Setting the Regulatory Framework



Introduction

The railway industry has always had high public sector involvement. In many countries, railways are owned and managed by the public sector. However, both publicly and privately owned railways have usually been subject to some government control—pricing, market entry and exit (obligations to keep lines open and services operating), financial structure, accounting methods, vertical relations such as those between infrastructure and train operations, and operating rules.77

Increasingly over the past 30 years, experts have questioned the heavy burden of economic regulation. Regulations that once protected national monopolies have been replaced in some countries by regulations that open access to infrastructure for third parties. These opposing trends are most apparent in the European Union (EU) where rail market liberalization has been accompanied by extensive regulation to establish a non discriminatory market.

In principle, the best regulator is the market, which means that economic regulation should be used only to correct for market failures, for example, if competition is absent. Regulation should be used cautiously, as it can inflict unintended consequences on those it was designed to protect. For example, in many countries, regulated prices are set below cost. In the short term this appears to benefit customers but over the longer term railway assets and services will deteriorate because prices that are set at below cost-recovery will discourage or even prevent railway companies from making longer-term investments, and could even cause bankruptcies. Therefore, regulations that work against railways' long-term financial sustainability will also eventually hurt customers.

Railway reform may involve changes to railway ownership or management, institutional and organizational structures, and governance systems. These changes may require changes in the form of economic regulation. For example, the introduction of third-party access creates the need to regulate the conduct of infrastructure supply organizations. Economic regulation may also include the difficult task of maintaining and developing competition in the sector.

Although this section focuses on economic regulation, the discussion will also include regulations needed for railway safety, environmental protection, and harmonization of technical standards.78

This section also covers the institutional and organizational aspects of regulation. In many countries, the ministry responsible for transport has been replaced as regulator by a body that is independent of government. Regulation is then separated from the government, which retains administrative oversight and its roles as policymaker, owner, and financier. In countries that have not yet managed to establish independent regulation, other solutions may be required, at least in the shorter term, until obstacles can be overcome.

    







77 I. Kessides and R Willig, Restructuring regulation of the rail industry in the public interest, Policy Research Working Paper, (World Bank, 1995).
78 A broad range of information on regulation, with a glossary available in six languages, is available at http://www.regulationbodyofknowledge.org/
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