Competition Report 2008 Foreword “Partial privatisatio by qru15075

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										 	 	 	 	 	 	 	 	 Competition Report 2008

“Partial privatisation of DB strengthens competition”

For more than ten years, the private passenger and freight railways have been in-
creasing their market shares from year to year. Overall performance in rail passenger
and freight transport has been growing for years as well. This has resulted in rail be-
ing able to regain some of the traffic that it had lost to road transport. That was the
central mandate given to the railway undertakings in the Rail Reform.
   The opening of Deutsche Bahn AG for private shareholders, which was also pro-
vided for in the Rail Reform, has now come within reach following the Federal gov-
ernment’s recent decision. Private capital can now be acquired in order to strengthen
DB’s position in international competition and DB can make the necessary invest-
ments – in rolling stock for example – to continue its internationalisation strategy.
The recently announced now complete takeover of Geodis – the leading transport
and logistics group in France – by the French state railway SNCF for some EUR 600
million shows that there is a continuing trend towards concentration. If DB wants to            Hartmut Mehdorn,
survive in these markets, it will be vital in the future for it to be able to invest flexibly   Chairman of the Board of
                                                                                                Management and CEO
in growth markets in the same way as its major European competitors. Partial privati-
                                                                                                Deutsche Bahn AG
sation opens up this opportunity and thus strengthens competition as well.
   Deutsche Bahn once again demonstrated its ability to stand up to competition
last year: It increased both its revenue and profit – in spite of the strike by the GDL
(German Train Drivers’ Union) without which development would have been even
more positive. Since the staff employment conditions and their pay – not only of the
train drivers – are so decisive for the success of the company in competition, this
seventh DB Competition Report deals with them in great depth. Apart from a compar-
ison with other railways, the focus is on our intermodal competitors – that is trucks
in particular. The possibility used by many DB customers to shift their transports to
other modes at short notice during the strike underlined the dimension of competi-
tion among different traffic modes. The existence of this competition had previously
been challenged by some advocates of a narrow market definition. The railway
undertakings are all pulling together in this competition of the transport modes.
They oppose the far more severe regulations compared with road traffic and call for
adequate financing of their infrastructure. Eliminating capacity bottlenecks in the
railway system – especially in port hinterland traffic – will be one of the decisive
factors as to whether the successes of rail can be continued in the future.



    Published by: Deutsche Bahn AG, Potsdamer Platz , 0785 Berlin · Oliver Schumacher, Group Spokesman/Head of Corporate Communications
    (responsible for the contents) Editorial board: Joachim Fried, Group Representative for European Affairs, Competition and Regulatory Affairs
    Coordination: Helge Sanner, Competition and Regulatory Affairs Consulting/Copy Editing: Alexandra Weiß, Head of Corporate Print Media
    Photos: Deutsche Bahn AG, except: Kuehne + Nagel (p. 8), EWS (p. ), Hector Rail AB/K. Dudzik (p. 4), R. Eisele/Project Photos (p. 6), Arriva
    Deutschland GmbH (p. 0), PanBus (p. ), Bilderbox (p. 30), Allianz pro Schiene/Kraufmann (p. 4), R. Woelk/Freelens Pool (p. 45), Usedomer
    Bäderbahn GmbH (p. 47), Bayerische Oberlandbahn GmbH (p. 48), Flashfilm/Getty Images (p. 51), SBB AG (pp. 52, 57, 59), ÖBB-Personen-
    verkehr AG, CI & M/H. Eisenberger (p. 55), Veolia Verkehr GmbH (p. 64) Publishing Company: corps. Corporate Publishing Services GmbH,
    P.O. Box 00, 4000 Düsseldorf Printers: Koelblin-Fortuna-Druck GmbH & Co. KG, Baden-Baden

    Please submit any suggestions and comments on this report to: · All information correct at March 008


Market and Competition
Dynamic logistics industry                                       5
Ongoing strong growth for rail freight                           9
New prospects for passenger transport                           5
DB Stadtverkehr faces up to the competition                     
No conflicts in working timetable compilation                   24
Focus on the workforce                                          7

Joachim Fried in scientific dialogue with Lars-Hendrik Röller   32

Regulatory Policies
Ongoing development of European legislation                     37
Regulatory framework defined in court                           45

Special Areas of Discussion
A look at the Alpine regions                                    53
Regulation practice not yet settled                             60
Discussion of regulatory framework                              65

Annex                                                           66

    The transport and logistics market remains particularly dynamic. Coop-
    erative ventures and takeovers facilitate access to new markets and generate
    synergies. In the passenger transport market, the purchase of stakes in foreign
    companies makes up for restricted growth opportunities in the home market.
    Cooperation in the high-speed sector leads to numerous benefits for the custom-
    ers and improves the competitiveness of rail in comparison to air travel.

                                                                                                                        Market and Competition

Dynamic logistics industry
Encouraged by the ongoing upswing of the global economy, international trade flows have continued
to develop positively and the logistics markets have achieved substantial growth due to this environment.
Expanding international transport and logistics networks remain a key trend.

Despite high oil prices, the global economy continued to flourish. In 2007, growth                                      Driven by expanding goods
reached a rate of 3.4 per cent, although it slowed down slightly over the course of the                                 production, the global trade
year, especially in the US, where the effects of the property and financial market crisis                               flows increased by seven
became apparent. The pronounced rise in the value of the euro adversely affected                                        per cent, according to the
exports in the Eurozone. Once again, Asia was the region with the best performance,                                     OECD. There was a particu-
with economic growth rate in China reaching a good eleven per cent, surpassing the                                      larly strong increase in trade
already high level of the previous year. According to the OECD, global trade flows                                      between Europe and Asia.
increased by seven per cent, driven by expanding goods production. There was a par-
ticularly strong increase in trade between Europe and Asia.
   For 2008, experts again identified the greatest exchange of goods between Asia
and Europe, forecasting a total figure of EUR 913 billion. Logistics companies are set-
ting up new transhipment terminals to profit from the steadily growing trade flows.

Strong growth in trade between Asia and Europe

In particular the exchange of goods between Asia and Europe and within both regions continued to grow.
BRIC states (Brazil, Russia, India and China) enjoy above-average growth.

                                    + 11.5 ³
                                                               Europe ¹                 + 17.0 ³
                                                               + 13.5 ²
       North America
          + 13.5 ²                                                                                        Asia ¹
                                                                                                        + 18.0 ²

                                                        + 16.5 ³

1) Europe excl. CIS countries, Asia excl. Middle East
2) Increase in exports from 2005 to 2006 in per cent (basis: US dollar)
3) Increase in exports between the regions from 2005 to 2006 in per cent (total individual exports, basis: US dollar)
Source: WTO World Trade Organization “Time Series” database

    Container terminals, for example in
    Singapore, benefit from the growing
    trade volume.

                                          Together with other logistics partners, Deutsche Bahn AG is therefore participating
                                          in a Chinese joint venture, based in Beijing, with the key objective of planning, con-
                                          structing and operating 8 transhipment terminals and marketing container trains.
                                          Other companies are also exploiting the market opportunities in Asia by expanding
                                          their service portfolios – FedEx Express, for example, launched a fixed-day collection
                                          and delivery service, including customs clearance, specifically for the Asian region in
                                          January 008.
                                             The world’s largest free trade area, planned in Dubai, will also affect the global flow
                                          of goods. The Middle East countries are gradually becoming major sales markets for
                                          European and American companies. DB Schenker, the transport and logistics subsidi-
                                          ary of Deutsche Bahn, also offers transport services between Europe and the Middle
                                          East. In June 2007, the first Boeing 747-400F deployed by DB Schenker landed at
                                          Frankfurt-Hahn airport en route from Dubai to Ohio, USA.
    Despite ongoing market                   The German and European market also harbour further growth potential for logis-
    concentration, the logistics          tics companies. Growth of around eight per cent is predicted for the German market
    sector is still highly frag-          alone in 008. With a revenue volume of more than EUR 00 billion, it is already by
    mented.                               far the largest in Europe to date.

                                          Vigorous competition between logistics providers

                                          The segment of contract logistics in particular – that is the provision of complete
                                          services for key accounts on a long-term basis – will continue to expand. The Fraun-
                                          hofer Society estimates potential revenues, including warehouse management and
                                          transport, at EUR 33 billion in Europe. Contract logistics is particularly attractive for
                                          transport companies owing to a high growth potential and intensive customer rela-
                                          tions. Nevertheless, competition remains fierce. Shorter product life cycles, shorter
                                          contract terms and invitations to tender for services have led to keen competition
                                          between the providers. For example, the logistics manager of Braun in Melsungen, a
                                          leading manufacturer of appliances and products for the health care industry, states:
                                          “We do not wish to become dependent on one service provider, which is why we in-
                                          vite international tenders every one to two years.”

                                                                                           Market and Competition

                                                                                           The DB rail freight operators have a
Thanks to their international transport networks, global logistics service providers
                                                                                           pronounced European focus. More than
are in a better position to exploit new market opportunities. According to the market      half of all transports are cross-border.
analysis conducted by the Fraunhofer Society, the logistics subsidiaries of DB AG rank
amongst the five leading providers in the global logistics market, hold third place
in the European logistics market and actually rank first in the German market. As in
the previous year, Deutsche Post (incl. DHL and Exel) heads the worldwide ranking
of the top ten logistics providers with revenues of almost EUR 40 billion. In 006,
the revenues of its most important European competitor, Maersk, amounted to just
EUR 8.5 billion, in other words less than half of Deutsche Post’s revenues. Only the
American logistics companies FedEx and UPS, with revenues of more than EUR 30 bil-
lion, come anywhere near the world market leader.

Wide range of suppliers, with SMEs alongside global players

The expanding logistics market has triggered enormous demand which benefits not
only global players, but also SMEs. These frequently concentrate on special market
segments, such as pharmaceuticals. Some service providers, which are linked to a
                                                                                           Top ten global
parent company but operate independently in the market, such as VW Logistics or
                                                                                           logistics players incl.
the Metro company MGL, compete with the largest names in the industry. A further
                                                                                           mail and express
60,000 firms are active in the German logistics sector, which is meanwhile the third
                                                                                           Logistics sales worldwide 2006
largest industry in the country. Despite a strong market consolidation process with
                                                                                           (EUR billion)
a high number of shareholdings, takeovers and joint ventures, the logistics sector as
a whole remains highly fragmented. The logistics business units of DB AG, although
                                                                                           Deutsche Post 1)                     39.9
they lead the German market according to the Fraunhofer Society, account for a             Germany
market share of less than three per cent in terms of the total market for outsourced       UPS                                  34.9
logistics services. In the air and sea freight sector, concentration is more pronounced.   USA
Deutsche Post holds a market share of 5 per cent of air freight, while Maersk accounts    FedEx                                32.3
for an impressive share of 29 per cent of sea freight.
                                                                                           Maersk                               18.5
   Ongoing globalisation also leads to a steady increase in demand for transport. In       Denmark
addition to the transport distances, the worldwide transport volumes have been grow-       Deutsche Bahn 2)                     17.0
ing since 005, which has led to capacity bottlenecks and waiting times at terminals       Germany
and depots before cargo can be handled and distributed onwards from the major              Chinese Railway                      13.0
European ports. This also affects the hinterland transport operations by road, rail and
                                                                                           RZD                                  12.4
inland waterway.                                                                           Russia
                                                                                           NYK Line                             12.3
Competitive pressure makes higher efficiency a must                                        Japan
                                                                                           Union Pacific                        11.8
Increasing labour and energy expenses in 007 have raised the cost of surface trans-
                                                                                           Nippon Express                       11.4
port substantially. Productivity improvements alone are unable to compensate for           Japan
these increases, as diesel already accounts for roughly a quarter of the total transport   Total top 10                       203.5
costs. Surface transport prices will therefore continue to rise. Hugo Fiege, co-owner of
the Fiege Group, predicts an average price increase of between four and six per cent       1) Including DHL and Exel; 2) Rail Freight
for the industry as a whole.                                                               Transport and Logistics business fields

  At the same time, competitive pressure is forcing logistics companies to operate         Source: „TOP 100 in European Transport and
                                                                                           Logistics Services 2007”, Fraunhofer Centre
more efficiently in order to offer their customers worldwide transport services at         for Applied Research on Technologies for the
                                                                                           Logistics Service Industries (ATL)

    The Swiss logistics group Kühne + Nagel   attractive prices. Many logistics specialists are relying on organic growth as well as
    increased its surface transport activi-   mergers. Expansion into upstream and downstream markets also continued in 007,
    ties in 2007.
                                              which allows the companies to distribute the costs of transport and infrastructure
                                              more evenly and thus generates vital competitive advantages. Customers benefit from
                                              lower unit costs and shorter journey times.

                                              Tapping into new markets and creating synergies

                                              Mergers can also help companies to penetrate new markets and exploit synergies
                                              resulting from complementary business units. In addition to maritime transport,
                                              the Maersk shipping company meanwhile also offers seaport hinterland rail services
    Competitive pressure forces               through its subsidiary European Rail Shuttle. Forwarders who previously ordered
    logistics companies to operate            services from external transport companies are now systematically buying transport
    more efficiently.                         operators. The Swiss logistics group Kühne + Nagel expanded its surface transport
                                              activities in 2007 by taking over G. L. Kayser and the Cordes and Simon Group. The
                                              company has budgeted a sum of between EUR 400 and 500 million for takeovers in
                                              the surface transport market up to the year 2009. Lufthansa and Deutsche Post have
                                              set up a joint airline for the transport of CEP consignments (courier, express and
                                              parcels) and air freight. Smaller logistics providers are also keeping the market in
                                              movement: with the takeover of the Interspe Hamann Group in 006, Rhenus boosted
                                              its revenues by 90 per cent and was thus able to secure a position among the top ten
                                              logistics services providers in Germany.

                                              Integration processes along the value chain

                                                                                                                 Terminal                                   Contract
                                                                        CEP 1)            Air          Sea                       Rail         Road
                                                                                                                  (port)                                    logistics


                                              Deutsche Bahn


                                              Kühne + Nagel



                                                                                 own transport activities          activities as forwarder            no activities
                                                                                                planned or already executed expansion of activities

                                              1) Courier, express and parcels
                                              Source: DB data

                                                                                              Market and Competition

Ongoing strong growth for rail freight
The freight transport market again enjoyed strong growth of around seven per cent in 2007. Rail profited from
this dynamic trend. As in 2006, competitors managed to sharply increase their traffic performance.

In 007, the freight transport market in Germany (rail,         After two years of relatively weak growth, inland ship-
road, inland shipping and pipelines) achieved strong            ping increased its traffic performance by 1.4 per cent in
growth of around seven per cent. The dynamic trend of           2007. Traffic performance was initially strong but gradu-
the previous year continued, despite the curbing effects        ally slowed down over the course of the year. The posi-
of a strong euro exchange rate, marked increases in en-         tive effects of the economic upswing were counteracted
ergy prices and capacity bottlenecks across all transport       by negative effects due to strong dependence on natural
modes.                                                          factors such as water levels. The sector also suffered
   In the road haulage market, which comprises both             from dispatching problems at the ports and the sharp
German and foreign trucks inclusive of cabotage trans-          rise in gas oil prices. Due to the strong increase in traffic
ports in Germany, traffic performance in 2007 increased         performance by road and rail, inland shipping was unable
by approximately eight per cent year-on-year. Foreign           to maintain its market share, which fell below the ten per
trucks, which dominate the cross-border segment, again          cent mark for the first time.
achieved higher growth than their German competitors.              On the whole, rail freight enjoyed satisfactory growth,
Whereas the impetus from the economic environment had           with an increase of 7. per cent to 4.6 billion tonne-
an overall positive effect, this trend was impaired by rising   kilometres (tkm). Domestic transports were up by 6.5
costs (especially diesel prices and labour costs owing to       per cent, cross-border transports by 7.7 per cent, while
new rules governing driving hours and rest periods). Road       the increase in transit traffic was even double-digit (12.8
transport increased its market share to 70.5 per cent.          per cent). With growth of more than five billion tkm

                                                                    Economic environment
                                                                    The upturn of the German economy continued in 2007, although growth
                                                                    was at a slightly lower level than in the previous year. Following slower
                                                                    expansion of the global economy and the strong euro, growth rates for
                                                                    exports also tailed off. As a result of the significant increase in VAT, do-
                                                                    mestic consumer demand slowed down. Domestic and foreign demand,
                                                                    however, remained at a high level. Good sales and earnings prospects
                                                                    for the companies combined with good capacity utilisation also led to
                                                                    a sharp increase in investments in equipment. Investments in construc-
                                                                    tion projects also continued, although at a slower pace.

     (+19.1 per cent), the “special freight” segment, which                                         the fourth quarter of 007 and the consequences of the
     includes containers, again proved to be a central growth                                       strikes. DB’s competitors succeeded in raising their traf-
     driver. Following its impressive increase of 0.8 percent-                                      fic performance by 28.7 per cent year-on-year. In 2007,
     age points in the previous year, rail’s market share re-                                       their share of total rail freight transport in Germany
     mained constant in 007.                                                                       amounted to almost 0 per cent. In addition to domestic
                                                                                                    transports, DB’s competitors achieved particularly high
     Competitors continue to expand their market shares                                             growth in cross-border transport, a result of the ongoing
                                                                                                    expansion of their international business activities. DB’s
     The DB subsidiaries which operate in the rail freight mar-                                     competitors hold a particularly strong market position
     ket in Germany continued their positive performance in                                         in sectors such as combined transport, chemical and
     2007 with an increase of 2.9 per cent. This upward trend                                       mineral oil products and construction materials. They are
     was curbed by the downturn in crude steel production in                                        increasingly also improving their market shares for goods
                                                                                                    such as agricultural products, animal feed and the auto-
                                                                                                    motive segment. This trend once again underlines the
                                                                                                    fact that competition is working well in Germany.
     Modal split: rail defends its market position                                                     In its 007 Market Observation Report, the Federal
     (per cent, basis: traffic performance, values rounded)                                         Freight Transport Office (BAG) further confirms this as-
                                                                                                    sessment, stating that increasing competition is reflected
                      2.9               2.8                2.9            2.6                 2.4   in unrelenting downward pressure on prices, despite in-
              10.9              11.2                11.1           10.3                 9.8         creasing demand and the resulting capacity bottlenecks.
                                                                                                    The incentive for private railway undertakings to gain a
                                                                                                    foothold on the market by offering low prices is particu-
                                                                                                    larly high. The BAG confirmed the incumbent’s reaction
                                                                                                    to this challenge: “While private railway undertakings
              70.2              69.9                69.6           69.8             70.5
                                                                                                    (RU) were able to respond more flexibly and quickly to
                                                                                                    customer requirements in many cases in recent years
                                                                                                    and therefore win business from the former monopolists,
                                                                                                    the latter are now increasingly trying […] to regain lost
              16.0              16.1                16.5           17.3             17.3
                                                                                                    Trend: establishing international networks
             2003               2004                2005           2006            2007 1)

               rail       road 2)      inland shipping           long-distance pipelines            The liberalisation of the cabotage segment on  January
                                                                                                    2007 removed the final legal obstacle for a truly Euro-
     1) Estimate; 2) German and foreign trucks (incl. cabotage transports in Germany)
                                                                                                    pean rail freight transport market. In actual practice,
     Sources: Federal Statistical Office, DB data
                                                                                                    foreign RUs have had access to the German rail network

                                                                                                              Market and Competition

                                                             Competitors increase their traffic performance
                                                             by almost 30 per cent
                                                             Deutsche Bahn also achieves good growth.

                                                             Traffic performance in rail freight transport
since 1994 – for example by establishing a subsidiary in     (billion tonne-kilometres, figures in brackets show
Germany. However, the extent to which competitors are        year-on-year change in per cent)
participating in international transport flows and com-                                                                          22.5
peting in each other’s home markets has reached a new        120                                                     17.5        (+28.7)
dimension. For example, the Swedish RU Hector Rail,                                                       13.7
subsidiary of Samskip shipping company, is currently         100           5.9           (+49.2)
planning through services from Sweden to Germany via                                                                 89.5        92.1
Denmark, which include the transport of intermodal car-      80           79.2
                                                                                          83.1            81.7       (+9.5)
                                                                                         (+4.9)           (-1.7)
riers such as containers between these countries. The                    (+2.6)

private railway company ITL Benelux BV operates on           60
the Dutch rail network since September 007, providing
services from Rotterdam to Prague three times a week.        40
In October 007, Rurtalbahn also received a licence to
offer rail transport in the Netherlands. The company         20
transports magnesium lime between Veedam and Co-
logne. TX Logistik, in which the Italian national railway                2003             2004            2005       2006        2007
Trenitalia holds a 5 per cent share, is planning to in-
crease service frequency and capacity on the Italy–Ros-      Market share of DB and its competitors
tock–Trelleborg route to up to five pairs of trains per      (per cent)
week. Together with Maersk shipping company and the
terminal operator Eurogate, the company also holds a                       6.9             9.6            14.4       16.4        19.7
share in boxXpress, which has expanded its market share      100
                                                                          93.1            90.4
in the seaport hinterland transport market over the past                                                  85.6
                                                             80                                                      83.6
few years. Rail Cargo Austria (RCA) intends to increase                                                                          80.3
its services on the Graz–Neuss route to six departures
per week. All of these examples illustrate the success of
newcomers, particularly in international transport mar-
   The trend of establishing international networks con-     20
tinued in 007. A consortium led by RCA acquired the
freight transport division of the Hungarian state railway
                                                                         2003             2004            2005       2006        2007
MAV. In June 007, DB AG took over the largest British
freight company English Welsh & Scottish Railway Lim-                                   DB 1)       other railway undertakings
ited (EWS), as well as the Spanish transport and logistics
                                                             1) Railion Deutschland and RBH Logistics as from 2006
service provider Transfesa. As a consequence, DB AG can
                                                             Source: Federal Statistical Office and DB data
now offer its customers a direct link to the transport and

                                                                              In June 2007 DB AG took over EWS,
                                                                              the largest British rail freight company.

     logistics markets in western Europe and on the south-         Deutschland AG to intensify its existing cooperation
     west corridor. Moreover, EWS is also active – and highly      agreements and enter into new ones. Eurasia Rail Logis-
     successfully so – in the French market through its sub-       tics, for instance, the multilateral cooperation project
     sidiary Euro Cargo Rail. Since January 008, EWS has          set up by Railion with the Russian, Polish and Belarusian
     tripled the number of combined transport trains it offers     state railways, is aimed at facilitating access to the mar-
     through the Channel Tunnel.                                   kets in Poland and Russia.
        On 1 January 2008 Dillen & Le Jeune (Belgium) and             The positive trends in the procurement market have
     Crossrail AG (Switzerland) merged, thus forming one of        also contributed to competition in rail freight. Virtually
     the largest private providers of pan-European transport       all the services required can meanwhile be obtained in
     capacities, with currently 37 main-line locomotives in        the market and it is apparent that the RUs are making
     operation. The train drivers of the new company are           the most of the offers available: VTG AG, the leading
     trained and licensed to operate in the Netherlands, Bel-      freight wagon lease company, generated EBITDA of
     gium, Germany, Switzerland and Italy. In February 008,       EUR 137.1 million in 2007 from the lease of its fleet of
     the French transport group Veolia Cargo announced the         47,800 wagons, had a capacity utilisation in the leased
     takeover of the freight railway Rail4Chem. Veolia is also     wagons sector of almost 94 per cent in the year 2007.
     one of the main competitors of DB AG in the German pas-       In addition to rolling stock, the services offered include
     senger market. The transaction is subject to approval by      specialist personnel as well as technical support and
     the antitrust authorities. The purchase will enable Veolia    management of third-party wagon fleets. Cooperative
     to double its activities in the German rail freight market.   ventures and mergers further facilitate the provision of
     Rail4Chem also handles transports between Poland and          necessary equipment.
     France, Italy and the Netherlands and will therefore pro-        In 007, several freight wagon manufacturers, ship-
     vide Veolia with growth potential in important European       pers and repair depots joined forces in the “Cargo Rail
     markets.                                                      Service Center” (CRSC) project. The cooperation ensures
                                                                   that defective parts such as wheel-sets and brake com-
     Market barriers despite liberalisation                        ponents can be replaced at the next available location
                                                                   at fixed prices. Such services also reduce the investment
     Takeovers and cooperative ventures are also an option         expenditures of private freight railway companies.
     for overcoming market barriers, which continue to exist
     despite official liberalisation of the markets (cf. Annex,    Customers power aggravates pressure on prices
     page 68). Cross-border rail freight transports, for exam-
     ple, are still hampered by change of driver, formalities at   Finally, the bargaining power of some of the RUs’ cus-
     the border and different safety systems and regulations.      tomers implies that there is extreme pressure on prices
     Cooperation enables companies to offer certain services       in the rail freight market, a situation which is aggravated
     at a lower cost. Customers also benefit from integrated       by the high fixed costs in this sector: a stable level of
     transports in the form of lower prices, shorter trans-        demand is necessary to guarantee sufficient capacity
     port times and better quality, reason enough for Railion      utilisation and thus economic viability. This power on

                                                                                                                                                                       Market and Competition

Increase in rail transport, particularly on the main corridors
The increase in rail transport volumes concentrates on the main north-southbound corridors as well as the hinterland of the major European western and
northern ports. The transport forecast until 2015 predicts a volume of up to 150 billion tonne-kilometres per annum for freight transport. In the infrastructure
sector, train-path kilometres showed an underproportional growth of 1 billion per annum, owing to increased capacity utilisation by the transport companies.

                              Infrastructure utilisation in 2004                                                                                 Infrastructure utilisation in 2015

                                     Flensburg                                                                                                          Flensburg

                                            Kiel                                                                                                               Kiel
                                                                               Rostock                                                                                                           Rostock
                                                 Lübeck                                                                                                            Lübeck

                  Emden                                               Schwerin                                                       Emden                                              Schwerin
                                               Hamburg                                                                                                             Hamburg
                                                                                         Neustrelitz                                                                                                       Neustrelitz

                                Bremen                                                                                                             Bremen
                                                                  Stendal                   Berlin                                                                                  Stendal                    Berlin
                                          Hanover                                                                                                            Hanover
                   Osnabrück                                                                                                           Osnabrück
                                                                            Magdeburg           Frankfurt/O.                                                                                  Magdeburg            Frankfurt/O.
Emmerich                                           Brunswick                                                       Emmerich                                          Brunswick
                     Münster                                                                                                             Münster

    Duisburg                                                         Halle                                              Duisburg                                                       Halle
                   Dortmund                                                                                                            Dortmund
            Düsseldorf            Kassel                                         Leipzig                                        Düsseldorf           Kassel                                        Leipzig
                                                         Erfurt                                                                                                            Erfurt
              Cologne                                                                      Dresden                                Cologne                                                                     Dresden
   Aachen                                                                                                              Aachen
                                                 Fulda                  Zwickau                                                                                    Fulda                  Zwickau
                                 Gießen                                                                                                             Gießen
       Koblenz                                                                                                            Koblenz
                          Frankfurt/M.                                                                                                       Frankfurt/M.

        Trier       Mainz                        Würzburg                                                                  Trier       Mainz                       Würzburg

                              Mannheim                                                                                                           Mannheim
                                                                   Nuremberg                                                                                                         Nuremberg
       Saarbrücken            Karlsruhe                                     Regensburg                                    Saarbrücken            Karlsruhe                                    Regensburg

                                   Stuttgart                                                                                                          Stuttgart
                                                                                     Passau                                                                                                               assa u
                                           Ulm                                                                                                                lm
                                                  Augsburg                                                                                                          Augsburg
                                                                    Munich                 Salzburg                                                                                   Munich                 Salzburg
                    Freiburg                                                                                                           Freiburg

                  Basel                                                                                                              Basel

                Routes with particularly high capacity utilisation                                         Examples:                              Forecast
                                                                                                       1   Hamburg–Hanover                          +26 %
                                                                                                       2   Bebra–Fulda–Frankfurt                    +22 %
                                                                                                       3   Frankfurt–Mannheim                       +20 %
                                                                                                       4   Karlsruhe–Basel                          +20 %
Source: DB data

                                                                              Hector Rail is planning through
                                                                              transports from Sweden to Germany.

     the part of the customers results from their option of        tors. The required infrastructure capacity will have to in-
     choosing alternatives, not only between intramodal com-       crease as a result of the growth in demand for rail freight
     petitors, but also between the different transport modes.     transport (cf. map on page 3). Capacity utilisation is
     Furthermore, not only do customers integrate forwards         particularly high on the north-southbound corridor,
     into the transportation market, but they are also increas-    with emerging bottlenecks on the Hamburg–Hanover,
     ingly putting transactions up for tender. The strike in the   Bebra–Fulda–Frankfurt and Frankfurt–Mannheim lines,
     rail freight market once again clearly showed that cus-       although other lines – e.g. for trans-Alpine transports –
     tomers in the automobile sector and its supply industry       are also running almost at full capacity. This situation
     are capable of switching their chosen form of transport       is aggravated by the fact that other transport modes
     from rail to road at short notice. The sharp increase in      also face infrastructure bottlenecks, which could thus
     traffic performance by competitors, which were able to        become a limiting factor for the entire logistics industry.
     take over large proportions of the traffic volume dur-        Infrastructure that can cope with high demand is vital
     ing the strikes, proved that customers are prepared to        for the success of RUs. If the railways are to handle the
     switch providers.                                             forecasted transport increases until the year 05 on the
        The Federal Government assumes that long-distance          major corridors, the most severe bottlenecks will have to
     freight traffic performance will increase by 74 per cent      be eliminated. Both national and European initiatives are
     between 004 and 05. An increase in transport vol-          currently being planned to remedy this situation. In view
     umes equivalent to 300 freight trains daily is predicted      of the forecasted growth in transport volumes, however,
     for the ports of Hamburg, Bremen and Wilhelmshaven            it is not certain whether the measures and instruments
     alone by the year 05, according to Detthold Aden,           which have been adopted to date will be sufficient to
     President of the Association of German Sea Port Opera-        raise capacities to the extent necessary.

                                                                                           Market and Competition

New prospects for passenger transport
2007 saw slight growth in traffic performance by rail passenger transport. While the increasing share of cross-
border long-distance transports could not quite match the previous year’s performance, regional transport
reported a moderate increase.

According to estimates by Deutsche Bahn, demand in             strike threats, rail passenger transport by the DB group
the German passenger transport market in 007 almost           managed to maintain the year-on-year traffic perform-
matched the previous year’s level. This market includes        ance level in the second half of 007.
private motorised traffic, rail, public road transport and        DB assumes that non-DB RUs, which operate primarily
domestic air traffic. The stabilisation is attributable pri-   in the regional market, enjoyed a strong increase in de-
marily to the motorised traffic segment, which was not         mand. That growth was slightly lower than 006, as the
affected by the sharp increase in fuel prices until the        competitors launched fewer new services after winning
final third of 2007. That segment suffered a decrease in       tenders. The estimated share of competitors in the local
traffic performance (in passenger-kilometres, pkm) of ap-      rail passenger market in terms of traffic performance was
proximately minus 0.5 per cent, which was lower than in        9.5 per cent in 2007, compared with just 8.9 per cent the
the previous year, and its market share also fell slightly.    year before.
   Despite the positive economic climate, growth impe-            Of the other transport modes, domestic air traffic
tus for rail passenger transport was limited, especially       reported the strongest increase, with growth of 7.7 per
as private consumption was slightly down. Nevertheless,        cent. That improvement was based primarily on the
rail succeeded in raising traffic performance by approxi-      wider range of products offered in the low-cost air mar-
mately 0.4 per cent in 007 and slightly improved its          ket. Threatened and actual strikes at Deutsche Bahn
market share. Despite the negative effects of strikes and      led to uncertainty for many customers, who opted to

                                                                                                    Economic environment
                                                                                                    Private consumption was stagnant, amongst
                                                                                                    other things because of the VAT increase, the
                                                                                                    higher rate of inflation and the increased share of
                                                                                                    private savings. There was a noticeable increase
                                                                                                    in the number of gainfully employed, in particu-
                                                                                                    lar employees paying compulsory social security
                                                                                                    contributions, while unemployment was down by
                                                                                                    approximately 1.6 percentage points to an aver-
                                                                                                    age of 8.7 per cent for the year.

     Declining growth in rail passenger transport                                                   fly instead, so that demand for flights was up in the last
                                                                                                    quarter of the year.
     (Year-on-year change in per cent; basis: passenger-kilometres)
                                                                                                       Public road transport, on the other hand, remained
                                2006                                         2007                   virtually constant in 007. A slight decline in occasional
                                                                                                    traffic was compensated by a slight increase in scheduled
     Total rail                        3.8                                       0.4
                                                                                                    bus, tram and underground services. Traffic performance
     DB                                3.1                                   0.0                    by the DB bus companies was substantially up year-on-
                                                                                                    year owing to the re-inclusion of a bus company in the
     Competitors                                                    25.0                      8.2   DB Group’s consolidated accounts.

     Source: DB data
                                                                                                    European prospects for long-distance transport

                                                                                                    Although DB Fernverkehr AG was unable to fully match
                                                                                                    the previous year’s performance in 007, it has set itself
                                                                                                    clear targets: in conjunction with other European rail-
                                                                                                    ways, DB Fernverkehr plans to achieve future growth in
     Slight increase in rail’s market share                                                         the cross-border sector.
     (Share of modal split in per cent; basis: traffic performance, figures rounded)                   Last year, Deutsche Bahn reported a decrease of
                                                                                                    0.9 per cent to 34.1 billion passenger-kilometres in the
                       1.1              1.1               1.1              1.2                1.3   long-distance sector (inclusive of motorail and night
               8.9               9.0               9.0              9.2                 9.2
                                                                                                    services), despite positive effects of special campaign
                                                                                                    fares, ongoing optimisation of the timetable, the launch
                                                                                                    of faster connections to Paris and the fact that the ef-
                                                                                                    fects of new infrastructure inaugurated in 006 (north-
                                                                                                    south tunnel in Berlin, Nuremberg–Ingolstadt–Munich
              81.7              81.3              80.9              80.2               80.0         high speed line) were now apparent for the whole year.
                                                                                                    There were also increasing passenger figures for the high-
                                                                                                    speed lines inaugurated the year before (Cologne–Rhine/
                                                                                                    Main and Berlin–Hamburg). However, that good impetus
                                                                                                    was overshadowed by negative effects, such as hurri-
               8.3               8.6               8.9              9.4                 9.5         cane “Kyrill”, which put many railway lines in Germany
                                                                                                    temporarily out of operation, and the uncertainty for
             2003              2004               2005              2006               2007 1)
                                                                                                    the customers caused by the industrial action of the Ger-
            rail       private motorised traffic            public road transport             air   man Train Drivers’ Union (GDL). Accordingly, it failed to
                                                                                                    match the traffic performance of the preceding year, also
     1) Estimate; Sources: Federal Statistical Office and DB data
                                                                                                    because 2006 had benefited from one-off effects result-

                                                                                                                      Market and Competition

                                      Deutsche Bahn and SNCF:
                               high-speed traffic between Paris
                                       and southern Germany.

ing from the FIFA World Cup. There was a particularly                        one pair of trains per day running between Hof and Ber-
sharp slump in traffic performance by the night and mo-                      lin, and the seasonal trains operated by Georg Verkehrs-
torail services run by DB Fernverkehr, not least because                     organisation between Berlin and the Swedish city of
these product portfolios had been streamlined.                               Malmö.
   The products offered by competitors of DB Fern-                              According to a provisional assessment based on the
verkehr totalled 745,000 train-kilometres in 007, which                     data of the Federal Statistical Office, traffic performance
was also a slight downturn. This could be attributed to                      by competitors in the long-distance sector almost dou-
restrictions of InterConnex services on the Leipzig–Ber-                     bled, to a total of approximately 60 million passenger-kil-
lin–Rostock line owing to construction work. There was                       ometres. Nevertheless, the market share of competitors
no change in the services offered by Vogtlandbahn, with                      is still negligible.

No growth in long-distance sector                                            Railways wish to improve their modal share
In 2007, DB Fernverkehr was unable to beat the previous year’s performance   After launching high-speed services between Paris and southern Germany,
(traffic performance in billion passenger-kilometres)                        Deutsche Bahn and SNCF plan to gain additional market shares over the
                                                                             medium term (modal split; basis: passengers carried; per cent)

                                        33.6        34.5          34.1               Frankfurt–Paris           Munich–Paris              Stuttgart–Paris
            31.6           32.3

                                                                                                 30.0                                    26.6     23.5
25                                                                                     33.6

15                                                                                               41.7                                             50.2
                                                    226                                52.2                             27.4             61.4
                                        224                       223
10                         210                                                                                 37.0
5                                                                                                28.3                   28.8                      26.4
                                                                                      14.2                     12.2                      11.9
           2003            2004        2005         2006        2007                  1998       2010         1998      2010             1998     2010
                                                                                                 Forecast               Forecast                  Forecast

                          traffic performance by DB Fernverkehr
                  traffic performance per operating unit in (pkm/t-pkm)                                      rail     road         air

Source: DB data                                                              Source: SNCF/DB market survey

                                                                Railteam was formed at the beginning of 2007 by seven Euro-
                                                                pean high-speed traffic providers, including DB Fernverkehr.
                                                                The joint venture provides a common marketing and sales
                                                                platform for the high-speed services offered by the member
                                                                railways. The first stage defined a Railteam high-speed network
                                                                with 60 calling points. Railteam standardises tickets and fare
                                                                structures, defines comfort and service standards, harmonises
                                                                compensation regulations and grants special customer benefits.
                                                                Railteam would welcome other rail companies to its ranks.

     Deutsche Bahn and its French partner company Société                          ICE 3MF (multi-system France), which also reduced the
     nationale des chemins de fer français (SNCF) hope that                        journey time between Paris and Frankfurt am Main by
     the new high-speed services between Paris and south-                          more than two hours, to three hours 48 minutes. These
     ern Germany inaugurated in June 007 will lead to in-                         noticeably reduced journey times are possible because
     creasing passenger numbers and market shares. On the                          both these high-speed lines use the LGV Est européenne
     southern route from Paris to Stuttgart via Strasbourg,                        high-speed line between Paris and Beaudrecourt which
     the French high-speed train TGV POS has reduced the                           was inaugurated in spring 007, enabling them to run at
     journey time by more than two hours, to just 3 hours 39                       speeds of up to 320 kilometres per hour. Line upgrading
     minutes. The northern route between Paris and Frank-                          projects in Germany have also contributed to the shorter
     furt am Main via Saarbrücken is operated by the German                        journey times.

     Railteam – the new European way to travel
     The harmonisation of high-speed railways creates genuine
     added value for the customer. The joint objective of the                                                                          Hamburg
     Railteam member railways is to make international travel
     as simple and comfortable as possible for the customer.                                                                           Hanover       Berlin
                                                                           London                               Dortmund
                                                                                                 Antwerp Duisburg Essen
                                                                                                              Brussels   Cologne
                                                                                                         Liege Frankfurt
                                                                                                                 Airport Frankfurt
                                                                                                  Roissy                 Mannheim
                                                                                                  CDG Reims Metz Karlsruhe                       Nuremberg
                                                                                       Paris                                       Stuttgart
                                                                           Le Mans                           Strasbourg
                                                                   Rennes                    Marne-
                                                                                       Massy la-Vallée Nancy                     Munich                  Linz
                                                                        Angers      Tours                               Freiburg                                Vienna
                                                                   Nantes                                                                            Salzburg
                                                                                                          Dijon      Basel
                                                                                 Poitiers                                     Zurich        Innsbruck
                                                                                    Angoulême                       Geneva

                  Railteam route/station                                                       Nimes          Avignon
                  Line opening soon                                                  Montpellier               Aix-en-Provence
       Brussels   Railteam hub

     Source: DB data

                                                                                                       Market and Competition

                         Local rail traffic performance
                 increased to 44.9 billion pkm in 2007.

A study commissioned by SNCF and DB forecasts sub-               (cf. chart on page 0). The market share of competitors
stantial increases for the railways in long-distance pas-        in 006 was therefore . percentage points higher than
senger transport between Paris and Frankfurt am Main,            previously stated.
Stuttgart and Munich, predicting that their market shares
in terms of intermodal competition will increase from 5         Higher performance despite lower volume ordered
per cent of passengers in 1998 to as much as 28 per cent
in 2010. It is meanwhile apparent that the joint efforts         An essential factor for assessing competition in local rail
of the railway undertakings are enabling them to suc-            transport is the trend for train services ordered by the
ceed against the airlines in this market, as the number of       Federal Laender and the ordering authorities. Cutbacks
daily flight connections from Stuttgart to Paris has been        in the regionalisation funds in 006 and 007 led to a
reduced by a third, from twelve to eight.

Reliable framework for local transport

   Although the Federal Laender cancelled train services         Competitors continue to expand their market shares
to compensate for cutbacks in regionalisation funds, de-         There was a sharp drop in the train services ordered from Deutsche Bahn
                                                                 owing to cancellations by the Federal Laender and lost tenders, leading to a
mand for regional transport was nevertheless up in 007.
                                                                 further increase in the market share of competitors (train services in
Moreover, the amendments to the Regionalisation Act, in          million train-kilometres).
which the legislator specified the financial framework for
local rail passenger transport until 04, were adopted
at the end of last year.
   With 44.9 billion passenger-kilometres, traffic per-                       61            75        84           97          103
formance by local rail in 007 was approximately ,4 per                     558            553      549          540
                                                                 500                                                           530
cent up year-on-year. DB achieved traffic performance
of 40.6 billion pkm, which is 0.8 per cent more than in
006. Competitors accounted for approximately 4. bil-
lion pkm in 2007 as against 3.9 in 2006. The share of            300
non-DB companies in total local rail traffic performance                                                                       16.3
rose from 8.9 per cent in 2006 to 9.5 per cent in 2007.          200                       11.9      13.2
   At the end of last year, the Federal Statistical Office is-
sued a statement that its figures for traffic performance
by competitors had to be corrected as from 006. This
                                                                            2003           2004      2005         2006         2007
subsequent report of transport handled by other compa-
nies which had not previously been taken into account                  DB          competitors    market share of competitors (per cent)
led to a far higher figure for the traffic performance by
                                                                 Source: DB data
competitors and consequently to a higher market share

                                                                 Arriva with its subsidiaries is one of
                                                                 the major competitors of DB in the
                                                                 local rail transport market.

     decline of 0.6 per cent in train services and the 637 mil-                         29.0 million train-kilometres in 2007. 27.3 million train-
     lion train-kilometres performed in 006 fell to 633. The                           kilometres of that figure were awarded in the form of
     train services provided by DB were actually down by .8                            tenders, of which Deutsche Bahn won 19.9 million train-
     per cent, from 540 to 530.5 million train-kilometres.                              kilometres, which is equivalent to almost 70 per cent.
     Although the ordering public authorities also cancelled                               At the end of 007, the Federal government and the
     train services from DB’s competitors, these companies                              Laender governments agreed on a financial framework
     nevertheless raised their performance from 97 to 103                               for regional transport until the year 04. The amended
     million train-kilometres because they took over train                              Regionalisation Act will still uphold the previous distri-
     services from DB. In 007, competitors held a market                               bution key between the Federal Laender. From the initial
     share of 6.3 per cent of the total train-kilometres com-                          figure of EUR 6.675 billion in 2008, regionalisation funds
     pared with 5. per cent the previous year.                                        are to increase in a straight line by .5 per cent per an-
        The Federal Laender and their ordering authorities                              num as from 2009 and the requirements will be reviewed
     awarded new transportation contracts for approximately                             again in 04.

     Secure financial framework until 2014                                              Local rail transport continues to grow
     At the end of 2007, the Federal government and the Laender governments             Both Deutsche Bahn and its competitors increased their traffic performance
     agreed on the amendment of the Regionalisation Act. The funds will rise by         in 2007. The competitors accounted for a share of almost ten per cent of local
     1.5 per cent per annum as from 2009 (in EUR billion).                              rail transport in 2007 (traffic performance in billion passenger-kilometres).

     8                                                                                  45

                                                                        7.30                                         2.2              2.3             3.9                4.2
     7     7.05                                           7.08   7.19                   40           1.7
                                            6.88   6.98
                       6.71   6.68   6.78                                                                                                            40.3            40.6
                                                                                                     37.9            37.9            38.9
     6                                                                                  35

     5                                                                                  30

     4                                                                                  25
                                                                                                                                                      8.9                9.5
     3                                                                                  20                           5.6              5.7
     2                                                                                  15

     1                                                                                               2003           2004            2005            2006            2007

           2006 2007 2008 2009 2010 2011 2012 2013 2014                                         DB         competitors            market share of competitors (per cent)

     Source: DB data                                                                    Source: Federal Statistical Office (inclusive of amended figures as from 2006)

                                                                                          Market and Competition

DB Stadtverkehr faces up to the competition
The takeover of the Danish company Pan Bus in 2007 was an important milestone for the international expan-
sion of the urban transport business unit. Its activities in foreign markets are also a consequence of the legal
situation in its home market.

Ongoing liberalisation and harmonisation are leading to the increasing integration        Now that numerous foreign
of the European local transport markets. While numerous foreign companies have            companies have gained a
gained a foothold in the German market and are expanding powerfully, access to the        foothold in Germany, foreign
markets of other Member States is becoming an increasingly attractive option for DB       markets are becoming an
Stadtverkehr. In autumn 007, the idea of internationalising the bus activities of the    increasingly attractive option
urban transport business unit bore the first fruit, with the purchase of the Danish bus   for DB Stadtverkehr.
company Pan Bus in Viborg. Pan Bus is one of the oldest urban transport companies
in Denmark and runs urban and regional services in Jutland, urban transport in Viborg
and regional services in the Limfjord region with a workforce of 120 and a fleet of 58
   The combination of Pan Bus and DB Stadtverkehr has created a powerful entity
which will not only be able to perform successfully in the tender market of the Jut-
land region, but which also plans further expansion from that basis. The concept has
already proved successful, as the company won the Silkeborg tender for urban and
regional transport, involving 8 vehicles and approximately 60 employees, just a few
weeks after the takeover and had Silkeborg urban services already up and running
smoothly by December.

                Foreign local transport markets
                are now an increasingly important
                element in the portfolio of the urban
                transport business unit.

     In a European comparison, liberalisation of the Danish market has already made good
     progress. After ten years of volatile competition, the transport experts now anticipate
     a phase of consolidation and stable market prices. This trend will be promoted by a
     government reform which has led to much larger local authorities. This will mean that
     the lots up for tender will be larger, a situation which creates great potential espe-
     cially for powerful and efficient companies. The conurbation areas of Copenhagen and
     Aarhus are characterised by high growth rates and are therefore interesting for both
     light rail projects as well as bus services. As the competitive situation in Sweden is
     similarly dynamic, the Scandinavian local transport market as a whole offers attractive
        In addition to its commitment in northern Europe, the urban transport business
     unit’s international focus also includes cross-border services to France, Benelux, the
     Czech Republic, Austria and Switzerland. In 007, these services generated revenues
     of more than EUR 3 million for the Group.
        By focussing on the Danish market and simultaneously pursuing activities in other
     European markets, the urban transport business unit continues to pursue its strate-
     gic objective of ranking amongst the top three international providers in Europe. Its
     good economic performance abroad gives DB Stadtverkehr a more independent and
     stronger competitive position in its home market, which still remains the major venue
     for its business activities.

     National antitrust legislation encourages new entrants

     The company’s commitments outside the German market are also a consequence of
     the legal situation in Germany. The ruling of the Federal High Court of Justice on the
     joint venture intalliance founded by DB AG and üstra Hannover has recently made it
     far more difficult for DB AG and municipal transport companies to achieve growth in
     the local public transport market (cf. 007 Competition Report, page 0). European
     competitors profit from the weakened market position of German companies, as many
     of them have recourse to backing from financial investors or state-owned companies to
     fund their operations in new markets. This is confirmed by transactions during 2007,
     such as the purchase of a stake in BENEX by Babcock & Brown, the takeover of SMEs
     by FirstGroup and further acquisitions by Veolia and Arriva.
        Municipal transport companies and SMEs are poorly equipped to counter such
     moves. The urban transport business unit endeavours to remedy that situation by
     means of cooperative models, integration projects and joint ventures, working to-
     gether with both municipal as well as private small and medium-sized transport com-
     panies. The models range from joint operations planning to repair depot cooperatives
     right through to drawing up joint plans for transport services. For SMEs in particular,
     this form of cooperation is a promising alternative.

                                                                                           Market and Competition

However, that type of partnership appears to be at risk again owing to the new EU
Regulation 370/07/EC on local public transport (cf. chapter “Ongoing development
of European legislation”). The regulation prescribes “self-provision quotas”, in that a
“significant part” of the transport volume put up for tender has to be provided by the
actual transport company to which the contract is awarded, which will then be per-
mitted to commission subcontractors only up to a limited “significant” extent, which
however is not specifically defined. This means a substantial limitation of the scope
for cooperation, so that the orders available for small and medium-sized transport
companies can be expected to fall. As a result, an increase in costs for the provision
of traffic performance can be anticipated, contrary to the actual objective of the
Regulation. This will apply particularly in those areas where small and medium-sized
enterprises have in the past provided transport services at low costs and without any
loss of quality.

Increasing competition for public road transport outside the cities

Owing to the above developments, the competitive situation continued to change in
007, with market trends determined primarily by the local transport policies of the
individual Federal Laender. Hesse is still the Land which makes most use of tenders
as an instrument to promote competition. In the meantime, Schleswig-Holstein also
makes increasing use of competitive tenders to award transportation contracts, and
Laender such as Saxony-Anhalt and some local authorities in North-Rhine Westphalia
have also opted for that procedure. In 007 alone, DB Stadtverkehr participated in
around 40 tenders, most of which were placed in Hesse. The DB Stadtverkehr subsidi-
ary Autokraft successfully took part in the tender and won the contract for transport
services in the rural district of Dithmarschen in Schleswig-Holstein.
   In comparison, no tenders are held for services ordered by the municipal authori-       Municipal authorities can
ties, most of which award the contracts directly to their own transport undertakings.      still award transportation
That option is still expressly permitted under the new local transport regulation,         contracts directly to their
which means that approximately 80 per cent of public road transport is exempt from         own transport companies.
competition. At the same time, however, there is increasing competition for services
outside urban areas, the core business segment of DB Stadtverkehr.
   Overall, it can be seen that cutbacks in public spending combined with increasing
competition outside the cities will shape the future of public road transport in Ger-
many. Although the market players are faced with new challenges, these also pose
new opportunities. Foreign investors in particular can take over SMEs which come
under more and more pressure as a result of the new market conditions. Despite the
limited opportunities for profiting from this market trend, performance by the DB ur-
ban transport business unit improved yet again last year.
   Serious consequences are meanwhile emerging as a result of the contract awarding
process implemented in Hesse, where responsibility for essential business processes
such as compiling timetables and fare configuration, customer information and qual-
ity management is increasingly being shifted from the transport undertakings to the
public authorities. Most of the contracts for the remaining actual transport services
are awarded in the form of tenders, which are regularly won by companies which pay
the lowest wages and have the most optimistic expectations – in some cases, with
fatal consequences: in some tender procedures, the revenues did not even cover the
costs of the services to be provided and several companies – especially SMEs – have
meanwhile actually gone bankrupt. As the companies will no longer be able to submit
such bids in future, the prices tendered for these services will increase again over the
medium term.

     No conflicts in working timetable compilation
     In 2008 the working timetable could again be compiled without the need for conflict resolution procedures, al-
     though increasing demand for train paths made compilation a real challenge. Operational train scheduling and
     planning construction work on the tracks, which are essential criteria for smooth train operations, were also
     more complicated owing to the rise in demand.

     The total number and structure of train path applica-                                  regionalisation funds resolved by the Federal govern-
     tions for the 008 working timetable are in line with the                              ment in 006.
     key transport trends of the preceding years. On the one                                   In terms of competition and access aspects, the time-
     hand, the overall demand for rail transport services in-                               table compilation phase in 2008 confirmed two unbro-
     creased: 46,60 train path applications were up . per                                ken trends. The successful coordination of all train path
     cent ) year-on-year (45,636 applications). On the other                               applications was once again a positive achievement with
     hand, there was a marked increase in the number of                                     benefits for all market players. Approximately 100,000
     applications for rail freight, which were up by 3. per                                train path applications which had originally overlapped
     cent, a sign of the continuing upswing in that sector. De-                             in terms of time and route could be integrated in a joint
     mand for passenger train paths was up by 1.9 per cent,                                 timetable by mutual agreement within the scope of the
     with local rail transport reporting the lowest growth of                               coordination procedure. There was no need to resort to
     0.9 per cent. This can be attributed to the cutbacks in                                the instruments of prioritisation according to type of

     1) 2008 was the first time that the working timetable was handled entirely through the electronic train path portal of DB Netz (TPN), which allows all customers to
        submit applications, cancellations and alterations of train paths online. Whereas applications which were processed in parallel by two regional organisations used
        to be recorded separately, the system now consolidates them and shows them as one application. Applied retroactively, this means that there were 45,636 train
        path applications for the 2007 working timetable, as against the figure of 47,275 train path applications calculated using the former method.

                                                                                                        Market and Competition

transport specified in § 9 (4) and (5) of the Railway In-      in December 2006 identifies the party which caused the
frastructure Usage Regulations, nor the provisions relat-      delay (RU or DB Netz) and imposes a penalty, which
ing to standard and maximum infrastructure charging.           currently amounts to ten cents for each minute of delay.
   A second consistent feature is the ongoing growth in        Both the infrastructure manager and the railway under-
market shares of railway undertakings which do not be-         takings are potential originators of delays, so the penalty
long to the DB Group. Train path applications by these         system encourages the two parties alike to avoid disrup-
customers increased by 8.4 per cent in the local pas-          tions. However, it is hardly surprising that although this
senger sector and a striking .7 per cent for rail freight,   system appears simple at first glance, designing its exact
which is high above the overall average. In relation to the    structure and applying it in practice is extremely compli-
total number of applications for the annual timetable,         cated and frequently controversial. One example is the
competitors thus now account for a fifth of local passen-      problem of allocating consequential delays. Following
ger and a quarter of rail freight transports. Long-distance    complaints by the Federal Network Agency and legal
passenger transport was the only sector where train            action filed by a group of market players, the Perform-
path applications showed no significant differences in         ance Regime is currently the subject of two court cases
intramodal competition.                                        (cf. also the chapter “Regulatory framework defined in
   In addition to the working timetable, which is speci-       court”). Further progress is also affected by endeavours
fied well in advance, applications for occasional serv-        to achieve Europe-wide harmonisation.
ices – some of which are submitted at extremely short             Even if optimum provisions are defined, it will never
notice – play an important part in train path formation        be possible to rule out disruptions in daily operations
and substantial increases are anticipated in 008. The         completely. Delays caused by the weather, for instance,
booming freight transport market is highly dependent on        are simply beyond the control of the parties involved.
flexibility, so that the option of ordering train paths for
non-regular services at short notice is essential.

Train controllers have to cope with growing demand

Growing overall demand, and in particular the increasing
demand for occasional train paths which are not included       Reliable access to infrastructure
in the working timetable, make train path construction         Despite a higher number of train path applications, demand from all
                                                               applicants could be satisfied without exception.
a very challenging task. As a result, planning construc-
tion work and operations handling, to ensure that the
timetable can be implemented as smoothly as possible           50,000
                                                                                        10,164                   10,251
in day-to-day operations, are equally sophisticated tasks.
This is particularly so in the extremely dense German                                   35,472                   36,369
rail network, where trains follow each other at extremely      30,000
short intervals. Every day, the network is used by ap-
proximately 36,000 trains and even minor disruptions in        20,000
                                                                                          0.1                      0.0
operating procedures can trigger a domino effect which
is noticeable throughout the entire network.
   To prevent potential retroactive effects for other mar-                               2007                     2008
ket players who are not directly involved, such disrup-                            working timetable        working timetable
tions – regardless of who causes them – should ideally
                                                                                 applications by DB     applications by non-DB RUs
be avoided right from the start. The Performance Regime
                                                                                 share of unsuccessful non-DB train path applications
envisaged in the Railway Infrastructure Usage Regula-                                                 (per cent)
tions is intended to act as an incentive for smooth opera-
                                                               Source: DB data
tions. The Performance Regime introduced by DB Netz

     Apart from clarification of the question of who is respon-     tages from physical proximity to the system: only five of
     sible for a disruption, it is vital to restore implementa-     the total 350 customers in the survey expressed a funda-
     tion of the timetable as soon as possible. That is the task    mental interest in working at an operations centre.
     of the traffic controllers, who permanently monitor and          Regardless of the lack of any good reason for the au-
     control train operations at the DB Netz network control        thority’s reservations and the absence of any legal basis
     centre in Frankfurt am Main and the seven regional             for the investigation by the EBA, in December 007 DB
     operations centres. Efficient traffic control should keep      Netz offered to set up work stations at the operations
     the effects of delays on any other trains to a minimum         centres within the scope of the capacity available as an
     and restore scheduled operations as soon as possible.          additional product. Negotiations about the actual imple-
     Scheduling regulations have been drawn up for that pur-        mentation and other questions are currently in progress
     pose and serve as the basis for decisions which the traffic    with the Federal Railway Authority.
     controllers at the operations centres often have to make
     within just a few seconds regarding train sequences, di-
     versions, overtaking and connecting trains.

     Authorities investigate operations centres

     In other words, the operations centres do not decide on
     the allocation of train paths, that is the services provided
                                                                    Sharp increase in operating performance once again
     there are not covered by the unbundling provisions of
                                                                    The freight sector in particular ensured that demand for train paths from
     Section 9a General Railway Act (AEG). Nevertheless,
                                                                    DB Netz AG increased yet again. In contrast, transport performance by the
     as the regulatory authority responsible for unbundling         passenger sector was stagnant (million train-path kilometres).
     matters, the EBA investigated an allegation that traf-
     fic contol could conceivably be in breach of Section 9a                                                                     146.0
                                                                    1,000                                          128.0
     AEG. In addition, the Federal Network Agency expressed                     70.3      87.8        109.8
     reservations concerning non-discrimination in respect of       900        915.7      905.1                                  890.4
     train control and instituted a parallel investigation pro-                                       879.6        877.7
     cedure concerning operations centres. Both these cases         800
     were triggered by the fact that workplaces of DB RUs’
     transport control centres are located in the same office
     spaces.                                                        600
        However, that certainly does not involve discrimina-
     tion against customers, or that third parties influence the    500
     scheduling of operations by DB Netz. The RU employees
     who work at the operations centres do not make any
                                                                                                                    12.7         14.1
     decisions regarding the allocation of track capacity. They     300                                11.1
                                                                                 7.1       8.8
     only have access to a control system for network control
     (LeiDis) which provides them with real-time information        200
     about the current operating status of their own trains,
     and this in turn allows them to inform their customers
     about ongoing developments promptly. This does not
                                                                               2003       2004         2005        2006          2007
     entail any significant advantage over their competitors,
     as LeiDis is one of the ancillary services which DB Netz                                  DB        competitors
     offers to all its customers. Moreover, the system can be                           market share of competitors (per cent)
     used anywhere. A survey conducted by DB Netz proved
                                                                    Source: DB data
     that the market players do not seem to see any advan-

                                                                                         Market and Competition

Focus on the workforce
The prolonged wage disputes between the German Train Drivers’ Union (GDL) and Deutsche Bahn put train
drivers firmly in the public eye. However, they account for only a small proportion of the total employees
of the integrated rail system. Whether or not DB succeeds in the face of competition depends on all its
employees – their qualifications, their commitment and their remuneration.

The economic focus of Deutsche Bahn was determined in the rail reform of 1994.           In addition to the new strate-
The Federal state – and thus the entire population – have since profited from savings    gic focus of DB AG, it is above
running into billions, which means a lower burden on the taxpayer. Since the reform,     all the effort of its employees
customers have enjoyed improvements in service as well as faster connections in both     that has enabled the financial
the local and long-distance sectors. Far-reaching consequences of the reform, how-       recovery of the former loss-
ever, also affected the Deutsche Bahn workforce in particular.                           ridden state-owned railway.

Employees are vital for the success of Deutsche Bahn AG

The financial recovery of the loss-ridden state-owned railway as a business enterprise
with a private-economy structure can be attributed not only to the new strategic
focus of Deutsche Bahn AG, but first and foremost to the effort of its employees. The
employees in turn benefit from the success of the company in the form of job secu-
rity and rising income: wage levels rose by a total of 4 per cent between 000 and
007. The wage increase in former West Germany amounted to ten per cent, com-
pared with 24 per cent in the new Federal Laender, owing to the alignment process
between east and west. Since  September 006, there have no longer been any wage
differences between the old and new Federal Laender at Deutsche Bahn. During the

                                             above period, all employees enjoyed a growth in real terms of 3.5 per cent, according
     Only the interaction between many
                                             to weekly report 43/007 of the German Institute for Economic Research. Over the
     different occupational groups enables
     DB to offer its customers transport
                                             year 008, salaries and wages in companies that are covered by the group’s collective
     services.                               agreement on payments will increase by eleven per cent on average.

                                             Wage agreements affect competitiveness

                                             This chapter will not argue whether or not wage levels are reasonable. Instead, it ex-
                                             amines the role of working conditions and wages in terms of their effect on competi-
                                             tion between the different RUs and the different transport modes.
                                                It is apparent that the disproportionately high wage agreements concluded be-
                                             tween DB and the unions during the last negotiations were based on wages which
                                             were already above average. Over the short and medium term, these wage levels will
                                             weaken Deutsche Bahn’s intramodal competitive position. It will hardly be possible
                                             to compensate for an increase in personnel expenses of this level by means of cost
     There has been no difference            reductions in other categories. This concerns especially the freight and regional trans-
     between the wage levels at              port units, since numerous competitors with lower personnel expenses are already
     DB in the new and old Federal           active in this sectors.
     Laender since 2006.                        According to the 006 Annual Report of Railion Deutschland AG, personnel ex-
                                             penses account for approximately a quarter of the total expenditure in this sector, in
                                             contrast to other cost categories where there are practically no differences between
                                             the companies. This is because charges for the use of tracks and other infrastructure,
                                             for instance, have to be the same for all competitors by law. Nor do the costs of roll-
                                             ing stock show any significant differences between the companies, since DB’s major
                                             competitors, such as the companies in the Veolia Group or SBB and its subsidiaries,
                                             are also able to place orders on a large-scale basis. One option for offsetting these
                                             additional costs for the DB companies which are faced with this intramodal competi-
                                             tion is to increase efficiency. However, since these companies have already achieved
                                             substantial efficiency improvements in recent years, it is dubious whether sufficient
                                             efficiency reserves are still available.
                                                It remains unclear to what extent DB’s competitors will be able to remain unaf-
                                             fected by the wage developments at the market leader. There will be a noticeable
                                             shortage of skilled employees in the labour market in future. DB’s competitive posi-
                                             tion will improve in proportion to the extent to which its competitors align their wage
                                             rates with those of DB. However, this will inhibit the development of rail as a whole
                                             compared with the other transport modes, in particular road haulage.
                                                While it is, of course, the companies themselves which first have to bear the higher
                                             personnel expenses, they can make use of ongoing innovation progress to adapt to
                                             changing conditions and reorganise their cost structures. Moreover, DB is a special
                                             case as it is still wholly owned by the state.
                                                As there is already effective competition in the transport markets, higher costs can
                                             be passed on to the customers only to a limited extent. This means lower profits for
                                             Deutsche Bahn and its owner, the Federal state. Partial privatisation of the company
                                             would also not change this situation. The anticipation of lower profits is already hav-
                                             ing an adverse effect on the willingness of potential investors in the rail market.
                                                The question is – will the other railway undertakings profit from their better
                                             competitive position resulting from the higher wage levels at DB? In principle, DB’s

                                                                                                                                Market and Competition

competitors have two options: they can either leave their prices unchanged and try
                                                                                                                                Customers benefit from the strong focus
to gain more market shares than before, or they can also raise their prices and benefit
                                                                                                                                on service since the rail reform.
from a higher profit margin. Some competitors are already complaining about a scar-
city of train drivers. In the past, some of these companies recruited drivers who had
been trained by DB, enabling them to achieve substantial increases in traffic perform-
ance. The capacities of capital-intensive rolling stock are already utilised to the full
in many cases today. So assuming that numerous competitors are already operating
at the limits of their capacities as a result of the growth they have achieved in recent
years, it will be virtually impossible for them to grow at an even faster pace. Instead,
they will raise their prices and consequently their profits. In that case, road transport
would be one of the prime beneficiaries of the high wage agreements – the losers
would be the rail freight customers who have to pay higher prices.

Existing distortion will be aggravated

   Price increases and declining efficiency at the RUs would inevitably jeopardise the
success that has been achieved in shifting transport from road to rail since the rail
reform. This would benefit private motorised traffic, aviation, road haulage and inland
shipping, and thus aggravate the existing distortion of competition between the dif-
ferent transport modes. Outstanding examples of this are the exemption of aviation
and inland shipping from mineral oil tax, and the lack of internalisation of the exter-
nal environmental effects of road and air traffic.
   Legal and contractual regulations in the labour market further impair the competi-
tiveness of railway undertakings: one example is the far stricter regulations that apply
to train drivers compared with truck drivers regarding safety at work and rest periods.
Pursuant to EU law, for example, train drivers are permitted to spend a maximum of

Wages for DB train drivers already above average before collective wage agreement
The table shows annual income pursuant to wage agreements (wage rates at October 2007) which were calculated
on the basis of a comparable database. The figures include selected bonuses e.g. for Sunday and public holiday
work, as well as night shifts. The table shows DB AG and five competitors. As the relevant data was not available for
all competitors, the selection may not be representative.

                                  Company           DB AG                           non-DB railway undertakings (RU)
  annual salary                                                       RU 1            RU 2       RU 3        RU 4       RU 5

  Minimum 1)                                        30,880          23,293           29,474     25,085      29,627     25,469

           Difference to DB in per cent                             –24.6             –4.6      –18.8        –4.1      –17.5

  Maximum 2)                                        33,401          30,035           33,293     34,389      30,239     27,064

           Difference to DB in per cent                             –10.1             –0.3       +3.0        –9.5      –19.0

  1) 27 years old, single, no children, 1 year of service with the company and in that job
  2) 50 years old, married, 1 child, 26 years of service with the company and in that job

Source: DB data

                                                                         The rules on rest periods
                                                                         and occupational safety for
                                                                         truck drivers are not as strict
                                                                         as for train drivers.

                                     two nights abroad on any one trip. There are no such regulations at all for truck driv-
                                     ers. In a survey conducted by a German medical journal, truck drivers stated that
                                     they spend an average of 50,000 kilometres per annum at the wheel, which means
                                     that the distance driven by a truck driver is almost four times higher than that of a
     Truck drivers perform almost    freight train driver, which is less than 40,000 kilometres. A reduction of red tape for
     four times as many kilometres   the rail sector would also make the railway markets more attractive to new entrants.
     as a freight train driver.      In the long run, a better position for rail in intermodal competition would lead to
                                     more competition on rail. Excessive regulatory provisions, on the other hand, weaken
                                     rail as a whole.
                                        Moreover, truck drivers earn far lower wages, and many professional drivers are
                                     not covered by any collective wage agreements whatsoever. Where collective agree-
                                     ments do exist, the wages amount to just over half the salary earned by a train
                                     driver. According to weekly report 43/007 of the German Institute for Economic
                                     Research, a train driver employed by Deutsche Bahn earns an hourly wage of between
                                     EUR 8.0 and EUR 0.03, compared with the average hourly wage of a truck driver
                                     of just EUR .05. Moreover, DB train drivers will receive a hefty pay rise following
                                     the record outcome of the last wage bargaining round.
                                        In May 007, the European Commission accepted a legislative package for the
                                     modernisation of the regulations in force in the road haulage market. One of the
                                     aims of that initiative is to harmonise the standards in that sector. The regulations in
                                     force to date led to a distortion of competition, not least because they were partially
                                     ambiguous and therefore not applied uniformly. The proposed regulation is therefore
                                     intended to ensure greater uniformity of the provisions in force in the EU. Amongst
                                     other things, each road haulage company will in future be obliged to employ a traf-
                                     fic manager with proven professional qualifications. As these regulations are still not
                                     nearly as stringent as those for the railway market, there can still be no question of
                                     equal treatment of the different modes.

                                     Trade unions for specific occupations and their economic consequences

                                     The wage dispute with the GDL revealed a further fundamental difference between
                                     the rail and road freight markets. While the road haulage market is defined by one
                                     dominant occupational group – the truck drivers – there are a whole number of dif-
                                     ferent occupations in the rail sector. Only the interaction of these different groups
                                     enables rail to offer its customers transport services. Without train drivers – but also

                                                                                           Market and Competition

                         The DB average train driver earns
                         more than EUR 33,000 per annum
                                    (wage levels at 2007).

without signallers, schedulers and traffic controllers, shunters, the personel of roll-
ing stock and rail maintenance depots, train crews or service staff at the stations to
name just a few – it would not be possible to carry passengers or freight from A to B
on rail.
   If a separate trade union existed for each of these occupational groups, and each
represented solely the interests of its own members, each of these unions would be
motivated to demand very high wage rates – at the expense of the other employees
and the company as a whole.) The consequences of such behaviour would ultimately
be disastrous for all sides. Economists refer to such a constellation as the “prisoner’s
dilemma”: behaviour which is optimum from the viewpoint of the individual ulti-
mately leads to a sub-optimal outcome for everyone – including the individual con-
cerned. It is therefore vital for the future, not only for Deutsche Bahn, but for many
other industries and in the final analysis also for Germany as a business location, to
prevent any tendency towards fragmented unions from taking hold.

Employee profit sharing strengthens the company

Amongst other things, competition between railway undertakings is intended to
raise the efficiency of rail transport. Severe discrepancies between the wages could,
however, be counterproductive to that target. For instance, a company might prove
successful in the market, despite its producing its services with obsolete and ineffi-
cient technology, because its wages are so low that it can underbid other companies.
The consequence would be a drop in productivity in this sector, instead of the desired
   DB employees have already participated in the success of the company in the past.
However, this is only possible if the companies which make up the DB are competitive
not only on rail, but also with respect to other modes of transport. To ensure that this
remains the case, the remuneration structures have to take competitive aspects into
account. In other words, a part of the future wage increases has to be used to expand
employee profit sharing and for company pension provisions. The objective is to raise
efficiency whilst simultaneously increasing the attractiveness of DB as an employer.

1) Cf. also H.-W. Sinn: “Hart bleiben, Herr Mehdorn!”, WirtschaftsWoche 32/2007.

     Joachim Fried in scientific dialogue with Lars-Hendrik Röller

     Customers can benefit from alliances
     How cooperative ventures in the long-distance rail passenger sector are judged by the European Commission
     depends on their effect on the consumer. While better efficiency is an argument in their favour, as it also benefits
     the consumers, there could be reservations based on grounds of the competition.

     Joachim Fried: Deutsche Bahn’s competitors now provide        their cost and risk structures, or the extent of intermodal
     approximately 20 per cent of all rail freight transport and   competition. Accordingly, there seems to be no good rea-
     nine per cent of local and regional passenger transport,      son to demand more regulation solely on grounds of the
     but less than one per cent of long-distance passenger serv-   low market shares of new entrants compared with other
     ices. Does this mean that the Federal Network Agency has      segments. An appraisal of the different shares in the rail
     not done enough to promote competition in the long-dis-       market can only be the first step in a reliable analysis of
     tance sector?                                                 competition. Rather, all the relevant alternatives from
                                                                   the point of view of demand must be taken into account
     Lars-Hendrik Röller: Although the intensity of regula-        – and that naturally also includes the products offered
     tion is undoubtedly an important factor for the extent of     by competitors in the road and aviation sectors. It is
     intramodal competition in the different segments, it has      also important to consider the frequently disregarded
     to be remembered that these segments are subject to           supply side: Can suppliers from neighbouring segments
     highly diverse market conditions, such as differences in      or regions enter the market over the short or medium


term? One example of this refers to the low-cost airlines,    Fried: What are the results that competition is actually
which can offer new routes and withdraw them again at         intended to achieve – lower prices for the customers?
relatively short notice. In such a situation, high market
shares are not a good benchmark for the intensity of          Röller: The Commission focuses primarily on the con-
competition.                                                  sumer standard. The decisive factors in such an analysis,
                                                              however, are the long-term effects for the consumer: for
Consumers in the focus of European competition                example, the consumer may profit for a short while when
                                                              a company achieves a dominant position in the market
Fried: So how is the actually relevant market defined         by predatory pricing. Ultimately, however, the company
in practice, for instance by the European competition         will try to recoup its “investment” in the form of exces-
authorities?                                                  sively high prices, so that the customer actually suffers
                                                              a disadvantage in the long run. In addition to the long-
Röller: As I said, rigid and legalist limits for the market   term effects, it is also important to assess the efficiency
shares which are considered tolerable tend to be less         criteria. As a rule, the potentially negative effects that a
important now than they were a few years ago. The trend       cooperation or alliance could have on competition have
is towards using the market performance which competi-        to be weighted against positive effects on efficiency. Af-
tion is supposed to enable as the basis.                      ter all, that is the reason why companies decide to coop-
   The aviation sector normally defines the market on         erate in the first place.
the basis of routes. It remains to be seen to what extent        The consumers can also benefit from the improved ef-
this can be applied one-to-one to the rail sector, where      ficiency over the long term. The results of the review by
the network effects are far more noticeable. The rel-         the Commission therefore depend on which of the above
evant question is whether different connection networks       effects outweighs the other. In other words, competition
compete with each other from the point of view of the         is not an end in itself, but is seen as a way of raising con-
customer, or whether the specific point-to-point con-         sumer welfare. For example, if one company can produce
nection is the only relevant criterion for the customer       at lower costs than several, it may be better from the
when planning his journey. Different answers to these         consumers’ point of view to dispense with competition in
questions can have a significant effect on the definition     part and to benefit from better efficiency.
of the market and consequently on the market shares of
rail as a whole or individual railway undertakings. Other     Fried: I could imagine it must be very difficult to weigh
important elements in an economically based market            up the different effects. After all, even the companies
definition in the rail sector mean considering the differ-    themselves occasionally make errors of judgement when
ent customer groups, such as differentiation between          assessing the benefits of cooperation.
business customers and leisure travellers, or taking into
account a fare system with only limited flexibility, which    Röller: That is totally correct. And this is also why the
is necessary owing to the blanket coverage provided by        Commission has specified three criteria for the efficiency
rail services.                                                analysis which have to be satisfied simultaneously. The
   The competition authorities still have to accumulate       first criterion states that the efficiency gains are specific,
experience in that respect in the course of the liberalisa-   which means that they can only be achieved by means of
tion process. But the corporate strategies will also be       the planned merger or cooperation. The second criterion
adapted in line with the new market circumstances, with       demands that the efficiency gains are verifiable. And
appropriate consequences for definition of the market         finally, the third criterion demands that these efficiency
and the analysis of competition.                              gains are passed on to the consumer.

                                                   Joachim Fried –
                                                   Competition Officer
                                                   of Deutsche Bahn AG

     Fried: To get back to the rail markets, how would you               long-distance rail passenger market, owing to the ongoing
     judge the cooperation between Deutsche Bahn and SNCF                rivalry between plane and train.
     in the high-speed traffic sector from the consumers’ point
     of view?                                                            Fried: Last year, SNCF and Deutsche Bahn also set up
                                                                         Railteam, together with five other European providers of
     Röller: The efficiency gains of such a cooperation are              high-speed rail services. This is aimed at making rail more
     undeniable – joint marketing, timetable coordination,               attractive compared with air travel, for example by means
     harmonised quality standards are obvious advantages                 of joint marketing, transferable tickets and the reciprocal
     of such a cooperation. Given that market opening will               use of lounges. You are currently preparing a study com-
     not be legally implemented until 00 and negative ef-              missioned by Deutsche Bahn to analyse how this coopera-
     fects on competition are therefore ruled out de jure, any           tion will be assessed in terms of competition policies. How
     assessment right now can only be positive. However,                 would a European Commission that is dedicated to the
     there are two questions which will be decisive for the              welfare of the consumer judge Railteam?
     long-term assessment of this cooperation – and also of
     potentially more extensive forms in future – in terms of            Röller: The Railteam alliance goes beyond a purely bi-
     competition law. Firstly, how would intramodal competi-             lateral joint venture, such as the one between SNCF and
     tion develop in future without cooperative ventures of              DB described above. To a certain extent, this alliance
     this kind? And secondly, the future competitive pressure            is a sign of intermodal competition: the railways are
     from other transport modes is a central aspect. It is in-           now catching up on a practice that has long since been
     teresting to note that the answers to these two questions           implemented by the airlines. The assessments of such al-
     are inextricably linked. If the competitive pressure from           liances in the aviation sector are mainly positive – most
     other transport modes is high, profit margins fall, and             of the empirical studies establish positive price effects
     therefore so does the incentive for joining the rail mar-           for the consumers, and corresponding effects can also be
     ket. The significance of this intermodal competition will           assumed for the rail sector. Nonetheless, there are two
     undoubtedly increase in future.                                     significant differences: firstly, there is less intramodal
                                                                         pressure on prices in the rail market, where network ef-
     Alliances are a sign of intermodal competition                      fects limit the appearance of “low-cost rail operators”,
                                                                         like those in the aviation sector. Secondly, the stronger
     Fried: What are your reasons for that assessment?                   links between infrastructure and operations prevent the
                                                                         occurrence of competing rail alliances. As I already said,
     Röller: The example of Paris–Brussels, where scheduled              the degree of intermodal competition will be the decisive
     flights were discontinued after high-speed rail services            factor for assessment in terms of competition economics.
     went into operation, already clearly proves that rail               We are currently analysing this issue on the basis of com-
     is definitely competitive. On the other hand, the low-              prehensive data supplied by Deutsche Bahn, but it is too
     cost carriers are increasingly encroaching on the fare              early to announce any results.
     segments of rail – air has evolved into a mass means
     of transport and is increasingly competing for leisure              Fried: However, the development of competition in the
     travellers in the medium-haul segment. I believe that               inner-German transport market could be an indication. Al-
     competitive pressure, which is decisive for the consumer,           though we already have open markets, other railways are
     will continue to be generated after liberalisation of the           nevertheless unwilling to take the risk of joining the market.


                                                    Prof. Dr. Lars-Hendrik Röller –
                                                        President European School
                                                   of Management and Technology
                                                                (ESMT), previously
                                                      Chief Competition Economist
                                                       of the European Commission

Röller: As no intramodal competition has been able to             limited. It therefore seems likely that the liberalisation of
develop to date in the long-distance segment despite              rail passenger transport will not lead to the pronounced
the fact that market access is governed by the same               intramodal competition anticipated by the European
legal regulations in Germany as for instance rail freight         Commission.
transport, the reasons for this lack of competition have
to be sought in the market environment. So I agree with           Fried: After liberalisation of the rail passenger transport
you in that respect. The greater distances to be covered          markets in 2010, if there is still no competition which
in the international transport market and the concentra-          could be obstructed by alliances between railway under-
tion on comparatively few point-to-point connections in           takings, then cooperation between the major railways
other countries could impair the comparison with the              presumably could not be a problem in terms of competi-
German long-distance rail market. But no matter whether           tion policy?
at national or international level, the high investment
costs are a major barrier for newcomers. Moreover, there          Röller: The European Commission has already approved
are positive network effects which mean that individual           similar alliances between the airlines, which are now
routes cannot be operated profitably. In layman’s terms,          the railways’ intermodal competitors. The crucial factor
network effects mean that the whole is better than the            will be what could develop once the markets have been
sum of its parts. These effects mean that there is less           opened if there were no such cooperative ventures. This
competition “inside the market”, than competition “for            hypothetical situation will have to be compared with
the market”, as in the regional transport market where            the actual developments. If there were no significant
entire networks are put up for tender. Competition for            intramodal competition in future, the alliances would not
the market, by the way, is a convincing argument why              impair the market structure. However, that analysis is
market shares are not a good yardstick for measuring              difficult and would require comprehensive data to enable
the intensity of competitive relationships. Even if the           any estimate of the probability of third parties joining
transportation contracts for such networks have been              the market. The potentially negative effects of coopera-
awarded in transparent and competitive procedures, in             tion on the market structure would however be offset by
the end there is only one railway undertaking which actu-         demonstrable positive effects on efficiency, which satisfy
ally handles the transports. If the market were to be de-         the above criteria of the European Commission relatively
fined accordingly, that undertaking would have a market           irrefutably. These positive effects can only be achieved
share of 00 per cent.                                            by cooperation, are verifiable and, owing to the strong
                                                                  competitive pressure from airlines and private car, they
Intermodal competition limits profits                             would also be passed on to the consumer. Cooperation
                                                                  between the railways should therefore be permitted as
Fried: The annual reports of the undertakings show that           long as the positive effects from the consumer viewpoint
they are not making excessive profits. That might also be         outweigh the negative effects.
a reason which makes other railway undertakings reluc-
tant to join the market.

Röller: Correct. The competition with the other trans-
port modes imposes a ceiling on the prices that can be
charged, so that the profits of the undertakings are also

     In 2007, the European Union continued to pursue harmonisation of
     the rail markets. For commissioned bus and rail transport a new Regulation
     on public transport is of crucial importance. Court decisions in Germany have
     defined interpretation of the current regulatory legislation in more detail.
     A common denominator still has to be found with the regulatory authorities
     on many points.

                                                                                                      Regulatory Policies

Ongoing development of European legislation
Adoption of the third railway package, reform of the regulation on public passenger transport and simplification
of the approval procedures for rail vehicles were important additions to the European legal framework in 2007.
Although market opening in the European rail passenger transport market in 2010 will still remain behind the
degree of liberalisation already achieved in Germany and a few other Member States, European legislative
progress over the past year can largely be rated as positive.

Opening of the rail freight transport markets is beginning to show success, particu-
larly as regards international rail freight transport on corridors of those Member
States whose markets have been liberalised for some time. The rapid agreement
between the European institutions to simplify the legislation governing approval
procedures for rail vehicles is an important step towards eliminating existing access
barriers in the European rail transport market. This development of the European rail
sector is also promoted by concerted international efforts to improve interoperability,
especially on the major freight transport corridors.
   The Commission has defined the key items of its work for the coming years as ini-
tiatives for freight transport logistics, port policies and the development of a priority
network for rail freight. It will therefore be vital to identify the fields of action where
European transport policies can effectively improve the competitive situation of rail         Liberalisation in the rail passenger
transport in Europe. The crucial requirement remains ensuring sufficient rail infra-          transport still falls short of the status
                                                                                              which rail freight had already achieved
structure and providing the financial resources required for that purpose.
                                                                                              in 2007.
   After a phase of intensive activity by the European legislator in the form of three
railway packages, the focus now has to be on ensuring full implementation of Commu-
nity law in all Member States, as there are still severe discrepancies in that respect, as
evident for example in the recently published Rail Liberalisation Index 2007 by IBM.

Liberalisation of passenger transport falls short of expectations

   The compromise on the liberalisation of rail passenger transport adopted in the
third railway package falls short of the status that has already been achieved in rail
freight transport in Europe since the beginning of 007. The new European Directive
merely obliges the Member States to open up cross-border transport as from 00,
but does not specify a target date for the liberalisation of national transports. The
Commission is merely obliged to submit a report by the end of 0 which, amongst
other things, will deal with potential further opening of the rail passenger transport
markets. As from 00, railway undertakings will also be entitled to pick up and set
down passengers on the national segments of cross-border routes. However, the
Member States will have the possibility to restrict these rights severely in order to
protect those transport connections which are offered as a public service: The Direc-
tive includes an option of restricting market access rights and imposing a levy on
cross-border transports to finance public service transports.

                                      New EC Regulation on passenger rights in rail transport

                                      On 3 December 2009, a regulation governing passenger rights in rail transport will
                                      come into force throughout Europe. However, the compromise reached for the new
                                      regulation means that Member States will be permitted to exempt their national trans-
                                      ports from a large part of the requirements until 04 and their regional and urban
     The European regulation on       transports indefinitely. The regulation contains primarily provisions governing duties
     passenger rights generally en-   to provide information, the sale of tickets, the liability of the railway undertakings in
     sures a fair balance between     case of delays and special rights for persons with reduced mobility. In case of delays,
     passengers and the railway       passengers will in future be entitled to a refund of 5 per cent of the fare for a delay
     undertaking. However, the        of one hour or more and 50 per cent of the fare for delays of more than two hours.
     provisions are far stricter         Many parts of the European regulation on passenger rights will create a fair bal-
     than in aviation.                ance between the legitimate interests of the passengers and the commercial interests
                                      of the railway undertakings. In order to ensure a uniform standard of protection
                                      for passengers throughout Europe and avoid imposing unilateral burdens on some
                                      railway undertakings in the gradually opening European market, the Member States
                                      should refrain from introducing additional national legislation which goes beyond the
                                      scope of the EC regulation. In the case of Germany, for example, which borders on
                                      nine other countries, the application of divergent legislation would not be feasible.
                                      Another critical point is that the European regulation on rail passenger rights goes far
                                      beyond the scope of comparable provisions for air passengers. The European air pas-
                                      senger regulation, for example, prescribes monetary compensation only if the flight is
                                      cancelled, but not in the case of delays. As these less stringent provisions are moreo-
                                      ver not sufficiently applied by the airlines, according to reports of the Commission,
                                      this constitutes distortion of competition to the detriment of rail.

                                      European train driver’s licence will facilitate cross-border deployment

                                      The Directive on the certification of train drivers specifies uniform minimum require-
                                      ments for train drivers, the objectives of vocational training, as well as examination
                                      and licensing procedures. Mutual recognition of the standardised driver’s licences is
                                      intended in particular to simplify the execution of international transports. During
                                      the first stage, all train drivers deployed on international routes have to be in pos-
                                      session of an EU licence by December 00. However, this requires extensive and
                                      coordinated preparatory work by the European Rail Agency, the Member States and
                                      the railway undertakings. The Directive is to be transposed into national law by the
                                      Member States by 4 December 2009. It deliberately grants extensive freedom of ac-
                                      tion which Germany should use to ensure practicable transposition of the Directive.
                                      It has to take operating procedures in rail transport into account and at all costs avoid
                                      unnecessary administrative and financial outlay.

                                      New public transport regulation adopted

                                      Regulation 1370/2007/EC on public transport, replacing Regulation 1191/69/EEC,
                                      has been published in the EU Official Journal and will come into force at the end of
                                      2009. It is a compromise reached after years of negotiation and includes provisions
                                      on the duration and mandatory contents of public service contracts as well as provi-

                                                                                            Regulatory Policies

                                 Arrival at Brussels –
                   the European train driver’s licence
                          will facilitate cross-border
                            deployment of personnel

sions on the award of contracts. In that respect, the Regulation permits the authori-
ties to choose between direct award or a more formal procedure for railway services.
In the case of direct award, a shorter contract term applies and stricter transparency
criteria have to be met. Contracts can also be awarded directly to internal operators.
This in-house award procedure is not in line with the principle of competition as – in
contrast to direct awards in the rail market – only one operator is considered in each
case. This procedure therefore has to be confined within strict limits. This is provided,
on the one hand, by the ban laid down in the Regulation which generally prevents mu-
nicipal providers from expanding from the basis of their protected home market. On
the other hand, the scope of application of the in-house direct award should not be
extended, as joint action of several public authorities could otherwise artificially en-
large the area which is exempt from competition. One positive aspect is that the new
Regulation generally does not affect the validity of existing contracts.

Commission plans to recast the first railway package

One of the items on the EU Commission’s work programme for 008 is recasting the
provisions of the first railway package. In view of the progress made in the rail mar-
kets, the Commission now believes that simplification and streamlining measures are
called for and will come back to the recommendations laid down in its 006 report
on the implementation of the first railway package. It intends to present a Communi-
cation together with a proposal for amending or recasting the legal acts currently in
force. This will involve combining the Directives of the first railway package to form
one single legal act, a “Rail Access Code”. The focus will be on the relations between
infrastructure managers and RUs.
   Although it generally makes sense to simplify and combine European railway law in
order to create a coherent and transparent set of rules, such a recast should cover the
entire European regulatory framework relating to the railways. As the third railway
package was not published in the Official Journal of the EU until December 2007, the
current initiative by the Commission is therefore clearly premature. Experience of the
rail reform in Germany has shown that the actual effects of market opening cannot be
judged until several years have elapsed. Only then is it possible to answer the ques-
tion of whether supplementary legal acts are necessary, for instance to extend infra-
structure access rights or the powers of the regulatory authorities.

     Heterogeneous liberalisation status in Europe
     The Rail Liberalisation Index 2007 shows that despite positive trends as regards market opening, there are still
     severe discrepancies between the Member States. The Commission should therefore focus on asserting the consis-
     tent implementation of existing railway legislation.

     Market opening status in the rail freight and rail passenger markets

                        advanced                                                                                                                           on schedule                                                                                                             delayed
     Points                      >800                                                                                                                         600–800                                                                                                                <600








     300                                                                                                  Czech Republic
              Great Britain














     Source: IBM Global Business Services and Kirchner, Rail Liberalisation Index 2007

     Instead of presenting new legislative proposals, it would make more sense for the
     Commission to concentrate on the uniform enforcement of existing Community law
     over the next few years. To date, the Commission has instituted 0 proceedings
     against Member States, but only because they have not formally transposed the provi-
     sions of the first two railway packages. The Rail Liberalisation Index 2007 published
     in October 2007, however, revealed clear evidence of existing deficits in the imple-
     mentation of European railway law.

     Liberalisation most advanced in Great Britain and Germany

     IBM Global Business Services and Professor Christian Kirchner of Berlin Humboldt
     University presented the third Rail Liberalisation Index (LIB Index) in October 2007.
     The study examines how easy it is for an RU wishing to join the rail market in different
     EU Member States to actually gain access to the market. The 2007 LIB Index reveals
     that in the three years since publication of the previous study, the European rail mar-
     kets have further opened up to competition. However, the latest study also shows
     that RUs still have to overcome severe barriers in some countries, such as intranspar-
     ent or time-consuming and expensive approval procedures. Nevertheless, new en-
     trants have already been licensed for rail freight transport in most countries and are
     also active there – a clear sign of ongoing liberalisation, although there are still great
     discrepancies in the passenger sector. Whilst some countries completely refuse new-
     comers access to the markets, in others there is already fierce competition.

                                                                                                    Regulatory Policies

The 2007 LIB Index ranked Germany in second place in Europe, slightly behind Great
Britain, in the top group “Advanced market opening.” The study confirms that the
countries in that leading group – Great Britain, Germany, Sweden and the Nether-
lands – have pushed ahead intensely with market liberalisation. The 2007 LIB Index
confirmed that they have regulatory bodies with far-reaching powers and experience
of dealing with conflicts and complaints. The bottom group in the 2007 LIB Index,
“Delayed”, consists of Luxembourg, France, Greece and Ireland. According to the
study, these four countries have the highest market barriers in Europe.
   In addition to the status of market opening, the study also examined the intensity
of competition in the European rail markets. These findings are reflected in the sepa-
rate COM Index, which in 007 was again led by Great Britain, followed by Estonia,
Sweden, Germany and the Netherlands.

European initiatives for more efficient infrastructure

On many major European transport corridors, rail operators are faced with infrastruc-
ture bottlenecks, which lead to delays and other quality impairments. The opening
of the national rail markets, common interoperability standards and new regulations        Market opening in Europe
governing the recognition of vehicles and driver’s licences have created important         Liberalisation is progressing, even in
conditions for strengthening international competition on rail. Nowadays, it is increas-   new Member States.
ingly the lack of infrastructure capacities which is proving a barrier to competition.
Further measures are therefore required at European level to improve infrastructure.          advanced
   In October 007, the European Commission accordingly presented a package of                on schedule
measures for freight transport, the central element of which is the establishment of
a rail network intended primarily for use by freight trains. There are plans to define
cross-border corridors within the scope of the existing infrastructure on which inter-
national freight transport will be given priority over other users and to set up sepa-
rate administrative bodies for each of these corridors. The Commission’s intention
of defining corridors between major European conurbations which have to be refur-
bished to cope with the anticipated growth in traffic is fundamentally to be approved.
However, some of the further measures derived from that basis have to be criticised:
removing some individual corridors which are used for mixed operations from the
integrated network in the Member States would cause severe practical problems and
lead to bottlenecks for the remaining rail transports. Implementation of these propos-
                                                                                           Source: IBM Global Business Services and
als would also entail a substantial degree of additional administrative work.              Kirchner, Rail Liberalisation Index 2007
   A solution to the capacity problems therefore has to be sought in the form of
upgrading the existing infrastructure. According to a study conducted by McKinsey
management consultants on behalf of the Community of European Railways and
Infrastructure Managers (CER) and the International Union of Railways (UIC), trans-
port volumes on six major European corridors are expected to increase by 6 per cent
(train-kilometres) by 00. To cope with that growth, a sum of EUR 45 billion would
have to be invested in these major rail routes. When presenting its multi-annual pro-
gramme for 2007–2013 on financing priority projects in the central trans-European
transport network, the Commission indicated that it was fundamentally willing to
provide above-average support for environmentally friendly transport modes such as
rail. A sum of approximately EUR four billion, that is 75 per cent of the funds avail-
able in the Community budget, was therefore allocated to rail projects.

                                          Environmental and safety aspects
                                          are arguments against a further in-
                                          crease in truck lengths and weights.

     However, in view of the enormous investment requirements, the search nevertheless
     continues for further sources of financing. To date, the budget plans of the Member
     States and the European Union include funds of just EUR 30 billion for the period
     up to 00. The European Commission is currently investigating a promising option
     involving imposing equalisation levies on those transport modes which pose a par-
     ticularly high risk for the general public (external costs). Levies such as toll charges in
     road transport could then be invested in environmentally friendly modes which gener-
     ate lower external costs. The Eurovignette Directive entrusted the European Commis-
     sion with drawing up a model for the assessment of external costs and apportioning
     them to infrastructure charges by June 008. It is important that these external costs
     are based on reliable and neutral sources – such as the report of the Intergovernmen-
     tal Panel on Climate Change.

     Mega-trucks weaken rail transport and generate high costs

     As part of its logistics initiative, the Commission is also investigating options for rais-
     ing the permissible maximum vehicle dimensions and weights and the effects of the
     cross-border deployment of the so-called gigaliners. While the approval of such vehi-
     cles would lower price levels in the road haulage market, it would raise the costs of
     the publicly funded infrastructure. Owing to the high intermodal competitive pressure
     in the freight transport market, a reduction in road haulage prices would immediately
     lead to a drop in rail freight volumes, with single wagonload and combined transports
     particularly at risk. Raising the permissible truck dimensions and weights would thus
     be a biased decision in favour of road transport. Licensing heavy trucks would also
     be contradictory to the resolutions of the European Council of 8 and 9 March 2007
     which obliged the European heads of state to reduce emissions of greenhouse gases
     by 20 per cent between 1990 and 2020. That target can only be achieved by promot-
     ing both inter- and co-modality, as well as combined transport, but not by unilaterally
     promoting road transport.
        Until it is possible to charge road tolls which actually cover costs, approving the
     deployment of gigaliners would also cause further negative external effects at the ex-
     pense of the general population. Raising the permissible gross vehicle weight would
     require a number of adjustments to existing road infrastructure, such as bridges.
     Additional stress on motorway infrastructure would also lead to an increase in main-

                                                                                                   Regulatory Policies

tenance and repair costs, whilst the deployment of gigaliners also poses new safety
risks in the road transport sector.

Approval procedures will soon be faster, more transparent and cheaper

In future, the approval or homologation procedures for rail vehicles in the European
Union will be significantly facilitated. Divergent homologation practice in the EU
Member States in the past has proved to be a severe market access barrier. Until now,
rail vehicles have to go through a time-consuming and expensive homologation pro-
cess in each Member State. A well known example is the licensing of class 85 and
189 locomotives. After applying for an authorisation for freight locomotive BR 189
in Austria back in 00, DB AG has had to invoke the Austrian Administrative Court
of Justice. In the past, the homologation of locomotives and traction units for deploy-
ment in other Member States has generated costs running into millions, which in
many cases could not be justified on grounds of safety considerations. The rail sector
estimates the potential savings from streamlined and more effective homologation
procedures at around EUR 400 million by the year 05.
   The Directive which has now been adopted and which is to be transposed by the
Member States by 00 provides leverage for substantially accelerating the homolo-
gation processes for new and existing rail vehicles. In particular, the procedures are to
be made much more transparent and easier to review. For the first time, the amended
Directive specifies time limits within which the national safety authorities have            The newly adopted Directive
to reach a decision on applications for an authorisation which have been duly and            for simplified homologation
properly submitted. If they fail to do so, the applicant is entitled to assume that the      of rail vehicles would enable
authorisation has been granted after a further short period and without an explicit          potential savings of
decision by the national safety authority. In future, applicants will also have more op-     EUR 400 million by 2015.
portunities to demand a review of negative decisions by the safety authorities.

EU proposes changes in the aviation sector

The legislative procedure initiated by the European Commission to include avia-
tion in emissions trading could be an important step towards aligning competitive
conditions, although this depends on the actual form that the legislation takes. The
resources generated from this move should be used to optimise the overall transport
system in the interests of society in general and to promote environmentally compat-
ible and safe mobility. As long as aviation (and shipping) – unlike railways – are not
affected by emissions trading and are moreover exempt from taxation on energy, rail
should be relieved of the dual burden simply in the interests of equal competition.
   The proposed regulation on air transport services in the Community will ensure
transparent pricing in that sector in future. The proposal submitted to the European
Parliament for its decision specifies that the airlines will be obliged to state the final
price of a flight, including all applicable taxes, duties, supplements and charges. At
present, low-cost airlines frequently advertise fares which amount to only a fracture
of the price that the customer actually has to pay. The planned regulation will put an
end to this practice and thus contribute to more consumer protection and greater
transparency of competition, not only between the different airlines, but also be-
tween the different transport modes.

                                              Commission investigates Berlin/Brandenburg transportation contract
     The European legislator is simplifying
     and accelerating the homologation of
     traction units for deployment in other
                                              In August 003, Connex Regionalbahn GmbH submitted a complaint to the Euro-
     Member States.                           pean Commission concerning alleged state aid relating to the public service contract
                                              awarded by the Federal Laender of Berlin and Brandenburg to DB Regio AG. In Octo-
                                              ber 007, the European Commission instituted formal investigation proceedings to
                                              examine whether the payments made to DB Regio AG pursuant to the public service
                                              contract are too high and consequently include inadmissible aid elements. While
                                              institution of the formal investigation proceedings does not mean that the Commis-
                                              sion has decided in advance, it is nevertheless contrary to the administration practice
                                              which has been exercised for years. The investigation by the Commission has led to
                                              substantial legal uncertainty, not only for the contract directly affected, but also for
                                              other public service contracts in Germany and all over Europe, which were signed in
                                              the belief that the existing legal situation was reliable. In its reinterpretation of Regu-
                                              lation 1191/69/EEC, which is relevant in this case, the Commission is opposing con-
                                              tract award procedures which have been practised by the public authorities for years.
                                              However, DB AG is confident that the in-depth investigation will confirm that no in-
                                              admissible aids are involved. The contract satisfies all the requirements of Regulation
                                              1191/69/EEC, which is relevant and conclusive in this case. Moreover, the contract
                                              also meets the criteria of the Altmark Trans ruling of the European Court of Justice.

                                              Financing conditions of DB AG do not constitute aids

                                              In August 003, Netzwerk Privatbahnen (an Association of German Rail Freight
                                              Operators) submitted a state aid complaint to the European Commission, claiming
                                              that DB AG enjoyed inadmissible aids relating to the Federal government’s warranty
                                              obligations for rail infrastructure enshrined in the German Constitution. It alleged
                                              that DB AG benefited from a higher credit rating and was therefore granted better
                                              funding conditions than its competitors. However, there is no evidence of aids in that
                                              respect. In particular, Article 87e of the German Constitution does not constitute
                                              any warranty or state guarantee of the Federal government for the liabilities of DB
                                              AG. The fact that the Federal government – and thus the public purse – is the sole
                                              shareholder of DB AG is of no relevance for aids pursuant to the EC Treaty. Moreover,
                                              under the present legislation, the company’s creditors have no scope for seizing rail

                                                                                         Market and Competition

Regulatory framework defined in court
In 2007, the Federal Network Agency (BNetzA) and Federal Railway Authority (EBA) made full use of their
powers and also instituted parallel proceedings on some issues. In several cases, the DB companies sought
temporary judicial relief to avoid severe financial disadvantages following official orders.

The BNetzA continued its regulatory practice from the preceding year and instituted      One of the main focuses of
more than 70 infrastructure access proceedings against DB companies in 007. Fur-        the Federal Network Agency
ther proceedings relating to the provisions of Sections 9 and 9a were also instituted    last year was to check the
by the EBA. In 4 cases, the regulatory authority based its decisions on Sections 4c,   network statement for non-
14e and 14f German General Railway Act (AEG). Although the companies filed objec-        discrimination.
tions to many of these decisions so that they are not final, in some cases they were
nevertheless obliged to implement the official orders temporarily, as Section 37 AEG
prescribes that decissions in railway law cases are immediately enforcable. As the
companies were frequently either unable to implement these measures, or could not
reasonably be expected to do so, they had to seek temporary relief against the deci-
sions from the courts.

In-depth examination of usage conditions

In the year under report, the Agency also focussed on reviewing the network state-
ments of infrastructure undertakings before they came into force. These documents
state the conditions for access to infrastructure, such as the periods of notice for
requesting train paths and services facilities. If an infrastructure manager plans to

                                                                                The DUSS had to submit
                                                                                new usage conditions for its
                                                                                freight terminals.

                                       amend or recast its network statement, the new version must be submitted to the
                                       Agency, which has four weeks in which to object to the statement if it believes that
                                       the new version infringes any provisions of rail regulatory law. One of the key provi-
                                       sions in that respect is the ban on discrimination of individual companies. In that
                                       case, the infrastructure manager is not permitted to enforce the clause to which the
                                       complaint refers. The Agency is also entitled to object to any such clauses after they
                                       have come into force.

                                       Court cases eliminate legal uncertainty

                                       The legal requirements of the network statement and other usage conditions and the
                                       regulatory authority’s powers of review have still not finally been clarified in court.
                                       In recent years, this legal uncertainty has led to numerous administrative procedures
                                       and court cases. Back in autumn 005, the EBA, which still acted as the regulatory
                                       body at that time, objected to numerous provisions of the usage conditions for the
                                       passenger stations of DB Station&Service, the infrastructure and service facilities of
                                       DB Netz AG and the railway fuel stations of DB Energie GmbH, all of which had been
     The court concretised the ban     adapted in line with the new legal requirements. The EBA also ordered amendment
     on discrimination which is cen-   of the provisions to comply with the legal opinion of the regulatory authority. The
     tral to the regulation.           subsequent appeal proceedings were conducted by the Federal Network Agency,
                                       which had in the meantime assumed responsibility for regulatory matters. After sev-
                                       eral hearings in the course of the appeal proceedings, the Agency issued its appeal
                                       decision, ordering application of the usage conditions in force between 0.4.006
                                       and 9.4.2007.
                                          Just a few months later, in October 006, DB Station&Service AG and DB Regio-
                                       Netz Infrastruktur GmbH submitted their usage conditions for passenger stations
                                       to the Agency for preliminary review. DB Netz AG submitted its network statement
                                       for the use of rail infrastructure and service facilities. In notices of 7..006 and
                                       0..006, the Agency objected to numerous clauses and threatened to impose pen-
                                       alties if its specific orders for amendment were not executed promptly. The Agency
                                       further demanded that DB Netz AG and DB Gleisbau GmbH draw up and submit usage
                                       conditions for their maintenance facilities, which it then objected to in full and man-
                                       dated the publication of a revised version.
                                          Irrespective of unequal treatment, the authority based its complaints on further
                                       requirements which it derives from the general ban on discrimination as a benchmark
                                       for usage conditions, in particular the “principle of transparency” which prescribes

                                                                                                   Regulatory Policies

that usage conditions must be worded so that a completely unqualified reader can
grasp the meaning. DB Netz AG submitted a petition for temporary judicial relief
against particularly serious complaints regarding the network statement for rail in-
frastructure, for example complaints relating to the incentive system, or the ban on
freight transport on the Berlin north–south line and the new-build Nuremberg–Ingol-
stadt line. That petition was sustained in full by Münster Higher Administrative Court
in its decisions of 26.3.2007 (13 B 2592/06). The infrastructure managers concerned
promptly adapted the remaining clauses to satisfy the demands of the regulatory au-
thority owing to the immediate enforceability of the notices and they duly came into
force on 0.4.007. Nonetheless, they wished to have the fundamental legal issues
clarified in court and therefore, after failing to win the appeal proceedings, took legal
action against all the notices on which no decision had been issued.

Münster higher administrative court rejects extension of the regulatory powers

As the outcome of these proceedings is not yet clear, the DB AG infrastructure man-
agers concerned decided to avert further intervention by the regulatory authority
by waiving any amendments to the network statement in force from 0.4.008 to
9.4.2009 as far as possible in 2007. This was primarily intended to reduce legal un-
certainty on the part of the market players. The amendments which DB Netz AG did
make referred first and foremost to operating and technical regulations and were
necessary owing to technical changes. The company duly notified the regulatory au-
thority of these amendments. Furthermore, revised usage conditions were submitted
                                                                                            UBB appealed against the order
to the Federal Network Agency by Deutsche Umschlaggesellschaft Schiene (DUSS) for
                                                                                            to submit new usage conditions.
the freight terminals under its management and by Usedomer Bäderbahn (UBB) for
its passenger stations, rail infrastructure and services facilities.
   In the year under report, the Agency again objected to the recast and revised us-
age conditions either in full or at least to a large extent, claiming that they infringed
its “principle of transparency”. It threatened the companies with penalties if they did
not adapt these conditions to satisfy the criteria of the Agency. In addition to indi-
vidual clauses, it also objected to the methods of structuring the document. All the
companies concerned have appealed against the notices and invoked Cologne Admin-
istrative Court to ensure that their objections have a suspensive effect. In the appeal
proceedings, Münster Higher Administrative Court has meanwhile sustained all these
petitions in full or at least in part in rulings of 8.0.008 and 5.0.008.
   In its rulings, the court issued fundamental statements on the interpretation of the
ban on discrimination and the scope of the regulatory authority’s powers during the
preliminary examination procedures and rejected excessive interpretation. It contra-
dicted the wide interpretation of the ban on discrimination advocated by the Federal
Network Agency and Cologne Administrative Court and confirmed established court
practice, which states that the offence of discrimination is given only when RUs are
denied equal treatment regarding access to rail infrastructure without objectively
legitimate reasons. Discrimination owing to unclear or contradictory regulations in
usage conditions which apply to all parties is given only if that lack of transparency
leads to concealed discrimination (Münster Higher Administrative Court, rulings of
8.0.008 – 3 B 04/07, 04/07 and 05/07 and rulings of 5.0.008 – 3
B 2091/07 and 2092/07). In view of the statements by Münster court, it can be as-
sumed that the benchmark developed by the Agency for reviewing usage conditions
will not be sustained during the formal investigation proceedings. As the regulatory

                                                Since two years the Federal Network
                                                Agency is in charge of monitoring
                                                access to rail infrastructure.

     authority is increasingly applying the definition of transparency, which it derived from
     the ban on discrimination, outside the scope of its ex-ante examination in order to de-
     mand the subsequent amendment of usage conditions during the course of the year,
     the forthcoming decisions on the network statements of infrastructure managers will
     play a central role for the future of rail regulation.

     Regulation of charges and Performance Regime

     It is still not clear what strategy the Federal Network Agency will pursue for the
     regulation of charges, although it has announced its intention of conducting a full re-
     view. A study commissioned by the Agency to clarify charging issues pursuant to the
     General Railway Act (AEG) and Railway Infrastructure Usage Regulations (EIBV) was
     presented in May 007. In 007, the regulation of charge systems by the Agency was
     still largely restricted to sporadic reviews. At the start of the year, it initiated proceed-
     ings on the charging of loading lanes. DB Netz AG was able to remedy the Agency’s
     reservations by changing its list of charges. In another instance, the Agency issued
     a notice objecting to a regulation on the adjustment of charges in connection with a
     contractual dispute. Since August 007, the regulatory authority has been conducting
     a comprehensive examination of the station charging system of DB Station&Service in
     the form of an ex-post procedure pursuant to Section 4f () AEG. In February 008,
     it instituted parallel infrastructure access proceedings in which it is examining the
     level and structure of the infrastructure charges of DB Netz AG.
         Independent of the decision by the regulatory authority, DB Netz AG suspended
     settlement of accounts based on the incentive system for both freight and passenger
     transport in November 007. The incentive system – or Performance Regime – is
     aimed at ensuring that rail infrastructure managers and transport companies utilise
     the capacities of the rail network as efficiently as possible. In response to a request
     from a group of European freight transport companies, Frankfurt Regional Court
     declared individual passages of the DB Netz AG Performance Regime invalid in its
     ruling of 6..007 owing to a breach of the law on general terms and conditions
     of business. The ruling does not stipulate the relation between the provisions of rail
     legislation on access to rail infrastructure and the provisions of monitoring general
     terms and conditions of civil law and thus correctly does not conduct a comprehen-
     sive investigation of the legitimacy and expediency of the Performance Regime pursu-
     ant to the law on injunctions. However, it had no fundamental reservations against
     the review of individual clauses pursuant to civil law, as these clauses had not been

                                                                                                  Regulatory Policies

approved by the authorities. The court was further prepared to accept that the solu-
tion based on its ruling did not make any economic sense. It thus forced DB Netz AG
to suspend the settlement of accounts based on its incentive system in contradic-
tion of the provisions of rail legislation on freight transport. To avoid discriminatory
treatment of its customers, DB Netz AG simultaneously also suspended this form of
settlement of accounts for passenger transport. This, in turn, led to the institution of
regulatory proceedings by the Federal Network Agency.
   In its ruling of August 007, Münster Higher Administrative Court upheld the ruling
of Cologne Administrative Court of 0.0.006 in respect of the “supplement for spe-
cial trains.” It rejected DB Netz AG’s motion for appeal proceedings (OVG Münster 3
A 08/07). The court claimed that the ten per cent supplement which was levied until
the end of 006 constituted discriminatory treatment for which there were no objec-
tive grounds. The ruling is based on the legal situation prior to the 005 amendment
of the Railway Act. Its grounds for the decision were primarily that no sufficient and
plausible explanations had been submitted for the additional charges.

Point of conflict: construction work and scheduling

                                                                                           In connection with construction work,
In 007, the Agency paid increasing attention to information and coordination proc-
                                                                                           the Agency instituted a total of ten
esses in connection with construction work, instituting a total of ten infrastructure      proceedings on infrastructure access
access proceedings relating to the installation of building sites and issuing four deci-   and issued four notices.
sions. In its notices of 2.3.2007 and 29.8.2007, the regulatory authority established
discrimination of an RU owing to belated information about construction work.
It took that individual case as grounds for obliging DB Netz AG to make extensive
changes to its information and coordination processes in connection with construc-
tion work without any advance warning as part of its ex-post monitoring of network
statements pursuant to Section 4f ()  No.  AEG, setting .0.007 as the dead-
line for implementation. It did not claim discriminatory treatment of parties entitled
to access. The demands of the Agency are neither in line with the processes of con-
struction work planning nor with the other operating and technical circumstances in
such cases. Even if implementation of the requirements was technically feasible in the
first place, it would lead to severe financial consequences. The authority’s demands
are not appropriate, as DB Netz AG itself has already been endeavouring to remedy
this situation for some time and can already offer demonstrable success as regards
optimisation of its construction operations planning. DB Netz AG has therefore ob-
jected to that notice in the form of administrative proceedings and has also applied to
the court for summary judgements. Cologne Administrative Court granted summary
legal protection by ordering the Agency to suspend execution of its notice until con-
clusion of the appeal proceedings.
   Since then, the Agency has conducted several hearings at which DB Netz AG ex-
plained its current practice and the proposed changes to its planning procedures for
construction work. Since October 007, it has been unclear whether the Agency will
nevertheless go ahead with the appeal proceedings or whether it will be willing to de-
velop a concept for a long-term solution in cooperation with DB Netz AG.
   In view of this uncertain legal situation, DB Netz AG saw itself forced to revoke its
notification of 15.10.2007 on the planned amendments to its network statement.
That was necessary to avoid further complication of the procedures owing to overlap-
ping orders. The Agency had already implied that it would file extensive complaints
about the amended clauses in the scope of its preliminary review.

                                               Another focal point of the Agency’s work is the examination of the regulations regard-
                                               ing traffic control in force at DB Netz AG, which are aimed at ensuring the fastest pos-
                                               sible restoration of scheduled operations after disruptions. The Agency took several
     If they are unable to satisfy demand
                                               complaints by RUs as grounds for conducting a fundamental examination of the regu-
     for train paths to an adequate extent,
     the operators have to declare the lines
                                               lations of DB Netz AG as stated in Directive 40.005, which forms part of the operat-
     congested.                                ing and technical rules. Again, the Agency indicated that it believes the DB Netz AG
                                               regulations on are “not transparent”.

                                               Framework agreements rendered possible

                                               In 007, three RUs exercised their option of signing aperiodic framework agree-
                                               ments with DB Netz AG to come into force as from the 008 working timetable. The
                                               DB Netz AG network statement permits parties entitled to access to sign framework
                                               agreements for a longer term than the working timetable in order to secure rail in-
                                               frastructure capacities. These capacities then enjoy priority in terms of train path
                                               construction in accordance with the relevant legal regulations. The three framework
                                               agreements could only be concluded after court proceedings, as the Agency had origi-
                                               nally prohibited them in its notices of 7.3.007. One of the three RUs concerned
                                               succeeded in provisionally enforcing the conclusion of its framework agreement be-
                                               fore Münster Higher Administrative Court (OVG Münster, ruling of 0.4.007, 3 B
                                               537/07). DB Netz AG subsequently succeeded in dispelling the Agency’s reservations
                                               and securing the unconditional conclusion of the framework agreements for all three
                                               RUs. In its ruling to dismiss the proceedings of 4.6.007, the court stated that it had
                                               reservations against the basis for the Agency’s powers and the suitability of the order
                                               it had issued.

                                               Congested rail infrastructure

                                               Pursuant to the EIBV, line sections on which demand for train paths cannot be sat-
                                               isfied to an adequate extent must be declared congested by the rail infrastructure
                                               manager, which is then obliged to conduct a capacity analysis and draw up a plan for
                                               increasing rail infrastructure capacity pursuant to strictly specified procedures. In
                                               2007, DB Netz AG had numerous meetings with the EBA on that subject and finally
                                               also with the Agency. The EBA had issued a documented procedure for defining con-
                                               gestion on rail infrastructure. In 2007, when applying that definition, DB Netz AG
                                               first declared three railway line sections (line 5200: Gemünden–Würzburg, line 5900:
                                               node Fürth–Bamberg, line 5910: Würzburg–Fürth) to be congested.
                                                  The administrative and court procedures in connection with non-discriminatory
                                               access to rail infrastructure and service facilities in 007 were otherwise limited to a
                                               moderate number of individual cases. In its notice of 0..007, the Agency stated
                                               that the operating procedures in force on the Köthen–Aken line since 1996 (spur line
                                               block) was in contravention of the provisions of railway law on access to rail infra-
                                               structure. The EBA, in its capacity as competent rail regulator, had not previously ob-
                                               jected to that procedure. The regulatory authority further prohibited DB Netz AG from
                                               billing the parties entitled to access for the additional charges sustained because of
                                               this procedure. After failing to win the appeal proceedings, DB Netz AG filed an action
                                               with Cologne Administrative Court on 12.2.2007 (18 K 494/07), which is still pending.
                                                  In its notice of 3.4.007, the Agency obliged DB Netz AG to permit steam loco-
                                               motives to operate on the Berlin Stadtbahn infrastructure subject to prior notice.

                                                                                                   Regulatory Policies

The decision was not upheld by Cologne Administrative Court which, in its order of
30.4.2007 (18 L 543/07) ordered that the objection filed by DB Netz AG against the
decision should have suspensive effect. The Federal Network Agency filed an appeal
                                                                                           For its second market survey, the
against that order with the Higher Administrative Court which it subsequently with-
                                                                                           Agency sent off some 1,600 question-
drew, waiving the appeal proceedings as the RU concerned had no longer requested           naires to rail infrastructure managers
train paths.                                                                               and parties entitled to access.
   In its declaratory notice of .6.007, the Agency stated that the removal of level
crossing keepers by DB Netz AG on the Dorsten–Coesfeld line operated by NWB was
discriminatory. After failing to win the appeal, DB Netz AG filed an action with Co-
logne Administrative Court on ..007 (8 K 36/07).
   In addition to the Federal Railway Office, the Federal Network Agency also insti-
tuted infrastructure access proceedings on the conception of the operations centres
and the network control centre of DB Netz AG on 8.6.007, demanding informa-
tion about the structure, staffing and operating sequences at the operations centres
and the network control centre. The Agency classified the operations centres and
the network control centre of DB Netz AG as service facilities and therefore believes
that non-discriminatory access is jeopardised if only employees of DB companies are
granted access.

Market survey by the Federal Network Agency in 2007

The Agency conducted its second general market survey in spring 007 and sent ap-
proximately ,600 questionnaires to rail infrastructure managers and parties entitled
to access. As in the previous year, the DB subsidiaries also participated in the survey,
but without acknowledging any obligation to do so. According to the Agency, the
market survey data is also used to enable it to monitor infrastructure charges. Claim-
ing that the Agency was not authorised to conduct such a survey, the DB companies
chose not to answer some selected questions. In its notice demanding information
on ..007 the Agency mandated Railion Germany AG to answer the outstanding
questions. On  February 008, Münster Higher Administrative Court ordered that
the objection filed by Railion Germany AG should have suspensive effect as the notice
issued by the Agency would “in all probability fail to be sustained in a formal investi-
gation procedure”.

Investigation regarding company lawyers

In its notice of 4..006 the EBA prohibited DB Netz AG from entrusting lawyers
employed by DB AG to act as its representatives or consultants in legal cases relating
to decisions about the working timetable, allocation of occasional train paths and
infrastructure charges. The ban also applies to the preparatory work for these deci-
sions. The Agency based its decision on Section 9a AEG, claiming that this practice
of seeking / providing legal advice constitutes unlawful intervention in the entrepre-
neurial freedom of DB Netz AG. The parties concerned filed an appeal against the
order and applied for provisional judicial relief from Cologne Administrative Court.
In view of the complexity and fundamental importance of the issues in dispute, the
EBA temporarily suspended execution of its notice until a decision was reached in the
formal investigation procedure. In its ruling of 4..007, Cologne Administrative
Court confirmed the decision of the EBA, upon which the parties concerned filed an
appeal with Münster Higher Administrative Court.

     Learning from others is a key to success. A look at the details of the railway
     markets in Austria and Switzerland reveals highly different approaches. The
     second symposium on “Competition and Regulation” provided an opportunity
     to hear about the experiences of regulation in other countries and industries.
     However, before German railway law undergoes a further reform, it is impor-
     tant to gather sufficient experience inside Germany itself.

                                                                                       Special Areas of Discussion

A look at the alpine regions
Switzerland is frequently regarded as a model country as regards the structure of its rail market. In Austria, too,
the railway enjoys a central role. Developments in both countries and a comparison with the German rail markets
reveal that we can learn a great deal from each other.

As transit countries for the enormous freight quanti-         In Austria, on the other hand, traffic performance by the
ties carried on the north-south corridors, Austria and        railways fell from 9.76 billion passenger-kilometres in
Switzerland play a key role for cross-border transport        1995 to just 8.17 billion in 1999, although the popula-
to and from Germany. As a result of environmental             tion is comparable with that of Switzerland. Since then,
pollution and roads which, despite high infrastructure        however, rail has again gained ground and by 006 had
expenditures, remain notoriously congested, transit traf-     reached a figure of 9.30 billion passenger-kilometres.
fic increasingly presents a problem in both Austria and          The rail freight trend, however, is totally different.
Switzerland.                                                  Although traffic performance in Switzerland in this sec-
   Both countries have consequently introduced tolls for      tor also rose by 3 per cent to .68 billion tonne-kilo-
all truck traffic with a gross vehicle weight of 3.5 tonnes   metres between 1995 and 2005, Austria was the clear
or more. In contrast to Germany, toll charges are not         winner here, with growth of almost 60 per cent between
restricted to motorways. Both countries are attempting        1995 and 2006, reaching a figure of 20.98 billion tonne-
to limit the negative effects of the high traffic volumes,    kilometres.
especially for the environment, by encouraging rail
transport. Their experience of steering traffic flows can     Successful Swiss railways
benefit other countries which have only recently become
aware of this problem. A fair comparison between Aus-         According to Eurostat, the shares of rail in the passenger
tria and Switzerland has to take into account the differ-     transport markets in Germany, Austria and Switzerland
ent starting points in the two countries.                     are above the EU average of 6.6 per cent (reference year
                                                              000). Swiss railways are the most successful and led
Rail transport developments                                   the Western European market in 006 with a share of
                                                              14.2 per cent of total traffic performance.
It is apparent that the Swiss railways are exception-            Swiss and Austrian railways also account for a high
ally successful in the passenger transport sector, where      share of freight transport and their competitive posi-
traffic performance has risen continuously from 11.71         tion is particularly good in trans-alpine domestic and
billion passenger-kilometres in 1995 to 16.14 billion in      transit traffic. In addition to the bottlenecks on the
005, which means a growth rate of approximately 38           roads, this can be attributed to numerous transport
per cent. This can be attributed to a highly concentrated     policy instruments, such as extensive infrastructure
product range (half-hourly departures on most main            projects, toll charges for trucks, and public support for
lines). According to information supplied by the Swiss        combined transport. However, the modal shift from road
Federal Railways (SBB), the largest provider, the range       to rail accounts for only a part of the extremely high
of passengers trains has almost doubled over the past         and still growing share of rail in Switzerland. In view of
twenty years. The success of rail in Switzerland is also      the weaker growth of rail in absolute figures compared
evident from the very high number – in terms of the           with Austria, it appears likely that the high share of the
population – of more than .3 million regular customers       railways is due to the fact that truck traffic has been
who have a “Halbtax” or general subscription.                 rerouted through other countries. The Swiss modal shift

     policy is therefore partly at the expense of other coun-                                                    January 005. Key elements of the new structure are
     tries and total truck traffic has in fact increased owing                                                  four largely independent operating corporate segments,
     to these diversions. A potential remedy could be better                                                    which operate under the umbrella of ÖBB Holding AG.
     coordination and standardisation of transport policies in                                                  These subsidiaries are
     the countries concerned.
                                                                                                                    ÖBB Personenverkehr AG (local and long-distance
     New structure in Austria since 2005                                                                            rail services)
                                                                                                                    Rail Cargo Austria AG (RCA, freight transport and
     The largest and best-known railway undertaking in Aus-                                                         integrated logistics services provider)
     tria is ÖBB (Austrian Federal Railways) founded in 1923.                                                       ÖBB Infrastruktur Betrieb AG (provision, operation
     The company was restructured pursuant to the “003                                                             and maintenance of rail infrastructure)
     Railway Structure Act” which had been the subject of                                                           ÖBB Infrastruktur Bau AG (planning, construction,
     highly controversial debate and which came into force on                                                       financing and asset management of rail infrastructure)

     Passenger transport: Swiss railways have continuously increased traffic performance
     Traffic performance by rail passenger transport in Switzerland and Austria
     (million passenger-kilometres)


     20,000                                                                                                                                                             16,144
                                                                                                                               14,147          14,509          14,914
                                                                                12,501         12,620          13,301
     15,000 11,713              11,890          12,051          12,148

                 9,755           9,824                                                                                                                                  9,061    9.296
                                                 8,477           8,313          8,166           8,374           8,573           8,565           8,557           8,549

                  1995           1996            1997            1998            1999            2000            2001           2002            2003            2004    2005     2006 1)

     Freight transport: Austria achieved almost 60 per cent growth between 1995 and 2006
     Traffic performance by rail freight transport in Switzerland and Austria
     (million tonne-kilometres)

     20,000                                                                                                                    17,132                          17,931
                                                                                               16,602          16,895                          16,869
                                                14,199          14,714          15,039
                13,160          13,333

     10,000                                                                                    11,080          11,172          10,746                          11,489   11,677
                                                                                9,831                                                          10,598
                 8,856                           8,836           9,411

                  1995           1996            1997            1998            1999            2000            2001           2002            2003            2004    2005     2006 1)

                                                                                         Switzerland                       Austria

     1) No figure for Switzerland – according to the Swiss Federal Statistical Office, the figures for the year 2006 will not be published until the end of 2008.
     Sources: Swiss Federal Statistical Office; Statistik Austria, ÖBB

                                                                                                           Special Areas of Discussion

                                  Almost all the trains
                            in Austria are run by ÖBB.
                  Until today, public service contracts
                            have not been allocated in
                             competitive procedures.

The task of ÖBB Holding is to protect the stake of the Fed-     extent to other publicly-owned companies. The Austrian
eral government and ensure a uniform strategic focus of the     audit office recently harshly criticised the lack of a re-
Group. Cross-sectoral functions are currently handled by ÖBB    gional rail concept.
Dienstleistungs-GmbH, but that company is to be disbanded          Nevertheless, several other railway companies – in-
and its functions distributed between the Group companies       cluding DB AG – also operate trains on the ÖBB network.
or, in the case of the major HR division, to the Holding. The   However, this takes the form of mutual cooperation
branches of the ÖBB Holding in turn have their own subsidi-     agreements. The trains run from the connecting or bor-
aries, such as ÖBB Traktion GmbH, Brenner Eisenbahn GmbH        der station for the account of and under the responsibil-
and ÖBB-Postbus GmbH. Altogether 144 companies belong           ity of ÖBB Personenverkehr AG. In the road-bound local
to the ÖBB group.                                               public transport sector, ÖBB is again the main provider,
   Based on the year 2006 and the ÖBB network, ÖBB
is by far the largest provider of rail transport services
in Austria, with an intramodal market share of approxi-
mately 93 per cent of passenger transport and 92 per            High market shares for rail, especially in freight transport
cent of freight transport. According to the 007 annual         Share of modal split (per cent)
report of the Austrian regulatory body, Schienen-Con-
                                                                             passenger transport                                 freight transport
trol GmbH, some private railways provide a substantial
volume of passenger transport services on their own


infrastructure. The share of ÖBB in total rail traffic per-     40
formance in the passenger transport sector amounts to

approximately 91.5 per cent. The 5,700-kilometre long           35
ÖBB network makes up more than 90 per cent of the to-

tal Austrian standard- and narrow-gauge network, while
the remaining 464 kilometres are split between numer-           25
ous small private railways. In the passenger transport
sector in particular, the market shares of the private          20
railways are generated almost exclusively on lines run by

these railways themselves.

   To date, there has been practically no increase in com-      10

petition in the Austrian rail passenger market, although


non-discriminatory access is guaranteed. This is because        5
there have been no competitive awards of public service
contracts in rail passenger transport to date and as a                       2000                2006                           2000                 2006
rule, it is not possible to recover the cost of transport
                                                                                     Germany                   Austria                 Switzerland
services which have not been commissioned by public
authorities. The greater part of traffic performance is         Sources: DB data (Germany);
                                                                Progtrans – European Transport Report 2007/2008 (Austria, Switzerland)
awarded to ÖBB on a discretionary basis and to a smaller

     with ÖBB-Postbus GmbH, and a market share of more              proved to be a crucial obstacle to the development of
     than 60 per cent. However, some invitations to tender          competition. In future, intergovernmental agreements on
     have meanwhile been conducted in that sector.                  the reciprocal recognition of vehicle homologation and
                                                                    the amended Interoperability Directives approved in the
     Dynamic growth in rail freight in Austria                      first reading in 2007 could remedy this situation.

     The situation for rail freight transport is totally differ-    Switzerland promotes modal shift to rail
     ent, as traffic performance by private railways rose by
     approximately 40 per cent in 006, compared with an            In 1994, the Swiss electorate voted in favour of the pro-
     increase of just five per cent for RCA, which means that       tection of the alpine region against transit traffic (Alpine
     the private railways have won market shares from ÖBB.          Initiative), endorsing a new transport policy which aimed
     Competitors have meanwhile secured an intramodal mar-          at transferring as much traffic as possible from road
     ket share of approximately eight per cent (in terms of         to rail. That political objective has been confirmed on
     tonne-kilometres) on the ÖBB network. The share of pri-        several occasions since then, latterly in 004 when the
     vate railways is particularly high on certain routes, such     Avanti Initiative was rejected. The modal shift policy is
     as the Brenner transit. As in Germany, the newcomers to        actually enshrined in the Swiss constitution and led to
     the market specialise in block train transports of certain     the adoption of a law to promote the shift of traffic from
     types of freight, whereas RCA – like Deutsche Bahn in          road to rail (Verlagerungsgesetz) in 2001 which defines
     Germany – acts as a classic all-round provider.                specific implementation measures.
        Like DB, ÖBB has set itself the target of expanding            Instruments of the modal shift policy include the per-
     into other countries, enabling it to offer its customers at-   formance-related heavy traffic levy, the New Rail Alpine
     tractive products as a one-stop shop, especially for cross-    Transit (NEAT), the rail reform and a ban on night and
     border transports. RCA concentrates primarily on South-        Sunday traffic. The EU acknowledged the Swiss modal
     Eastern Europe. One notable transaction is the takeover        shift policy in the Overland Transport Agreement which
     of the Hungarian MÁV Cargo for EUR 406 million by a
     consortium formed by RCA and the Austro-Hungarian
     company GySEV. When the agreement was signed on 
     January 008, the third-largest player in the European
     rail freight market came into being.                           Expansion of capacities on north-southbound lines
        In accordance with the different access opportunities       The largest Swiss rail infrastructure project NEAT involves the following
     for competitors to the passenger and freight transport         three individual projects: Lötschberg, Gotthard and Ceneri base tunnels.
     markets, the IBM 2007 Rail Liberalisation Index rates
     Austria in sixth place of the 7 participating countries       France                 Paris        Frankfurt     Stuttgart                  Germany
     in the passenger transport market and in third place
     in the freight transport sector. It must be emphasised                                                                                     Munich
     that European law does not prescribe open markets for
     domestic passenger transports. Even if no competition                                          Olten
                                                                                                                                  St. Gallen
     has de facto evolved to date, Austria grants access to its                                                                       FL
     market in principle, in contrast to many other countries.                                                          Arth-Goldau
                                                                                             Berne      Switzerland
     On the whole, Austria ranked in fifth place in the 2007
     Liberalisation Index, which is a substantial improve-                                                  Lötsch-
     ment compared with the previous Index in 004. The                                                     berg
     time-consuming and expensive approval procedures still                                                                 Ceneri
     required in Austria are described as a problematic aspect
     for market access by both the IBM Liberalisation Index
     and also the annual report of the regulator Schienen-                                                                   Milan
     Control GmbH. As there is no well-developed market for         France                                  Turin     Genoa Bologna                      Italy
     approved used vehicles in Austria to date, the availability
                                                                    Source: Swiss Federal Department for the Environment, Transport, Energy and Communications
     of locomotives and other rolling stock has in the past

                                                                                        Special Areas of Discussion

                     In Switzerland, SBB still enjoys
                     protection against competition
                           in the passenger market.

came into force in 00. In return, Switzerland raised the    north to south. It involves costs equivalent to approxi-
permissible gross vehicle weight for trucks to 40 tonnes,     mately EUR 5 billion, 55 per cent of which is funded by
the standard figure in the EU, and stipulated a ceiling for   the heavy traffic levy. The remainder is funded by loans,
transit fees.                                                 an increase in value added tax and mineral oil tax.
   Since 1 January 2001, the heavy traffic levy has been        After several adjustments owing to increasing costs,
payable on all Swiss roads by vehicles with a total weight    NEAT now comprises the following three individual
of 3.5 tonnes or over. The level varies according to the      projects (cf. map on page 58):
distance travelled in Switzerland, the gross weight of
the vehicle and its EU emissions classification. Between        Lötschberg base tunnel
00 and 008, the above charge for a vehicle in the me-        Gotthard base tunnel
dium emissions class (Euro 3) increased from the equiva-        Ceneri base tunnel
lent of one eurocent per kilometre and tonne of gross
weight to .7 cents. This means that a 40-tonne truck in         Whilst the Lötschberg base tunnel has been in opera-
that emissions class has to pay EUR 68 in toll charges for    tion since June 007 and has substantially reduced jour-
a distance of 100 kilometres, which is roughly five times     ney times between the Swiss German region and Central
higher than in Germany, where tolls are moreover levied       Valais, the Gotthard base tunnel, the most important
only on a part of the road network. Switzerland has thus      project segment, is not scheduled for completion until
created a strong incentive for shifting transports to rail,   06 and the Ceneri base tunnel, which also forms part
not least because the state also uses the income gener-       of the Gotthard corridor, will not go into operation until
ated from the above charge to finance major rail projects.    as late as 2019.
   The Swiss rail network is the densest in the world, with
the exception of a few small states, with approximately       Competition only in freight transport
 metres of line per square kilometre of area, com-
pared with 06 metres in Germany and 73 metres in Aus-        Although Switzerland is not a member of the European
tria. The standard-gauge network has a total length of ap-    Union, most of the provisions of the first railway package
proximately 3,650 kilometres, of which the state-owned        nevertheless apply in the country. In 1999, accordingly,
SBB railways operate approximately 3000 kilometres            SBB was transformed from a state institution into a joint
and BLS AG, the second-largest provider, approximately        stock company. Infrastructure and transport have been
440 kilometres. Almost the entire network is electrified.     separated, underneath the umbrella of the SBB Group.
Despite the already excellent infrastructure endowment        Since January 007, railway undertakings from the Mem-
compared with many other countries, further substantial       ber States of the European Union have had open access
sums are still being invested in infrastructure.              to the Swiss freight transport market, which was opened
                                                              up to national railway undertakings as early as 1999.
Major investments in infrastructure                              SBB – one of the major competitors of DB on the Ger-
                                                              man network – has also lost market shares in its home
The largest Swiss rail infrastructure project NEAT is in-     market since then. According to the Swiss Federal De-
tended to enable the transport of larger capacities from      partment for the Environment, Transport, Energy and

     Communications, SBB still handles 55 per cent of all          table year if there are insufficient capacities to cope with
     transit traffic through Switzerland, while its market share   all train path applications, and initiates the conflict reso-
     of domestic rail transport is still as high as 90 per cent.   lution procedure. The Swiss Federal Office of Transport
     In contrast to DB and ÖBB, which have promoted inte-          (FOT) and the Railways Arbitration Commission, which is
     gration of the transport chains in recent years and now       part of the FOT in organisational terms, also have regula-
     offer numerous services – including road haulage – as         tory powers. According to the IBM study “Rail Regulation
     part of the pre- and post-rail transport chain, SBB has       in Europe”, the FOT is responsible primarily for the issue
     concentrated primarily on pure rail transport. As the         of licences and safety certificates and for reviewing the
     freight transport division of SBB has been operating with     network statement. The Arbitration Commission, whose
     a high deficit for years despite the booming overall mar-     members have other full-time jobs, is entitled amongst
     ket, it is regarded as a primary concern in Switzerland. In   other things to initiate investigation proceedings in cases
     2007, the operating loss amounted to 87.9 million Swiss       of conflict and discrimination and to make decisions.
     francs, which was twice as high as in 006. A restructur-        Owing to the restrictions in access to the passenger
     ing programme will involve approximately 400 redun-           transport market in particular, Switzerland obtained only
     dancies at the company. At the beginning of 008, there       seventh place overall in the IBM 2007 Liberalisation In-
     were even rumours in the media that the freight division      dex. The country ranked fifth in the freight transport sec-
     was to be sold off, although these were promptly denied       tor and tenth in passenger transport. Switzerland fared
     by SBB.                                                       particularly well in the Europe-wide comparison in terms
        In the passenger transport segment, railway undertak-      of transparency and other practical access criteria.
     ings have to have a franchise or a transportation contract
     before they can offer services, a requirement which           The Swiss railway poses the highest burden
     protects the incumbents – first and foremost SBB – from       on the taxpayer
     competition. Although the competitive award of fran-
     chises is possible in principle, no use has been made of      The level of public contributions for rail in Switzerland
     that option to date. Accordingly, the 3 per cent market      is far higher than in Austria: at EUR .4 billion, Swiss
     share held by the competitors is divided mainly between       citizens paid 57 per cent more for transport services
     BLS AG (in particular S-Bahn Bern) and Südostbahn             and infrastructure in 005 than the Austrians, where
     (SOB), companies in which the majority stakes are also        the figure was EUR 1.42 billion (all figures based on year
     state owned.                                                  000 prices). That gap continues to grow. In 000, the
        The structure of the local rail passenger market has       difference between the two countries was only 44 per
     been deliberately encouraged by the politicians. The          cent. However, such a comparison has to take into ac-
     Swiss Federal Council recently expressly stated that the      count that infrastructure projects such as NEAT have
     target of consolidation and restriction of the number of      a major influence on performance by the state in both
     railway undertakings stated in the “SBB+X” concept in         these countries. In view of the long service life of tunnels
     003 had been achieved. This concentration is intended        and bridges, which can be up to several decades, these
     to raise the competitiveness of the remaining undertak-       projects distort the costs of rail.
     ings, also on a Europe-wide scale. This means that not           Moreover, the rail mode is highly successful in Swit-
     only SBB, but also BLS and their freight transport subsid-    zerland. A meaningful comparison of the two countries
     iaries can participate in international competition from a    places the burden on the budget of the state in relation
     secure basis in their home market.                            to traffic performance. This has the additional advantage
        SBB, BLS and SOB each own a 25 per cent stake in           of ensuring that the figures can be compared with trends
     Trasse Schweiz AG – the remaining 5 per cent are             in Germany.
     owned by the Association of Public Transport (Verband            In all three countries, public contributions per unit
     öffentlicher Verkehr). Requests for train paths for the       of traffic performance peaked in the years 2001/2002.
     annual timetable have to be addressed to that company,        In addition to declining absolute monetary sums in Ger-
     which checks them for completeness and forwards               many and Austria, this is attributable to the increasing
     them to the relevant infrastructure managers. Trasse          traffic performance in all three countries. Because of
     Schweiz AG is also consulted during the course of a time-     the high fixed costs of the rail mode – especially in the

                                                                                                                                                       Special Areas of Discussion

                                                                                          Costly tunnels and bridges
                                                                                 raise the costs of the infrastructure
                                                                                                in the alpine regions.

infrastructure sector – an increase in transport volumes                                                   4.7 cents over the same period. In Germany, state contri-
automatically means a sharp decrease in the contribu-                                                      bution were down 37.5 per cent, from 6. cents in 00
tion required per traffic performance unit. State funds                                                    to four cents in 006. This means that the German gov-
per traffic performance unit in Switzerland thus de-                                                       ernment pays only just over half the Swiss level of public
creased from nine cents per passenger-tonne-kilometre                                                      funds per traffic performance unit. The comparability
in 00 to eight cents in 005. That decrease was even                                                     of these figures is limited by the different geographical
more pronounced in Austria, where the public funds per                                                     structures of the countries as well as the different statis-
passenger-tonne-kilometre decreased from 6.7 cents to                                                      tical methods for recording and breakdown of the funds.

Public support for rail in Germany, Austria and Switzerland
State funds to the railways at year 2000 prices                                                            Actual public contributions per traffic performance unit
(EUR billion, figures rounded)                                                                             (EUR per passenger-tonne-kilometre at year 2000 prices)

10.0                                                                                                       0.10
        9.777       9.854                                                                                                                    0.090       0.088
9.5                                                                                                        0.09 0.084           0.085                            0.085
9.0                                          9.025                                                         0.08
                                                                                                                                0.067        0.067
8.5                                                                                                        0.07                                          0.063
                                                                                                                    0.062                                        0.061
8.0                                                                                                        0.06                 0.063        0.062
                                                          7.950                                                                                         0.058                 0.051
                                                                      7.842                                         0.055                                                             0.047
7.5                                                                                                        0.05
                                                                                   7.369                                                                         0.048
                                                                                                           0.04                                                                       0.040

2.5                              2.241       2.221        2.232       2.237                                0.03
2.0                 1.709        1.714                                                                     0.02
                                             1.602        1.616
        1.385                                                         1.424        1.417
1.5                                                                                                        0.01

        2000         2001        2002         2003        2004         2005        2006 1)                          2000         2001        2002        2003    2004     2005        2006 1)

                                                                          Switzerland                  Austria                Germany

1) No figure for Switzerland – according to the Swiss Federal Statistical Office, the figures for the year 2006 will not be published until the end of 2008.
Sources: German Federal Statistical Office, Swiss Federal Statistical Office, Statistik Austria, Eurostat, DB data, ÖBB, IMF World Economic Outlook Database (October 2007)

     Regulation practice not yet settled
     Numerous fundamental questions on the practical application of railway legislation in respect of unbundling and
     access regulation have yet to be clarified. This refers above all to infrastructure charges. As a consequence, the
     market players face a considerable planning uncertainty.

     In a European comparison, the German rail regulation re-        for instance by calling in experts, the substantial effort
     gime is highly effective. However, in the third year since      spent on demanding further amendment of the charging
     introduction of the new legal framework, regulation             regulation was actually counterproductive.
     practice has revealed that stable conditions have still not
     been achieved. The comprehensive activities of the Fed-         Regulation of access charges still uncertain
     eral Network Agency last year did little to alter that situ-
     ation. On the whole, no positive effect on competition is       The Federal Network Agency has repeatedly expressed
     evident from the numerous proceedings instituted by the         concerns that the existing charging systems could po-
     Agency since it took up work. This is hardly surprising,        tentially infringe the provisions of the German General
     considering that competition had already been working           Railway Act (AEG) or the Railway Infrastructure Usage
     well for years. At the same time, the regulation activities     Regulations (EIBV). However, no formal complaints have
     have generated substantial expense.                             been filed. In August 2007, the Agency first demanded
        The gradual optimisation of regulatory practice on the       detailed cost documents on the station charging system
     basis of existing rail legislation is in the interests of the   from DB Station&Service. In February 008, similar
     entire market. It is vital to remedy uncertainty regarding      requests were submitted for information on the infra-
     interpretation of the existing provisions, in particular        structure charging systems of DB Netz AG and Usedomer
     those concerning the regulation of charges. Although the        Bäderbahn. All the data requested by the authority was
     Agency has endeavoured to provide more legal certainty,         provided, together with detailed explanations.

                                                                                         Special Areas of Discussion

The Agency’s call for an incentive regulation is of par-       The cost pressure exercised on the infrastructure sectors
ticular relevance for the market players. This would           by internal customers in the integrated Group further
be aimed at creating incentives to boost efficiency by         raises the incentive to be efficient. Being the largest user
unbundling the maximum permissible charges from the            of the network and being connected with the infrastruc-
costs of the regulated undertakings. The infrastructure        ture through the DB Group, they would be particularly
manager would then be permitted to levy charges below,         affected if the tracks were managed inefficiently.
but not above, the specified price ceiling. In spring 2007        The opportunity provided by the future Performance
the Federal government appointed a “working group for          and Financing Agreement (PFA) of using funds flexibly
the ongoing development of the regulation of charges           wherever they yield the greatest benefit on the basis of
in the rail sector”. The party was chaired by the Federal      economic criteria will ensure a further increase in effi-
Network Agency and included representatives from Fed-          ciency. The European Commission also believes that such
eral and Land ministries, public authorities and business      multi-annual contracts will be a major instrument for
enterprises. After a total of seven meetings, the Agency       ensuring efficient management of rail infrastructure and
presented a final report in which it advocated incentive       is therefore currently drawing up concrete recommenda-
regulation.                                                    tions on that subject. The Commission’s Communication
   DB AG believes that the Agency’s demand is not only         on multi-annual contracts which was directed to the Eu-
wrong, but also does not accurately reflect the outcome        ropean Parliament and Council makes that clear.
of the working party’s discussions. There are no objective
reasons for incentive regulation in the rail infrastructure    Government should decide on use of funds
sector, neither at present nor in the case of implementa-
tion of any of the privatisation models currently under        In contrast, efficiency paths prescribed by the authori-
discussion. Nor does the Agency’s report eliminate DB’s        ties will not raise management incentives. Still, pro-
reservations regarding the proposed changes in the             tagonists of the incentive regulation use this argument
regulation of the charging systems. DB AG has submitted        to raise the hopes of the market players: in addition to
a comprehensive statement on its position regarding in-        declining infrastructure charges, they also promise other
centive regulation:                                            supposed advantages of the concept, such as avoiding
   The significant intermodal competitive pressure in the      future line closures or cancellation of local rail services.
transport markets prohibits rail infrastructure managers       Even if satisfactory market trends enable recovery of
from demanding excessive monopoly prices, which could          the capital costs in future, so that efficiency gains could
not be enforced in the market and would lead to an inter-      be put to other uses, it should not be the remit of the
modal shift onto road. That is also clear from the earn-       Agency to state their appropriation. It should be first and
ings of the DB infrastructure companies, which are still       foremost in the hands of the Federal government to de-
unable to achieve an acceptable return on their capital        cide whether to reduce infrastructure charges or relieve
employed. As price increases are confined within strict        the burden on the taxpayer by spending lower govern-
limits, the only way to improve earnings is to reduce          ment funds on infrastructure. Alternatively, such funds
costs. The present legal framework therefore already           could also be used to upgrade infrastructure or improve
provides a strong incentive to reduce costs and this will      local transport services. However, such decisions be-
remain the case as long as the charges are not sufficient      tween budget and transport policy objectives should not
to cover total costs, including costs of capital. In view      be left to an authority which has already stipulated the
of the level of invested capital which has still not earned    course it will take.
appropriate returns, this is unlikely to change in the fore-      Before this debate can be continued, it is also neces-
seeable future.                                                sary to reassess the arguments discussed by the working

                                                                               Intermodal competition limits the
                                                                               leeway of the network operator to
                                                                               set prices.

     party in the light of the current state of the privatisation   managers (IM) satisfies the legal requirements stated in
     discussion. The reasoning propounded by the Federal            the Railway Infrastructure Usage Regulations (EIBV), ac-
     Network Agency in favour of incentive regulation is            cording to which access charges – such as infrastructure
     based on a privatisation model which is no longer up for       and station charges – have to be designed to offer both
     discussion. Further development of the access charging         infrastructure managers and transport operators “incen-
     systems should therefore not be discussed until                tives for reducing disruptions and increasing efficiency”.
                                                                    The Deutsche Bahn IM have implemented these regula-
       the cornerstones for continuation of the rail reform         tions as part of their charging systems and published
       have been defined in detail                                  them in the network statement.
       the fitness and efficacy of the existing regulatory             The PFA will provide the federal railways with a fur-
       framework for access charging can be reliably assessed       ther contractual instrument for quality control in the rail
       under practical conditions                                   infrastructure sector. The design of the PFA is closely
       the risk of abuse through excessively high prices has        linked to the political decision process on partial privati-
       become relevant in practice                                  sation of DB AG. Although the Key Performance Indica-
                                                                    tors – such as standard journey time loss, or minimum
     Reconciling quality assurance regulations                      investment and maintenance expenses – have not yet
                                                                    been finally specified, the PFA will prescribe strict speci-
     The income from access charges, in combination with            fications for the quality of the entire infrastructure. Like
     public funds, determines the scope and the quality of          the Performance Regime, this mechanism also works
     services that infrastructure managers can offer their cus-     on the principle of sanctions. A company which fails to
     tomers. In their own economic interests, railway under-        meet the defined standards runs the risk of penalties or
     takings already have an incentive to offer their customers     a reduction/repayment of the funds stated in the public
     a high level of quality. This is true both for the transport   service contract. Monitoring compliance with the PFA
     market, where transport companies serve passengers             specifications is expected to be the responsibility of the
     and shippers, and for the infrastructure market at the         Federal Railway Authority (EBA).
     interface between infrastructure operator and transport           The coexistence of different quality control systems
     undertaking. These incentives are backed by statutory          (see table) entails the risk of multiple burdens and con-
     and contractual regulations, such as the EU regulation on      flicting specifications for the regulated companies, which
     rail passenger rights, or quality standards which are sub-     consequently places high demands on the competent
     ject to sanctions in the public service contracts between      authorities. Although different systems of quality con-
     ordering authorities and transport undertakings in the         trol affect different contractual relations in each case,
     market for local and regional passenger rail services.         there is close interaction between all the market players
        There are also several regulation systems in force for      involved. This can be shown from the example of train
     rail infrastructure. On the one hand, the so-called Per-       delays. A delay caused by a network operator can simul-
     formance Regime is aimed at reducing disruptions. The          taneously mean that the railway undertaking has to pay
     Performance Regime implemented by DB’s infrastructure          compensation to the passengers and penalties to the or-

                                                                                                       Special Areas of Discussion

dering public authority, while the network operator has                   original plans of implementing its own scheme of quality
to pay a penalty based on the PFA to the Federal govern-                  control in addition to the quality assurance measures of
ment as well as payments pursuant to the Performance                      the PFA.
Regime to the affected railway undertaking. In addition,
if poor performance of the infrastructure manager is                      Regulatory framework must be transparent
involved, the transport company also has the option of
reducing the infrastructure charges.                                      Each regulatory system has to abide by a number of fun-
    In this complex set-up of interlinked control systems,                damental principles, which also serve as benchmarks for
it is the job of the Federal Network Agency to assess                     their appropiateness. The costs of regulation must not
the reasonableness of the Performance Regime and its                      exceed the potential additional benefits. The regulatory
correct implementation. As part of the regulation of the                  authority has to make its decisions on the basis of trans-
charging systems, it is also responsible for ensuring that                parent and objective criteria to ensure that they are pre-
the expenses sustained in connection with the applica-                    dictable and logical. Discretionary scope should be kept
tion of these systems can be recovered.                                   to a minimum wherever possible.
    The Federal Railway Authority, on the other hand, is                     The objective of regulation is thus to protect com-
responsible for monitoring network quality and scope.                     petition, but not to protect individual competitors or
Potential overlapping responsibilities also have to be                    groups of competitors. This not only involves preventing
taken into account in the interests of integrated regula-                 discriminatory behaviour, but also supporting regulated
tory practice. The final report of the Federal Network                    companies in their endeavours to achieve balanced earn-
Agency on incentive regulation shows that the Agency is                   ings on a sustainable basis whilst simultaneously provid-
aware of these problems, and has meanwhile rejected its                   ing investment incentives. If these basic rules are not

Quality control systems in the rail sector

  Control system                Affected market           Implementation             What is controlled?       Competent authority

                                Transport market                                                               Courts/
  Passenger rights regulation                             Contractual                Delays
                                (RU/customer)                                                                  conciliation body

                                Local rail market                                    Various quality           Public authority as
  Public service contracts                                Contractual
                                (RU/orderer)                                         parameters                contracting party

                                Infrastructure market     Regulatory authority       Various quality
  Performance Regime                                                                                           Federal Network Agency
                                (IM/RU)                   (Regulation of charges)    parameters

  Performance and financing     Infrastructure market                                Various quality           Federal Railway Authority/
  agreement                     (IM/Federal government)                              parameters                Federal Audit Office

Source: DB data

                                                                                                       Providers and potential customers
                                                                                                       of rail infrastructure have specific
                                                                                                       knowledge of the subject matter

     observed, regulation could in fact aggravate the market                            OECD: separation means higher regulatory expenses
     shortcomings that it is actually intended to remedy.
        When selecting which cases are to be investigated,                              The need to regard market reforms and regulation as
     their practical relevance should therefore be considered                           one integrated whole is also stressed in an OECD study 
     to a greater extent than in the past. To date, the regula-                         which recommends distinguishing between vertical mar-
     tory authority has mostly investigated purely theoretical                          ket organisation in relation to the specific market condi-
     discrimination potential, which is virtually irrelevant for                        tions, stating that it is not possible to issue one catch-all
     network access under practical operating conditions.                               recommendation for or against the separation of infra-
     These complaints have often been triggered by a gen-                               structure and transport. It stresses that the disadvan-
     eral mistrust in the companies concerned, a motivation                             tages of full separation could outweigh the advantages,
     which is not in keeping with the rules of good regulatory                          especially on high-volume networks which are used for
     practice.                                                                          mixed operations.
        For example, the Federal Network Agency objected to                                One of the key reasons for that recommendation are
     certain phrasings in the DB network statement simply                               the increasing regulatory expenses required to replace
     owing to the choice of words, although the meanings                                internal coordination mechanisms and existing quality
     were identical. Although the passages referred to main-                            and investment incentives created in the companies’
     tenance facilities of DB Netz AG and DB Gleisbau that                              own interests. As intermodal competition already re-
     were of no relevance whatsoever to competition, the                                stricts the market powers of the network monopolies in
     Agency claimed that they infringed a supposed “prin-                               the rail sector even without regulation, these expenses
     ciple of transparency”, alleging that many expressions                             are offset only by limited potential additional benefits.
     were incomprehensible to the “lay reader”, despite the                             The findings of the OECD are relevant for the debate
     fact that management of rail infrastructure is a business-                         on completing the German rail reform in two respects:
     to-business sector.                                                                firstly, they point out that the German government is
        The powers of the authority were specified in closer                            pursuing the right strategy in defending integrated rail
     detail in several rulings by Münster Higher Administra-                            operations. Secondly, they raise the question of whether,
     tive Court in January and February 008 (cf. chapter                               in view of the circumstances stated above, it would not
     “Courts define regulatory framework”, p. 45). The court                            be advisable to consider less rather than more regula-
     rejected the “principle of transparency” made up by the                            tion. The potential outcome of additional benefits which
     Agency as grounds for intervention in the RIU’s network                            might be generated by more intensive state influence
     statement. This stricter definition of discrimination has                          on the rail sector has to be weighed against substantial
     improved legal certainty for RIUs and the entire rail                              costs which would definitely be sustained by the authori-
     sector.                                                                            ties and rail undertakings.

     1) “Report to the council on experiences on the implementation of the recommendation concerning structural separation in regulated industries”, OECD 2006

                                                                                          Special Areas of Discussion

Discussion of regulatory framework
At the second symposium on “Competition and regulation in the rail sector” held in Berlin on 31 January 2008,
leading experts from politics and science continued to exchange their experiences. While the comparison with
other regulated industries had been the dominant subject the previous year, this symposium concentrated on
the question of the effectiveness of the reforms to date in the European railway markets.

The opinions of the invited experts were by no means congruent. Dr. Iris Henseler-
Unger, Vice-President of the Federal Network Agency, explained the fundamental reg-
ulatory policy of the Agency, which states that its work has to lead to noticeable im-
provements in price and quality for the consumers, as only then would the consumer
accept privatisation. Professor Christian Kirchner of Berlin Humboldt University
countered that argumentation with the statement that the rail reforms were aimed
at improving the overall market situation and that restricting the focus to consumer
interests was therefore inadequate.
   A key aspect was the question of what consequences should be drawn from initial
experience of the new rail regulation. Henseler-Unger presented the position of the
Federal Network Agency and advocated further amendment of the existing legislation
                                                                                            Experts from politics, business and
as a number of deficits had been identified, especially as regards the regulation of
                                                                                            science attended the symposium
charging systems, where investigations by the Agency had so far come to nothing.            “Competition and regulation in the
   Georg Fürnkranz, Managing Director of the Austrian rail regulator Schienen-Con-          rail sector” in Berlin.
trol GmbH, argued that before any further legislative steps were taken, it was vital to
define the objectives of market opening more precisely. That statement was backed
by Professor Helmut Schmitt von Sydow, representative of the European Commis-
sion, who spoke out against a fourth railway package, explaining that the European
Commission was concentrating on the effective application of the existing legal
framework. In connection with the formal implementation of the first two railway
packages alone, the Commission had had to institute 0 infringement proceedings
and was only now beginning to monitor implementation of the contents. Joachim
Fried, Competition Officer of Deutsche Bahn AG, also pointed out the different status
in the implementation of the European regulations. It was first important to gather
and evaluate experience of how successful the different regulation models were in
practice before there could be any question of revising the European legal stand-
ards. To create a single market for the rail mode, market opening had to be pursued
consistently throughout the whole of Europe and market regulation had to satisfy
Europe-wide efficiency standards. That would raise the attractiveness of the rail mar-
kets in future.
   The event clearly showed that there is no sound statistical basis for many of the
analyses which were demanded. Some of the scientists in attendance are currently
performing groundwork in this field, which will be taken into account in future dis-
cussions and decisions.


     Practice of contract awarding differs considerably between regions
     Railway undertakings active in local and regional passenger transport (2008 timetable / correct at: 31.01.2008)

                                                                       NEG      Flensburg
                                                                                                           Kiel                                                   UBB      OLA
                                                                                 Heide                                                   MBB                     Stralsund
                                                                                                       Neumünster                            Rostock
                                                                                        NOB               NBE

                                                                                                                                Wismar                     OLA
                                                                 Cuxhaven                                         Lübeck
                                              Wilhelms-                 ME
                                                 haven              Bremer-                                                                                                             OLA      Pasewalk
                                                                    haven                              Hamburg         Schwerin
                                                                                                                                       OLA                             Neubrandenburg
                                    Emden NWB                                                                                                      ODEG
                                           Leer                                                                                                                              Neustrelitz
                           Arriva                                                                     ME          Lüneburg
                              NL                                        Bremen                                                                           Pritzwalk
                                            Oldenburg                                                                                                                                  Templin
                                                                                ME                                                            PEG
                                                                                                Soltau                             Wittenberge                                                 ODEG
                                    Cloppenburg NWB                                                                                                                                           Eberswalde
                                                                                                          Celle                    Stendal                                                       NEB
                                                                                                ME                                                                       Berlin
                                                                                                                           Wolfsburg                     OLA         Potsdam                      Frankfurt/O.
                                         Rheine        Osnabrück                                                                                         Brandenburg
                                                                                                                   Brunswick                                                                          ODEG
                                Gronau WFB                                                      Hildesheim
                                                         WFB                                                                                                               OLA
                                                 Bielefeld               ERB                   ERB                                           Magdeburg
                                  PEG               NWB                                                               Halberstadt                                            Jüterbog
                                            Münster                                                                           HEX
         Emmerich                                               NWB                                  ME                                                       Lutherstadt
                Dorsten                     Hamm                                              HSB                                                             Wittenberg                          Cottbus
                                      Lünen              Paderborn                                      KML                                                                                                  CXS
            Duisburg                                                                  HSB/SWN                                                HEX    Halle
                                    Dortmund Arnsberg                          Göttingen
                       Essen ABR                                   RT                           Nordhausen
        gladbach     RBE       Hagen                                      EB           EB
                                                                Kassel                   Mühlhausen                                                 Leipzig                                                    Görlitz
                      Düsseldorf       ABR                                                                                                                 CXS                          SDG
           RTB                                                             CAN                                                                                                      Dresden                         CXS
                                                                      RT          Eisenach                                                                                                                         Zittau
                                                                                               EB                                                                                Freiberg
                         Cologne              Siegen                  Bebra                                                                            Gera                                                  SBE
                                                                                                     Erfurt                                                                         FEG                              SOEG
                Düren                                                                                                                                                CBC
      Aachen                          WEBA         Dillenburg                                                                                                               Chemnitz
                     Bonn                    HTB Gießen                          STB              EB/STB
                               Altenkirchen                                                                                                        VBG           Zwickau
                                        VEC                         Fulda                   STB                                                                        SDG

                                Koblenz            Limburg HLB
                                                       VEC                                           EB                                      Hof
                          TR               Wiesbaden                  Frankfurt/M.                                 Coburg              VBG
                                                                           HLB                                                                                                                                     DB Regio and
                               Traben-               Mainz
                               Trarbach                                                                                           Bayreuth                                                                         Subsidiaries of
                                                               Darmstadt                                           Bamberg
                                             VEN      Alzey        VIAS
                  Trier                                                                       Würzburg                                                                                                             Veolia Verkehr
                                    TR             Mannheim
                                                                                                                                                   VBG                                                             Subsidiaries of
                                                                  Heidelberg                                                   Nuremberg
                                                                                                                                                                                                                   Arriva Germany
                                        lautern                    SWEG                                                                                          RBG
                        SB                                                                       o.d. Tauber
                 Saarbrücken                                                                                                                               VBG/RBG
                                                                                                                                                                                       Zwiesel                Other companies have
                                             Karlsruhe                AVG      Heilbronn                                                                  Regensburg RBG
                                                                                                                                                                                                              been assigned to
                                                                               WEG                                                                                                                            discretionary colours
                                          Baden-Baden                                                  Aalen          Donauwörth                                             Deggendorf
                                                                            Stuttgart                                                                                                        Passau
                                                     AVG                                                                                Ingolstadt
                                                      Freuden-              WEG                                                                 VBG
                                                      stadt                                                                                               Landshut
                                                                                                                                                                                                              List of abbreviations of
                                     Offenburg SWEG/                        Tübingen
                                                                                                                   Augsburg                                                                                   transport undertakings
                                                     OSB                                             Ulm
                                                                HZL                                                                                                                                           on page 67
                                           BSB                                                                                               Munich
                                                   Villingen                            HZL
                                          SWEG                                                                        VBG
                                                                       HZL                                                                                 Rosenheim
                                                                        Friedrichs-                                                     BOB
                                    SBB                                    hafen BOB* Kempten
                                             SBB/Thurbo             SBB
                                                                 Konstanz                                                      Garmisch-
                                 Basel                                                    Lindau                           BZB Partenkirchen

     Note: Does not show museum or mountain railways. All lines show the transport undertakings which actually operate services. As some of the undertakings provide services
     on behalf of other undertakings, the map does not indicate the contractual relationship between the undertakings shown and the ordering authorities and customers.
     Source: Bundesarbeitsgemeinschaft Schienenpersonennahverkehr, 2008


Deutsche Bahn succeeded in competition
DB companies won a substantial share of the transportation contracts awarded in competitive procedures in 2007.

                                Contract award procedure                                                                                          New contract
  Contract         Federal                                                                                                                               million                    Term
  awarded in       Land         Procedure               Network/Routes                    Previous Operator              Operator                       train km     Begins        (years)
  Jan. 07          NI, HH       Tender                  Hamburg Süd                       DB Regio                       Metronom 1)                       1.2       Dec. 07         3
  Feb. 07          BY, HE       Tender                  E-Netz Würzburg                   DB Regio                       DB Regio                          5.9       Dec. 09         12
                                                                                          DB Regio                       Ostdeutsche
  Mar. 07          SN, BB       Tender                  Spree-Neiße-Netz                                                                                   2.7       Dec. 08         10
                                                                                          Lausitzbahn                    Eisenbahn 2)
  May 07           BY           Tender                  München–Passau                    DB Regio                       DB Regio                          2.6       Dec. 09         12
  May 07           HH                                   S-Bahn Hamburg                    S-Bahn Hamburg                 S-Bahn Hamburg                  10.5        Dec. 09         8
                                Discretionary                                             Sächsisch-Böhmische            Sächsisch-Böhmische
  Jul. 07          SN                                   Mandaubahn                                                                                         0.2       Dec. 08         2
                                award                                                     Eisenbahn                      Eisenbahn
                   SH, HH,      Negotiation
  Aug. 07                                               Netz Ost                          DB Regio                       DB Regio                          7.0       Dec. 09         10
                   NI           procedure
                                                                                          Hohenzollerische               Hohenzollerische
  Aug. 07          BW           Tender                  Seehäsle                                                                                           0.3       Dec. 08         15
                                                                                          Landesbahn                     Landesbahn
  Sep. 07          RP, SL       Tender                  Mosel-RB                          DB Regio                       DB Regio                          2.4       Dec. 09         15
                                Negotiation             Berlin Wannsee–Jüterbog
  Okt. 07          BE, BB                                                                 DB Regio                       Ostseeland Verkehr 3)             1.0       Dec. 07         2
                                procedure               Rathenow–Brandenburg
                                Negotiation             Fürstenwalde–                                                    Ostdeutsche
  Oct. 07          BE, BB                                                                 DB Regio                                                         0.1       Dec. 07         2
                                procedure               Bad Saarow–Pieskow                                               Eisenbahn 2)
  Oct. 07          BB, SN       Tender                  Leipzig–Cottbus                   DB Regio                       DB Regio                          1.3       Dec. 09         13
  Nov. 07          RP                                   Eifel–Mosel                       Transregio                     DB Regio                          0.7       Dec. 08         5
  Dec. 07          NW                                   Maas-Rhein-Lippe-Netz             DB Regio NRW                   Keolis 4)                         3.3       Dec. 09         12
                                                                                                                         Veolia Verkehr
  Dec. 07          SN           Tender                  Leipzig–Geithain                  Lausitzbahn                                                      0.4       Dec. 07       2 (+2)
                                                                                                                         Sachsen-Anhalt GmbH
                                Discretionary           Fichtelbergbahn                   Sächsische Dampf-              Sächsische Dampf-
  Dec. 07          SN                                                                                                                                      0.1       Jan. 08         2
                                award                   (narrow gauge)                    eisenbahngesellschaft          eisenbahngesellschaft
  Dec. 07          NW                                   NRW RB 43                         NordWestBahn GmbH              NordWestBahn GmbH 5)              0.6       Dec. 08         2
                                Negotiation                                               Rügensche Kleinbahn            Pressnitztalbahn
  Dec. 07          MV                                   Rasender Roland                                                                                    0.1       Jan. 08         20
                                procedure                                                 GmbH & Co                      GmbH
  1) Majority shareholding of Arriva, minority shareholding of Hamburger Hochbahn AG and Bremer Straßenbahn AG; 2) 50 per cent shareholding of Arriva and Hamburger Hochbahn AG;
  3) Majority shareholding Veolia, 30 per cent shareholding of Nahverkehrsgesellschaft Schwerin; 4) Shareholding of SNCF and financial investor;
  5) Majority shareholding Veolia, 36 per cent shareholding of Stadtwerke Osnabrück and Verkehr and Wasser GmbH Osnabrück

Source: DB data

List of abbreviations of railway undertakings                  HSB Harzer Schmalspurbahn GmbH                                   RT RegioTram Betriebsgesellschaft mbH
                                                               HTB Hellertalbahn GmbH                                           RTB Rurtalbahn GmbH
ABR Abellio Rail NRW GmbH                                      HzL Hohenzollerische Landesbahn AG                               SB SaarBahn+Bus GmbH
AKN Altona-Kaltenkirchen-Neumünster Eisenbahn AG               KML Kreisbahn Mansfelder Land GmbH                               SBE Sächsisch-Böhmische Eisenbahngesellschaft mbH
Arriva NL Arriva Nederland                                     MBB Mecklenburgische Bäderbahn Molli GmbH                        SBB SBB GmbH
AVG Albtal-Verkehrs-Gesellschaft mbH                           ME metronom Eisenbahngesellschaft mbH                            SDG Sächsische Dampfeisenbahngesellschaft mbH
BOB* Bodensee-Oberschwaben-Bahn GmbH & Co. KG                  NBE nordbahn Eisenbahngesellschaft mbH                           SHB Schleswig-Holstein-Bahn GmbH
BOB Bayerische Oberlandbahn GmbH                               NEB NEB Betriebsgesellschaft mbH                                 SOEG Sächsisch-Oberlausitzer Eisenbahngesellschaft mbH
BSB Breisgau-S-Bahn GmbH                                       NEG Norddeutsche Eisenbahngesellschaft Niebüll GmbH              STB SüdThüringenBahn GmbH
BZB Bayerische Zugspitzbahn Bergbahn AG                        NOB Nord-Ostsee-Bahn GmbH                                        SWEG Südwestdeutsche Verkehrs AG
CAN cantus Verkehrsgesellschaft mbH                            NWB NordWestBahn GmbH                                            SWN Stadtwerke Nordhausen GmbH
CBC City-Bahn-Chemnitz GmbH                                    ODEG Ostdeutsche Eisenbahn GmbH                                  TR trans regio Deutsche Regionalbahn GmbH
CXS Connex Sachsen GmbH                                        OLA Ostseeland Verkehr GmbH                                      UBB Usedomer Bäderbahn GmbH
EB Erfurter Bahn GmbH                                          OSB Ortenau-S-Bahn GmbH                                          VBG Vogtlandbahn GmbH
ERB eurobahn (Keolis Deutschland GmbH & Co. KG)                PEG Prignitzer Eisenbahn GmbH                                    VEC vectus Verkehrsgesellschaft mbH
EVB Eisenbahnen und Verkehrsbetriebe Elbe-Weser GmbH           PRESS Eisenbahn-Bau- und Betriebsgesellschaft                    VEN Rhenus Veniro GmbH & Co. KG
FEG Freiberger Eisenbahngesellschaft mbH                             Pressnitztalbahn mbH                                       VIAS VIAS GmbH
     (Rhenus Veniro GmbH & Co. KG)                             RBE Rheinisch-Bergische Eisenbahn GmbH                           WEBA Westerwaldbahn GmbH
HEX HarzElbeExpress (Veolia Verkehr Sachsen-Anhalt GmbH)       RBG Regental-Bahnbetriebs-GmbH                                   WEG Württembergische Eisenbahn-Gesellschaft mbH
HLB Hessische Landesbahn GmbH                                  RNV Rhein-Neckar-Verkehr GmbH                                    WFB WestfalenBahn GmbH


     Liberalisation making good progress in Europe
     The rail freight markets are opening up to a greater extent than the rail passenger sector. Germany is the
     only country to achieve more than 800 of a possible 1,000 points in both sectors.

     2007 Rail Liberalisation Index – Freight Transport

                                                                                                                                                                                                                                                                                                                                           The liberalisation promoted
     900                                                                                                                                                                                                                                                                                                                                   by the EU is taking effect

     800                                                                                                                                                                                                                                                                                                                                   In most countries, external

                                                                                                                                                                                                                                                                                                                                           rail undertakings are already
                                                                                                                                                                                                                                                                                                                                           licensed and active in the

     600                                                                                                                                                                                                                                                                                                                                   freight transport market.
                                                                                                                                                                                                                                                                                                                                           The high median of 780 and
     500                                                                                                                                                                                                                                                                                                                                   high average value of 771
                                                                                                                                                                                                                                                                                                                                           points in the Index – with a low

                                                                                                                                                                                                                                                                                                                                           variance of just 85 points – are
     300                                                                                                                                                                                                                                                                                                                                   proof of this trend.
                                                                                                                   Czech Republic
                                                 Great Britain













     2007 Rail Liberalisation Index – Passenger Transport

                                                                                                                                                                                                                                                                                                                                           Market opening has devel-
     900                                                                                                                                                                                                                                                                                                                                   oped to different extents

     800                                                                                                                                                                                                                                                                                                                                   On average, the values are 166

                                                                                                                                                                                                                                                                                                                                           points lower than for freight

                                                                                                                                                                                                                                                                                                                                           transport. The liberalisation of

                                                                                                                                                                                                                                                                                                                                           passenger transport has made


                                                                                                                                                                                                                                                                                                                                           far less progress, and there

     500                                                                                                                                                                                                                                                                                                                                   are substantial differences be-

                                                                                                                                                                                                                                                                                                                                           tween the countries.


                                                                                                  Czech Republic
                       Great Britain
















     Source: IBM Global Business Services and Kirchner, Rail Liberalisation Index 2007

Deutsche Bahn AG
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      10785 Berlin

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