How is Finland going to proceed with the privatization of its railways?

train-station-374426_640The Finnish government has just announced that it will proceed with the privatization of the railways, and a train conductors’ strike takes place Monday and Tuesday. Without going into the usual Sipilä’s bashing, we try in this article to explain why Finland needs to change its present system, how it could be done, and what may be the consequences.

Why this privatization?

It comes from a decision taken in the EU, which was approved by Finland. As well as encouraging greater competition within national markets, EU legislation gives rail operators the ability to run services in and between other EU countries, opening up cross-border competition. Rail freight transport has been completely liberalized in the EU since the start of 2007, for both national and international services. This means that any licensed EU railway company with the necessary safety certification can apply for capacity and offer national and international freight services by rail throughout the EU.

The liberalization of passenger rail services within the European Union has developed much more slowly than for freight. As set up by Directive 2012/34/EU   recasting something called the First Railway Package, open access for passenger services is only required today for international services. An agreement on further liberalization  now appears to have been reached, but it will still be 2020 before open access for commercial services is required, and 2023 for competitive tendering in the case of public service contracts.

So, even if the present government is pushing for the liberalization of Finland’s internal railways, there is no need to rush into it. There are some doubts that the Finns Party (Perussuomalaiset) will agree on a rapid reform, but the government will have the support of the ghost party called New Alternative, which is a group of Ministers and members of Parliament who separated from the Finns Party in June to save Sipilä’s government and their ministerial positions. So they may try to proceed in their usual unprepared way.

How could the privatization be done?

Even with the EU decisions, it will be possible to restrict open access to protect the financial position of services operated under public service contracts. It will also be possible to make direct awards of public service contracts, subject to the monitoring of performance by an independent body to ensure that direct award is appropriate. That explains why there are different models which have emerged in different EU countries.

According to a recent report from the CERRE (Centre on Regulation in Europe), passenger rail services may be liberalized in two ways. The first is by means of competitive
tendering for public service contracts. The second is by open access for the operation of
commercial services, which means total liberalization.

The countries which have taken the first approach furthest are Britain, Sweden and Germany.

Britain has adopted franchising by means of competitive tender for almost all passenger services, subsidized and commercial; state-owned British Rail was not allowed to bid and ceased to exist as a train operator.

Sweden has adopted it for virtually all subsidized services; most are procured by the regions, and 45% of all services in Sweden are now operated by new entrants.

In Germany, the federal states are responsible for procuring all subsidized services; there is a trend towards competitive tendering and 18% of regional services are operated by new entrants. It is a slow process.

All three countries have at least some commercial open access operation, but the country that has taken this furthest is Italy, where a new entrant provides frequent services in competition with the state-owned operator on the high-speed network. By contrast, France has no competitive tendering or open access competition (except on a couple of international routes).

What are the consequences?

In all three countries – Sweden, Germany and Britain – there has been rapid growth in demand for regional services, and subsidy per train km has generally fallen. By contrast in France, with no competition and a system which looks like the Finnish one, it has risen substantially. Whilst in Germany and Sweden costs have been reduced, in Britain train operating costs have actually risen. So the public franchise model, where the regions are making the tenders and chose the contractors, seems to be the best system, and the countries where the state-owned company operation the trains before the reform stayed as the main operator seem to have the best results. If Finland chooses this system, it would be a relative liberalization, and not a revolution.

However, the privatization does not go without hiccups. In the UK, there were major problems with the trains, including a number of accidents and dissatisfaction with the costs for the passengers, and the government and the regions are now obliged to inject a lot more of public money in the system than what they expected. In Scotland, there is even a push for the re-nationalization of the railway system.

In Sweden, there were also some accidents, obliging the government to add more money in the budget to maintain the infrastructures. In addition, in 2014, there was a strike among the train staff, because of the zero-hours contracts imposed by one private company: in Sweden, private operators are not obliged to hire the staff operating the public services and to keep their contracts, but they were able to hire their own staff, which had led to some abuse and may explain the strike in Finland on Monday. IN Germany and UK, the staff and the contracts had to be kept by the private operator. This could be a wise solution for a smooth transition.

The question for Finland is to make a choice between these different options. Everywhere, it has meant long and serious negotiations to arrive to the best solution for the country. In Finland, the government, as usual for Sipilä’s team,  announced that it will pass a law, without taking the time for at least a serious consultation and a debate with all stakeholders. This led to Monday-Tuesday warning strike. It is contrary to the Finnish tradition where you take the time to discuss, and then you decide…


Categories: Economy, Government, Uncategorized

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