2016).
Evaluation studies have generally considered ambiguous effects on efficiency from state support
aiming at railways. As Pietrantonio and Pelkmans (2004) stated, state aid can induce an improvement
in efficiency, but when the intensity of state aid is too high, it could lower productive efficiency. Studies
evaluating the appropriateness of public support for railways have been carried out for a few EU
countries-e.g. Hungary pancoszand Besseneyi, 2005), Great Britain (McNulty, 2011), and Italy (Arrigo
and Di Foggia, 2014).
A study by Täncosz and Besseneyi (2005) evaluated the efficiency of government contributions in the
railway sector in Hungary using a benchmarking method (with German railways as the benchmark).
Another study based on a benchmarking method was McNulty (2011), which focused on general
factors determining the cost of railways in Great Britain and set recommendations for how to improve
efficiency and value for money for rail in Great Britain. This study used a benchmarking method when
comparing British rail with French, Netherlands, Swedish, and Switzerland railways. A paper by Arrigo
and Di Foggia (2014) devoted to the assessment of public support for railways in the case of Italy was
methodologically based on a benchmarking method. They focused on summarising the total amount
of public subsidies paid to the railway sector over the last quarter of a century in five major European
countries (Italy, Great Britain, Germany, France, and Sweden). Their main objective was to evaluate
the appropriateness of public support paid in Italy compared to that in the other selected European
countries.
A multi-country comparative study was performed by van de Velde et al. (2012), who also investigated
the question of value for money for state budgets in a sample of five countries (France, Germany, Great
Britain, the Netherlands, and Switzerland), where funding included all state contributions to the
railway system (operating subsidies, investment grants, pensions, and health insurance costs and net
of dividends to the state). It was a very rough assessment based on generalised data for both passenger
and freight transport. The authors concluded that there was no clear overall trend visible in the
development of state funding and that a more detailed analysis was needed.
As can be seen from the above, i) studies on on-track competition have not dealt with the question of
the budget effects of on-track competition on the passenger railway market, and ii) research on public
spending in the railway sector has not taken into account systematically and in detail the presumption
of on-track competition. Thus, the goal of this paper is to fill in the gap and answer the following
question: What have been the budgetary impacts of introducing on-track competition in the Czech
Republic?
3. Methodology
Considering the aim of the paper, we had to choose an adequate measure to calculate the effect.
Together with Di Foggia and Arrigo (2016), who claimed that data on EU railway funding suffer from
some limitations, we encountered some limitations in data availability that hindered a direct
calculation of the impacts of introducing on-track competition to the long-distance passenger market
in the Czech Republic. These limitations included: i) missing data for some years as a result of missing
notifications from EU countries, and ii) the fact that the published data do not disaggregate kinds of
support (Di Foggia and Arrigo, 2016). These constraints were a major barrier for selecting an
appropriate indicator to calculate the impacts on public resources and the efficiency of their use.
A calculation which included performance indicators in passenger-kilometres for separate longdistance
rail transport categories (non-commercial in PSO contracts vs. commercial in on-track
competition) would be the most illustrative and would most accurately describe the indicators for the
market situation. Unfortunately, the incumbent operating company does not provide this data for each
detailed category of transport services (regional PSOs, long-distance PSOs, and commercial transport)
and for individual routes not at all. The unavailability of suitable data is largely due to fierce
competition that makes detailed data more sensitive and makes operating companies protect the data
as a trade secret. In addition, the incumbent has been facing an investigation by the European
Commission regarding abuse of its dominant position and the availability of data is therefore even
more limited.4
In addition, there is no way to estimate or derive performance in passenger-kilometres
for individual routes reliably (especially not retrospectively).
For this reason, we used performance measured in train-km to calculate the efficiency of public funds
spent. This indicator is considered sufficient because it is a widely used measure of efficiency. Casullo
(2016) claimed, for example, that operating expenses per train-km is a critical indicator for rail
efficiency because it measures the level of financial inputs required per train. It is clear that the higher
this indicator is for a given railway, the more that railway must invest for each train-km, and,
simultaneously, a higher number compared to a peer group is indicative of relative inefficiency
(Casullo, 2016). In our case, we measured the efficiency of spent budgetary funds, which in the case of
PSO services shows at the same time the amount of provable loss per kilometre, but the principle
remains the same.5
In our calculations, we relied less on aggregated data from "global" EU sources (EU railway reports),
and instead most of the data used originated in national sources (e.g. the annual reports of individual
operators, the Ministry of Transport, and the infrastructure manager SŽDC). Data on compensation for
state-imposed discounts are publicly available from the Ministry of Transport website and in the
annual reports of individual operating companies. The amount of compensation for provable losses
for the provision of long-distance rail transport under a PSO for the incumbent is available from the
incumbent's annual reports. We recalculated the data at constant prices for 2010 based on year-onyear
CPI inflation to capture real trends.
The performance of private operators on long-distance routes was recalculated from the infrastructure
manager's annual reports. The number of ordered train-km for the incumbent under a PSO can be
traced back in annexes to the 10-year framework contract from 2010 between the Ministry of
Transport and the incumbent (Ministry of Transport, 2010).6
The number of ordered train-km is given for each one-year timetable, which begins in December every
year. We recalculated it for calendar years in order to carry out an accurate comparison with other
data. The market share measured in the incumbent's train-km for open access was calculated from the
4
For more information on the investigation, see European Commission (2016a).
5
The calculation of provable loss in the Czech Republic is addressed at Ministry of Transport (2010).
6
This contract forms the basis for an annually concluded agreement on ordered services.
timetables, but in a simplified manner. First, we assumed that all trains run daily, which is not always
the case, and this simplification therefore led to overestimation. Second, the distance from Prague to
Ostrava was always included in our calculation, but some trains continued to Bohumin or the border
with Poland or Slovakia (leading to a underestimation of the indicator). Overall, it can be assumed that
the incumbent's market share was slightly underestimated on the basis of the control calculation
according to the same method that was applied to private operators. However, all of these
simplifications distort the incumbent's performance for open access only very slightly and do not affect
the overall conclusions.
In order to determine the impact of the introduction of competition on the state budget, we built on
the development of public payments for long-distance domestic railway transport services. We took
into account two types of public payments from the state budget to calculate expenditures: i) a state
subsidy for a proven operating loss from long-distance transport services under a PSO, and ii)
compensation for state-imposed discounts for commercial services, which is not a traditional subsidy
but a budget expense related to the introduction of competition that is able to display the dynamics
of the market after the introduction of competition and, at the same time, may become a notable
budget item after a competition-led demand increase.
In addition to describing the current state, we were interested in the efficiency of public funds spent
depending on performance, which we measured in train-km. We methodologically built on the
calculation of the efficiency of the use of budgetary resources by Desmaris (2014) who measured public
fund use efficiency by CHF paid by the Swiss government for each train-km. Our concept of efficiency
is not efficiency in terms of operational efficiency, which is usually monitored at the company level.
The "public spending efficiency" we are monitoring is intended to be the monitoring of the efficiency
of the public funds invested and the benefits they gain measured by train-km (due to lack of a more
accurate pass-km indicator).
The first indicator was the development of state subsidies per train-km for domestic long-distance
passenger rail transport provided by the incumbent under a PSO. The indicator shows the unit loss for
long-distance services under a PSO and, at the same time, the efficiency of the public funds spent in
this transport category.
~ c c . . public subsidies for lonq-distance trains G PSO
E f f iciency pcn = — - (1
train-km ordered
Another indicator of the efficiency of the use of public budgets is the efficiency of budget funds on
routes with on-track competition - EfficiencycoMp. This indicator measures the costs on stateimposed
discounts with travelled train-km for on-track competition.
This compensation is the only public funds that an operator under open access obtains. This indicator
illustrates the cost of discount policy, and it also shows, with some constraints, the effectiveness of
the use of budgetary resources. It also illustrates the dynamics of the development of passenger
interest and is a side effect of changes in market demand. It can be expected that a fall in prices that
may arise from competition and an increase in the number of passengers eligible for a discount would
have a negative effect on the state budget. As demand grows, this indicator will grow. In view of the
fact that discounts are calculated from full prices, any potential market consolidation or price increase
may lead to an increase in budget entitlements and an increase in this indicator.7
7
Changes in discount policy interfere with the year-to-year comparability of the data. In the case of the Czech
Republic, there was a change in discount policy in September 2018, i.e. outside of the analysed period.
EfficiencyC0MP =
compensation for state-ordered discounts
train-km of commercial trains
(2)
In order to calculate the overall impact from the introduction of competition to passenger longdistance
railway transport on the spent budgetary resources, the two effects need to be combined.
The total impact was measured by the sum of both types of public spending on total train-km in longdistance
services. The formula for overall efficiency is as follows:
This indicator shows what the budget costs per 1 train-km of long-distance passenger transport in the
Czech Republic are.
4. The Czech case - market organisation and funding
It is generally considered that long-distance passenger services have some potential for intra-modal
competition depending on the scale and density of the market (Pietrantonio and Pelkmans, 2004). At
the same time, country conditions for newcomer access to the national networks should be consistent
with EU rules, which means guaranteeing access to every licensed operator (Beria, 2010). This has been
fully adopted into Czech legislation in Act No. 266/1994 Coll., on Rail Systems. Any licensed operator
may, after obtaining a license, operate rail passenger transport services financed solely by revenues
from fares, i.e. commercially.
The history of railway liberalisation in the Czech Republic was described in more detail in Tomeš et al.
(2014), and we will therefore be very brief. As noted above, the milestone forthe railway liberalisation
process was 1994 when the act enabling a change in the railway system and ensuring de jure the
introduction of competition into the railway market came into force. Long-distance railway passenger
transport services were not affected by competition until 2011, which means that all services were
provided by the incumbent, the state-owned operations company České dráhy (Czech Railways, CD),
and ordered as PSOs with the only exception being the highest category of CD trains - the SuperCity
(SC) Pendolino trains deployed on the busiest Prague-Ostrava line since 2005. In 2011, the market
structure changed when the first private operator, RegioJet (RJ), launched on the Prague-Ostrava line,
followed by another private newcomer, LEO Express (LE), the following year. In subsequent years, the
market was further opened and international routes to Poland, Slovakia, and Austria were added. The
evolution of operating performance with on-track competition is captured in Figure 1.
Efficiencytot =
Subsidies for long-distance trains £ PSO
+ compensation for state-ordered discounts
total train-km of long-distance trains
(3)
Figure 1: Performance of individual operators with on-track competition (train-km in thousands)
12000
2010 2011 2012 2013 2014 2015 2016 2017
RJ • LE • CD
Source: own calculations, data based on the infrastructure manager's annual reports and timetables
Nowadays, a combination of ordered and subsidised non-commercial services (under PSOs) and
services provided on a purely commercial basis (in on-track competition) makes up the long-distance
rail passenger transport market in the Czech Republic (see Table 1).
Table 1: Long-distance railway services
The scope of
services*
Routes Operating losses
covered
Compensation for
discounted tariffs
Commercial Minority Prague-Ostrava
& a few other
trains**
No Yes
Non-commercial
under a PSO
Majority Rest of the longdistance
market
Yes No***
Source: own elaboration
Note: * for details, see Table 3; ** see Figure 2; ** they are taken into account in the PSO contract.
The non-commercial services are motivated particularly by social and ecological factors.
Simultaneously, in this case, revenues from fares are lower than operating costs, which generates the
need to pay for operating losses from this non-commercial public transport. The Ministry of Transport
orders most of the long-distance rail transport services as PSOs and then has an obligation to pay any
provable loss to an operator. The maximum level for such compensation is set by the Ministry of
Transport as agreed with the Ministry of Finance (§ 4, Act No. 194/2010, Coll.). The Ministry of
Transport currently chooses operators by direct awarding of services to the state-owned CD.8
In addition to the obligation to cover operating losses, there is another duty - for losses caused by
state-imposed fare discounts for defined groups of passengers. It arises from Regulation No.
8
With a few exceptions and a governmental plan for future competitive tendering for the long-distance
segment.
1370/2007 on public passenger transport services by rail and by road.9
Following this regulation, the
Czech government adopted Resolution No. 452 of 7 June 2010 dealing with this kind of compensation.
All state-imposed fare discounts are offset by the Ministry of Transport in the case of services
performed outside of public service contracts, i.e. commercial services. The state-imposed discounts
include discounts for children, students, and disabled people and their attendants (from 2012 until
September 2018).10
Table 2: State imposed discount in Czech Republic in 2011-2017 (%)
Disabled
Traveller
category
Children
up to 6
years
Children
6-15 years
Students
6-15
years
Students
15-26
years
people
(holders of
UP or
ZTP/P
card)
Guide of
ZTP/P
cardholder
Parental
visits to
institutions
Discount 100% 50% 62.50% 25% 75% 100% 75%
Source: Resolution No. 452 of 7 June 2010
In connection with the above noted, a question arises: How important are commercial services in the
long-distance railway segment? As can be seen in Table 3, the share of commercial services measured
in train-km has been growing and now accounts for around 25% of total performance in the longdistance
passenger railway sector.
Table 3: Shares of service categories (%)
2011 2012 2013 2014 2015 2016 2017
Commercial 14.10 19.32 24.02 22.96 24.83 25.78 25.10
Non-commercial under a PSO 85.90 80.68 75.98 77.04 75.17 74.22 74.90
Source: own calculations, data based on the infrastructure manager's annual reports and timetables
None of the monitored private operators provides PSO services in long-distance passenger rail. The
above changes in the share of PSOs in the total performance of long-distance transport are therefore
due to the increasing number of CD connections that go beyond PSOs, and partly due to the changing
number of ordered PSO services.
Lines with at least some commercial services are displayed in Figure 2. In addition to the well-known
Prague-Ostrava open access line and the Prague-Brno line launched by the private operator RJ in
2016, there are some commercial services provided by the incumbent CD on the Ostrava-Breclav line.
9
ln addition to the compensation obligation, this regulation brought greater transparency particularly in the
methods and levels of compensation in the case of direct awarding and reduced uncertainty for both the
ordering authority and the service provider over legal obligations (Steer Davies Gleave, 2016).
1 0
Until the end of 2011, the discount was also imposed for elderly citizens and officials.
Figure 2: Commercial lines in the Czech Republic (as of January 2019)
Source: own elaboration
The long-distance segment of non-commercial trains comprises the various train quality categories of
fast (R), express (Ex), Intercity (IC), and EuroCity (EC) trains. Both ICand EC trains were fully subsidised
during 2007-2010, while only the highest quality SC Pendolino trains were excluded. The milestone in
2007 was connected with the separation of passenger and freight transport. While passenger transport
operated at a loss, freight transport was profitable and cross-financing was taking place, which
motivated the incumbent CD to address the funding and pushed politicians to receive subsidies for
higher quality IC and EC trains that were commercial until 2007 as well (Lysoněk, 2007).
In 2010, however, there was another change in the subsidising railway system. Orders from the
Ministry of Transport and subsequently subsidies for IC and EC services were limited based on the
prerequisite that these high-quality services had to be able to be profitable (Petrák, 2011). All IC and
EC trains were to be operated commercially, but only seven pairs of IC/EC trains were taken out of PSO
contracts in the first step in December 2010 (ČT24, 2011). The exception concerned EC trains bound
by international agreements from Prague to Germany, Austria, and Slovakia (via Vsetín; Petrák, 2011).
Simultaneously, the category of most of the trains that operated on the Praha-Ostrava line changed
from EC trains to subsidised Ex trains with the new 2010/2011 timetable (ČT24, 2011). Other
agreements between the incumbent CD and the Ministry of Transport led to subsequent growth in the
number of commercial connections.
5. Assessment of budgetary impacts
Concerning the impact of the introduction of competition in long-distance passenger transport on
performance measured in train-km, the introduction of on-track competition definitely reduced PSO
performance by about 3 million train-km. The performance of the commercial services increased more,
but the development was more variable than in case of PSOs. Generally, the overall impact balance
was clearly positive, especially since 2013, but the year-on-year development of total performance in
long-distance rail transport is characterised by both increases and decreases.
Table 4: Performance of long-distance passenger transport (train-km in thousands)
2011 2012 2013 2014 2015 2016 2017
Non-
commercial
under a
PSO
35 051 32 749 32 339 32 295 32 394 31725 32 431
Commercial 5 753 7 842 10 222 9 625 10 700 11020 10 867
Total 40 804 40 591 42 561 41920 43 094 42 745 43 298
Source: own calculation, data based on the infrastructure manager's annual reports and timetables
The assessment of impacts brought some surprising findings. While our expectations suggested that
the introduction of competition to the rail would bring about savings for public funds, our findings
bring an ambiguous result (see Figure 3).
Figure 3: State compensation for provable losses for long-distance services under PSOs for CD (CZK in
millions)
4 700
4 486
4 599
4 409
4 250^
03^T
2010 2011 2012 2013 2014 2015
• real —•—nominal
2016 2017
Source: nominal data: CD annual report, real data: own calculation
Basically, state subsidies for long-distance PSO services were at a standstill in nominal terms up until
2013 and then began to grow quite dynamically. If we recalculate expenditures to fixed prices from
2010, there is a decline in budget subsidies in the first years, but the post-2013 breakthrough is also
evident here, and from 2015 onwards, the real subsidies are higher than the 2010 level. Since 2015,
there has been an apparent stabilisation in public expenditures on long-distance PSO services (in
constant prices).1 1
1 1
For comparison, the development of total government expenditures can be find e.g. at
https://tradingeconomics.com/czech-republic/government-spending.
Another follow-up indicator is the budgetary impact of operators (and trains) operating at commercial
risk. Here, we monitor the development of compensation for state-imposed discounts (Figure 4).
Figure 4: Compensation for state-imposed discounts (CZK in millions, 2010 prices)
120
2010 2011 2012 2013 2014 2015 2016 2017
• RJ LE BCD
Source: own calculation, data based on Němec and Petrák (2018)
The introduction of on-track competition has led to a noticeable increase in traffic, especially on the
Prague-Ostrava route, where there is no reasonable alternative in road transport due to the lack of a
direct highway connection. The growth in passenger demand was also reflected in compensation for
state-imposed discounts, and the dynamics of the market are evident from the development of this
compensation. A significant increase between 2010 and 2011 was caused by a change in the system of
discount compensation, which began to be reimbursed by the Ministry of Transport during 2010. Since
2012, we can see obvious effects from the newcomers, with on the one hand the share of the
incumbent CD noticeably decreasing, and on the other hand, the total volume of compensation
dramatically increasing (it almost doubled between 2011 and 2017).
Table 5: Shares of long-distance passenger transport performance and public payments (in %)
Share in performance in trainkm
2011 2012 2013 2014 2015 2016 2017
CD 94.87 72.91 55.93 51.30 53.43 49.53 45.44
RJ 4.92 25.82 23.82 27.00 25.01 28.63 36.61
LE 0.21 1.27 20.25 21.7 21.56 21.84 17.95
Share in discount compensation
CD 90.27 63.62 48.14 33.14 25.69 23.31 21.49
RJ 9.73 34.99 33.55 46.74 49.91 53.05 60.11
LE 0.00 1.39 18.31 20.12 24.40 23.64 18.40
Source: own calculation, data based on the Ministry of Transport, the infrastructure manager's
annual reports and timetables
annual reports and timetables
When we focus on the market shares of individual operators, we can conclude that the increase in the
number of passengers entitled to a discount is higher than would correspond to the market shares per
kilometre in the case of the newcomers. This is particularly noticeable for RJ, which may have been
caused by the generally higher occupancy rate of RJ trains, the higher popularity of RJ among discount
passengers, or (theoretically) unauthorised travel with discounted RJ passenger tickets.
Regarding the development of the efficiency of public spending on PSO long-distance services
(Efficiencypso), it is not possible to forecast the impact of extraction of some PSO routes in advance.
The introduction of on-track competition may have had both a positive and a negative effect on the
efficiency of spent budget payments. If services on some tracks were more unprofitable (budgetdemanding)
than average, the indicator may be reduced because the exclusion of such services
significantly reduces the amount of public subsidies. In the case where relatively slightly unprofitable
services are excluded, the indicators may increase as relatively more loss-making services remain. The
difficulty of obtaining data on the profitability of individual railway lines in the Czech Republic
complicates the estimate, but when the fact that all cases are main routes connecting the largest cities
within the Czech Republic is taken into account, it may be assumed that these lines were relatively
slightly unprofitable (at least) compared to other subsidised long-distance lines. If this is proved, then
Efficiencypso should grow. These considerations were largely confirmed by the figures and EfficiencyPSo
in the monitored period increased annually in nominal terms and most years in real terms.
Figure 5: Compensation for provable losses for long-distance PSOs (CZK per train-km)
141 142
2011 2012 2013 2014 2015 2016 2017
real • nominal
Source: own calculation, data based on the Ministry of Transport (2010)
As shown above in Figure 5, three distinct periods can be seen in the development of Efficiencypso.
First, the period of 2011-2013 is characterised by stable development, which means that the primary
effect of the introduction of competition did not imply a change in the efficiency of budget subsidies
(Figure 5) and the decrease in the number of services (Table 4) under PSOs was accompanied by a
percentage decrease in budget subsidies (especially if we focus on the figures in constant prices - see
Figure 3). Second, the period of 2013-2016 is distinctive in a gradual increase in the indicator, in both
constant and current prices. This development is consistent with increasing subsidies to compensate
for provable losses, when the loss of PSO services increased with a more-or-less constant (in 2016,
even decreasing) extent of ordered PSO services and the effectiveness of budget subsidies declined.
The year 2017 could suggest some signals of stabilisation.
The growing real spending pertrain-km in PSO long-distance services after the introduction of on-track
competition can be interpreted as indirect evidence of cherry-picking. It can be reasonably assumed
that newcomers enter a market that is commercially lucrative. Losses for the incumbent due to the
loss of revenues from the busiest routes then leads to an increase in overall losses and thus to an
increase in the compensation required. A second, purely hypothetical, justification may be a decline in
interest in long-distance PSO services, which would increase their likelihood of leading to losses. Any
increase in traffic recorded in recent years in the Czech Republic would be caused by growth in demand
on commercial lines (and possibly in regional transport). Another potential explanation would be that
the increase in rail costs would be higher than overall inflation. The last, again hypothetical,
justification could be the government's attempt to compensate the incumbent for losses caused by
the introduction of on-track competition. There is no way how to confirm or disprove any of these
hypotheses. The exact verification is unfortunately prevented by the unavailability of detailed data,
internal documents and recordings of meetings.
An international comparison is also worth attention. Long-distance PSO payments in Czech Republic
oscillated nominally between EUR 4.73 and EUR 5.38 per train-km throughout the monitored period,
and these values are below the EU average (see Figure 6).1 2
Figure 6: PSO compensation (EUR pertrain-km, 2014)
120
100
80
60
40
20
0 I I I I
RO FR LU BE NO IT DK AT DE IE LV SK HU ES BG EE HR CZ PL EL SI Fl PT LT UK
Source: European Commission (2016b)
As the development of EfficiencyPSo has already shown, on-track competition had a rather negative
impact on public PSO expenditures. On the other hand, the introduction of on-track competition
increased the performance of long-distance rail transport and led to savings in public funds paid via
PSO contracts given that only compensation for state-imposed rebates is paid to operators providing
commercial services.
'If we also include regional transport in the calculation, the value would even be about half a euro lower.
Table 6: Discount compensation of on-track competition (CZK pertrain-km)
2011 2012 2013 2014 2015 2016 2017
EfficiencyCOMP (real prices) 1.71 2.76 2.55 2.57 2.51 3.18 3.54
Source: own calculation, data based on the infrastructure manager's annual reports, the Ministry of Transport,
and timetables
As Table 6 shows, compensation for state-imposed discounts showed relatively dynamic growth over
the monitored period, more than doubling in constant prices, yet remaining less than l/50th of the
compensation for losses for PSOs in 2017. It means, budget cost of running the PSO service is 50 times
more expensive than the service under the on-track competition. The budget demands of open access
service (pertrain-km) were significantly lower and reached values equivalent to EUR 0.1, with the peak
in 2017. When we combine the two indicators, we can see the overall impact from the on-track
competition on the budget spending (see Table 7).
Table 7: Total efficiency of budget expenditures on long-distance services (CZK per train-km, 2010
prices)
2011 2012 2013 2014 2015 2016 2017
EfficiencyToT (real prices) 100 96 91 97 97 99 98
Source: own calculation
The total efficiency of budget expenditures for long-distance passenger rail transport stagnated for
most of the monitored period. The exception was 2013, which is characterised by the lowest PSO
subsidies and simultaneously performance at a level close to the maximum within the monitored
period. Generally, the introduction of on-track competition did not have a significant impact on the
efficiency of budgetary spending. The positive impact generated by the increased transport
performance and on-track competition savings was offset by growth in spending on the remaining PSO
long-distance services. The budget cost per km of long-distance service remained close to 100 CZK per
train-km over the entire monitored period, and numbers close to this value are also typical for regional
transport in the Czech Republic.
6. Discussion and conclusions
The introduction of competition on long-distance railways had various goals. A reduction in prices for
passengers, an increase in quality, and an increase in the availability of services were expected. These
effects have actually come to pass and have been documented to different degrees, in both the Czech
Republic and other European countries. Assumptions from the introduction of on-track competition
are usually identical in the issue of competition-led productive and commercial efficiency. The question
of whether greater operational efficiency would lead to greater public spending efficiency over the
entire passenger transport sector had been neglected by most authors, or addressed only regarding
competition for the market. Our approach is different in the respect that we focused on the impacts
on the entire segment of long-distance rail passenger transport, regardless of the category of transport
services (whether commercial or non-commercial).
There are two effects related to the development of the overall impact of the introduction of on-track
competition on budget expenditures and their effectiveness. The first effect is the increase in public
spending for long-distance trains that remained under PSOs and the deepening loss per train-kilometre
after 2013. The second effect is the increase in performance of commercial, on-track competition,
services and minimal, although slightly increasing, compensation for state-imposed discounts
compared to PSO payments. By combining these effects together, we conclude that the introduction
of on-track competition has not changed overall public spending efficiency in the long-distance
passenger rail transport segment, since budgetary expenditures for long-distance PSO services have
increased and their efficiency has fallen, but, in contrast, the efficiency of public spending on
commercial services has improved due to generaly low budgetary cost of discount compensation and
simultaneous increase in transport performance. Consequently, the two effects have been offset and
budget spending has remained virtually unchanged.
Next, we claim that the introduction of on-track competition has not changed public spending
efficiency per train-km in the long-distance rail transport sector. The question of conclusions based on
an analysis of performance in passenger-kilometres still remains open. In view of the increasing
demand for rail transport services, we may assume that the subsidy per passenger-kilometre would
gradually decrease over time, but we have only weak evidence that relies on performance in all
transport service categories and across the entire network. There are no publicly available data for
more detailed calculations.
The data show that the introduction of on-track competition causes an increase in demand for rail
transport. This positive effect, however, increased budget demands on the state as a result of
compensation for state-imposed rebates, even if only to a relatively small extent during the monitored
period. This effect was only a few percents of the PSO subsidies, but it needs to be taken into account.
Using a difference-in-difference estimator, Casullo (2016) concluded that on-track competition has
brought major efficiency improvements across the rail systems affected, which corresponds to our
finding about the public spending efficiency impacts on long-distance passenger railway services. It
seems that the impacts of on-track competition are in qualitative indicators and price competition
rather than in efficiency indicators.
Simultaneously, there is evidence of cherry-picking practices performed in the Czech on-track
competition segment. This problem has been solved, for example, in Great Britain, where open access
is constrained to services that are not currently available for fear of cherry-picking of existing services
(NERA, 2004). In contrast, the on-track competition was introduced on the most lucrative routes in the
Czech Republic, and it is most likely that one of the explanations for the increase in budget
expenditures with unchanged efficiency is cherry-picking by the newcomers.
Many new questions have arisen, one of the most important of which is the question of what is behind
the rise in budget spending - whether the increase in public subsidies is the result of real, provable
increases in operating costs under PSOs, the result of a decline in revenue from PSO service fares,
and/or a hidden effort to compensate the incumbent CD for a loss of revenues from the most lucrative
routes. However, it is almost impossible to answer this question without access to detailed operational
data.
Future research providing comparisons of impacts across a group of more countries with different
approaches to implementing on-track competition would be worthwhile in order to obtain a more
detailed view of the issue and more a ccurate conclusions. These comparisons would then either
support our findings, and show their relatively general validity, or prove that our conclusions are
country-specific, which is not an unusual matter in the case of railways.
Acknowledgement
This article is the output of the project called "New Mobility - High-Speed Transport Systems and
Transport-Related Human Behaviour", Reg. No. CZ.02.1.01/0.0/0.0/16 026/0008430, co-financed by
the "Operational Programme Research, Development and Education".
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