Arriva Spain Rail’s announcement of a new cross-border railway service from A Coruña (La Coruña) in Galicia to Porto (Oporto) in northern Portugal took some in the railway industry by surprise. The first proper phase of the liberalisation of Spain’s national passenger railways was widely expected to be focused on the high speed AVE network, a somewhat commercial near-aviation market, theoretically serviceable with trains acquired outside Spain. Even interest in cross-border services had hitherto focused on the high speed route from Madrid via Barcelona to the south of France, which judging by its latest search for 15 new cross-border drivers, state operator Renfe intends to respond to competitively. After all, the Spanish government had declared every regional railway service to be “Obligación de Servicio Público” (Public Service Obligation, OSP), to be financially supported as a Renfe monopoly, likely well into the 2030s. Add the difficulty of acquiring and operating uniquely Iberian gauged and signalled rolling stock in an environment where almost all the relevant assets are held by state operators, and one might dismiss the whole A Coruña-Porto scheme as an ill-conceived dream of a multinational that had not yet understood the local railway environment. Except the Arriva Group have been operating buses in Galicia since 1999 and Portugal since 2000, and so should know the territory as well as anyone. Perhaps more importantly, while Arriva’s British rivals sought liberalised markets for their initial forays “overseas” in the 1990s, Arriva learnt to work with whatever competitive environment it found on mainland Europe. That combination of local experience and competitive adaptability makes Arriva’s approach to Spanish railways unique. That Arriva’s first instinct is A Coruña-Porto, and not head-to-head competition on flagship intercity routes such as Madrid-Barcelona, reveals much about Spanish railway liberalisation. As explored in the following paragraphs, Arriva’s competitive strategy is contextualised by the need to:
- Address an underlying commercial market, not the “railway” market Renfe is structured around.
- Expose Renfe as no longer a “national” entity, thereafter making its role contestable.
- Exploit the structural weakness between national Renfe and regional government.
Arriva’s current parent group, Deutsche Bahn (DB), has already been burnt by the (non) liberalisation of Spanish railfreight: DB was fined 10.5 million euros by the Spanish competition authority, CNMC, for anti-competitive agreements to control the supply of traction – at rail-freight liberalisation in 2005, only Renfe Mercancías (its freight division) and DB subsidiary Transfesa (which had, exceptionally, operated privately since 1943 on RENFE‘s network) had freight locomotives that could operate across Spain. The case was emblematic of Renfe Mercancías’ anti-liberalisation strategy of asset control – from a non-auction of life-expired rolling stock that was all but useless for new operators, to a driver training paralysis that resulted in Renfe hiring competitors’ drivers (Renfe’s employment offer more favourable because of its public status). Renfe Mercancías’ approach was exceedingly traditional – defending the body of workers using the assets of the company – with scant regard for what those workers and assets were functionally there to do – move goods: Between its regular state-subsidised operating loses and its minimal impact on the national economy, Renfe Mercancías arguably lost track of its own importance and risks irrelevance. Yet even now the railway has few commercial logistics-orientated operators, and practical asset liberalisation is still dependent on the regulator forcing Renfe’s hand – hardly the panacea of free market liberalism envisaged by European Union policy. Even if this were the beginning of the end for Renfe Mercancías, it might also be the beginning of the end for freight on Spain’s railways: The underlying model (from the Spanish, not European Union, perspective) assumes the mercantile elite test the resolve of the national railway – the railway as a strategic entity of the nation – and only once that resolve has been broken does the national railway structure begin to yield actual liberalisation. However as simple transport utility, Spain’s internal freight was already somewhat liberalised on the roads, which convey the vast majority of Spain’s domestic goods traffic. Consequently it may have been easier to test the resolve of the national railway by capturing its freight market from the road, than compete on the railway itself: Renfe is easily blind-sided by functional competition that focuses on the market for moving goods, since Renfe’s organisational focus is “trains”, especially the staffing of trains.
While the problems of freight liberalisation have ensured intending commercial passenger railway operators are better prepared, for example establishing their own driver training schools and acquiring their own rolling stock, the underlying structure of Spain’s passenger railway liberalisation remains rather similar to that of freight. The baseline assumption, if only by historical pattern, is the emergence of a dominant commercial duopoly, plus Renfe: Perhaps a market similar to Spanish terrestrial television, where two dominant but counter-balancing commercial broadcasters co-exist with a state broadcaster. However, the dominant state actor is surely ADIF, the state owned provider of railway infrastructure: Commercial liberalised operators will rationally focus only on passenger “utility” (delivering a functional transport service), so, as discussed in The Expectations of Competition, the only unfilled role is that of “presence” (the physical manifestation of authority). While the original unified RENFE provided both utility and presence, on the modern railway presence can effectively be achieved by ADIF alone building and maintaining railway infrastructure: Exactly who operates the trains would not matter strategically, only that they were operated by someone. That cripples Renfe (specifically Renfe Operadora, its passenger division) as the strategic national entity it was, and explains Renfe’s desire to merge back with ADIF and thus remain part of a true national entity. Assuming Spain does not follow Poland and merge its national operator and infrastructure company back together, it will be incumbent on commercial operators to break Renfe’s monopoly position on track, so that Renfe can no longer be considered a national entity, thereafter allowing other operators to take Renfe’s role in subsequent non-commercial (typically regional and local) liberalisations. Mere dilution of Renfe’s patronage by indirect competition, such as by alternative modes, will not break Renfe as a national entity. Even competition only on high speed routes risks fostering a liberalised environment that cannot subsequently transfer to older (primarily) Iberian gauge networks, thus cannot compete effectively in whatever contractual regime eventually emerges for state-supported regional and local services, and hence maintains Renfe as a monopoly operator of much of the Spanish railway network.
If Renfe’s status as a national entity has been admonished by the time its OSPs are due for review (a maximum of 10 years after they are awarded), it will surely be politically impossible for Spain’s national government to continue to determine regional railway services: If there is a genuine choice of operator, the relevant Autonomous Community governments can scarcely be denied that choice for their own internal services. This is presumably the main aim of Arriva in Spain: To open up the large, but historically often uncontested, contractual market for public transport. A rather different aim to those market entrants focused on a handful of commercial near-aviation markets, such as Madrid-Barcelona. The hostility of regional government in Spain to Renfe is well documented in Catalunya, but from Aragon to Madrid to Extremadura, none has much love for Spain’s national railway operator. Regional government theoretically counters centralist Spain, representing a powerful ally against Renfe, even if the Catalan example suggests that such power is no guarantee of success. In some regions, Renfe could become vulnerable at much the same time as the local bus concessions that were last extended without contest in the 2000s: In Galicia, law 5/2009 extended most until the end of 2019. The metropolitan concession in A Coruña is already under intense pressure from the CNMC to be modified for compliance with European state aid rules. While all this raises the possibility of multi-modal contracts, especially attractive to an operator with the breadth of Arriva, the more immediate outcome should be greater clarity on the costs of delivering different services: As demonstrated in Catalunya, even apparently “fair” funding mechanisms can disguise substantial cost differences. In a similar vein, the Spanish government’s blanket OSP allocation is eminently challengeable as a policy: Aside from mocking its intended methodology by waving efficiency and utilisation targets for every service that didn’t meet them, INECO’s “rubber stamp” analysis ignores other transport modes, offering no reasoned assessment of Renfe’s contribution to policy objectives such as local mobility: Why support a train between Ferrol and A Coruña with an average of just 16 passengers a trip, when the route is more-or-less mirrored by a faster and more frequent bus?
As explored in The Art of Public Competition sequence of essays, Ferrol-A Coruña does not pose the rational economic question it may seem. The implicit long-run expectation is that the railway service will be improved to compete effectively as a balanced duopoly – although with up to a billion euros of investment required, those improvements may be a long time coming to Ferrol. Liberalisation implies the transformation of the societal model of competition, such as where discrete local duopolies maintain balance, to a more economic model of competition, where factors like cost and demand determine balance across a whole. A Spanish legislature devoid of absolute power can only expose the new model to an environment defined by the old – Spanish policymaking is necessarily structured in a way that lets its society test new legislation, successful EU “directives” included. The challenge for liberalised market entrants is thus to transform the old environment into a new model. Being more operationally efficient or market orientated than the status quo should be straightforward for veterans of open public transport markets. But if the terms of that competition don’t gain state (in the widest sense, of knowing) acceptance, then the theoretically liberalised market might be overwhelmed by attempts, however irrational, to the maintain prior “competitive” balances. As the operator of the Ferrol-A Coruña bus, Arriva presumably have some understanding of the challenge posed by Spanish railway liberalisation, and some strategy for addressing it. The three contexts outlined above – market redefinition, operator contestability, culminating in a regional endgame – give some clues as to why Arriva’s first foray into Spanish passenger railways is on familiar territory for Arriva as a bus operator (both in Galicia and northern Portugal). But is Arriva’s A Coruña-Porto passenger railway service a feasible commercial proposition, or is its purpose more… strategic?