House of Lords - Tunnel vision? Completing the European rail market

Tunnel vision? Completing the European rail market - European Union Committee Contents

CHAPTER 4: OTHER BARRIERS TO GROWTH

72. Apart from the governance structure of the Channel Tunnel, there are a number of other potential barriers to growth. Some are particular to the Channel Tunnel, while others apply to the European rail market as a whole.

Projected passenger and freight levels

73. The projected levels of passenger and freight services were both overestimated when the Channel Tunnel was conceived. Initial British and French forecasts estimated around 17-20 million passengers per annum. Instead, figures have ranged between 6-7 million in 2004 and 9-10 million today. Eurotunnel was confident that there was potential for the market to grow to 15 million passengers within the next decade, and up to 20 million in the long term if necessary improvements were made. For freight services, the initial forecast was 8-10 million tonnes per annum. However, after rising to only 3 million tonnes per annum shortly after the Channel Tunnel opened, it stagnated at this level until 2001 and then declined. Eurotunnel told us that, after a near collapse of the market in 2007, it worked with the respective governments to recover the market, which preserved traffic at a level of one million tonnes. After a further dip in 2010 it is now growing at rate of 15% per annum in 2011. As a result, Eurotunnel is confident that the level can be increased to 3 million tonnes and indeed beyond 6 million tonnes over a longer period of time.[123] Figure 1 plots both passenger and freight levels since 1994.

FIGURE 2

Number of passengers and tonnes of freight (in millions) from 1994 to 2010

Source: Eurotunnel annual traffic figures

Capacity

74. Capacity within the Channel Tunnel is not a constraint. Eurotunnel told us that it allocated pathways between passenger and freight services, and of these less than 50% of the passenger capacity was used, with only about 10% utilisation for freight. They further explained that a 50:50 split of overall capacity was currently in place between the railway network connections and the road network connections. The Eurotunnel Shuttle services used the latter connection and there were occasionally periods when 100% utilisation of their capacity was achieved.[124] Roy Griffins, head of the UK delegation to the IGC, told us that 50% of the Channel Tunnel's capacity was currently reserved for Eurostar and the freight operators under the current Rail User Contract, with the remaining 50% being available for other operators to enter the market under the open access rules.[125] High Speed 1 told us that there was also spare capacity on their infrastructure[126], though the ORR indicated that there were some issues on the network in northern France.[127]

75. There is therefore a great deal of spare capacity available in the Channel Tunnel in which further international passenger and freight services could easily be accommodated.

Access charges

76. Our earlier report recommended that the Government should work with the French government to ensure fair and open access through the Channel Tunnel, with competitive access charges.[128] Despite this, many of the contributors to this inquiry considered high access charges to be the main barrier to growth in international passenger and freight services through the Channel Tunnel. While the Minister told us that an operator unhappy with the charges set by Eurotunnel could appeal to the IGC[129], Network Rail suggested that the IGC should examine Eurotunnel's charges to see if they were consistent with the "letter and spirit of EU rules".[130] In any event, the principles on which these charges are actually formulated remain unclear.

A barrier to growth?

77. Many witnesses called for Eurotunnel to reduce their access charges in order to stimulate greater competition.[131] The Rail Freight Group called for Eurotunnel to cut these charges by a third as a first step to increasing competition.[132] Eurostar explained that the high charges set a minimum on the fares they could offer to customers and suggested that these charges would limit future growth of international services. It also suggested that different operators appeared to be charged different tariffs and argued that the charging regimes should be fairer and more transparent between different types of operators.[133] Deutsche Bahn also argued that the access charges were too high—representing 50% of total charges on some services—and that lower costs would make higher service frequencies and more destinations possible.[134]

78. Brian Kogan, a member of the IGC, stated that access charges to the Channel Tunnel were "extremely high relative to other networks", but that he did not know whether they were "just inexcusably high or ... justifiably high".[135] He considered it to be a "no-brainer" that reduced charges would increase competition; however, he warned that they could not simply be reduced to an uneconomic level, as Eurotunnel needed to "make a living".[136] He stated that the IGC was reviewing Eurotunnel's charging scheme and confirmed that the IGC has the power to direct Eurotunnel to lower access charges, as well as to enforce any such decision.[137] Roy Griffins noted, though, that the IGC had received only one appeal from a railway undertaking about the charges that applied.[138]

79. The Minister argued that access charges should be for the market to determine and suggested that a reduction in charges would result in additional Government subsidies to freight operators, thus placing greater burdens on the taxpayer.[139] The Rail Freight Group strongly disagreed with the Minister's view. It referred to Article 8(1) of Directive 2001/14/EC, which states that the freight charges should, as a minimum, be what the market can bear. It stressed that if charges went down then the level of traffic would increase as a result.[140] However, Article 8(2) allows for different charging principles to be applied for specific long term investment projects: higher charges may be imposed if the project could not have been undertaken without such higher fees. This provision could, ostensibly, apply to the Channel Tunnel.

Rail User Contracts and network statements

80. The Treaty of Canterbury prohibits subsidies to Eurotunnel, but allows it the freedom to make its own commercial decisions regarding the operation of the Channel Tunnel. The Treaty also allowed Eurotunnel to conclude a Rail Usage Contract (RUC) with the then state-owned UK and French railway companies. After privatisation, Eurostar and English Welsh and Scottish Railway assumed British Rail's preferences and liabilities under the contract through 'back-to-back' agreements, which account for 50% of Eurotunnel's capacity. The contract guarantees a minimum level of income for Eurotunnel, which helped it meet its liabilities for construction costs and now also serves as the basis for how access charges are levied on all railway undertakings using the Channel Tunnel.[141]

81. Each infrastructure manager, including Eurotunnel and High Speed 1, publishes a network statement which specifies the charges that apply to rail passenger operators and rail freight operators, alongside the conditions of use.[142] Following criticism from the IGC, we heard that improvements have been made to the statement which is published annually by Eurotunnel.[143] The charges in that statement sometimes differ from those in the Rail Usage Contract, which are subject to negotiations between Eurotunnel and the operator and remain confidential. Brian Kogan considered the current charging scheme to be too "opaque" and suggested that more transparency was needed.[144]

Domestic access charges

82. Eurostar asserted that the calculation of charges was influenced too much by domestic funding conditions, and argued that there should be more EU involvement in their future development in order to ensure greater affordability and predictability.[145] Eurotunnel stressed that it received no public subsidy and was the only infrastructure manager in Europe to be funded entirely from access charges, unlike its national equivalents who were primarily funded by their taxpayers. Its level of access charges were now set at approximately the sum of both these national access charges and were also subject to an indexation formula—RPI minus 1.1%—that had been in place since 1987, resulting in no increase in real terms since then. Eurotunnel maintained in supplementary evidence that the increases were as a result of the significant rise in the levels of access charges levied by the UK and French infrastructure managers, which it said should be limited. It also called for the indexation formula to be applied to all infrastructure managers in the EU, in order to reverse the upward trend in charges at the national level.[146] None of our other witnesses raised any concerns about national infrastructure charges.

83. While it stressed that it was for the UK and French governments to justify the current level of composite access charges that applied to services running through the Channel Tunnel, Eurotunnel also stated that these charges were set at an "appropriate level" and were "bearable", with prospective new operators assessing that new services would be profitable. However, it admitted that problems might arise in the long-term, if charges continued to rise, with operators potentially withdrawing services through the Channel Tunnel.[147]

84. Access charges set by Eurotunnel and the United Kingdom and French governments constitute a large part of the cost of running a service through the Channel Tunnel. However, we appreciate that Eurotunnel is a private company, and that its access charges constitute a significant share of its income. It should be free to set access charges at a market rate subject to their obligations under EU law.

85. New entrants could be deterred from seeking authorisation to provide services if access charges are not fair, predictable and available more easily. We recommend that the Intergovernmental Commission's review of access charges is expedited and any changes, whether by Eurotunnel or by the United Kingdom or French governments, are made without delay. We would welcome a reduction of the charges in the medium-term as a means of encouraging use and increasing revenue.

Security and border controls

86. Most international trains travelling through Member States on the Continent do not have to worry about security and immigration controls, as they are part of the Schengen Area. The border control system for services running through the Channel Tunnel is explained in Box 6.

BOX 6

The Schengen Area and Juxtaposed Border Controls

The Schengen Area includes 25 EU Member States alongside Norway, Iceland and Switzerland. The Schengen rules became part of EU law when they were incorporated into the Amsterdam Treaty in 1999. Bulgaria, Romania and Cyprus will also join the Schengen Area in due course. Internal border controls no longer exist within the Area. The United Kingdom and the Republic of Ireland, which maintain a Common Travel Area between them, are not full members of the Schengen Area[148] and therefore still maintain border controls with the other Member States.

As a result, Eurostar services between London, Brussels and Paris must still operate border controls. This is achieved by so-called "juxtaposed controls" at the station of departure. A traveller leaving London will be checked first by the United Kingdom Border Agency (UKBA) and then by French or Belgian officials before boarding the train. The passenger does not need to show his passport on arrival. This means that UK officials have to operate on French and Belgian soil, and the French and Belgians on UK soil. A similar arrangement would be necessary for any extension of the service to other countries such as Germany or the Netherlands.

87. The question we posed was whether the system was necessary and viable in an expanding market. Many witnesses were satisfied that a greater volume of traffic through the Channel Tunnel did not pose any additional security risks to the infrastructure.[149] Eurostar supported the current system of juxtaposed border controls between Belgium, France and the United Kingdom but suggested that they might not work for other, smaller, destinations.[150] Some argued that the security and immigration requirements for travel through the Channel Tunnel were already too onerous—negating some of the advantages of train travel over flying. The International Rail Journal considered the check-in times for Eurostar services at stations in Lille and Brussels to be too long[151], while High Speed 1 and the International Air Rail Organisation favoured on-board passport checks as a quicker alternative.[152] The Man in Seat Sixty-One also supported on-board security and immigration checks as a means of cutting journey times and benefiting the consumer. He suggested that the current juxtaposed system might hinder the development of other international routes due to the complexities involved of setting up such checks at new stations.[153] Deutsche Bahn also suggested that there may come a time when prospective new operators would examine the arrangements and say, "This is too expensive for us and we cannot afford it".[154]

88. Eurotunnel considered that the continued application of passenger and luggage searches would limit the growth of international passenger services, as only the major stations—Paris, London and Brussels—could accommodate the necessary infrastructure costs. It viewed the checks as discriminatory and excessive, given that similar procedures do not apply to passengers on domestic British and French rail networks, notwithstanding the fact that the only major terrorist attack to have occurred in either country targeted domestic rail services.[155]

89. The Minister suggested that the juxtaposed border controls system may no longer be viable with respect to new services, including the prospective Deutsche Bahn operation, "because neither Germany nor the Netherlands is currently keen on the idea of UK border officials on their territory".[156] She suggested that an alternative would have to be found, possibly involving an increased reliance on the United Kingdom's e-Borders system, the use of Advanced Passenger Information and on-board checks. She also suggested that an interim procedure might allow the Deutsche Bahn service to commence in the short term, to be replaced by a more permanent arrangement in due course.[157]

90. The development of new international services may render the current system of juxtaposed border controls unsustainable. We welcome the Government's open-minded approach to this matter, and would welcome a statement on their proposals. All feasible solutions should be considered, including the reintroduction of on-board passport checks. Any revised security policy must be proportionate and avoid an adverse impact on passenger waiting times.

Interoperability

91. To take advantage of expansion opportunities in the European rail market, interoperability is integral; rolling stock must be compatible with infrastructures across Member States. A new service running through the Channel Tunnel from London to Amsterdam would need to run on HS1, Channel Tunnel, French, Belgian and Dutch infrastructures. Alstom explained some of the issues: "There are several systems ... The question is whether the train can carry the technical systems on board to switch between the two. On top of that ... there are 25 train protection systems in operation in Europe across the countries ... A train can go everywhere but it will be an expensive train. That will not change by 2020, but it will be improved".[158] High Speed 1 pointed to other constraints including platform lengths, station layouts and signalling issues.[159]

92. A number of Directives have been adopted in order to facilitate progress in this area.[160] The ERA also provides advice and assistance in promoting interoperability, in part, by producing a number of Technical Standards for Interoperability (TSIs). Funding and technical support is also provided for projects like the European Rail Traffic Management System, which is described in Box 7. Alstom was enthusiastic about this project, regarding it as providing "a pillar for the future of European rail". While the system was progressing well so far[161], they considered faster deployment to be the "highest priority" for the future development of an EU rail market.[162] The Government favours greater interoperability and suggested that Trans-European Transport Network (TEN-T) funding for high-speed projects should become conditional on compliance with the relevant TSIs.[163]

BOX 7

European Rail Traffic Management System (ERTMS)

The European Rail Traffic Management System (ERTMS) aims to increase safety and interoperability on Europe's high speed rail network. It uses Global System for Mobile communications-Railways (GSM-R) to transmit data about a train's location and speed. This, coupled with automatic train protection (ATP), enables the automatic supervision of the train's speed and braking. High-speed trains can therefore travel more frequently and safely on ERTMS routes. The provision of ERTMS is a condition of EU funding for infrastructure upgrades which incorporate signalling improvements.

93. Deutsche Bahn also considered that there was still work to be done to remove technical and administrative market entry barriers, particularly with respect to the homologation of rolling stock. However, it suggested that progress was being made by the ERA to increase the predictability and transparency in obtaining safety certificates.[164]

94. Providing a cross-border rail service will continue to be expensive as long as rolling stock is required to meet multiple safety and interoperability standards. TSIs should be extended in scope wherever possible in order to facilitate market entry for new operators. We urge the European Rail Agency to be more proactive in this area.

95. We endorse the continued rollout of the European Rail Traffic Management System, subject to the costs being controlled adequately. Alongside other interoperability initiatives, this will be crucial for the future development of the European rail services market.

Infrastructure

96. The Channel Tunnel and HS1 should be seen in the context of Europe-wide infrastructure development. The Commission's Transport White Paper argues that "no major change in transport will be possible without the support of an adequate network and more intelligence in using it".[165] However, rail infrastructure is variable across Europe and is generally more developed in the West than the East, and the EU has identified priority areas for EU infrastructure through its Trans-European Transport Network (TEN-T) designation. The core network envisaged for 2030 is shown at Figure 3.

FIGURE 3

TEN-T 2030 Core Network Map

Source: European Commission, Revision of TEN-T Guidelines

97. TEN-T funding was previously used to build HS1 and the TGV Est, which operates between Paris and Strasbourg. However, transport infrastructure funding to date has been criticised as serving national rather than cross-border interests. Delays and environmental concerns have also beset other projects such as the Turin-Lyon rail tunnel, and there is evidence of under-spend in other areas.

FUTURE PRIORITIES

98. Witnesses were divided as to whether funding should be focused on developing high speed lines[166], or upgrading existing normal speed lines.[167] The Minister argued that the priorities could not be split. She said that the focus should be on where the most significant economic return in terms of jobs and growth could be achieved.[168]

99. Alstom called for a higher funding allocation to be made under the next MFF to TEN-T rail infrastructure, with a focus on cross-border projects with high European-added value.[169] This was echoed by the European Rail Infrastructure Managers.[170] The Minister said there was a case for prioritising limited resources on transport but that a better result could also be achieved if regional and cohesion funding was looked at alongside TEN-T funding.[171]

100. Network Rail argued that TEN-T funds should focus on core networks, removing bottlenecks, and on projects that would not proceed without assistance and where return on investment was considered to be high.[172] High Speed 1 and the Minister also argued that the resolution of bottlenecks was paramount.[173] Deutsche Bahn suggested that TEN-T funding should be based on assessment of the contribution to traffic development, the environmental impact, the safety advantages, the network effects and the saving in travelling times. They argued that funding should be allocated so as to encourage optimum interoperability.[174]

101. Some witnesses suggested that TEN-T funding should be contingent upon other factors such as compliance with EU measures[175], the promotion of low-carbon and sustainable transport, interoperability, the use of the ERTMS and meeting project deadlines.[176] Eurostar cited HS1, which was built with TEN-T funding, being standardised with high speed rail lines in Belgium and France[177], in accordance with the relevant TSIs.[178] The Government agreed with condition-based funding, arguing for compliance with High Speed Rail TSIs and the implementation of the ERTMS.[179]

102. TEN-T funding should be prioritised for cross-border transport infrastructure projects that contribute to economic growth by overcoming bottlenecks and helping to achieve the completion of the Single Market. The decision should not be prejudiced in favour of either conventional or high-speed rail projects. It is imperative that the risks should be properly assessed before funding is allocated.

103. If funding is to be provided at EU-level, projects should advance EU aims to develop a competitive and resource efficient transport system. Conditions on interoperability and fair access should be attached to any such funding.

REVISION OF TEN-T FUNDING

104. On 19 October 2011 the Commission published a new infrastructure package, including a proposed revision of the TEN-T guidelines[180] and a "Connecting Europe" funding instrument, as part of the next Multiannual Financial Framework for 2014 to 2020. Under "Connecting Europe", the Commission intends to invest €31.7 billion upgrading infrastructure, building missing links and removing bottlenecks in order to increase the flow of goods and people around Europe.[181] This will be aimed particularly at sustainable cross-border transport links, but funding is also likely to be earmarked for the further development of the ERTMS. The package also designates 10 core cross-border corridors, including Dublin-London-Paris-Brussels and Warsaw-Berlin-Amsterdam/Rotterdam-Felixstowe-Midlands, which should be completed by 2030. This will be supplemented by a comprehensive network of feeder routes at regional and national level, to be completed by 2050 and mainly funded by the Member States.

105. The new infrastructure package also focuses on the use of innovative funding instruments[182] and other means to secure more private sector investment. Alstom supported the use of such instruments, while the European Rail Infrastructure Managers and High Speed 1 argued for more private investment. They stressed that a stable regulatory climate, which accepted a reasonable return for investors, was needed to facilitate such support.[183] Ferrovie dello Stato suggested that public-private partnerships should play a more significant role in funding high speed rail projects.[184]

106. In the interests of promoting economic growth, funding for the development of the European rail network should be a priority during the next financial perspective. We welcome the inclusion of €31.7bn of "seed capital" in the next Multiannual Financial Framework to help complete necessary cross-border links which might not otherwise be built.

107. Given the constraints on European public funding for the foreseeable future, policies should be developed which seek to maximise contributions from the private sector whilst ensuring a fair allocation of risk. A more predictable EU regulatory framework and the use of innovative financial instruments where appropriate should be pursued to facilitate more commercially viable propositions.

Inter-regional services and intermediate stations

108. When Eurostar began operating services in 1994, it was anticipated that regional and 'Nightstar' sleeper services from Paris and Brussels to locations beyond London would also be introduced. While rolling stock was ordered for these services, they were eventually abandoned due to concerns about their economic viability. The feasibility of regional services was revived during the construction of HS1[185]; but while domestic services now use this line at a lower speed, alongside faster Eurostar services[186], no such services have been introduced since it opened fully in 2007. Professor Vickerman suggested services between Kent and Nord-Pas de Calais were feasible, and made clear his support for their introduction. He pointed to similar services between France, Belgium and the Netherlands that had been successful.[187] However, he acknowledged that while it would be technically possible to run such a service, a major constraint was the access charges to the Channel Tunnel that, on a short journey, would represent a large part of the operator's service cost.[188]

109. We have already noted the spare capacity available in the Channel Tunnel for new services, including inter-regional ones, but we received evidence that longer-distance operators were disinclined to stop at intermediate stations on HS1 because of time considerations.[189] Eurostar stressed that the bulk of their market was between the big cities—Brussels, Paris and London. Intermediate stops would increase journey times and make services less competitive with airlines.[190] High Speed 1, though, are working to make stations such as Stratford International appealing for international operators.[191] The Minister stressed that stopping at Stratford International was a business decision for international operators to make but considered that the 2012 Olympics could only bolster such a business case.[192]

110. While the increased provision of inter-regional services through the Channel Tunnel is desirable, it is ultimately a commercial decision for the operators. Fixed costs, such as access charges and train control systems, mean that longer-distance international services should be more viable. Ways of rendering such services more sustainable and making stoppages at intermediate stations more attractive should be examined further.

Fair competition between different transport modes

111. The Commission's Transport White Paper states that: "by 2050 the majority of medium-distance passenger transport should go by rail".[193] The question is how to achieve this. Some witnesses told us that there was already healthy competition between rail and air on the London, Paris and Brussels routes, with Alstom reporting that the displacement from air to rail travel was significant where high-speed rail routes were available.[194] The Man in Seat Sixty-One attributed an increase in enquiries he received from people interested in switching from air to rail to the desire for reduced stress—avoiding "the airport checks, the delays and the extra charges"—and environmental concerns. He estimated an 80:20 split: "80% stress of flying versus 20% carbon footprint".[195] Some witnesses argued that the key factors that influenced choice of transport mode were journey times, competitive pricing and efficacy of services.[196] However, the Government suggested that factors underlying modal shifts were more complex, including infrastructure improvements, and argued that people should not be coerced into changing travel modes.[197]

112. Eurostar and High Speed 1 stressed the importance of consistent application of regulatory principles across rail, road and air in order to facilitate modal shift, and also emphasised the environmental benefits that would result from such an approach.[198] Examples of disparity cited include the exemption of cross-border flights from VAT (unlike cross-border rail), and the application of the EU Emission Trading System.[199] Deutsche Bahn also called for equal treatment between these transport modes in terms of taxation.[200] Alstom argued that modal shift not only required fairer taxation, but also fairer infrastructure charging. It called for the internalisation of external costs[201] and the full application of the polluter-pays principle.[202]

113. Against this, the Minister did not accept that there was currently unequal treatment between the two modes in terms of taxation. She argued that although airlines did not pay VAT, Air Passenger Duty was levied on flights and noted that the aviation industry was soon to be included in the EU Emission Trading System. She further argued that adopting a uniform approach to taxation across transport modes would rule out imposing higher taxes on the most polluting forms of transport and said that "we do not rule out the option of aligning the tax system more closely to the emissions of the transport mode in question".[203]

114. Achieving a greater degree of competition between rail and air transport, in terms of taxation and the application of the EU Emission Trading System, is necessary before rail travel will become an attractive alternative to short haul flights.

123 QQ 339-340 and Eurotunnel Back

124 QQ 336-338 and Eurotunnel Back

125 QQ 290-291 Back

126 Q 135 Back

127 Q 184 Back

128 European Union Committee, 4th Report of Session 2004-05: Liberalising Rail Freight Movement in the EU (HL Paper 52) Back

129 Q 288 Back

130 Network Rail Back

131 DB Schenker, Eurostar, Deutsche Bahn, Professor Vickerman and the RFG Back

132 Q 307 Back

133 Q 77 and Q 79 Back

134 Q 121 and Q 123 Back