Funding cutbacks threaten German regional revival

THERE WERE good reasons why two years elapsed before Germany's railway regionalisation programme took effect after the much-acclaimed legal reform of the Federal Railway in 1994.

Germany's Grundgesetz, or constitution, placed ownership of local railways firmly with the federal government. But successive administrations have been anxious to rid themselves of this responsibility as the financial burden of regional railways became a serious drain on the national budget.

The 1994 reform was intended to solve this issue once and for all by transferring responsibility to the Länder and other regional authorities. No-one could refute the argument that planning and organisation of local services should be in the hands of local authorities who were much closer to the needs of rail customers in their district than the politicians and civil servants in distant Berlin. But the Länder proved to be tough negotiators, and two years went by before the agreement could be implemented.

In return for taking on the financial responsibility for running their local trains, the Länder extracted 'regionalisation funds' worth billions of euros from the federal government, with payments commencing in 1996. The money was to be used by the local authorities to contract with operators and pay them for their services.

Different Länder negotiated different deals, but essentially the arrangements all boiled down to funding coming from the fare-payers through ticket sales and from 'compensation funds' paid by the contracting organisations using federal finance channelled through the Länder.

Competition

In theory competition would ensure that passengers were offered attractive fares as groups of local services were put out to tender. The arrangements required new operators to be charged the same access fees as DB Regio, the incumbent service provider.

To begin with there was little serious competition as DB Regio was the only organisation in a position to provide the required level of service across what are sometimes quite large geographical areas. Nonetheless, in the 10 years since the market has opened up, competitors have taken a significant share of the business, and they now handle 13·7% of train-km.

More and more routes and groups of lines are being put out to tender with operating contracts, and in many cases these are open to any bidder within Europe.

The authorities administering the contracts are obliged to ensure that DB's competitors are able to run the services economically. As improved performance and higher standards are expected, often in the form of new rolling stock, the period of the concession is often a critical factor, and the investment in trains and facilities has to be secured and paid off in a fair manner.

Critics argue that competition is effective only on a single day when the bids are handed in. Once the concession deal is agreed, the winner is free to act without fear of competition for the entire period.

Success story

After 10 years, federal government, the Länder and rail operators are unanimous that the regionalisation policy has worked.

Earlier this year Transport Minister Wolfgang Tiefensee underlined the importance of the regionalisation programme for the success of local rail services. While the number of services has increased by 15% in the 10 years since launch, usage has risen by as much as 30%. 'Today Germany has a comprehensive, high-quality local transport network, which contributes significantly to the quality of life and which we will retain in the future thanks to an adequate funding base', he said.

This assertion did nothing to alleviate concerns among the Länder over what the future may hold. Given the federal government's difficulty in meeting EU demands to rein in its budget deficit, cuts in funding for public transport look inevitable. 'Booming S-Bahn and regional rail services have had a tangible effect on cutting car traffic on main roads and in city centres, and the Länder must make quite sure that the federal government continues to provide sufficient finance', says Ingeborg Junge-Reyer, who chairs the Conference of Regional Transport Ministers and is the Senator for City Development in Berlin.

From DB AG's point of view, the focus lies in the open market that has emerged. Chairman Hartmut Mehdorn notes that 'competition began with regionalisation and it has intensified from that day on. We have risen to the challenge, cutting our costs and raising productivity. At the same time we are winning new customers with attractive offers, and DB Regio is one of the most successful operators in the business. Germany now has the most effective local transport in Europe, and in national terms that gives us an important advantage when it comes to international competition.'

VDV, the Association of German Transport Undertakings, offers further confirmation of the success of regionalisation. Since 1994 public financial support has increased by 15%, but the reward is greater, it says, with real improvements in performance and usage. VDV members have seen patronage rise by 35·3%, passenger-km by 33·4% and train-km by 27·7%. These figures suggest that load factors have also improved.

Drastic cuts in the budget

The national budget - or strictly speaking the bill that accompanies the budget and which sets out the financial framework for running the country - provides for drastic cuts in regionalisation funds. In 2005 the funds available totalled €7·053bn, but the planned increases of €106m in 2006 and €107m in 2007 have been scrapped. The total has been chopped by a further €556m to €6·71bn in 2007, and the amount set for 2008 is even lower at €6·61bn, a level which is then frozen until 2010 (Table I).

It has been the operators who have fought hardest against these plans to cut back their funding. The successful policy of regionalisation would be thrown into doubt, according to the VDV, and the consequences would be service cutbacks and rising fares. Whatever scenario follows, public transport's role in the economy, in society and in preserving Germany's environment would be in danger, the organisation has warned.

'So we won't be playing in the champion's league any more; we'll be in the second division', comments VDV President Günter Elste. Four other national associations have added their protests - Allianz pro Schiene (The Pro-Railway Alliance); Deutscher Gewerkschaftsbund (the German Association of Trades Unions); Deutscher Naturschutzring (the German Nature Conservancy); and Deutscher Städte- und Gemeindebund (the German Association of Towns and Communities). In a joint statement they said that 'the success of buses and trains should be rewarded and the level of local and regional services should be protected - that means no cuts in regionalisation funds!'

Partial compensation

In the meantime the federal government has decided to increase Value-Added Tax from 16% to 19% from 2007. As a result around €11bn a year will flow into the accounts of the Länder. Against this background the Bundesrat voted through the budget and its controversial bill without amendments in mid-June, allowing the federal government to slash regionalisation funds by a total of €3·3bn by 2010.

In mitigation it is only fair to point out that the government has promised to pay the Länder compensation worth €0·5bn from 2008 to 2010 in total and to provide a small increase in regionalisation funds from 2008. Allianz pro Schiene has calculated that this would give €6·675bn in 2008, €6·775bn in 2009, and €6·877bn in 2010.

However, this undertaking was no more than a verbal assurance, and VDV Chief Executive Dr-Ing Adolf Müller-Hellmann has called for the promise to be enshrined in law. He has also asked the Länder to undertake to make good the shortfall in public transport funds from the VAT increase that they will receive. While he accepts that the federal government should gradually withdraw from local transport funding, this can only be done if the necessary funds are made available from other sources.

Dirk Flege of Allianz pro Schiene is more forthright. 'The Länder are exchanging part of the hypothecated grants for local transport for VAT funds that can be used for anything', he says, warning that the money will not be spent on rail and bus services but simply used to plug budget deficits at Land level. 'That would be a black day for public transport, with very serious consequences', he cautions. In his view connections will be broken, regular-interval timetables thinned out, other services withdrawn and rail lines closed. Ticket prices would also rise, ending the success story that has changed the face of local transport across Germany.

Towards independence

Following the pattern of the free-market economy, the privately-structured DB AG has been keen to establish business structures that conform to the model of medium-sized companies with a degree of commercial freedom and financial independence.

A campaign to this effect was launched by Chairman Hartmut Mehdorn in 2000, the idea being to set up a number of small business units that were responsible for their own financial well-being. This concept was translated into 43 regional infrastructure networks (Regionalnetze) within DB Netz AG with four 'Regio Netze' involving DB Regio as well (p567).

These regional networks are essentially groups of lines with no long-distance or S-Bahn traffic - in total around 12000 route-km of rural and lightly-used lines. To keep them open, they no longer have to conform to the standards of the 'big, heavy railway'.

One option would be to adopt the standards applied to Germany's tram networks, but DB does not plan to go so far. It believes the basis for future technical and operating standards exists in the VDV rules for non-federal railways. Considerable savings can be achieved in signalling and train radio, for example, with standardised cost-effective technology and more flexible staffing being the keys to low-cost operation.

Years of political debate about keeping open rural routes have had the effect of halting maintenance, and even with simplified operations, restoring these lines to acceptable standards will require considerable expenditure. For this reason a number of models for individual routes have been developed with the Länder, local communities and operating companies combining forces. This process has been quite effective, with around €650m invested in regional networks during 2005.

A number of closed routes have been reopened, for example the line from R?€?vershagen to Graal-Müritz in Mecklenburg-Vorpommern. Together the regional railways have a turnover of about €600m a year, which represents a significant contribution to DB AG's overall financial performance. Whether this can be maintained in the future is an open question.

Table I. Regionalisation funds 2006-10 (€m)

• CAPTION: TOP: Münster-based DB Regionalbahn Westfalen GmbH has invested in new rolling stock. Future funding for investment may be curtailed when the threatened cutbacks start to bite Photo:Alstom LHB
• CAPTION: DB AG has set up five Regio Netze, which operate as vertically-integrated joint businesses owned by DB Regio and DB Netz. Largest of these is the SüdostBayernBahn based in Mühldorf, where this loco-hauled service is about to depart
• CAPTION: The arrival of competitors such as Vectus has seen many regional services transformed by new rolling stock, such as these Lint diesel railcars developed by Alstom LHBCAPTION: Veolia, operator of NordWestBahn services linking Wilhelmshaven, Bremen, Osnabrück, Bielefeld and Münster, is DB AG's largest competitor Photo:Alstom LHB
• CAPTION: Veolia-owned BOB carries around 13500 passengers a day on routes from München to Tegernsee, Lenggries and Bayrischzell. BOB took over the services from DB Regio in 1998

What lies behind the cuts?

The reason why the German government is so anxious to make financial savings stems from overspending at the national level which has transgressed the guidelines on monetary policy agreed with the EU.

The present coalition has made some progress in reining in the runaway finances, and the EU agreed on July 16 not to press Germany further. This is because the 2007 target of cutting the budget deficit below 3% of GDP now looks likely to be met. However, the reduction in regionalisation funds is now legally binding, and cuts in the level of public transport services look inevitable unless the campaigns against the axe are successful