ECONOMIC REGULATION AND COMPETITION IN RAILWAYS

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Deputy Director-General: Transport

Ms. Kgomotso Modise

Transport Forum

01 October 2015

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Contents

Rationale for Economic Regulation & Competition Policies General Policy trends across the globe Sector-specific regulation versus competition policy approach Policy decisions to address rail sector challenges Principles of sound economic regulation Key Lessons from European and American experience Future trends Conclusion

Domination of large railways and monopolies

Historically, networks industries (including railways industry) were national monopolies.

Lack of investment in railways to commensurate economic growth.

Lack of innovations to respond to the dynamic logistics requirements

Effects

Inability of railways to remain competitive

The investment curtailment and deregulation of road transport had major impact on theperformance of railways.

Decline in railway’s market share on the national transport task.

Two types of mechanisms at government’s disposal to deal with market failures: Economic Regulation Competition Policies (Antitrust Regulation)

Rationale for Economic Regulation & Competition Policies

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Competition Laws Sector-Specific Regulation

Competition agencies apply an ex-post, harm basedapproach.

Enterprises face the risk to be penalized if their businessconduct is found to be an abuse of dominant position ormarket power.

competition agencies opt for structural remediesaddressed to specific conducts

competition policy approach has the informationaladvantage that it requires the authority to assess thebusiness conduct after the alleged abuse and only inlight of what is known at the time of the investigation.

The regulatory approach relies on detailed ex-anteprescriptive business conduct, for example price controls.

Regulatory agencies have to take forward looking view ofdifferent business conducts and place restrictions oncertain conducts.

sector specific regulators impose and monitor detailed

conduct and behavioural remedies.

The regulatory approach supposes much moreinformation than the one needed under the competitionapproach

Economic Regulation versus Competition Policy

Deregulation of road transport

Regulation of railways

Introduction of competition in railways

Collaboration between:

Road and railways

Public and Private Sector

General Policy trends across the globe

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Deregulation of road transport To deal with rail inefficiencies (level of service and price) Uneven allocation of national resources between railways and roads.

Effects The road transport sector expanded significantly and competition intensified At the same time investments in railways reduced significantly due to various policy

decisions of the day. Railways lost many commodities (especially manufactured goods) over many routes

(especially shorter ones), and in some cases on the entire long haul routes This came at a cost: externalities (damages to the road networks, accidents, etc.) Infrastructure costs covered mainly by taxpayers while railways remained self-

funding Skewed operation costs & therefore prices between roads &railways

Deregulation of Road Transport

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Introduction of competition on railways

To remove barriers to entry and allow third party access to monopoly railwayinfrastructure.

Non-discriminatory rules for the allocation of paths and for access charges.

Effects Low fares Additional services by utilisation of spare capacity Pressure on cost

But also Monopolies over single geographic corridors Reduced profitability Loss of economies of scale and density Loss of integration and coordination

Introduction of Competition in Railways

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Regulation of Access, Access Charges, Haulage Prices, Levels of Service

Entry and exit into different markets depended on profitability of markets

Stability of prices vs profitability

Value of service pricing & equalizing discrimination

Effects Allocative and productive inefficiencies Distortion of rail costs and prices vs road cost and prices Licences for access in line with applicable policy Levels of service improve in line with price increases

Economic Regulation in Railways

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Defining the goals and objectives of economic regulation and competition policy is a crucialfirst step in developing and implementing policy reforms.

Railway technical skills are very crucial in implementation of rail economic regulation toensure that decisions take into account rail industry realities.

National transport strategies may differ, but broad government policy aims and principles fortransport should be coherent when applied to the sector as a whole, independent of mode.

No single best model for economic regulation of railways exists. Instead, regulation should becustom designed to achieve government objectives for the whole transport sector, takingaccount of other aspects of railway reform.

Government actions are always influential and often decisive in helping or hindering asuccessful railway industry.

Conclusion

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