Wednesday, July 4, 2012

How do They Do It?

We Americans often shake our heads at the European rail systems, wondering how they do it. The most frequent answer is population density. The theory is, if you have enough people living in a small enough area, you can afford good public transportation there. I'd like to take a look at that in more detail in another post, and look now at some of the details of organization and financing for rail service in Germany to answer the question from that perspective.


DB's signature ICE-2 high speed trainset in Cologne
In my last post, I compared government-run service in Germany with privately run service in the United Kingdom. To be strictly accurate, though, Deutsche Bahn (German Railway, DB) is a private company majority-owned by the German Federal government. That makes it somewhat like Amtrak in its corporate structure, but the resemblance ends there. DB is one of the largest and most successful transportation and logistics providers in Europe.
Structurally, the organization is consolidated under a holding company, DB AG. Internally, the structure has undergone a number of reorganizations in the years since its "privatization" in 1994, and as of the end of 2011 consists of these main groups:
  • DB Bahn Long-Distance runs passenger trains, mainly in Germany;
  • DB Bahn Regional runs trains and buses in German cities, suburbs, and exurbs;
  • DB Schenker runs freight trains across Europe and supplies other logistics services;
  • DB Netze builds and maintains the German rail infrastructure, including stations and rail lines, and electric power for the trains;
  • Arriva, a recently acquired British company, operates rail and bus services in several European countries other than Germany.
DB Netze is in charge of 23,863 miles of track. The right of way, for the most part, was inherited from predecessor railways when DB was formed, although I believe new right of way has been acquired to create highspeed-only lines. In 2011, DB ran 5,261 freight trains daily, and 25,532 passenger trains (including local and long-distance). Those carried 412 million tons of freight and nearly 2 billion passengers (remember I said passengers were kings of the rails in Germany?). Oh - and DB carried 756 million passengers in its bus fleet that year as well.
Two buses from DB-operated Suedostbahn converge
at the Mummelsee resort in the Black Forest
on Sunday morning (!), May 20, 2012

Looking at the company's 2011 cash flow statement, a couple of important points emerge. First, the company made a lot of money from its operations: €3,390,000,000, roughly $4.2 billion in US dollars. This, after subtracting expenses and finance costs, left €203M profit, roughly $255M in USD. In addition, the German Federal government, which owns all or most of the stock in the company, received a €500M ($630M) dividend payment. (In 2010, however, the company had a net loss of €43M, about $55M, having spent a lot to purchase the Arriva group.)

This positive cash flow, plus government stimulus funds, enabled all the DB units to invest heavily in new capital projects in 2011, for a total of €7.5B, or $9.4B. Of this, 79% went to infrastructure, 11% to refurbishing old and purchasing new passenger equipment, and the rest to freight, logistics, and other projects.

Other Trains in Germany

But DB is not the only rail operator in Germany. As part of the European Union (EU), Germany must comply with the 1991 EU rail directive (91/440/EEC) and its updates, mandating open access to rail infrastructure for private operators and trains from other countries. In practice, DB has a virtual monopoly on long-distance trains in Germany, and the European Commission has filed a law suit against Germany (and most of the other countries in the EU) for not properly implementing the 1994 rail directive. Other countries, especially neighbor France, operate their trains through to German destinations. Within Germany, though, the only notable non-DB long distance trains are a handful operated by Veolia, the French multinational conglomerate that also operates commuter service in Boston and south Florida.
French company Keolis operates the Eurobahn train,
seen in Duesseldorf's main station.

Local and regional service in Germany is not provided directly by DB. It isn't profitable even there, so under German law, the state and local governments provide the funds necessary to operate and maintain local public transportation. They all provide a rich variety of transit options, but they do it in a number of ways. Some directly own and operate transit through the equivalent of US regional transit authorities; others using their authority to contract with private and semi-private companies to provide various services. Since, in the EU, such contracts normally go to the low bidders, quite a few companies have been created in Germany or have come in from abroad to do business. DB is one such company, and runs regional services under contract through its DB Bahn Regional operating unit.

"Lower Saxony is on board"
on a Metronom commuter coach
A good example of an operating company that was formed especially to provide regional transportation is Metronom Eisenbahngesellschaft mbH. It provides rail services in the northwest part of Germany around Hamburg and Hanover. It was originally formed in 2002 as a stock company in order to replace service previously provided by the Regional entity of DB. The three states in area -Lower Saxony, Hamburg, and Bremen - formed wholly-owned rail company shells, which in turn purchased stock in the joint railroad, Metronom. In 2007, part of the stock in the Lower Saxony rail company was put up for auction and purchased by Arriva, then British-owned. That made Arriva the largest stockholder in the company, with 30.7% of the shares. Arriva was purchased by DB in 2010, but the EU anti-trust agreement required DB to divest itself of Arriva's German holdings. The purchaser (in 2011) was Netinera, a company jointly owned by the Italian State Railways and investment company Cube. So at present, regional service in northwest Germany is provided by a conglomerate of three states, a foreign railway company, and an investment company. The states and the passengers provide the money, and the railway company operates the trains. Most of the stations are owned and operated by DB Netze, except those which aren't served by DB and are owned by the individual state rail companies. All this is pretty complicated, but that's how public-private partnership works.

Paying the Piper

Although the EU requires all countries to report the accounts of their railway operations, it's not easy to find the information online. DB's corporate accounting reports do not break out operating cost; only the balance of income minus expenses. So I can't tell you (now, at least) how much Germay spends on its rail transportation. But I can give you some interesting tidbits...
  • Railway operating costs in 2005 were about 75% covered by income; the rest came as government subsidies. In 2001, the subsidy amounted to about 7.5 euro-cents for each passenger-kilometer.
  • When DB was organized in 1994 as a government-owned company, the predecessor, German Federal Railway (Deutsche Bundesbahn) had a debt of €68 billion, which was taken over by the Germany Federal government.
  • European railway infrastructure organizations like DB Netze charge for all trains that use their rails. In Germany in 2005, that charge covered only about 60% of the actual cost of the maintenance.


The outcome of it all is that the German governments, state and federal, have invested a lot in their infrastructure over the years, and continue to subsidize rail operations. In response to EU and internal urgings, rail service has been partially decentralized and competition has been (theoretically) introduced. The federal government of Germany made a sizable profit in 2011 from its earlier investment in long-distance rail, while the states are paying for regional and local transit. I don't know the status of the €68B debt inherited by the Federal government from pre-1994 railroad.

Light rail vehicle in a Karlsruhe street.
These provide local service to outlying towns
as far as 30 miles away.
From the passengers' point of view, the system works as a pretty seamless whole. Local rail operators, for the most part, join with DB in a ticketing union that allows passengers to go from one part of the system to another pretty much without regard to who operates it. (The exceptions are some of the local subway, streetcar, and bus lines.)

Bottom line: German railways cost the government money, but there is an ongoing effort to open railways to competition and so get the costs down. The UK has been quite successful in making its railroad operators compete and pay their own operating costs, but the British government still pays about half the infrastructure costs. Both countries have very good passenger rail systems, providing frequent, fast, comfortable, and reliable service. We can learn from them...but do we have the population density to make it possible? Next time...
To learn more:


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