Railway (De-)Regulation – A European Comparison

Guido Friebel, Marc Ivaldi, Catherine Vibes

November 2003Railroad Conference, Toulouse

Subject of the study Intensive reform discussion: how to increase

European railroad efficiency? Three types of reforms (Directive 91/440):

Separation infrastructure/operations Independent regulatory body Third-party access

Large variation across time and countries in adopting these reforms

Main question: What does the experience in EU countries teach us about the effect of reforms on railway efficiency?

Approach Production function Measure of efficiency: closeness of a given railway firm to

“production frontier”? Efficiency = residual that is not explained by:

Technological elements Reforms in the law book

For instance: quality of management, implementation of reforms...

Our specific interest: what is the impact of reforms on productivity trends?

Approach allows to look at Effects of reforms Efficiency of railways: over time and across countries

Main results Reforms increase output More reforms are not necessarily better

than less reforms It depends on sequencing:

packages of reforms are neutral or even bad sequential reforms improve efficiency

More favorable efficiency development for smaller countries than for larger countries,

except for Sweden and Germany.

Data Worldbank: information about physical

inputs and outputs Inputs: route kilometers, staff Outputs: total kilometers (freight and

passenger), passenger kilometers Reforms: date of adoption of three reforms:

Separation Regulatory institution Third-party access

Data strengths and weaknessesStrengths: Physical data: most comprehensive data set

available Institutional data: variation over time and

across countriesWeaknesses: Lacking data of UK during reform period:

clearer (better) results without UK Institutional data:

Problem of compatibility across countries Very different types of reform implementation

Deregulation events, three main aspects

separation infra-structure, operations

third party access

independent regulatory entity

Austria 1997 1995 Belgium 1998 Denmark 1997 1999 Finland 1995 1999 France 1997 1997 Germany 1994 1994 Italy 1998 1999 The Netherlands 1995 1995 Portugal 1997 1997 Spain 1996 1995 Sweden 1988 1989 United Kingdom 1993 1993 1993

The model Cobb-Douglas production function

After log-linearization

Country fixed effects and time trend

y=output, K=Capital, L=Labor OLS Estimation, robustness check: LISREL

LK LAKy

LKAy LK lnlnln

0( )it i it itA Deregulation t

Result 1: Reforms increase productivity

Variables Parameter estimate t-value Intercept -1.327*** -4.92 Logarithm (Capital) 0.526*** 9.77 Logarithm (Labor) 0.737*** 15.53 Deregulation Productivity trend 0.004* 1.76 Productivity trend Austria 0.009** 2.03 Productivity trend Belgium 0.020*** 4.40 Productivity trend Denmark 0.038*** 7.75 Productivity trend Finland -0.002 -0.39 Productivity trend France 0.049*** 9.62 Productivity trend Germany 0.024*** 4.42 Productivity trend Italy 0.050*** 11.57 Productivity trend The Netherlands 0.081*** 16.47 Productivity trend Portugal 0.032*** 6.28 Productivity trend Spain 0.039*** 7.15 Productivity trend Sweden 0.026*** 3.85 Productivity trend United Kingdom - -

Distinguishing reforms Result 1 does not take into account:

Intensity of reforms Type of reform

Regression on quantity of reforms only: more than one reform does not improve efficiency

Distinguish sequencing of reforms: Partial Sequential Package

Result 2: Sequencing matters

Variables Parameter estimate t-value Intercept -1.133*** -4.23 Logarithm (Capital) 0.518*** 9.53 Logarithm (Labor) 0.711*** 14.93 DeregulationPartial Productivity trend 0.008* 1.59 DeregulationSequential Productivity trend 0.011** 3.05 DeregulationPackage Productivity trend -0.005 -1.28 Productivity trend Austria 0.004 0.89 Productivity trend Belgium 0.018*** 3.63 Productivity trend Denmark 0.035*** 6.98 Productivity trend Finland -0.009 -1.48 Productivity trend France 0.054*** 10.15 Productivity trend Germany 0.031*** 5.31 Productivity trend Italy 0.049*** 11.04 Productivity trend The Netherlands 0.085*** 16.98 Productivity trend Portugal 0.035*** 6.87 Productivity trend Spain 0.034*** 5.80 Productivity trend Sweden 0.017** 2.25

Efficiency measure

Global efficiency:

Passenger traffic efficiency:

))max(exp(/

)max(lnln

lnln

*

*

iiiii

iii

iii

uuyyE

uxy

uxy

exp[( max( )) (ln max(ln )]i i i i iPE tonkm tonkm

Efficiency development over time, total traffic, larger countries

Larger countries

0.2

0.4

0.6

0.8

1

1.2

Periods

Eff

icie

ncy

Lev

els

France Germany Italy Spain Sw eden

Efficiency development over time, total traffic, smaller countries

Smaller countries

0.2

0.4

0.6

0.8

1

1.2

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Periods

Eff

icie

ncy

Lev

els

Austria Belgium Denmark Finland Netherlands Portugal

Efficiency development over time, passenger traffic, larger countries

Larger countries

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

Periods

Eff

icie

ncy

Lev

els

France Germany Italy Spain Sw eden

Efficiency development over time, passenger traffic, smaller countries

Smaller countries

0.2

0.4

0.6

0.8

1

1.2

Periods

Eff

icie

ncy

Lev

els

Austria Belgium Denmark Finland Netherlands Portugal

Relative efficiency among larger countries, five-year periods, total traffic

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1980-1984 1985-1989 1990-1994 1995-2000

Periods

Eff

icie

ncy

Lev

els

France

Germany

Italy

Spain

Sweden

Relative efficiency, larger countries, five-year periods, passenger traffic

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1980-1984 1985-1989 1990-1994 1995-2000

Periods

Eff

icie

ncy

Lev

els France

Germany

Italy

Spain

Sw eden

Summary and implications First detailed test of effect of reforms on

railroad efficiency Reforms help increase efficiency More reforms are not necessarily better:

sequencing seems to matter Additional result: Institutional/full

separation of infrastructure do not score better than organizational reforms (when including UK)

Much need to dig deeper into differences in implementation

Backup slides

The mean-and-covariance structure analysis: the LISREL model

z

B

Advantage of the method: it allows to solve the potential problem of correlations between input quantities and individual effects.

The theoretical model:

η= latent variablesz=observed variablesEstimation of the model entails choosing values for the parameters so that the predicted covariance matrix fits the empirical one.

Efficiency comparison, total traffic

a) Smaller countries

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Periods

Eff

icie

nc

y le

ve

l

Austria Belgium

Denmark Finland Netherlands Portugal

Efficiency comparison, total trafficb) Larger countries

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Periods

Eff

icie

nc

y le

ve

l

France Germany Italy Spain Sweden

Intensity of reforms

Variables Parameter estimate t-value Intercept -1.328*** -4.94 Logarithm (Capital) 0.510*** 9.49 Logarithm (Labor) 0.750*** 15.86 DeregulationOneAspect Productivity trend 0.008** 2.35 DeregulationTwoAspect Productivity trend 0.002 0.83 Productivity trend Austria 0.01** 2.11 Productivity trend Belgium 0.019*** 4.00 Productivity trend Denmark 0.036*** 7.48 Productivity trend Finland -0.002 -0.34 Productivity trend France 0.051*** 9.81 Productivity trend Germany 0.025*** 4.50 Productivity trend Italy 0.051*** 11.75 Productivity trend The Netherlands 0.082*** 16.73 Productivity trend Portugal 0.033*** 6.58 Productivity trend Spain 0.040*** 7.46 Productivity trend Sweden 0.029*** 4.25

Separation of infrastructure from operations

Organisational Institutional or Full Austria From 1997

Belgium From 1998

Denmark From 1997

Finland From 1995

France From 1997

Germany 1994-1998

Italy From 1998

The Netherlands From 1995

Portugal From 1997

Spain From 1996

Sweden From 1988

United Kingdom From 1993