Competition on the French passenger’s railroad market
Written by Leo CAPPUCCIA
The French rail sector is regularly the target of criticism: prices are increasing, and delays are sometimes important. Thus, the modal share of rail in domestic passenger transport has stagnated for several years. In the meantime, transport represented 30% of the domestic greenhouse emissions in 2021. In order to reduce these emissions and to improve social fairness, developing the rail’s sector is an important stake. A solution, adopted in other European countries decades ago, is to liberalise the sector. How is this policy being implemented in France? What are the motivations behind this proposition? What are the current issues?
The liberalisation of France's railways generates considerable interest throughout Europe
The train policy is harmonised at the European level thanks to the four “Railway packages” adopted between 2001 and 2016. The Commission aims to create a unified railroad network with an increased interoperability between national networks and with free access and competition. The last adopted package aims to end national monopolies on domestic passenger railroads by opening them to competition.
“This competition is guaranteed by two mechanisms: open-access and public conventions”
between operators and national organising authorities. The first solution is mainly used for long distance connections, and the second for regional trains (TER and Intercités in France) or unprofitable lines. Thus, we can differentiate two types of competition here: competition in the market (open access) and competition for the obtention of the market (which is then exploited in monopoly through conventions). This framework has been implemented in France between 2020 and 2023.
The French railroad sector is thus challenged by this new framework, with a lot of reorganisation needed to ensure a total independence between the network manager and the transport operators. Hence, in 2020, the national operator SNCF has been reorganised into distinct operators: SNCF Voyageurs (transport operator) and SNCF Réseau (network operator). However, these entities are not totally separated as they belong to the same group, SNCF, owned by the state.
Moreover, the French railroad network attracts much interest due to its geographical position, at the centre of Europe, connecting major touristic areas on the Mediterranean coast (French Riviera, Spain, Italy) with the north of Europe. With more than 28.000 kilometres, it is the second most important network in Europe, with an important proportion of high-speed railways. In recent years, many operators have manifested their will to enter this market, such as TrainItalia which connects Paris to Milan through Lyon for example, or Renfe (Spain) connecting Marseille to Madrid, but also Le Train or Transdev (Marseille-Nice). The potential demand to be served is important, especially on roads connecting metropolises or for connections no longer maintained by the historical operator (like night trains).
The expected benefits from competition in railroad industry
Many positive effects are expected from this liberalisation. First, transitioning from monopoly to a competitive market should lead to a decrease in prices.
“ “For example, the entry of NTV against TrainItalia on the Milan-Rome line in 2012, led to a decrease of average price of 31%.”.
Moreover, this competition encouraged the historical operator to modernise its trains, which improved quality, and to create different classes to better fit consumers’ needs. For lines with government procurement, the German and Swedish cases show that competition led to a decrease in costs of 20 to 30%, leading either to a decrease in public subsidies or to cheaper fares.
However, some recent studies contested this negative effect of competition on prices in the railroad sector. The study of Laroch et. al (2022), cited in many newspapers, demonstrated in their model that the HHI (market concentration index) was not a significant explanatory variable for price. But they did not consider the possible issue of reverse causality between HHI and price, so their conclusions could be put into perspective. In addition, some doubt that in France train fares could be lower, as they are among the lowest in the continent.
Another expected positive effect is the increase in offer and number of passengers (Laroch et al.). For example, the number of trains increased between 2010 and 2019 in Sweden by 16% when it decreased in France by 4%. In Italy, the entry of NTV led to an increase in the number of trains by 45% on the Turin-Milan-Rome-Napoli axis. Moreover, the demand has also been positively impacted. The comparison between France and other countries shows that between 2010 and 2019, the number of passengers increased only by 9% in France, compared to 20-30% in countries where competition existed. This increase in demand can then be profitable to the historical operator, contrary to the claim of detractors.
At the same time, in liberalised markets, the share of trains in domestic passengers’ transportation increased faster than the mean of European countries, which shows that this policy can help reduce emissions of passengers’ transportation.
However, it is sometimes difficult to see if the effects discussed before are due to the liberalisation directly or to the public investments realised to prepare for it (Malay et. al, 2019). Indeed, this process has largely induced an increase in public expenditures for rail (i.e. in the UK, Sweden or Germany). These expenditures are linked to the separation of the network operator, of which the state often assumes the debt. For example, the French government announced in 2018 that it will handle 35 billion euros of the debt of SNCF Réseau. They can also be linked to the modernization of the infrastructure to allow competition (interoperability, security…). For example, the Swedish government has introduced five major infrastructure modernization plans between 1991 and 2010. Therefore, it is hard to see if the increase in frequency and in train’s modal share are explained by the liberalisation or by the investments in infrastructures. In the same way, some cost reductions (i.e toll charges) could be partly explained by the debt reduction of the network operator.
An initiative that faces many obstacles
Opening the railroad market to competition is a long and costly process. Since 2020, only a few competitors entered the market, and they are mainly present on the densest lines (i.e. Paris-Lyon) and in international lines. Some operators started exploiting lines after winning government procurement against the historical operator, such as Transdev for Marseille-Nice.
This low number of competitors seems to be linked to the difficulty in entering such a capital-intensive and regulated market. Yet some obstacles are specific to the French market where the historical operator still owns many key equipment and infrastructures (i.e. maintenance facilities) but also has privileged relations with public institutions.
A first difficulty is that the signalling and communications infrastructures are not prepared to be compatible with other European companies’ trains. The 2022 ART’s (French transport authority) report pointed out that only 4% of the lines are equipped with the ECTS (European Train Control System). Therefore, companies entering the French railroads must lease the required communication equipment to their competitor, the SNCF, to be able to transit by France, as it is no longer produced. Many complaints came from the high rental cost which impacts the operating costs and thus the competitiveness of the entrants. Fortunately, this situation should end as Alstom is planning to resume production of this equipment.
Another issue is the difficulty to acquire new trains, with full order books of industrials and few used trains available. Hence, new companies (i.e Le Train) will have difficulties to efficiently begin their activity for years to come. Moreover, some argue that the SNCF is willingly destroying many of their used trains rather than selling them to new entrants.
Entry could also be negatively affected by the remaining proximity between the network operator and SNCF Voyageurs. For example, the attribution of transit slots is a long and complex process that operators need to complete before entering, in coordination with SNCF Réseaux. However, the proximity between the two SNCF’s entities eases their negotiations, compared to new operators that need time to learn and to create a good relationship with the network operator. Another example is that these two SNCF’s entities are still financially linked. In fact, some of the dividends paid by SNCF Voyageurs to the parent company (SNCF) can be thus redistributed to SNCF Réseaux. This could encourage the network operator to favour the historical operator.
Finally, on subsidised lines (competition for the market), local authorities need time to learn this new process and to train the specialised manpower to conduct them.
These difficulties (among others) could explain the delay between the opening to competition and its actual implementation. Some new companies have already given up the fight, such as Railcoop which has been put into receivership in 2024. Others have had to delay their entry such as Le Train.
Conclusion
French consumers are still waiting for competition’s virtuous effects. The SNCF’s monopoly is still strong with about 99% of market shares on passengers’ transportation. Only a few competitors have tried to enter, with some of them already out of the game. Competition does not miraculously resolve all the difficulties of the French rail sector, or more generally, of the transportation sector, but it could be a tool in its improvement. This process will be long, and for some parties, difficult. Negotiations and reorganisations are still running, but one could think that this reform will be profitable to the society in the long run.
More Articles
The practical application, potential effectiveness and limits of the Digital Markets Act
By: Besseghir Yassine
On the 1st of November 2022 the Digital Market Act entered into force and become applicable on 2 May 2023. As it is stated on the European Commission webpage, “The Digital Markets Act is the EU’s law to make the markets in the digital sector fairer and more contestable”....
At a Crossroads: Europe's Weaknesses and Future in the Draghi Report
By: Du Breil Lucie
On September 9th, Mario Draghi, former president of the European Central Bank, derived its findings about the economic future of “The Old Continent”, like a ticking bomb. It presents a sharp analysis of Europe’s economic competitiveness, highlighting the strengths and the incoming challenges ...
Mental and intellectual disabilities on the labor market
By: Desbabel Chloé and Doville Léopold
The 28th European Week for the Employment of People with Disabilities will take place from November 18 to 24, 2024. Between 20% and 30% of people across Europe report having some form of disability that impacts their daily activities...
The Fed’s Finest Hour
By: E.Flandin, V.Belleux and P.Rossignol
The central bank, often unknown to the general public, plays a crucial role in regulating and stabilizing the economy of a country, or a continent. Its main objectives are to regulate inflation and help the economy operate “smoothly” using various levers.These tools can be used for economic stimulus, such as setting key interest rates, which determine lending conditions for banks...
Why Are Monopolies Hard to Dismantle in the United States?
By: Echerfaoui Laila
This year, Professor Michael D.Whinston was awarded the Jean-Jacques Laffont Prize for his significant work on antitrust laws and his involvement in the Google monopoly case. After going through his main publications, news reports about him, and videos on the Google case, I started wondering: why are monopolies so hard to dismantle in the U.S. ...