Economics



Economic Features of Railways

Railway transport is a subsector of the wider transport industry so it shares many key economic features with other transport modes. This section identifies common features, and notes characteristics that are unique to railways.

All modes of transport provide services using vehicles, vessels, or aircraft that rely on a substantial infrastructure network comprising routes, terminals, and controls for the movement of those vehicles. However, railways are unique in that the same entity often provides both railway services and network infrastructure. Most countries prefer this approach, while others prefer to separate service provision from network infrastructure. Reasons for these choices are explored in of this toolkit.

For all modes of transport, neither infrastructure nor service capacity can be stored—the unused train path, aircraft take-off slot, or shipping berth is lost. Similarly, when trains, ships, aircraft, or trucks travel with only partial loads, the unused capacity is lost. Therefore, higher vehicle productivity is crucial to better commercial performance for transport service providers, just as higher infrastructure utilization is crucial to better commercial performance for the infrastructure provider.19 For vertically integrated railways, the drive for higher vehicle productivity coexists in a single entity with the drive for higher infrastructure productivity.

In all modes of transport, differences arise in how much competition exists in the market for the transport infrastructure (e.g., the road) and the market for the transport service (e.g., the trucking company). Transport infrastructure investment tends to be location-specific and physically fixed or difficult to move. It is also “lumpy” (provided in indivisible increments for a range of possible output) so it exhibits economies of density—declining marginal cost—as the intensity of use increases. These various characteristics endow most transport infrastructure, including rail networks, with elements of a natural monopoly. The opposite is true in transport services, where head-to-head competition is the norm within all modes of transport that compete with rail services for freight and passenger business—roads, airlines, barging, and international shipping. Historically, most countries have chosen policies that restrict competition between rail companies. Now, more countries (identified in ) are choosing policies that permit competition in the rail freight sector, and more rarely, in the inter-city passenger services sector.

Competition, together with capacity that cannot be stored, points to the importance of service design, marketing strategies, and pricing policies to maintain and increase capacity utilization. Crucially, railway transport should be viewed as a service industry of differentiated products tailored to specific markets, rather than a ‘utility.’ Railway transport has often been considered to be a ‘utility’ like water, gas, or electricity supply, which has led to undesirable policy and management outcomes.

Finally, all modes of transport have external effects on the environment. The costs of impacts such as noise, air, land and water pollution, accidents, and greenhouse gas emissions are rarely paid by the entities creating them. These impacts differ by mode, country, and circumstances and affect overall transport systems sustainability and transport policies. Well-loaded freight trains have proven to incur significantly lower external costs than road or air freight transport; and well-loaded passenger trains incur lower external costs than road transport (cars or buses) or airlines.

Railways’ general and specific economic characteristics have many policy and management consequences that are explored in later sections of this toolkit. This section discusses how these characteristics drive the structure of railway costs and the principles of rail pricing; both are crucial to the financial sustainability of railways, discussed in .

    

19 For ocean shipping, the route ‘network’ is free and has vast capacity, but infrastructure utilization is still critical to performance for port providers.

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