German Railway Company: A Failed Privatization

Dirk Löhr

The Deutsche Bahn AG – a brief outline of the German privatization story

Privatization is still quite hip. Even the Chinese government has plans to privatize the railways. Thus, maybe it is interesting to look on the German experiences, also for foreign observers. Native speakers may apologize my D-English.

The government of the former chancellor Helmut Kohl started the privatization of the German railways in 1994.

800px-Bahn_Logo

This happened under the impact of the British wave of privatization, which was driven by the governments of Margaret Thatcher and John Major (Engartner 2009). In a first step, the German railways have been transformed from an administrative body into a private stock company (Deutsche Bahn AG, in brief: “DB AG”). However, for the moment the German government kept the property at the shares – to this day. However, according to the plan, at a later time the shares of the DB AG should be sold out to private investors. Originally, the shares of an integrated corporation should be sold, which includes the railway track as well as the operations. Within the privatization, also the short range traffic (Nahverkehr) was reorganized from 1996 on. Licenses were provided mostly by auctions. Thus, private bidders competed with the DB AG.

However, the privatization process ran into difficulties. Originally, the DB AG shares should be offered to the public until 2006.  In autumn 2004 the chairman of the board of the DB AG, Michael Frenzel, announced to think over the schedule for the initial public offering of the DB AG shares. For November 2008, again a capital privatization of the DB AG was scheduled. However, the conception differed from the original one. Now, only the daughter company DB Mobility Logistics, comprising passenger transport and logistics, should be sold out to privates. The infrastructure, however, should be kept in governmental property. Due to the financial crises in 2008, the going public failed.

Although the property at DB AG is still in the hand of the German state, the DB AG is acting quite similar as a privately owned company. The authorities in charge tolerate that behaviour, hoping for a contribution to the national budget – since the governmental budget is chronically underfinanced.

Features of the German model: Efficiency as guiding value

It is enlightening to analyze the privatization of the German railway system in the light of system theory. The guiding value approach (“Leitwerttheorie” – a system theory approach; Bossel 1998) gives indication that every living system has to satisfy a variety of so-called “guiding values” (Leitwerte), such as efficiency, access and provision, safety, flexibility etc. Overemphasizing certain guiding values may weaken the functional capability of systems and finally may lead to a collapse of the system.

Originally, the task of the railway system was the provision of mobility. This means, an important guiding value was “provision”. Before the privatization of the German railways, a well established railway network gave also the rural population access to the railway traffic. Considering the expected changes in mobility patterns (shift from individual to public traffic) the conservation and extension of this track system was supposed to be a prior task. However, complaints were made about a lack of efficiency of the old railway system.

Within the privatization process, the situation was reversed. In order to increase efficiency, the railway track was dismantled of about 8,000 km to now 33,500 km (since 1990; Engartner 2012, p. 41). Whereas Switzerland has more than 50 stations per 1,000 km2, Germany reduced its stations to only 16 per km2 (Neumann 2012, p. 46). The DB AG disregarded the “Golden rule of traffic”, according to which the public traffic supply creates its own demand.

Generally, Germany is stressing high speed trains and high speed long range traffic connections (Fernverkehrsverbindungen) at the expense of a comprehensive maintenance and extension of the track network. Basically, 90 per cent of all railway trips are with passenger short range traffic (less than 50 km). Although, only 10 per cent of all investments into the passenger traffic section are allocated into the short range traffic. However, the focus on high speed and long range traffic makes sense from the company’s standpoint: Substantial competition happens only in short range traffic, not in long range traffic, in which the DB AG in fact has a monopoly. The policy described above is connected with an intended shifts of clients: The DB AG is focusing on business men as first-class-customers with a high willingness to pay, and neglecting the needs of the broad population (Engartner 2012, pp. 45-46).

1024px-RE_Deutsche_Bahn_AG_Maschen_GFDL

Another indicator for the exaggeration of the guiding value “efficiency” and the concurrent negligence of the guiding value “provision” is the vision of being a worldwide leading actor in the mobility and logistics branch. For the acquisition of road hauliers such as Schenker, Hangartner and Joyau, the British rail freight company EWS, the US air- and seafreight specialist Bax Global, the Danish bus company Pan Bus and the British traffic company Arriva, the DB AG has been spent meanwhile some billion Euros. The DB AG is located in more than 150 countries as a provider of transport and logistics service (Engartner 2012, pp. 48-49). Meanwhile 105,000 of the 300,000 employees are working abroad (DB Networks Mobility Logistics 2013).

The strategy described above intends to make the company fit for the intended going public.

The most important sources of profit of the DB AG are the railway net and the short range traffic. Both sectors make only ¼ of the revenues, but contribute 2/3 of the company’s profits. At the same time, both sectors take also high governmental subsidies (around 7 billion for the short range traffic and 4 billion for the track). The investment of this money in globalized activities and long range as well as high speed traffic is criticized as a cross-subsidy, which is an abuse of funds in the eyes of many experts (Kirnich 2013).

Also an analysis of the passenger statistics is casting doubts on the strategy. Although the DB AG calls attention on the increase of passengers in 2012 (in total about 2 billion), the lion’s share of them relates to the subsidized short range traffic. In the long run the passengers in long range traffic even decreased (from 140 million in 1994 to 131 million in 2012).

Features of the German model: The under-funded railway track

In Germany, the network and operations are under the roof of the same mother company DB AG. Such an “integrated railway company” causes a variety of problems:

The first problem is the possibility of blocking competitors. Despite the law requires equal access of private competitors, the compliance to this requirement has been more or less insufficient. Hidden blockades (previously, for instance by means of no transparent pricing) have been a current source of many conflicts in the past.

The second problem is a regulatory one, since the railway track is a so-called natural monopoly. The DB AG knows very well about the strategic importance on the ownership of this monopoly. In 2012 the railway track contributed 40 % to the operating profits, and the price for using the tracks shall be increased even more. As long the DB AG owns operations as well as the track, as a consequence of such a price rise the “left pockets gets what is taken out of the right pocket” (Böll et al. 2013, S. 75). Thus, the DB AG doesn’t lose anything, in contrast to the competing private operators. The possibilities of the regulation authorities to control the abuse of such a natural monopoly are in fact limited. Although railway experts demanded for an independent network company for a long time, an unholy alliance between DB AG- managers, political parties and workers unions defend the status quo so far. However, independent governmental ownership of a natural monopoly is anything but a socialist idea; it was already promoted by classical liberal economists.

The third problem is the current lack of investments in the railway network. Basically, the investments in the railway tracks are too low to guarantee trouble-free operations. In this regard, also the British blueprint is enlightening. After the privatization, between 1996 and 2001 Railtrack paid some 700 million pounds dividends to the private owners. However, after the cow had been milked and the need for high reinvestments was more and more urgent, the call for subsidies came up. The Labour government (under Tony Blair) was forced to intervene, and in the end the network company was in fact re-nationalized. Railtrack changed to Network-Rail. Since 2002 the state spent many billions of pounds in order to compensate the investment backlogs. However, although the ticket price was the highest in whole Europe, the spending gap after eight years of private mismanagement was still some billion pounds.

In Germany, maintenance has to be financed by DB AG (whereas extensions of the net are paid by the state). This is why the company tries to minimize the correspondent expenditures. In contrast to the current maintenance, the reinvestment of outranged tracks is financed by the state.  Thus, at least from the company’s point of view, the excessive wear and tear-strategy of the DB AG makes sense, in order to shift the expenses for the track to the state. Up to now, about ¾ of the investments in railway infrastructure (maintenance and reinvestments) are actually paid by the German state, only ¼ by the DB AG (DB Mobility Networks Logistics 2011, p. 4). However, all this may have serious consequences: In January 2011, two trains crashed in Hordorf (Eastern Germany). Ten people died, more than 23 have been injured heavily (N.N. 2011). The accident could have been avoided easily, if systems for forced braking (Zwangsbremsung) would have been installed in the single-track line (which, in case, would have to be funded by DB AG). Nonetheless, Germany continues to follow the poor British example. Also in UK, the net network was falling into decline during the privatization era, due to a lack of investments. One of the worst accidents happened in Hatfield at Oktober, 17, in 2000 on the heavily frequented track from London to Leeds. Four people have been killed and 70 heavily injured (Engartner 2009, p. 84).

Less severe, but annoying are the current delays. Actually, in Germany it is safer to take a bet on a horse than on a punctual train. Most delays are caused by low speed lanes (Langsamfahrstrecken), due to backlog in maintenance. Again Germany follows the poor British example. Before the British railway networks was renationalized, daily newspapers such as “Daily Mirror” and “Daily Mail” provided article series in order to document the strangest experiences with the “worst railway system in Europe” (Zöttl 2001). Two months after the abovementioned crash by Hatfield (October, 17, 2000), 55 % of the 18.000 passenger trains have been delayed (Engartner 2009, p. 84). Railtrack was forced to change 1,286 track sections into low speed lanes and to close many tracks.

In Germany, this misery could be seen best at the situation of the track control centers (Stellwerke). The network company (DB Netz) reduced their employers from 51,918 (2002) to 35,249 (2012). At the same time, the digitalization of control centers came into delay – also due to the high costs. During the last eight years the company invested 1.8 billion Euro in new electronic switch towers, which cover only some 1/3 of the track. The consequences are bottlenecks. The status report for the track mentions a plus of delays and cancellations of 4.5 %, caused by problems with the control centers (Böll et al. 2013, p. 76). However, this is an understatement, since the DB AG created its own definition of being “on time” (e.g. a train with a delay less than 6 minutes is “on time”, Tagesschau.de 2011).

The latest culmination happened in September 2013, when Mainz (the capital of the state of Rhineland-Palatinate), was almost completely decoupled from the railway net for nearly two weeks, due to acute staff shortages. Since the public opinion was outraged, a CEO of DB Netz was fired. Nonetheless, the problem is less the poor management, but the good compliance of managers to the political guidelines.

Of course, the funding of the railway infrastructure was a problem also before the privatization of the German railway; there was a current under-funding.

Is there really no alternative in funding the railway infrastructure and to overcome the chronic underfunding? The example of Hong Kong shows the direction. In Hong Kong, the MTR corporation was established in 1975 to construct and operate a mass transit railway. Originally, the government of Hong Kong was a 77 per cent owner (in 2000, the company was privatized). The MTR was also a big player in the Hong Kong real estate market, capturing the land rents and incremental values, which have been created by the MTR-infrastructure. Although the company was acting according to commercial principles, the ticket prices have been frozen for many years, since 1997 (Harrison 2006, p. 87-94).

The example of Hong Kong is a practical application of what is called the “Henry George Theorem”. The basic idea is that land yields (land rents) and land value increased, when infrastructure is set up. The Henry George Theorem was formalized by Arnott / Stiglitz (1979) and Atkinson / Stiglitz (1987). According to the Henry George Theorem, the whole public good (including railway infrastructure) could be financed by land rents and the incremental value. This holds not only for short range traffic, but also for long range traffic. Using the land rents as funds, the whole infrastructure could be self-funded. The subsequent figure shows the main features of the Henry George Theorem in a simplified version.

National income
Composition   Distribution
Private goods and services <=> Wages (labour)
Interests (capital)
Public goods and services <=> Rents (land in a broad sense)

 
If land rents were used in order to finance the infrastructure, the price of the tickets could be oriented at the marginal costs of operation (this is the costs for the operation of the trains). This would be the way of choice to provide access for the broad public to mobility. At the same time, it would be an important step into a sustainable traffic system, in which transport of passengers and goods are shifted from the road to the railway. Due to resource scarcity and environmental problems, the contemporary excessive individual traffic cannot be sustained in future – neither in Western nor in Eastern countries.

In Germany, so far the political decision is not to touch the land rents. Most of the land rents and increments of land values are pocketed by private land owners. Thus, the land rents don’t serve for financing the public goods and services. Instead, the lion’s share of the investments is funded by the tax payer (and, in case of the railways, by the users). In the actual discussion about the overdue reform of the property tax this issue was not touched at all by the so-called experts and interest groups, which are involved in the process. Thus, since the burden on the tax payer is already excessive in Germany, the further decline of the railway infrastructure is foreseeable. This can also not been compensated by higher ticket prices. During the last ten years, the ticket prices increased already by more than 30 % – thus the goal of shifting more traffic to the railways is determined to fail (Bahn für alle 2012, p. 85).

Lessons learned

The German example provides a blueprint of wrong-headed policies. The announced target of the reform – the increase of efficiency – is outpaced and eaten up by the unsuitable framework of privatization. Private operators of trains might be a feasible option, but not the private ownership and operation of the network. Policy shouldn’t forget the target of provision of access to mobility at affordable prices for the people. A state owned network, which is funded by land rents, is an essential for a sustainable traffic policy.

 

Literature

Arnott, R. J.  / Stiglitz, J. E. (1979): “Aggregate Land Rents, Expenditure on Public Goods, and Optimal City Size”, Quarterly Journal of Economics, Vol. 93 No. 4, pp. 471-500.

Atkinson, A. B.  /Stiglitz, J. E. (1987): Lectures on Public Economics. McGraw-Hill Book Co., London.

Bahn für alle (2012): Die wahre Bilanz der Deutschen Bahn – oder: Was Rüdiger Grube lieber verschweigt. Alternativer Geschäftsbericht der Deutschen Bahn AG 2011, Berlin, Germany.

Böll, S. / Kaiser, S. / Wassermann, A. (2013): Mainz bleibt Mainz, Spiegel No. 34, pp. 75-76

Bossel, H.  (1998): Globale Wende – Wege zu einem gesellschaftlichen und ökologischen Strukturwandel, Droemer, Munich.

DB Mobility Networks Logistics (2012): Die Finanzierung der Eisenbahn des Bundes, position paper, Berlin, Germany.

DB Networks Mobility Logistics (2013): „Mitarbeiter in Zahlen“, online: http://www.deutschebahn.com/de/konzern/konzernprofil/zahlen_fakten/mitarbeiter.html (accessed on September, 2013).

Engartner, T.  (2009): „11,000 Jahre Verspätung“, DIE ZEIT 11, March, 5. März, p. 84.

Engartner, T.  (2012): „Börsenparkett statt Bürgernähe. Die Deutsche Bahn zu Beginn des 21. Jahrhunderts“, Universitas, Vol. 67., No. 792, pp. 39-55.

Harrison, F.  (2006): Wheels of Fortune, Self-funding Infrastructure and the Free Market Case for a Land Tax, The Institute of Economic Affairs, London 2006, pp. 87-94.

Kirn, T.  (2010): Anreizwirkungen von Finanzausgleichssystemen, Diss., Univ. Potsdam, Frankfurt a.M., Germany

Kirnich, P.  (2013): „Schwarz subventioniert“, Frankfurter Rundschau, March 20, online: http://www.fr-online.de/wirtschaft/deutsche-bahn-schwarz-subventioniert,1472780,22157028.html (accessed on September, 2013).Neumann, L., Wolter, C., Balzer, I. (2012), Leistungsanalyse des Schienenverkehrs in Europa, SCI Verkehr GmbH, Berlin, Germany.

N.N. (2011): Tote und Verletzte bei schwerem Zugunglück, in: DIE ZEIT online January 2011, online: http://www.zeit.de/gesellschaft/zeitgeschehen/2011-01/zugunglueck-sachsen-anhalt (accessed on September, 2013).

Tagesschau.de (2011): „Wie die Bahn Pünktlichkeit definiert“, online: http://www.tagesschau.de/wirtschaft/bahnpuenktlichkeit100.html (accessed on September, 2013).

Tullock, G.  (2005): The Rent-Seeking Society. Liberty Funds, Indianapolis, USA.

Zöttl, I.  (2001): „Weichenstellung ins Chaos“, Wirtschaftswoche No. 17, p. 31.

 

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