The Government has been weighing the idea of having a regulator in the railway sector to take a call on tariffs. This would involve deciding the cost of providing railway services for passenger and freight trains. The Railways is also in the process of finalising the network access charges for the dedicated freight corridor corporation.
In this context, Business Line caught up with Lord Anthony Berkeley, Chairman, Rail Freight Group, UK, and Member of the House of Lords, during his recent India visit, to understand the structure of privatised rail freight market, and the access charges setting mechanism.
What is the structure of rail freight market in UK?
There is the railway regulator — Office of Rail Regulation (ORR). Then there is Network Rail, which manages the railway network and is supposed to that it runs efficiently.
The freight market in the UK is not subsidised. We have five different train freight operators. There is a contract between network rail and train operator, which defines the access charges that the operator will pay, and another contract between the train operator and the leasing companies.
For the freight customers, there is another contract between train operators and customers. The train operator has rights to run a train on the network — between point A and point B within a certain time. An operator has to run services on the track on maintain those rights.
The cost to the operating company include cost of access, locomotive, terminal access charges, fuel, hire charges of wagon and staff.
How are the rail network access charges, which companies pay to network rail, fixed?
In the UK, Network Rail fixes the charges for freight operating companies to access the network at marginal cost, but the actual level of charges and all other elements of charges are set by the regulator (ORR), which bases its calculation by defining marginal cost of building and/or maintaining the lines. This applies to all the mixed traffic lines on the railway.
For freight only lines, freight operators pay the whole cost of maintaining these lines, but since they are only for freight, the cost is not high.
And we have had big arguments on the marginal cost. About five years ago, Network Rail said they spent £100 million to maintain the (freight) line. We contested that as we had not seen them maintain those lines and the amount dropped to £10 million. Five years ago, the regulator reduced the freight charges by 20 per cent. We are having the exercise again.
In the UK, ORR is required ensure Network Rail operates efficiently. The regulator said that network rail should reduce the cost of operations by 50 per cent spread over 10 years — that finishes next year. They have to do that without reducing the quality of network.
The cost is then separated to wagon type, axle weight, wagon suspension and speed. So, each wagon has a charge factor, for empty or loaded.
What is the impact of competition in the rail freight market in the UK?
The cost of transportation has gone down. One of our railways was taken over by DB Schenker (German Railways). Initially it had most of the coal contracts and lost most of them. That was because other train freight operators came in with much cheaper services for the customers.
Competition does twist the market in many ways. Now, we have five companies — two came from British Rail and three were new.
The annual turnover per employee for the three entrant private companies is 38 per cent more than the turnover per employee in the two British Rail companies. This is what competition does — the new companies found ways to improve asset utilisation.
What are the key commodities that are transported on rail in the UK and Europe, and also the projected growth trends?
Broadly, there are two commodity groups — bulk and inter-modal. In the UK, bulk includes coal, biomass, building material, steel raw material and steel products. They have grown significantly in the last 15 years, particularly coal.
Building material such as sand, cement and aggregates are the other group of commodities. On a long term basis, they will not grow very much because people ultimately will not use a lot of bricks.
In Europe, it is much the same, except there are additional users — chemical industry and steel industry are large users. They use rail not just in moving cargo around Europe but also within their plants.
In the steel industry, the problem is that customers are tied to one train operator, which owns a certain kind of wagons. Steel customers there want to change operators, but it is not possible unless they buy new wagons, which is very expensive. The French Railways have lost 50 per cent of their rail freight traffic in the last 10 years.
In the chemical industry, wagons are generally leased. So, customers have it relatively easy because they can change operators.
The inter-modal segment — which is containerised segment — is growing in the UK and Europe. Our forecast is that the inter-modal section will at least double or, may be, treble over the next 20 years. This will be the trend over Europe.
However, the inter-modal customer wants more reliability. The customer wants deliveries on time.