Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

Railway Reform: Toolkit for Improving Rail Sector Performance
9. Setting the Regulatory Framework
aged to establish independent regulation, other solutions may be required, at
least in the shorter term, until obstacles can be overcome.
9.2 The Public Interest
Regulatory intervention is required if the public interest is expected to differ materially
from the commercial interests of service providers—usually private companies.
This situation is often referred to as ‘market failure.’
The public interest is compromised if the market fails to deliver on government
objectives, such as national security, national cohesion or social policy objectives.
It is then up to the government to set out what it requires the railways to do and
to pay for the cost of doing so. These are essentially public sector obligations
(PSOs). Administering public sector obligations is a form of regulation, but since
this is discussed in Chapter 8, it will not be repeated in this chapter. Instead, this
chapter focuses on regulating railways’ monopoly power and developing competition,
safety and environmental regulations, and establishing technical standards.
Aspects of public interest that must be considered in designing rail sector regulatory
systems are discussed in the following sections.
9.2.1 Economic issues
Most economic regulation in the railway sector is designed to address two issues:
(i) monopoly, particularly natural monopoly; and (ii) managing industry interfaces,
usually at the point of separation between the natural monopoly and the
rest of the industry.
Monopoly
The most common form of market failure in railways arises from monopoly
power. Railway companies may dominate certain markets and usually have a
natural monopoly, at least for infrastructure. 79 In the rail sector, it is rarely possible
to create competition in infrastructure provision due to the economies of density
required to sustain the business—average cost declines as corridor volumes
rise (see Chapter 3). Also, when inter-modal competition and intra-modal competition
between railway undertakings are weak, regulation may be needed to
protect the final customer and perhaps to ensure that all competitors or potential
competitors have fair access to facilities owned by incumbents. Economic regulation
should be designed to replicate a competitive environment to the extent possible.
79 A natural monopoly is an entity whose average costs decline with output.
The World Bank Page 129