Publicly-owned operators can also challenge incumbents. New cases of open-access passenger rail competition in Poland

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Publicly-owned operators can also challenge incumbents. New cases of open-access passenger rail competition in Poland �l a, *, Jakub Taczanowski b, Stefan Jarecki c, Arkadiusz Koło�s b Marcin Kro a b c

Warsaw School of Economics, al. Niepodległo�sci 162, 02-554, Warsaw, Poland Institute of Geography and Spatial Management, Jagiellonian University in Cracow, ul. Gronostajowa 7, 30-387, Cracow, Poland Warsaw School of Information Technology, ul. Newelska 6, 01-447, Warsaw, Poland

A R T I C L E I N F O

A B S T R A C T

JEL classification: L11 L51 L92

Open-access passenger rail competition in Europe has mostly resulted from activities of the ‘new’, ‘agile’, ‘private’ entrants to the market. However, the existing operators can themselves take advantage of market opening opportunities. In this paper we identify and analyse eleven new minor current examples of long-distance open-access competition in Poland. Compared to the previously described short-lived (2009–2015) experience of an extensive and fierce market ri­ valry in the country (the Interregio case), the profile of these entries is very low and incumbent’s reactions very moderate. We show that the limited scale of post-Interregio competition may partly result from regulatory routine. One interesting feature of the researched evidence is that almost all entries to the long-distance commercial market in Poland (including the Interregio case) were made from another market segment (regional public services). Interestingly, by publicly-owned operators. The relatively high number of such entries shows that expansion towards new mar­ kets can be a possible line of growth also for publicly-owned railway businesses. Our discussion includes some implications for pro-competitive regulation.

Keywords: Railways Open-access competition On-track competition Long-distance passenger services Asymmetric regulation Public services

1. Introduction The objective of this paper is to identify and analyse the examples of open-access long-distance passenger rail competition in Poland that have not been presented so far. In the rail passenger services, open access refers to situation where there is competition in the market. Compared with the alternative of competition for the market (through competitive tendering), open access is usually seen as a way of introducing competitive pressures on profitable (i.e. mostly long-distance) rail routes through a direct, ‘on track’ competition among operators. Competition in the market is an important element of the forthcoming ‘true’ internal market for rail services in the EU (European Commission, 2011). ‘True’ means, among other things, the full opening up to competition of the passenger domestic rail markets across the EU. Access to these markets is to be ensured to potential new entrants by the 4th railway package starting from December 2020 (Agreement, 2016). Fortunately, as several European countries have pre-empted the 4th railway package by allowing open access on profitable routes (Wheat et al., 2018), a lot of experience about how competition in the market can work in the rail passenger business has already been gathered. This is beneficial because analysis of various cases determines how confident we, re­ searchers, can be in making recommendations to policy-makers for specific solutions. However, we are still at the experience-gathering stage where the research into new cases is particularly important to extend the body of knowledge. Having this in mind, we present in * Corresponding author. E-mail address: [email protected] (M. Kr� ol). https://doi.org/10.1016/j.jrtpm.2019.100150 Received 10 February 2019; Received in revised form 30 May 2019; Accepted 4 October 2019 2210-9706/© 2019 Elsevier Ltd. All rights reserved.

Please cite this article as: Marcin https://doi.org/10.1016/j.jrtpm.2019.100150

Król,

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this paper the experience from Poland. The most distinctive open access case from Poland – a full-scale long-distance competition that existed there following an extensive �l et al. (2018). In this paper we entry of services branded under the name of Interregio (2009–2015) – has already been presented by Kro extend the scope to include the variety of remaining minor cases of on-track passenger rail competition that have occurred in this country since 2005. We have identified and analysed 11 of them. We believe that our results may be of interest to those who do research on open access. The majority of entries to the long-distance passenger services in Poland have been made not by the ‘new’, ‘agile’, ‘private’ openaccess operators, but by the state-owned enterprises (SOEs) already operating in a different segment of the passenger rail market, that is in regional services subject to public service obligation (PSO). The relatively high number of such entries shows that even by this type of operators the expansion towards commercial services may by perceived as a possible line of growth of their railway businesses. This is interesting not only in the context of co-existence of for and in the market competition. Also, this shows that when competition is being introduced to the already existing railway systems (as it is in the EU), the ‘old’ operators are not necessarily bound to play their old boring role of incumbents. Their market initiatives can target new markets. On the eve of opening domestic passenger rail markets to competition, this observation seems to have implications for regulatory policy in the EU. ‘On-track competition’ does not have to result exclusively from the activities of the ‘new’ open-access operators. And if so, asymmetric regulation in favour of ‘new’ operators that is increasingly considered by national regulatory authorities as a prospect pro-competitive tool (Montero, 2019) may sometimes rather distort than reinforce competition. Market entries that we have analysed are relatively numerous, but – as a rule – low scale. Poland is one of the countries that have pre-empted the 4th railway package. Ironically, however, the only example of a full-scale market entry in this country (i.e. Interregio) occurred before the new, intentionally pro-competitive regulations were implemented there. This may be not a pure coincidence. In fact, in Poland, there have been one or two attempts since then to make a full-scale challenge to the incumbent. However, challengers have been denied open access by the regulatory body on the grounds that their commercial services would pose a threat to the economic equilibrium of the incumbent’s PSO services. We show in the relevant section that these decisions were controversial and that the new legislation has been possibly used to legitimize protectionist practices in Poland – that is to hamper competition rather than to encourage it. This again seems to have implications for pro-competitive regulation of passenger railway transport in the EU – as protectionist routines of this kind may be reproduced elsewhere. The paper is organised as follows. In Section 2 we review the relevant literature. After a concise description of how passenger rail services are organised in Poland (Section 3), the methodology and sample are presented in Section 4. In Section 5 we present the results of our study, that is the market evidence from Poland and the regulatory routine which may has influenced the pattern of competition in the country. Section 6 provides a discussion and conclusions. 2. Literature review While the literature on passenger rail liberalisation in the EU is generally rich, the issue of open access has been analysed much less frequently. The reason for this is that competition in the market is still not very widespread. Interestingly, the countries usually treated as liberalisation forerunners, i.e. Great Britain, Sweden and Germany, are characterised by rather low scale of open access which is €idh and Bystro €m, 2013; Nash et al., 2013; Fro €idh and Nelldal, 2015; Vigren, 2017; Preston, 2018). mostly limited to market niches (Fro The nations which are most advanced in terms of open access are Italy and the Czech Republic followed by Austria and Slovakia (Tome�s et al., 2016; Nash et al., 2019). In particular, the former two countries provide interesting examples of quite large-scale open-access competition. Italy is known to be the first and only country where on-track competition on high-speed lines has been present so far (Bergantino et al., 2015; Beria et al., 2016; Beria and Bertolin, 2019). The Czech Republic, in turn, stands out as wit­ nessing as many as three operators vigorously competing on the same railway line (Tome�s et al., 2014; Tome�s et al., 2016). Austria and Slovakia do not deliver such unusual evidence but still provide good examples of an intense open-access competition on the country’s most important trunk line (Tome�s and Jandov� a, 2018). The Slovak case is interesting also from a different point of view – the chal­ lenger was defeated there by the incumbent on the country’s backbone line (Kvizda and Solni�cka, 2019). �l Since extensive reviews of open-access competition literature have been recently presented by i.a. Feuerstein et al. (2018), Kro � (2018), we further focus on issues that seem particularly relevant in the context of our research. et al. (2018) and Tome�s and Jandova Despite a number of differences in the character of open-access competition in passenger rail markets between several European countries, some features seem to be quite similar in all cases that have been analysed so far. First off, all open-access entries known from the literature have been made by the operators that have been set up in order to compete with an incumbent. This is the case of Italian NTV, Czech Regio Jet and Leo Express or Austrian Westbahn (Bergantino et al., 2015; Casullo, 2016; Tome�s et al., 2016).1 Another similarity is the scale of entries of these new operators. The observed cases are mainly low-scale entries. Although – as said – Italy, the Czech Republic, Austria and Slovakia have witnessed a full-scale entry on the most important railway connection in the country, even there open access is limited to one or a few main lines at most. In fact, ’in each country, new competitors tend to focus on the busiest routes, which are usually the lines with the best infrastructure and achieving the highest speeds’ (Finger et al., 2016, p. 6). Consequently, the opinion of Perennes (2017, p. 358) that ’wide-scale entries with brand new rolling stock are extremely uncommon’ is generally still valid. Nash (2008) identified reasons for that in the lack of profitability of many passenger services and the advantages

1

The only exception that has been described so far is to our knowledge Polish Interregio (Kr� ol et al., 2018). 2

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that characterise large network operators. In any case it is not very easy to enter European passenger rail markets. The possibility of entering these markets should not be limited by the interests of incumbents or infrastructure managers. One of the tools that are utilised in order to achieve this is infra­ structure unbundling. However, as Bergantino (2015, p. 175) states, the fact that many European incumbent operators are still publicly owned gives them ’considerable power to limit the introduction of tenders, or to raise barriers of entry for potential competitors’. Indeed, the incumbents often take advantage of their strong position and act against liberalisation; and what is more, national gov­ ernments permit this behaviour (Beria et al., 2012). There are many examples of anticompetitive behaviour of incumbents, including from such liberal markets as Swedish. According to Finger and Rosa (2012), the national operator in this country refused to coordinate ticketing with other operators and provided lower quality connections with services by another operator. In fact, as Finger and Messulam (2015, p. 6) claim, ’there is no limitation to the strategic behaviour of the various operators’. It seems that one of possible ways to facilitate market entries could be asymmetric regulation. On rail passenger markets this could mean that the competitors whose position is weaker (usually newcomers) could enjoy the easier business conditions (e.g. lower access charges) and that the stronger competitors (usually incumbents) would have to provide access to some of their assets like ticketing systems or even rolling stock (Montero, 2019). According to Montero (2019, p. 185) ’asymmetric regulation is being called by newcomers, and increasingly considered by national regulatory authorities, as the tool to incentivize market entry and a more vigorous on-track competition’. 2.1. Literature on passenger rail liberalisation in Poland Passenger rail liberalisation in Poland have been discussed less frequently than in other European countries. This applies in particular to open-access competition, although and interesting – and unusual – example of it existed in the country in 2009–2015 �l et al., 2018). The ambiguous effects of the Polish rail liberalisation have been analysed by Taylor (2018) and Taylor and Cie­ (Kro � ski (2006) who describe the results of reforms as moderate. They highlight a very low privatization rate of companies set up by chan splitting the national railway company PKP and criticise the unusual fact that in Poland the regional governments have become not only the organisers of public rail transport but also the owners of railway operators. Mę_zyk (2012) is of a very similar opinion when she states that the institutional solutions in Poland have served rather to limit than to support competition. In fact, the regulation of the Polish railway market has often been criticised. Many authors argue that a serious threat to the pro-competitive regulation of the railway transport in Poland is the insufficient level of independence of the regulatory body (Kr� ol, 2010; Gola, 2014; Pawłuszko, 2014; Rokita, 2015). Some of them notice that open-access decisions issued by the regulatory body are not well documented (Kra�sniewski, 2017). Jarecki (2017) writes that national authorities classify as public services the connections that could be easily provided on purely commercial terms. All these demonstrates that the conditions for open-access competition are not particularly favourable in Poland. 3. Organisation of passenger railway services in Poland The general regulatory framework for the Polish rail sector was set up in the Railway Transport Act of 28 March 2003 which since then has been amended several times in order to adjust Polish transport law to EU regulations (railway packages). At the central level there are two public authorities responsible for railway transport: Ministry of Transport and the Office of Rail Transport (UTK). The ministry deals with the general policy in the railway sector and with the provision of passenger rail services at national and inter­ national levels, whereas UTK is a regulatory and technical supervision body. In Poland, like in other EU countries, most of national rail passenger services are provided under public service contracts awarded by public authorities (referred to as ‘organisers’ in Polish law) and financed by them. Poland has three levels of transport authorities responsible for public rail services: � Ministry of transport, responsible for the provision of long-distance services; � regional governments (heads of 16 Polish regions), responsible for the provision of regional services; � municipalities, responsible for local commuter services.2 An important issue is the fact that regions may conclude interregional administrative agreements. On the basis of such agreements several regions may award together public service on long distance routes (passing through the territory of the regions which have concluded the agreement). Under Polish law public service contracts between transport authorities and operators may be concluded on the basis of direct award or through a competitive tender in line with the provision of Polish and EU rules on public procurement. In practice the former has been usually used. The present structure of Polish rail industry is the result of the vertical and horizontal divestiture of the formerly monopolistic PKP (Polskie Koleje Pa� nstwowe, ‘Polish State Railways’) that was carried out in 2001. In the aftermath of this decision the manager of the country’s railway infrastructure – the company PKP PLK (PKP Polskie Linie Kolejowe, ‘PKP Polish Railway Lines’) – was set up and several operator companies started their activity. Among passenger operators, the two main have been since then PKP Intercity and PKP Przewozy Regionalne, (PKP ‘Regional Services’). Whereas the former was initially stated to operate exclusively commercial longdistance express trains, the task of the latter was to be responsible for subsidised services, including regional connections and a 2 In practice, the number of cases in this category is very limited and the only important rail transport organiser at this level are municipalities in the Warsaw urban area, responsible for metropolitan rail service on their territory.

3

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budget category of long-distance trains, called ’fast trains’. However, this model did not persist for a long time. Already in 2008 all ’fast trains’ were transferred to PKP Intercity (which had launched itself some similar services three years before), whereas PKP Przewozy Regionalne was devolved to the authorities of 16 regions. Since then the company – now called just Przewozy Regionalne (PR) – has been �l et al., 2018). supposed to function as an operator active solely in regional services (Kro However, a different scenario was executed. While reforming the railway industry, the national government neglected several issues, one of the most important being a very problematic financial situation of PR. High debts, lack of investments and decreasing number of passengers were all among the most urgent challenges for the company. In order to improve this poor financial situation, in 2009 the managers of PR decided to enter a lucrative long-distance market launching a new category of cheap trains called Interregio. Persisting financial problems of PR, accompanied by difficult relations between its managers and the heads of regions, as well as the lack of any clear vision for the future of regional rail transport on the side of the national government had also a different consequence. These issues have induced some regional governments to set up their own local passenger rail operators. So far it has happened in the � (i.e. regions of Warsaw (i.e. in Mazovia), Cracow (i.e. in Małopolska), Wrocław (i.e. in Lower Silesia), Katowice (i.e. in Silesia), Poznan �d�z (i.e. in Ło �dzkie), where (accordingly) the following operators have been set up: Koleje Mazowieckie, Koleje in Wielkopolska) and Ło � Małopolskie, Koleje Sląskie, Koleje Dolno�sląskie, Koleje Wielkopolskie and Ł� odzka Kolej Aglomeracyjna. In some regions (Mazovia and Silesia) these in-house operators are responsible for the entire regional service, whereas in others only some selected lines are operated by them. The only important rail passenger operator that is independent from any public authorities (national or regional) in Poland is Arriva, that won tenders for operating some regional lines in the northern part of Poland. Arriva’s market share in the Polish regional passenger railway market is currently under 1%. As in other European countries, apart from provision of public services, railway undertakings may also obtain the track access right in order to provide commercial services (services provided at the operator’s own risk without public subsidies). The European Commission (EC) has noted that Poland opened its domestic commercial passenger transport market to competition before liberali­ sation of this market at the EU level (European Commission, 2013). Before 2016 any railway undertakings interested in the provision of commercial passenger rail services were granted track access rights without any legal constraints. The access to the railway network was open to all users on a non-discriminatory basis. Obviously, this could pose a threat to the economic equilibrium of public services – as the new commercial services could have a negative impact on the revenues generated from the rail passenger services provided under public service contracts. This is the reason why already in 2011 the government decided to establish mechanism of protection of public services in the Polish law (Jarecki, 2013). However, due to the long transition period, the mechanism was not effectively used until 2016. According to the Railway Transport Act, if a railway undertaking aims at running commercial trains on the Polish railway network, it has to get permission from UTK. In line with the first version of the mechanism, UTK could refuse to issue positive decision con­ cerning the open access to the rail infrastructure when the new commercial services might result in: � an increase in the level of public service compensation paid by the public authorities to the operator by more than 10% in relation to level established in the public service contract or � disturbance to the regularity of passenger transport (in respect to the intensity of traffic on a given line and to the needs of travellers). The risk assessment criteria for the economic equilibrium of public services laid down in the Polish law have recently been changed. The new provisions were adopted in November 2016. According to the new criteria, the economic equilibrium of public services should be considered as compromised when new proposed services have – to quote the obscure legal jargon that has been used – ‘a different impact than irrelevant negative effect’3 on the revenues generated from public services. The new criteria are strongly criticised for being confusing and giving the regulatory body too much discretion. 4. Methodology and sample Methodologically speaking, this paper is an empirical study based on primary data that we have collected specifically for this research. The study is exploratory and interpretative. In the first stage, we identified all cases of co-occurrence of two passenger operators on the same long-distance railway connection in Poland. The phenomena have taken place from 2005 to present. The characteristics of this sample is described below in Section 4.1. �l et al. (2018) as well as the examples of Then we excluded from further analysis all phenomena that have been analysed by Kro co-occurrence of two operators sharing the same track infrastructure which could not be qualified as competition. The remaining eleven phenomena from the sample – i.e. the newly-analysed examples of open-access passenger rail competition in Poland – have been subject to further analysis in the paper. For the purpose of analysis, two databases have been prepared. The database on market phenomena contains microanalytical data obtained through the analysis of timetables, tariffs, operators’ websites and other sources of primary information (including press articles and press releases). The data include the number of trains operated by different operators, their frequency, travel time, ticket prices and travel comfort on all connections on which more than one operator is present. The data about the number of trains,

3

Railway Transport Act of 28 March 2003, Article 29c (4), Dz. U. [Journal of Laws] of 2019, item 710, as amended. 4

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frequency and travel time come from railway timetables. The information about ticket prices was mostly obtained from official tariffs of the operators but sometimes other sources – mainly press articles – turned out to be necessary. The data about travel comfort (that we related to the type of rolling stock used and its features), hard to find in the official rail timetables, were mostly derived from webpages of railway enthusiasts and press articles. We have also prepared the database of all 55 open-access decisions that have been issued so far by the regulatory body in Poland. All decisions in the sample relate to the period 2016–2019. 4.1. Identified examples of open-access competition and on-track co-occurrence in Poland Our important concern was to categorize properly the variety of cases that occurred in Poland. We have decided to divide them into five categories: (1). Cases involving setting up new commercial rail long-distance passenger services from scratch. New market entries target the natural clientele of the incumbent and as such result in a clear open-access competition. We have identified 6 examples in this � category, made by 5 operators (Koleje Mazowieckie, Koleje Sląskie, Koleje Dolno�sląskie, Leo Express, Arriva) (Fig. 1B). All examples targeted the leisure segment of the long-distance services, both domestic and international. (2). Cases involving new long-distance services that have been set up by combining the pre-existing regional services along the route. We have identified 5 examples in this category, made by 2 operators (PR, Arriva) (Fig. 1B) Technically, these are stopping trains that operate on long routes (258–322 km in case of PR) and skip some stops on some sections. Journey times offered by them are therefore longer than incumbent’s (up to 25%, depending on the connection). On the other hand, the price is very competitive (up to 45% lower than the incumbent’s), because pricing is still based on regional tariffs. These services also result in on-track competition, with new entries focusing on customers who are more sensitive to price than to time of journey. Characteristically, services in category (2) result in an interesting phenomenon of using regional PSO subsidization to finance (or co-finance) market entry initiatives targeting the long-distance market. We explore this issue in the discussion (Section 6). �d�z route, where PR-operated Interregio still competes with the incumbent (Fig. 1B) An interesting (3). Situation at the Warsaw-Ło phenomenon is PR’s cooperation with the local (region-owned) company Ł� odzka Kolej Aglomeracyjna (ŁKA). (4) Interregio 2009–2015. Although of historical character, this case can be used as a natural reference point by those who research on-track passenger rail competition in Poland. By railways undertakings, it has been certainly used as an inspiration and a testing ground. The entry of Interregio was exceptional in terms of acquired market share (33%) and spatial reach. The network of new connections covered all 16 regions of Poland and served not only the most important cities (reaching up to 62% of all possible direct connections between the largest cities), but also several minor centres (Fig. 1A). However, after a few years of fierce market rivalry with the incumbent PKP Intercity, challenger almost completely withdrew from the market in 2015. The excessive territorial extension of the offer, challenger’s unexpected departure from the strategy of keeping direct cost low and – on the other hand – the incumbent’s strategic use of political action, were among the most important causes of this withdrawal �l et al., 2018). (Kro (5) Co-occurrence of PR-operated regional trains (Regio) and long-distance trains run by PKP Intercity at the routes connecting neighbouring capitals of regions in Poland. Due to their function and to their length (in most cases greater than 100 km4), these routes can be classified as typical interregional links and as such are served by PKP Intercity (Fig. 1C). On the other hand, regions-subsidised stopping trains are also present there to provide services for commuters. Consequently, they ‘steal’ pricesensitive customers and market share from regular long-distance services5. This kind of co-occurrence can be observed at about 20 interregional links, making it an extensive phenomenon in the country. Although category (5) involves two different railway undertakings operating at the same time on the same routes and (partly) having the same customers, we have been strongly hesitant to label it as on-track competition. In open access, competition starts with actions of companies. In case of Regio trains, the market initiative is on the side of regional authorities that organise services operated under public transport contracts. PR company only acts as a contractor and we are not aware of any of its own initiatives aimed at attracting to Regio trains the clientele of PKP Intercity. This can easily change, however. Regio trains operated on interregional links can be used by PR as a platform to launch services classified in category (2); as such, we did find this particular type of service interesting enough to put it into a separate category (5) and to include it in the sample description. All phenomena belonging to categories (1)–(5) are presented in detail in Table 1. Their spatial range is shown in Fig. 1A–C. Only phenomena in categories (1) and (2) – i.e. the newly-analysed examples of on-track passenger rail competition in Poland – are subject �l et al. to further analysis in this paper. We excluded from further analysis categories (3) and (4) as having been already analysed in Kro (2018) and category (5) that involves co-occurrence of two operators sharing the same track infrastructure which cannot be qualified as on-track competition. Categories (1) and (2) combine 11 examples that are (or were) present on over 30 different routes all over the country. The first of them was observed in 2005, but most of the market entries occurred in the last few years (in 2016 or later).

4

This length is set by many authors, e.g. Fr€ oidh and Bystr€ om (2013), as the lower limit of interregional services. We have not managed to assess the scale of this phenomenon in terms of passengers. At least on some lines, however, the harm may be sig­ nificant. We know of a few cases when PKP Intercity tried to influence regional authorities to reduce the number of subsidised Regio trains connecting regional capitals. 5

5

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Fig. 1. Identified examples of open-access competition and on-track co-occurrence in Poland. Source: authors’ own elaboration.

5. Results 5.1. New open-access entries in Poland The newly-analysed examples of open-access competition in Poland – that is phenomena of categories (1) and (2) in Section 4.1 – � sk, are strongly differentiated. They include entries on the principal railway routes, both domestic (Warsaw-Cracow and Warsaw-Gdan operated by Koleje Mazowieckie) and international (e.g. Cracow-Prague, Leo Express), but also entries targeting niche markets (e.g. � _ Katowice-Zywiec-Zakopane, operated by Koleje Sląskie, or Bydgoszcz-Hel, operated by Arriva). On the other hand, if we use Interregio as a benchmark, the common trait of them is much lower intensity (that is frequency) and territorial extent of the offer. Many new services are simply single trains operated in the leisure segment. An interesting feature of the researched evidence is that all entries except one (Leo Express) to commercial services were made not by new ‘private’ open-access operators, but by the railway undertakings already operating in another segment of the passenger rail market, that is in regional services subsidised by Polish regions. What seems to be even more interesting, the majority of these unusual intrusions from another segment were made not by the ‘agile’ private operators, but by the state-owned (PR) and region-owned en­ � terprises (Koleje Mazowieckie, Koleje Sląskie, Koleje Dolno�sląskie) that dominate regional services in Poland. These characteristic features are subject to further discussion in Section 6. Generally, the newly-analysed examples in categories (1) and (2) are numerous but low-scale. On the one hand, entries to principal 6

Category (from Section 4.1)

Character of competitors

Character of the market

Type of service

Frequency Periodity

Pairs of trains per day

1

LRegO vs NIcO

Domestic

Leisure

During summer season

1 pair every day

All year round During summer and winter season During summer season

1 pair at weekends 1 pair at weekends and selected days 1 pair every day

1 1

� Koleje Sląskie

1

Arriva

2010–2012; Since 2016

International

All year round

1 pair at weekends and selected days

1

Koleje Dolno�sląskie

Since 2016

1 pair at weekends

1

Leo Express

Since 2018

Domestic

During summer season All year round

1 1 1 1 1

Przewozy Regionalne (PR)

Since 2005

Arriva

2011–13

Przewozy Regionalne (PR)/ŁKA Przewozy Regionalne (PR)

Since 2010 2009–2015

Interregio The entire country

Przewozy Regionalne (PR)

Permanent service

Connections between regional capitals operated by regional trains

Private RO vs NIcO LRegO vs NIcO

2

Private IcO vs NIcO NRegO vs NIcO

7

Private RO in a niche market

1-4 pairs every day

During summer season

1 pair at weekends

Number of analysed examples

Number of routes

Challenger

Period

Challenger’s train name and route

6

1

Koleje Mazowieckie

Since 2005

Soleil („Słoneczny”) Warsaw-Gda� nsk-Gdynia (Ustka) Dragon Warsaw-Cracow Ornak (in 2017 Giewont) Katowice-Zakopanec Baywatch („Słoneczny Patrol”) Bydgoszcz- Gda� nskGdynia-Hel Culture train („Pociąg do kultury”) Wrocław-Berlind Cracow-Pragued

5

NRegO and LRegO vs NIcO

Commuting

All year round

6 pairs every day

1

1

4

NRegO vs NIcO

Commuting/ leisure

1-7 pairs every day, some trains only at weekends

1

31a

5

NRegO vs NIcO

All year round, some trains only during summer season All year round

1-18 pairs every day

1

20–25b

Pozna� n-Szklarska Poręba Pozna� n-Międzylesie Pozna� n-Kołobrzeg � Pozna� n -Swinouj� scie Beach Train („Pociąg na plaz_ ę") Grudziądz-Nowy Dw� or Gda� nski Ł� od�z-Warsaw

Remarks to the table. RO – regional operator. NRegO – national regional incumbent operator ¼ Przewozy Regionalne (PR). LRegO – local regional operator (railway undertaking set up by regional authorities) (e.g. Koleje Dolno�sląskie). NIcO – national long-distance incumbent operator ¼ PKP Intercity. a The number for 2012 when the extension of Interregio service was the largest. b The exact number depends on the year. c PKP Intercity trains served the Katowice-Zakopane route only in 2018 and just on two days in the summer season. In December 2018 the incumbent introduced a new economic fast train with significantly higher frequency. d PKP Intercity connection between Wrocław and Berlin was operated until 2014 and then reintroduced in December 2018; PKP Intercity direct day train from Krak� ow to Prague was cancelled in December 2009 and reintroduced in December 2016. Only a night train has always been in operation on this route. Source: authors’ database

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3

2016–2017 Since 2017

M. Kr� ol et al.

Table 1 Identified examples of open-access competition and on-track co-occurrence of different operators on long-distance passenger railway market in Poland.

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� sk, both operated by connections with large passenger flows (Dragon service on Warsaw-Cracow and Soleil service on Warsaw-Gdan Koleje Mazowieckie) involved a very low frequency of service (one pair of trains per day). On the other hand, entries in which frequency of service was higher (PR-operated trains in category (2) – up to 4 pairs of trains per day) were made to niche connections. Conse­ quently, market shares of challengers are small. As there is virtually no information about passengers transported by them, we need to work with estimates. The total number of passengers transported in long-distance passenger rail services in Poland (both domestic and international) amounted to around 39.3 million in 2017. According to our estimates, the total market share of services combined under categories (1) and (2) amounted in 2017 to around 1.25% of this, which corresponds to around 0.5 million passengers. Of this, around 0.1 million passengers (or 20%) were transported by the Soleil train alone, making it the most outstanding newly-analysed example of open-access competition in Poland.6 We have analysed main features of challengers’ offers, that is price (Fig. 2), comfort (Fig. 2) and travel time (Fig. 3). Our analysis shows that the newly-analysed entries are characterised by attractive or – in case of category (2) – very attractive ticket prices and comparable or better comfort of service. Travel times offered by challengers are comparable or better in category (1). In category (2) travel times are typically worse (but there is one exception). The Soleil train, that has been introduced as early as in 2005, is a very good example of challenger’s market offer being attractive in � sk to popular holiday resorts on the Baltic Sea terms of all three analysed factors. Soleil offers a direct connection from Warsaw via Gdan � sk costs 45 zloties, against 147 zloties for express trains coast of Poland (Fig. 1B). At the time of writing, a ticket from Warsaw to Gdan and 63 zloties for budget fast trains of the incumbent. Travel time of 3h07 is only slightly longer than that of PKP Intercity’s express trains (2h53) and remarkably shorter than that of the incumbent’s economic fast trains (3h49, all travel times as for 2018). At this connection challenger operates modern air-conditioned low-floor push-pull double-deckers which offer a higher comfort of service than budget fast trains of the incumbent. A better rolling stock standard (modern low-floor electric or diesel units with air conditioning) is characteristic of all challengers’ � (the fifth largest connections to tourist resorts. Interestingly, this also applies to PR-operated trains in category (2) that connect Poznan city of the country) with tourist resorts in the Sudetes and at the Baltic Sea coast. Although, as said in Section 4.1, services in this category seem to be targeted on price sensitive customers, it does not mean that the comfort factor has been neglected. In fact, the PR train from Pozna� n to Szklarska Poręba is the only train of this operator that offers a buffet car (www.vagonweb.cz, 2019). All current cases in category (2) concern the PR company. This is not by accident. PR is an incumbent on the regional passenger services market and as such is present in the majority of regions in Poland. This allows it to combine the pre-existing regional services into a new long-distance service across the country. The four connections of this type, which have been offered so far by PR, constitute � . Regional operators other than PR, which are present the market initiative of a very active company’s division that is located in Poznan only locally, have necessarily very limited possibilities to set up this type of connection. The only exception took place in 2011–2013, with the Beach Train service which benefited from Arriva’s presence in two neighbouring regions of Pomerania and Kujawy-Pomerania. �r Gdan � ski, where they changed Interestingly, passengers took a regular Arriva-operated train on the route from Grudziądz to Nowy Dwo trains on a coastal narrow-gauge tourist railway line (owned by local authorities and operated by an association of railway enthusiasts) to be directly brought to an enchanting Baltic beach (in Sztutowo). The Beach Train entered a niche market where no competitor was present, but after a few years disappeared from the market. �d�z route, As the Interregio case is out of scope of this paper, we do not analyse in detail the individual category (3) of the Warsaw-Ło where the reminder of this PR-operated service continues to compete with PKP Intercity trains. Still, the market situation on this route, which links Poland’s capital with the country’s third largest city (and thus generates important passenger flows), deserves some �d�z. However, at weekends, Interregio attention. Interregio has sustained there as it obtained subsidies from regional authorities of Ło �d�z services are replaced at this route by – also subsidised – ŁKA trains. ŁKA is a local regional operator set up by the authorities of Ło region. Perhaps, this can be seen as a unique example of a coordinated action of two companies challenging the incumbent within a combined entry from a different market segment (regional services are core activities for both PR and ŁKA). Certainly, further research is required to better understand this case, including regional authorities’ motives to subsidise long-distance services of PR and ŁKA at this route. 5.2. Incumbent’s reactions The low scale of entry is typical for all newly-analysed examples of on-track competition in Poland. Therefore, despite very attractive ticket prices and – often – travel times as well as relatively high comfort of the service, it would be difficult to describe them as serious threats to the incumbent. One or at most a few challenger’s trains a day could not worry the incumbent too much and hence its reactions were very moderate. In particular, no responsive price cutting in any of the analysed cases has taken place. Fig. 4 shows � sk connection (where the Soleil train has been operated since 2005). Similar pattern of no this using the example of the Warsaw-Gdan incumbent’s price reaction can be found all over the sample. In fact, incumbent fares rise over time (to offset the inflation rate and increases in access charges) and challengers mirror their trend quite closely. Sometimes pricing policy of challengers is more active and includes testing new levels of fares (this phenomenon can be seen in Fig. 4). Incumbent’s responsive actions could be observed, but they rather took the form of offer adjustments – sometimes made only after some time. Here again a very good example is provided by the reaction of PKP Intercity on the season Soleil train. For the first few years 6 Approximate data about this service are the only publicly accessible figures on passengers transported by challengers in Poland (www. mazowieckie.com.pl, 2019).

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Fig. 2. Ticket prices and comfort for the analysed services in 2018. Remark: in the presented view the travel comfort is related to the type of rolling stock used and its features (low floor entrance, air conditioning and buffet compartment/car). Source: authors’ database.

Fig. 3. Average travel times for the analysed services in 2018. Source: authors’ database.

Fig. 4. Ticket prices for trains of the incumbent and of the challenger on the connection Warsaw-Gda� nsk in 2006–2018. Source: authors’ database.

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Soleil was the only budget train on this route in the morning as all other early connections were served by expensive express trains of the incumbent. Then, PKP Intercity completed the offer by implementing an economic season train (of the ‘fast train’ category) at a very similar time slot. Another example of unhurried incumbent’s adjustments can be observed on the connection between Katowice – the centre of the largest Polish metropolitan area (the ‘Upper Silesian Conurbation’, about 3.5 million inhabitants) – and Zakopane which is the most important mountain resort of the country (called ‘the winter capital of Poland’). An important feature of this connection is the fact that _ the shortest route between the two places uses a local line (Zywiec-Sucha Beskidzka) which was used by long-distance trains (including a direct train Katowice-Zakopane) only until 2003. After that year, merely local trains were in operation there. However, in 2012 an Interregio train connecting Wrocław and Katowice with Zakopane was introduced there and was in service until 2015 when the line was � closed for any passenger traffic. Finally, it was reopened in 2017 when the local regional operator Koleje Sląskie (owned by the Silesia region) introduced a season train Katowice-Zakopane which imitated not only the route but even the name of the mentioned Interregio train (Fig. 1A and B). This decision seems to have finally affected the incumbent which in December 2017 started to offer its own economic service on this line (a ‘fast train’ connection from the city of Bydgoszcz in northern Poland via south-western fringe of Katowice region to Zakopane). What is more, in December 2018 the incumbent introduced a new economic season ‘fast train’ just on the route Katowice-Zakopane, thus imitating the decision of the challenger made a year before. It would then seem that the appearance of a new operator has ultimately resulted in a comeback of the incumbent on a line that it had abandoned. What is more, a new market entry made it possible to reopen the line which had been before (i.e. since 2015) completely closed for any passenger traffic. A development which is as at least to a certain extent similar applies to international leisure connections Wrocław-Berlin and Cracow-Prague (Fig. 1B). Wrocław is the fourth largest Polish city. PKP Intercity cancelled direct day trains from there to Berlin in 2014 and reintroduced them in 2018, that is two years after the local regional operator Koleje Dolno�sląskie (owned by Lower Silesian Region) had started its own train on this route. Cracow is the second largest city in the country and its main tourist centre. PKP Intercity withdrew from the Cracow-Prague day service as early as in 2009. A few years later, in 2014, Leo Express offered a bus connection from Cracow to the Czech border station Bohumín, where a convenient transfer to Leo Express train to Prague was guaranteed. This was interpreted by PKP Intercity as the first step to enter the Cracow–Prague railway route, so it decided to restart services there. When, eventually, Leo Express introduced its trains (modern multiple electric units with buffet compartment) on Cracow-Prague in 2018, it was only two years after the Polish incumbent operator came back on the route. 5.3. Role of regulation in shaping the pattern of open-access competition The literature review clearly shows that regulation in Poland has often been criticized and even accused of restricting rather than supporting competition. Therefore, we decided to take a closer look at all these cases in which the regulatory body (UTK) rejected open-access applications. Denying an open-access application means that an intended entry cannot happen. The analysis of negative decisions may thus allow the researcher to notice this interest in competition that could not materialize and as such cannot be observed ex-post. What is more, the way the regulatory body justifies denials and even the content of these decisions may potentially provide valuable information on regulatory practice. For this reason, we prepared a database of all (i.e. positive and negative) open-access decisions that have been issued so far by UTK. All decisions in the sample relate to the period 2016–2019.7 The profile of the data is presented in Table 2. All four denied open-access applications were made by Arriva. They concerned important routes served by the PKP Intercity � , and could potentially lead to incumbent company, including principal Poland’s connections Warsaw-Cracow and Warsaw-Poznan full-scale entries and head-on rail competition. The negative open-access decisions of the regulatory body were based on ‘the possible � the distortion of the continuity of the public service on routes important from a social needs perspective’. In case of Warsaw-Poznan ‘lack of added value of a new service’ was also indicated. However, despite the very long processing time of applications (see Table 2), there was no trace whatever of any detailed economic analysis in any case – including no assessment of the influence of proposed services on the PSO services already being operated on the market. For this reason, all four denials can be considered discretionary and controversial. Interestingly, we know about at least two open-access applications made by Leo Express (one of them in consortium with a local Polish company) with an intention to make a direct challenge to the incumbent on the ‘flagship’ Warsaw-Cracow line. The planned fullscale entry gained media attention and resonated with the railway traveling public in Poland. However, both applications have been eventually withdrawn (prior to the decision of the regulatory body8). The Polish press wrote that the reason for the resignation of Leo Express was ‘an unequal treatment’ and the market foreclosure engineered by the government. The Czech company’s representatives did not deny these opinions and they admitted that launching new long-distance services was ‘much more difficult in Poland than in the Czech Republic or Germany’ (Interview with Peter Jan�covi�c, 2018). Further research is required to shed some light on this interesting case. The above evidence on regulatory routine in connection to open access may suggest that challengers have faced in Poland an additional barrier to entry – from the rail regulator. This issue is further discussed in Section 6.

7 As said in Section 3, before 2016, access to the railway network in Poland was open without any constraints to railway undertakings interested in providing any passenger services. 8 As such, they are not shown in Table 2.

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Table 2 Open-access decisions issued by the regulatory body in Poland. Total of which decisions issued for the incumbent decisions issued for challengers other decisions of which decisions issued for challengers for important routes served by the incumbent

All decisions

of which decisions denying an application

Average time of processing an application

55

4

–

35 19 1a

0 4 0

96 days 203 days

8

4

374 daysb

a

Decision concerning heritage steam services (issued for PKP Cargo). Number of days for decisions denying an application. Source: authors’ database. b

6. Discussion and conclusions Competition between two passenger operators on the same long-distance railway connection is not a new phenomenon in Poland. �l et al. (2018). The The most distinctive case of Interregio – which is now of mostly historical character – has been presented by Kro present study offers insight into the remaining examples of open-access long-distance passenger rail competition in the country. Eleven phenomena can be identified as new cases of open-access passenger rail competition in Poland. We have assigned them to two groups, referred to as the categories (1) and (2) in the paper. The analysed examples are relatively numerous, but their common feature is the small scale of entry. None of them has led to intense rivalry, the incumbent’s reactions have been moderate adjustments of supply (we did not observe any price reactions on the incumbent’s side), the combined market share gained by the challengers has never exceeded 2%. Such a sample profile is a limitation of our study. Due to limited effects of competition, our results will certainly not help to answer fundamental questions about ‘the effectiveness of open-access competition as a way of improving the efficiency of passenger rail services’ (Johnson and Nash, 2012) or a general ‘desirability of competition’ in this sector (Preston, 2009). On the other hand, the researched evidence has some interesting features. Firstly, eight of the eleven entries to long-distance commercial services have been made by publicly-owned enterprises set-up to operate in a different segment of the market (in regional services subject to PSO). A similar situation took place in the prior case of �l et al., 2018). The relatively high number of such intrusions may show that expansion towards new and Interregio (2009–2015) (Kro potentially lucrative markets may be a possible line of growth also for publicly-owned railway businesses – if they are given such a possibility. In Poland, there have been conditions for this type of phenomenon to manifest itself. There are many publicly-owned enterprises active in the regional market there, therefore a domestic expansion towards another market (the long-distance commer­ cial services one) could have happened there. Unlike in Poland, in the vast majority of European countries there is only one public operator (incumbent) and it already provides service in the potentially most lucrative segment of long-distance commercial services. Domestic expansion of this kind cannot therefore happen there. However, the 4th railway package is going to make an international expansion a much more accessible option than before. Possible implications of this finding may be important. Asymmetric regulation in favour of ‘new’ operators is increasingly considered in the EU (Montero, 2019). The evidence from Poland shows that identifying ‘new’ operators with challengers and ‘old’ones with incumbents may be deceptive. Not only ‘new’ operators can challenge incumbents – a much more complicated pattern of cases can be found even in an individual country. An intentionally pro-competitive market regulation that involves an unequal treatment of the ‘old’ and the ‘new’ operators (e.g. by allowing only the ‘new’ operators to finance rolling stock from European funds as proposed by the European Commission9) can limit opportunities for potential market initiatives of publicly-owned companies and therefore hamper competition. Secondly, there is a striking difference between the market shares acquired in Poland by Interregio only a few years ago (33% in 2012) and by the entrants in the newly-analysed cases of open access (up to 2%). Ironically, our analysis shows that this may be partly a result of a new legislation that has pre-empted the 4th railway package. A ‘consideration’ of open-access applications by the regulatory body was introduced in 2016, while the prior regulatory approach allowed access to the railway network without any constraints to any licensed railway operator interested in providing any passenger services. Railway markets in the EU are subject to a sectoral regulation and the control of entry is the most important instrument of regulation in downstream (operation) markets. The standard tool is licensing operators, but in long-distance passenger services an additional instrument of growing importance are open-access decisions. Open-access applications are analysed by regulatory bodies in order to make sure that new entries will not pose a threat to the economic equilibrium of PSO services which are already being operated on the market in question. Preventing such a possible negative phenomenon is an important regulatory consideration. However, the new instrument can also be used to restrict competition what seems to have happened in Poland. We have observed interest in full-scale entries in a few recent years, especially on the semi-high-speed Warsaw-Cracow line. However, the regulatory body in Poland denied the applications. As shown, these decisions were discretionary and controversial. Possibly, the new legislation

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has been used to engineer market foreclosures, that is to legitimize protectionist practices rather than to stimulate competition in the spirit of the 4th railway package. This experience may deserve some external interest, as such practices can be reproduced elsewhere. At the local level, the presented evidence is in line with the critical assessments of rail regulation in Poland (that we reviewed in Section 2.1), including the opinion of Mę_zyk (2012) that the institutional solutions in the country have served rather to limit than to support competition. Our research suggests that challengers interested in full-scale open-access entries face an additional barrier to entry in Poland – from the regulatory body. If so, this is detrimental not only to competition but also – in the long run – to the incumbent. Credible entry threats discipline incumbent monopolists (Baumol, 1982) and may induce efficiency gains even without direct competition. However, when credibility of threats is stripped away by protectionist practices, incumbents are not incentivised to improve their efficiency. Thirdly, our study confirms that a clear distinction between commercial and public services remains one of the most challenging regulatory issues in passenger rail transport (Beria, 2018). A fundamental barrier to introduce on-track competition into passenger rail markets may be a wide discretion of public authorities to define public services. This is ironic, as one of the most important reasons to liberalise these markets have always been hopes that competition would significantly reduce reliance on subsidies (e.g. Kain, 2007)10. The best-known effect at the level of mutual interactions between enterprises with divergent core activities (commercial vs. public services) is ‘cherry-picking’ made by commercial market challengers to their counterparts (Preston et al., 1999; Temple, 2015; Wheat et al., 2018). Our results show some potential for an adverse effect in Poland. New long-distance services have been set up there by regional operators combining the pre-existing regional services along the route (category (2) of examples). In other words, market entry initiatives targeting the long-distance market have been financed there using subsidies for public services. Potentially, this can lead to the ‘displacement effect’ of commercial services from the route or at least to the market re-segmentation by ‘cherry-picking’ from commercial services those customers who are more sensitive to price. According to literature, this kind of effect was also observed in Sweden. After operators providing subsidised regional services have been allowed by the government to form interregional con­ €), the nections competing with the incumbent’s commercial trains on one of the main railway lines in the country (Gothenburg – Malmo incumbent discontinued its commercial services for almost two years (Fr€ oidh and Bystr€ om, 2013; Fr€ oidh and Nelldal, 2015). In our research, we have faced a problem typical for the analysis of rail services and especially commercial services – very little data are publicly available.11 We fully agree with Vigren (2017) that this makes markets less transparent and, consequently, our research work more difficult. Therefore, although – as researchers – we must accept our inability to perfectly quantify everything and often work with our (imperfect) estimates, we associate Vigren’s point on the need for more publicly available data. Declaration of competing interest None. References Agreement, 2016. 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10 It is often claimed by the EC and national governments that liberalisation will improve rail performance and cause higher passenger flows (Kleinov� a, 2016) what would allow public funds to be spend for other purposes than railway subsidies. 11 Especially about passengers, let alone the costs of services.

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