Increasing rail freight competitiveness requires changes

Constantly, the European rail freight transport is facing new challenges, as it has to adapt to EU’s legislative changes and customers’ new demands. This includes a range of actions to be taken, from rethinking the business models along the supply chain, seeking solutions to reduce costs and increasing its performance and efficiency, and, of course, to investing in the wagon fleet. For a competitive and developed market, the liberalisation process, alone, will not be sufficient to meet all rail freight’s challenges and, for the improvement of the sector, there is much to be done. In order to achieve this objective, besides its own direct challenges, the sector must face many factors that are crucial for improving the economic sustainability and competitiveness: the quality and capacity of rail infrastructure, the TACs regime, technical innovation, the development of new industrial areas near the rail network, etc. For example, the much discussed “innovation” and the “digitalization era” will influence massively the development of the rail freight transport sector in the coming years.
To provide more information regarding the challenges of the rail freight sector, the impact of the liberalisation process on competitiveness, the establishment of the single European transport system, the development of the rail freight market and intermodal transport sector, as well as the rolling stock fleet trends in the coming years, Gilles Peterhans, the Secretary General of International Union of Wagon Keepers (UIP) kindly agreed to have an interview in our magazine.

Pamela Luica is talking with… Gilles Peterhans, the Secretary General of International Union of Wagon Keepers (UIP)

The European legal framework has changed for many sectors in the past decade. Rail freight is one of the targeted sub-sectors where legislation needs to be adopted and implemented by every member state and has a direct impact on transport companies. How do freight wagon keepers adapt to the new legal requirements to develop and face customers’ demands?

Gilles Peterhans: Complying with new laws that European institutions and governments around Europe pass, while addressing, at the same time, a changing demand from freight customers is indeed one of the biggest challenges freight wagon keepers and other railway actors must face. On the one hand, companies are seeking to accommodate with legislative changes, whilst on the other hand, they are trying to improve efficiency and deliver better quality of services in competition with other modes of transport. The situation is aggravated by the fact that legal requirements in rail may as well differ from country to country.
In this difficult environment, one of the main tools we use to cope with both challenges is the General Contract of Use (GCU)1. This multilateral contract between railway undertakings and freight wagon keepers regroups more than 600 companies which have agreed on common and mutual right and obligations. Since 2006, the GCU is the corner stone of the rail freight sector and offers a platform to define and describe common solutions for implementing legal requirements and best practices.
However, innovation and digitalisation are new disruptive factors which freight wagon keepers must also adapt to. Both are key drivers of the new customers’ demand and essential to the sustainable development of our very fragmented industry.

What impact do you think liberalisation will have on the competitiveness and development of the rail transport system?

Gilles Peterhans: Liberalisation and structural changes are necessary and crucial to foster performance, efficiency, ensure more private investments and develop the competitiveness of the rail freight sector. Unfortunately, liberalisation alone won’t be sufficient to address all the challenges we are facing today. To improve the competitive position of rail freight as a transport system, we need, in parallel, the benefits of:
• Fair market conditions between transport modes and fair intramodal competition between freight and passenger (i.e. track access charges which reflect the priority and the quality of paths);
• Regulatory stability at European and national level to give confidence and attract investments;
• Strong regulators with strong co-ordination between them to ensure that key principles are implemented fairly and consistently;
• Sufficient investment in rail infrastructure to increase the quality of services;
• Reducing technical and administrative barriers to cut the cost burden.
However, some 10 to 15 years will probably have to pass before the benefits of competition become fully visible and the Single European Railway Area (SERA) becomes a reality.  >

In establishing a single European transport system, rail transport should be a backbone in reaching the EU objectives (environmental, economic growth etc.). Under these circumstances, what is UIP’s opinion about developing the rail transport system without compromising the activity of the other transport modes?

Gilles Peterhans: In fact, there is a general increasing demand by shippers for greener logistics, faster and reliable delivery of goods across transport modes. But the transport chain is rarely monomodal. A greater collaboration between the modes of transport would allow for more resource efficiency, less congestion and pollution, lower emissions, fewer accidents, etc., making these forms of freight transport a preferred choice for shippers and society. Together, the transport sector and the European Institutions must rethink the business models for freight transportation along the supply chain and seek solutions to reduce costs and time-to-market for freight services in general.
But in this context, making rail more competitive and more efficient as a mode of transport should remain a priority. Rail freight has been a key part of the EU transport policy for the last 25 years and is essential to reach the 2011 Transport White Paper targets of shifting as much as 30 % of road freight being transported further than 300 km to other modes by 2030, and more than 50 %
by 2050. These should remain the guiding principles for EU freight transport policymaking, including new legislative proposals, which should all be assessed as to their contribution towards achieving these aims.
To put it short: Rail freight transports must in any case be made economically attractive if we want to achieve the EU’s transport policy objectives!

How does UIP see the development of the rail freight market and intermodal transports? What are the critical factors to a positive trend towards a higher modal split for rail?

Gilles Peterhans: Different forms of rail freight transports exist: wagon load (transport of a few wagons, trains composed of wagons from different customers), full or block trains (shippers have enough volume to fill a train) and intermodal or combined rail–road transport (transport of containers/loading units).
In this sense, an important barrier to competitive rail freight services remains in the fragmented approach via different legislative acts and the missing link towards the needs of the logistic supply chain and correlated shippers’ priorities. We need a new approach that combines all rail freight related policies! Many factors are crucial to all types of rail freight services for improving economic sustainability and competitiveness:
• High quality and capacity of rail infrastructure;
• Track access charges regimes reflecting path quality and speed, without prejudice to current quality standards and without resulting in disproportionate track access charges levels for other rail segments;
• Technical Innovation supported through HORIZON 2020 and Shift2Rail;
• ‘Last mile’ links to industrial sites, ports and logistics centres;
• Development of new industrial areas near rail networks.
The rail freight strategy framework needs more coherency and a streamlining of European legislative activities. For the business of freight wagon keepers, the Rail Freight Corridors Regulation, the Combined Transport Directive and the latest initiative of the European Commission on support programmes for investments in last-mile infrastructure are parts of the same puzzle. HaCon for example, developed a model to forecast the future demand for last-mile transport volumes, as well as infrastructure and investment needs for the time horizon 2030. The results is a matrix of three scenarios where the variation of different parameters like political framework conditions, economic development in European countries and technical innovations have been bundled.
Innovation, digitalisation, investments and framework conditions are the key drivers which will influence the development of the rail freight transport sector in the coming years. But if we can develop policy proposals based on business cases and business-driven initiatives, then we can really expect a positive trend for rail and an increase of the modal split towards rail transports.

During the TEN-T Days in June 2016, several European associations among which UIP, came up with a declaration committing themselves to the aim of enhancing the competitiveness of the Rail Freight Corridors. In parallel, a Ministerial Declaration on Rail Freight was published which underlines the importance of cooperation to increase rail freight’s competitiveness. To what extent could these declarations unlock the growth potential and promote rail transport as a “preferred mode of transport“?

Gilles Peterhans:  Regulation 913/2010 on a European rail network for competitive freight was an important legislative act aiming at increasing rail freight’s market share. Both declarations from the 2016 TEN-T Days came at a time when the European Commission envisaged the revision of this regulation which has now been postponed to the end of 2018.
As rail freight is a transport system which involves a multitude of actors who have very diverging interests, the industry needs to define common priorities and ensure coordinated efforts to increase the market share of rail freight. That’s where the declaration of the rail freight sector, supported by the Rail Freight Corridors and freight customers, steps in. It identifies important measures which are essential to improve competitiveness, make rail freight a more attractive option for all customers, enhance its operational efficiency and ensure adequate capacity. The declaration was accompanied by the development of a single list of important operational issues to be resolved, a kind of common action plan.
As such the declaration, introduced during the TEN-T Days last year, sets the ground for the establishment of deeper and more collaborative relationships among all actors, something which has not been the norm before in rail freight.
Time will tell if we are able to deliver but taking into
account the support of the European Commission and national Ministries, we remain confident about the potential of this initiative towards improving the attractiveness and performance of rail freight services.

In UIP’s opinion, the freight sector is still thinking traditionally. There are 4 sections with an important impact on the business sector. What can you tell us about these sections and to what extent are they capable to boost competitiveness?

Gilles Peterhans:  As the European Commission put it forward in its 2016 work programme: “There is no time for business as usual”. We could not agree more. Increasing competitiveness requires changes in the approach and perceptions in four main areas: the market, the customers, the infrastructure facilities (including terminals), and logistics.
Thinking that the market is limited to national borders and divided in single commodities   is becoming out of date.
Today in addition to bulk, heavy, construction and dange-rous  goods transport, we see increase in retail market,  e-commerce, intermodal and cross-border activities.  The transport infrastructure facilities and terminals are the arteries of freight services. Therefore, when access to networks is restricted or priority given to high-speed passenger services, we block those arteries. We need to improve capacity, network availability and last mile and intermodal links. When interacting with our customers, we tend to focus on bi-lateral contracts only and forget to consider that the supply-chain of freight services consists of all relevant actors (Keepers, Operators, IMs, Shippers, Suppliers, Customers). This leads to defragmentation of freight services and logistics. As digitalisation and automation are becoming more part of our daily business, it is time to focus on common (and where necessary One Stop Shop) solutions. Without question, conduct reflects culture. While we have much to be proud of in rail, developing a common culture requires constant attention and probably a new mindset.

How could East-European countries improve their role in the transport system on the Europe-Asia corridor since geographically these are the “access gates” between the two continents?

Gilles Peterhans:  If you look at the Fifth Report on monitoring development of the EC rail market2, East-European countries have indeed managed to increase the transport volumes in rail freight over the recent period. However, these countries still need to overcome many challenges in establishing an efficient freight transport system:
•    Rail freight is not a political top priority
• New legislative framework is poorly or partially implemented
• There is a lack of involvement in innovation and digitalisation activities
•  Financial support from Cohesion fund, Connecting Europe Facility (CEF) or European Fund for Strategic Investment (EFSI) is not used to its full extent.

 Let’s get back to UIP. The organisation that represents 250 wagon keepers and entities that carry out their activity in the maintenance segment. What is the current situation of the freight rolling stock fleet in Europe and what are the trends by 2020?

Gilles Peterhans:  Independent freight wagons keepers own more than 200,000 wagons that count for more than 50% of all tonnes-km around Europe. Their market share in terms of rolling stock is rising. If we compare the rail freight volume and the evolution of the number of wagons in Europe, we can state that the wagon productivity (i.e. utilisation) has increased by approx. 30% in the last 15 years! As a result, while transport volumes have been stable, the freight wagon fleet in Europe has been reduced by 30%.
There are various sources of information on the European wagon fleet (Eurostat, UIC, National Vehicle Registers, RSRDs, GCU), but even if the number of wagons operated across Europe is not known, the market trends are well acknowledged and the general picture shows that:
•  Procurement rates are expected to be remain stables in the coming years
• New procurements will serve mainly to replace old wagons
•  Former state railways are still in a fleet downsizing process.

Wagons are the most important resource of rail transport. Considering the economic performances and the European legislation, what is the most efficient method for operators/wagon keepers: retrofitted wagons or new freight wagons?

Gilles Peterhans:  UIP supports the objective of reducing rail freight noise and understands the need to increase the pace towards having only TSI noise compliant wagons (retrofitted or new builds) running throughout Europe. As such Noise is a top priority for freight wagon keepers which are expected to invest a great deal in the retrofitting of their existing fleet.
We focused our activities in supporting the European Commission towards developing an appropriate Noise Abatement Strategy, and setting-up a feasible financing framework for wagon retrofitting via the Connecting Europe Facility (CEF). We expect a higher participation and stronger subscriptions to the current CEF open call on Noise for which the submission deadline was the 7th of February.
In fact, noise reduction raises new challenges in terms of rolling stock management and today many wagon keepers effectively consider building new wagons as a valid alternative to retrofitting. We can’t, a priori state that building new freight wagons is the most efficient method to deal with the noise issue but it’s for sure an alternative strategy.

What can you tell us about the value of necessary investments for an efficient rolling stock in the EU? What are the general financing sources that wagon keepers prefer and what are the latest methods that could help increase the value of financing?

Gilles Peterhans:  Investments are key to the development of any company and very often considered as somehow confidential. As such assessing their level is always a challenge. Looking at the fleet declared by independent freight wagon keepers to UIP, the 200,000 freight wagons represent a private investment volume of roughly 8 to 10 billion EUR. Yearly “new investments” are estimated at a volume of 400 to 500 million EUR. In assets financing, rolling stocks investments are characterised by long disbursement and loan repayment periods (15 – 20 years), relative constant returns with recurring revenue streams, more value than corporate and pledge of assets. Of course, appropriate returns are key incentives to private investments, but the attractiveness for private investments suffers currently from low margins, low returns, and decreasing volumes.
To increase the value of financing, revenue streams should be isolated from risks over which investors or banks have little control. To this end, we should focus on following issues:
• Independent and strong regulatory authorities are essential to attract large scale private investments;
• Government’s sovereign regulatory functions must be separated from those of management and operation of railways;
• Policy makers must provide a stable regulatory frame-work and avoid over-regulation;
• Stakeholders must focus on fields with competitive advantage and improve productivity and service quality (in particular reliability, price and customer orientation).

Pamela Luica is talking with…

Gilles Peterhans

Secretary General of International Union of Wagon Keepers (UIP)

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