‘Infrastructure costs influenced by many interrelated factors’
Track Access Charges is a quite complicated and important topic for the EU railways. Despite the differences between the charging systems being acted in the various Member States, they could be classified into two major approaches. Latvian researcher and CEO of LatRailNet, the country’s rail charging and allocation body, Justina Hudenko reflects on their advantages and handicaps as well as on the possibility to unite both approaches.
There are two main charging systems used by the EU railways. Sometimes they could be divided into four if the minor modifications take into account. What do you think about this classification?
I would argue that there are as many charging systems as infrastructure managers (IMs) are. But I may agree that there are two broad categories of cost allocation approaches and those combinations, that form the base of the charging systems. I call them bottom-up and top-down approaches.
What is the main advantage and disadvantage of each system?
The bottom-up approach based on demand-side based thinking – the macroeconomic assumption that rail infrastructure is the supporting industry of the state’s economy. This approach is meant to find out the minimum cost of additional inputs required to produce the next transportation unit mostly using econometrical and engineering tools.
The main advantage of this approach is certain fairness of presentation – with certain assumptions you can prove that you ask no more than it probably costs. However, this approach attracts a lot of criticism. For the econometric evaluations econometrical approaches, there are missing and multicollinear data as well as retrospection, meaning that this approach doesn’t consider changes in production factor markets, failures or improvement of IM decision-making, inconsistent exploitation regime etc.
Therefore, this approach works well when coherent traffic volume contributes to coherent network operation and fails on the unevenly loaded networks with incoherent traffic. The engineering evaluations used to avoid the disadvantages of the econometric approach, but I would say that approach is far from determining marginal cost, it is more related to the concept of renewal costs. The necessity of complicated measurements is another disadvantage of the engineering bottom-up approach, limiting its networks with a highly developed field of railway engineering.
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And what about the top-down approach?
Oppositely, the top-down approach based on supply-side based thinking – the microeconomic assumption that rail infrastructure is a commercial undertaking in a market with certain natural and artificial imperfections. The top-down approach recognizes the relationship between costs, overhead activities and various kinds of services provided by an IM, and through this relationship, it assigns direct and indirect costs to services less arbitrarily than bottom-up methods. The mutual understanding that this approach is optimal for a vertically integrated transport company.
However, there are acknowledgements that it does not show the degree to which RUs are satisfied with the performance of an IM and agreement of the demand side is that this approach automatically causes a charge rise in favour of an IM. Another disadvantage of the approach is the subjectivity when choosing a cost driver system, with the possibility of allocating overhead costs to minimum TAC and a dependence on the accuracy of cost driver value forecasts. Therefore, this approach also does not seem to offer an adequate explanation of cost causation and, therefore, the intention to deliver costs to their causative agent.
Both approaches luck excluding of misalignment costs.
How could each charging system be improved?
First, rail policy-makers must decide a matter in favour of one of the approaches. What do your transport policy-makers want to achieve by TAC system? Whether it fairness and client appeal, so there is a need to improve the presentation of contrasting one competing transport system to another, going deep into details of cost causations; or they aim to accuracy and investor (incl. state) appeal, then you have to improve cost driver system to avoid cross-subsidization.
Is it possible, at least theoretically, to combine the best features from each charging system and to combine the joint one? Is it a utopia?
I made this attempt in my book “TAC access in freight transport” putting the equity principle as the cornerstone of the TAC theory: the infrastructure charges have to be the same if factual and legal circumstances are equivalent and have to be varied if factual and legal circumstances are different. Therefore, costs incurred in different circumstances or with different actors must be separated in a transparent way. The direct costs, therefore, may vary for different infrastructure users even if they have been calculated by following a uniform methodology.
How rail infrastructure managers can reduce TACs in order to make the rail sector more competitive?
The infrastructure costs are influenced by many interrelated factors, which I divide into three main parts:
- (1) incurred by train operation and unevenly varying with traffic intensity;
- (2) incurred by state obligations and varying with quality requirements;
- (3) incurred by imperfections in production factor markets and varying with their conditions and with the uncertainty of traffic intensity.
An efficient cost allocation system can, therefore, be based on a three-component system, where in the same factual and legal circumstances costs are allocated in an equivalent way for each component separately, but coherent action plan must be developed and performed.
Are you interested in knowing more about the Track Access Charges? Justina Hudenko will deliver a presentation at the Track Access Charges Summit 2020 to take place on 21-22 April in Riga, Latvia. The programme is available on the event website.