EC issues ultimatum on 'hidden' state aid: the European Commission has told governments they have 18 months to stamp out aid to railways hidden in loan guarantees and national budgets

International Railway Journal, June, 2008 by Keith Barrow

THIS really is "the final whistle," said Mr Benoit Le Bret, chief of staff to transport commissioner Mr Jaques Barrot, as he presented the European Commission's (EC) latest guidelines on state aid for railway operators. "We know there is state aid being hidden. There are government loan guarantees and aid hidden in national budgets. These activities must cease by January 1 2010."

The use of public money to fund railway infrastructure and operations is nothing new, and the practice remains widespread in Europe. Since 2004, according to the EC, 25 EU states have contributed 17 million [euro] towards the construction and maintenance of railway infrastructure, and member states pay railway operators 15 billion [euro] per year to provide services on unprofitable lines.

The EC says that state aid can only be authorised when it contributes towards the aim of creating an integrated European market and meets its primary aims of competition, interoperability and sustainability. It adds that it intends to ensure that public sector financial support does not cause distortions of competition.

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Le Bret suggests some operators will have to change their practices to adhere to the new rules. "I'm confident they will do what is necessary without going through a fight with the Commission," he said.

Nonetheless, there are concerns that the EC may not have the necessary means to ensure operators and governments meet its conditions. Director general of the European Rail Freight Association (ERFA) Mrs Monika Heiming told IRJ she has doubts about how member states will end hidden aid, and how the EC intends to enforce the new guidelines. ERFA has asked the EC to set stricter conditions for allowing state aid, and to monitor the distribution of these funds, with penalties or withdrawal of state aid if these conditions are not adhered to.

ERFA also takes issue with the granting of state aid for restructuring of legally-separated freight divisions of the former national railways. It argues that this is one of the most distortive aids because it is granted to companies whose business models appear to be unable to cope with market conditions. In a recent position paper on the topic, ERFA stated: "In many cases, this situation leads to direct distortions of the entire market and the fairness of competition in particular."

The EC's guidelines argue that the railfreight sector is currently in "a very specific situation" because it is already open to competition, which means it is of common interest to help such freight operators to overcome their difficulties. It adds that under certain circumstances, this may also be compatible with the aims of the common market.

New trains

Despite the uncertainties surrounding implementation of the guidelines, the EC has facilitated a fundamental change in rolling stock funding that it argues will benefit the areas that need it most. Until now, regional aid could not be used to make the initial investment in transport equipment, something which the new guidelines seek to change to allow the purchase of passenger rolling stock (including light rail and metro) using this method of funding.

The impact of this decision is likely to be felt most strongly among the most recent entrants to the European Union. The EC says that in the member states that joined the European Union in 2004, 82% of locomotives and 62% of wagons are more than 20 years old, with an annual rate of renewal of just 1%. The guidelines state that under such circumstances, state aid is essential in maintaining the common interest. The EC says this approach to rolling stock renewal is therefore compatible with the aims of the common market.

The same day it adopted the guidelines, the EC also approved a 173 million [euro] aid programme for the Czech Republic, which allows modemisation of existing rolling stock and the purchase of new trains.

The guidelines may offer passenger operators, with the most urgent need to replace life-expired rolling stock, a means of obtaining new trains without having to rely on the methods of funding the EC is keen to eliminate. Indeed, it may offer a very attractive incentive to reduce dependency on hidden state aid. But the granting of state guarantees to railway operators is an age-old practice and one that is still commonplace. A significant and rapid shift of attitudes will clearly be required if these structures are to be dismantled by the start of the next decade.