At the crossroads

Rail transport in Poland is developing into an increasingly competitive market and is benefiting from ongoing investment, greater competition and better infrastructure brings the promise of more efficient and higher-quality services in both freight and passenger traffic – but also presents a threat to domestic state-owned and state-controlled operators By Brendan Melck When Polish state-owned PKP Intercity incorporated high-speed Pendolino tilting trains into its schedule, the media went into frenzy mode. News outlets carried live broadcasts from the trains, they even went inside the toilets. Everyone was excited that now the travel from Warsaw to Gdańsk will take just under three hours. But when excitement about the new trains cooled off, many realized that such a distance (323 kilometers) could be traversed much quicker. After all, Pendolinos are capable of achieving speeds of 250 km/h. So why so slow then? It turns out that even trains built in the 1980s are too modern for Polish rail infrastructure, which only allows for speeds up to 200 km/h and only on selected track sections. Why is the Polish railway network so outdated and can it be changed anytime soon? Poland has a significant rail market – in the economic sense, the social sense and of course, in the political sense. Poland is second in the European Union behind Germany in terms of the volume of freight transported by rail, and the country has a growing rolling stock production industry. In the last few decades, passenger rail utilization has declined significantly with a rise in car ownership, as well as major cuts to the rail infrastructure map in Poland. However, state-owned rail group PKP is the country’s fourth largest employer, according to the Forbes top 100 companies of 2013, with 44,100 employees; PKP Cargo, the freight operator in which PKP continues to own a 33 percent stake since its 2013 IPO, employs 28,200. Rail loses out to road transport Things haven’t been going very well for the rail sector in Poland in the last couple of decades, though. From a network totaling 27,185 kilometers in 1980, it has fallen to just over 19,000 km in 2013, according to statistics from Poland’s Central Statistical Office (GUS). A 2013 report made by management consultants AT Kearney, using data from GUS and the European Union’s statistics provider Eurostat, showed that the proportion of land freight transported by road in Poland increased from 66.4 percent in 2004 to 80.9 percent in 2012 – while rail’s share declined from 33.6 percent to 19.1 percent. According to a report by Poland’s Supreme Audit Office (NIK), in 2004-2011, the ratio of investment in road and rail transport was 86:14 in favor of road – far off from the 60:40 recommended to Poland by the European Commission within its balanced transport development policy. There is little doubt that the government in Poland has not regarded rail transport among its priorities. With macabre irony, only days after the major passenger rail accident at Szczekociny in 2012, when 16 people were killed, the government asked the EU if it could take out €1.2 billion of the funds it allocated to Poland for rail investments and transfer it to road investments. This matters economically, because rail is already an important industry in Poland, and hundreds of thousands of people are employed within it. Poland has a very good opportunity of benefiting from its geographical situation to develop the freight rail sector, particularly with regard to its position as an interchange between the broad-gauge rail of the former Soviet Union and the narrower EU standard gauge. Politically, whichever party is in government will have to try to ensure the survival – if not the prosperity – of the currently state-owned or state controlled rail companies, in order to avoid strikes, protests and unemployment. Freight speed ‘like a bicycle’ All this in the context of the gradual opening of the market (both freight and passenger) to competition, in line with the EU’s railway “packages.” The fourth such package is due to come into force in 2019, assuming approval, which would see a full liberalization of the passenger rail market – while the freight market was fully opened for competition within the EU under the second package, back in 2007. So, how is the Polish rail market doing in the context of this liberalization? Focusing on the freight rail market, in which Poland continues to be a European heavyweight (literally), freight rail activity has hovered around the same level over the past decade, while road freight has grown exponentially. “There are many barriers to the development of freight rail in Poland, primarily the infrastructure; the average speed of Polish freight rail is about 25 km/h – it’s as fast as a bicycle!” commented Michał Beim, an analyst at the Sobieski Institute. This is more than twice as slow as the European average freight rail speed. The market leader, PKP Cargo, continues to dominate, accounting for a 57 percent share of freight rail transport activity in 2014, according to figures from the Polish Office of Rail Transport (UTK). However, this is down from a share exceeding 60 percent in the latter half of the previous decade, as the opening up of the freight market has attracted many competitors. The most successful – at this stage – is DB Schenker, the freight division of German state rail operator Deutsche Bahn. Government seeks to retain control [caption id="attachment_85824" align="alignleft" width="300"] Image: Shutterstock[/caption] However, it is clear that the government is not ready to lose control over the freight rail market. In early March, reports emerged – first in Puls Biznesu business daily – that inter-ministerial consultation had started regarding a plan under which the freight rail subsidiaries of large state-controlled companies, including PKN Orlen and Lotos would be consolidated by the Industrial Development Agency (ARP). The reason: worsening results have forced the companies to get rid of such non-core operations. “The government wanted to merge these smaller rail subsidiaries of large Polish industrial companies with PKP Cargo, but it’s not possible, because the European Commission would not allow it,” explained Beim. “This merger would result in the establishment of a second state operator, which would be bad for the market, on which there already is a healthy level of competition,” he added. Not to mention the fact that this new state-owned operator would be in direct competition with PKP Cargo, of which the largest shareholder is PKP, which is fully-owned by the state treasury. Germany in terms of the volume of freight transported by rail, and the country has a growing rolling stock production industry. In the last few decades, passenger rail utilization has declined significantly with a rise in car ownership, as well as major cuts to the rail infrastructure map in Poland. However, state-owned rail group PKP is the country’s fourth largest employer, according to the Forbes top 100 companies of 2013, with 44,100 employees; PKP Cargo, the freight operator in which PKP continues to own a 33 percent stake since its 2013 IPO, employs 28,200. Rail loses out to road transport Things haven’t been going very well for the rail sector in Poland in the last couple of decades, though. From a network totaling 27,185 kilometers in 1980, it has fallen to just over 19,000 km in 2013, according to statistics from Poland’s Central Statistical Office (GUS). A 2013 report made by management consultants AT Kearney, using data from GUS and the European Union’s statistics provider Eurostat, showed that the proportion of land freight transported by road in Poland increased from 66.4 percent in 2004 to 80.9 percent in 2012 – while rail’s share declined from 33.6 percent to 19.1 percent. According to a report by Poland’s Supreme Audit Office (NIK), in 2004-2011, the ratio of investment in road and rail transport was 86:14 in favor of road – far off from the 60:40 recommended to Poland by the European Commission within its balanced transport development policy. There is little doubt that the government in Poland has not regarded rail transport among its priorities. With macabre irony, only days after the major passenger rail accident at Szczekociny in 2012, when 16 people were killed, the government asked the EU if it could take out €1.2 billion of the funds it allocated to Poland for rail investments and transfer it to road investments. This matters economically, because rail is already an important industry in Poland, and hundreds of thousands of people are employed within it. Poland has a very good opportunity of benefiting from its geographical situation to develop the freight rail sector, particularly with regard to its position as an interchange between the broad-gauge rail of the former Soviet Union and the narrower EU standard gauge. Politically, whichever party is in government will have to try to ensure the survival – if not the prosperity – of the currently state-owned or state controlled rail companies, in order to avoid strikes, protests and unemployment. Freight speed ‘like a bicycle’ All this in the context of the gradual opening of the market (both freight and passenger) to competition, in [caption id="attachment_85827" align="alignright" width="300"] Image: shutterstock[/caption] line with the EU’s railway “packages.” The fourth such package is due to come into force in 2019, assuming approval, which would see a full liberalization of the passenger rail market – while the freight market was fully opened for competition within the EU under the second package, back in 2007. So, how is the Polish rail market doing in the context of this liberalization? Focusing on the freight rail market, in which Poland continues to be a European heavyweight (literally), freight rail activity has hovered around the same level over the past decade, while road freight has grown exponentially. “There are many barriers to the development of freight rail in Poland, primarily the infrastructure; the average speed of Polish freight rail is about 25 km/h – it’s as fast as a bicycle!” commented Michał Beim, an analyst at the Sobieski Institute. This is more than twice as slow as the European average freight rail speed. The market leader, PKP Cargo, continues to dominate, accounting for a 57 percent share of freight rail transport activity in 2014, according to figures from the Polish Office of Rail Transport (UTK). However, this is down from a share exceeding 60 percent in the latter half of the previous decade, as the opening up of the freight market has attracted many competitors. The most successful – at this stage – is DB Schenker, the freight division of German state rail operator Deutsche Bahn. Government seeks to retain control However, it is clear that the government is not ready to lose control over the freight rail market. In early March, reports emerged – first in Puls Biznesu business daily – that inter-ministerial consultation had started regarding a plan under which the freight rail subsidiaries of large state-controlled companies, including PKN Orlen and Lotos would be consolidated by the Industrial Development Agency (ARP). The reason: worsening results have forced the companies to get rid of such non-core operations. “The government wanted to merge these smaller rail subsidiaries of large Polish industrial companies with PKP Cargo, but it’s not possible, because the European Commission would not allow it,” explained Beim. “This merger would result in the establishment of a second state operator, which would be bad for the market, on which there already is a healthy level of competition,” he added. Not to mention the fact that this new state-owned operator would be in direct competition with PKP Cargo, of which the largest shareholder is PKP, which is fully-owned by the state treasury. to further decline in the value of shares. In the meantime, the group has 40,000 unused plots, with buildings or without, which are generating costs. No one is putting much thought into that.” The implication here is that funds could be raised from these assets to improve the situation of the PKP Group, to help it compete in the opened market. Freight rail in Poland continues to be largely limited to the transport of bulk goods like coal, aggregate and metal ores. However, there has been a dynamic rise in the importance of containerized intermodal freight transport within the rail sector in recent years, which is seen as an area of potentially significant future growth. Rolling stock and infrastructure problems “A problem for the development of freight rail in Poland is the lack of specialist rolling stock designed for specialized transport conditions, like food products, for example,” explained assistant editor-in-chief of the rail market monthly Rynek Kolejowy, Michał Grobelny. “This works against rail in terms of losing market share to road freight.” Referring to the situation of PKP Cargo, Grobelny emphasized the need to diversify away from traditional bulk-goods transport in order to remain competitive. “Poland’s economy will continue to be based on coal, but PKP Cargo should focus more on other groups of goods, cross-border and also intermodal transports. This will not happen without investments – both in the infrastructure and in the rolling stock.” Facing the growing challenge of smaller competitors, this investment becomes increasingly important. [caption id="attachment_85829" align="alignleft" width="300"] Image: shutterstock[/caption] Revolution is coming The big changes in 2019, however, are due to take place in the passenger market. “The full opening of the passenger rail market in Poland will be a problem, not only for state-owned passenger operator PKP Intercity (the operator of PKP Group long-distance passenger services), but also for the regional governments, some of which have invested a lot in the development of their own rail operators (e.g. Koleje Mazowieckie),” Grobelny predicted. “It can be assumed that both the government and regional leaders will do everything not to threaten their companies, which they have invested a lot of money in. For sure, the fourth rail package will not be introduced without problems,” he added. “The biggest change planned to be brought in by the fourth package is for the introduction of competition on subsidized as well as commercial services,” explained Grobelny. “There are already reactions against this in countries where huge amounts of money have been spent on the development of state-owned operators. In the same way, in Poland, PKP Intercity has just undergone the upgrading and modernization of its rolling stock, financed by EU funds and the state budget, and the danger of losing the most profitable services is certainly a cause for concern for the government.” As Beim points out, the changes which 2019 will bring will not happen overnight. “The government has a long-running contract with PKP Intercity, to 2021, and it is trying to make the regions sign contracts with Przewozy Regionalne (the local and inter-regional passenger operator, owned by the regional governments) for the 2016-2020 period, which will block all competition for the time being.” Not much cause for optimism Roszkowski sees the future as being very difficult for Polish operators – both those from the PKP Group, and others. “There will be increased investments in the rail sector in the coming years, but it will probably benefit the infrastructure companies, mostly. In general, the European Union is interested in good infrastructure on which any European company can provide their services, and we (Polish companies) are probably not prepared at all to compete with companies from other countries which would benefit from the investments in the infrastructure,” he said. Taking a different line, Beim has concerns about the ability of the state-owned infrastructure operator PKP PLK to realize the projected investments. “PKP PLK is not very good at managing investment projects. The rail investments program for 2012-2015 is constantly changing, and there are many delays. A lot of the EU money is not used within the time allocated, and so it is lost.” In contrast, he regards the agency responsible for road investment, the General Directorate of National Roads and Motorways, as having a much better corporate culture and better organizational abilities. Grobelny sees the pro-automotive policy of successive Polish governments as a response to the increasing wealth in Polish society, which has enabled many more people to afford a car, which they can now drive on a much-improved road infrastructure network compared to pre-EU accession. Rail remains the poor cousin – a sector which has been overlooked and, to an extent, ignored, while the drive of individual wealth creation marched forward. However, for many reasons, there needs to be a change, putting rail further in the limelight, not least because of its considerably greater energy efficiency and lower environmental impact.