Going Off the Rails

Rail travel is considered the alternative transport option to climate killers like cars, trucks, and planes. But the way that the German railway system is currently organized means that it would struggle to cope with the millions of additional journeys. Structural reform is thus urgently needed.

Last year, Deutsche Bahn’s PR department was hit hard by a photo of Greta Thunberg sitting on the floor in the aisle of an overcrowded ICE train. DB’s attempts to downplay the situation only increased the amount of attention it received. Regular DB customers will hardly understand the excitement surrounding the photo, however: for many, it depicts a reality of travelling the German rail operator that is all too familiar. But Thunberg also symbolizes the widespread desire for a different kind of train travel experience.

The railway is still only partially able to fulfil its role as transportation infrastructure. The causes of the recurrent delays and train cancellations, the overcrowded railways and thinned out route plans are structural and have their starting point in the 1994 railway reforms, which simultaneously merged and formally privatized the two German rail carriers, Reichsbahn and Bundesbahn. The newly created Deutsche Bahn became a private joint-stock company with hundreds of subsidiaries. The federal government remained the owner, but took over the old debts and €5bn in yearly pension obligations. In the course of privatization, which was approved almost unanimously by the German Bundestag on 2 December 1993, a construct emerged that was in many respects contradictory. These contradictions have since become part of the genetic make-up of how rail is organized in Germany; like DNA, they reproduce themselves continuously and have caused enormous damage to taxpayers, railway customers, and the environment in the process. In addition, misguided government action has only worsened the situation. But there is another way.

Selling Off the Assets

Following formal privatization, DB AG was entrusted with the country’s rail infrastructure. It also received most of the prior entities’ land holdings not required for operations and thus became the largest owner of real estate in Germany—a fact that no federal government has yet sought to change. DB AG did not record the land and facilities it was awarded in its balance sheets, however. Instead, the railway used these assets to generate additional revenue through a series of sales. According to DB’s logic, the proceeds from these sales were not an additional subsidy from the federal government but rather the leveraging of hidden reserves. In places where existing railway operations prevented the land from being sold immediately, these operations were sometimes discontinued. The closure of freight stations freed up thousands of hectares of inner-city land, but was done without regard to the aim of shifting freight from road to rail. The Stuttgart21 underground train station was also a real estate deal: before the project began, the city of Stuttgart bought inner-city areas from DB for a price 18 times higher than the value listed on DB’s books.

The Destruction of Infrastructure

Since the railway facilities were not accounted for in the balance sheets, no depreciation was made on them, nor were provisions made for their amortization. Although facilities with a replacement value of well over €100bn were indispensable for operation, they were viewed only as a cost factor in the scheme of economic incentives. This created a destructive mechanism. Repairing bridges, for example, was considered too expensive. In addition, the contracts between Deutsche Bahn and the federal government stipulate that DB only has to pay for minor repairs, while the federal government is responsible for paying for large-scale damage and replacement construction works. It thus becomes beneficial to turn smaller infrastructure issues into much larger ones. In the meantime, 2,000 bridges have already become damaged to the extent that (railway) experts recommend their demolition. From 2016 to 2018, the cost of dealing with the backlog of necessary bridge repair work tripled from €8bn to €25bn (Wüpper 2019).

Organized deterioration was accompanied by deliberate destruction. Since 1994, DB AG has shortened the rail network in Germany by 33,440 kilometres, or 17 percent. To save money on maintenance and repair work, it also tore out thousands of railroad switches and dismantled many passing loops and railway sidings. This means that if a train is now delayed, all subsequent trains on this line will also be delayed until operations are completed. This has also had a massive impact on rail freight service. Thousands of stations were first reduced to “passenger buildings” and then later sold. These construction projects are also destructive in that they both reduce the rail network’s capacity and hinder its future expansion by creating absurd bottlenecks.

26 Years Without a Long-Distance Railway Law

In implementing the rail reforms, federal MPs deregulated the management and financing of railway transportation. Federal states were left to deal with regional railway services, receiving considerably more money to do so, which today amounts to about €7.8bn annually. As a result, the number of passengers using local transport increased significantly. However, opening these services up to private providers reduced both their quality and reliability. Long-distance rail services, on the other hand, were henceforth to be run “eigenwirtschaftlich” (in an economically self-sufficient manner), with the federal government providing nothing in the way of financial subsidy. As a result, DB safeguarded profits through regular fare increases that regularly exceeded the rate of inflation and by charging competitors increasingly steep fees for using its railway and station infrastructure. As part of the reforms, the German Basic Law was amended to stipulate that long-distance transport would be regulated by its own corresponding law. This law was never created. Thus a deliberate choice was made to refrain from providing an alternative to cars and aeroplanes. The absence of this law also spelled the end of the InterRegio. This train type, which was very popular with passengers until its discontinuation, made it possible to travel medium and long distances without having to change trains. From DB’s perspective, however, there was insufficient funding for the InterRegio to function as a link between local and long-distance transport. Instead of negotiating mixed financing with the federal and state governments, DB instead abruptly discontinued the service. Many cities were cut off from the long-distance railway network, and passengers were subsequently forced to put up with longer travel times and additional transfers.

Abandonment of the Partnerships Between Government and Rail

A largely forgotten but serious consequence of privatization is the end of the series of partnerships between the Federal Ministry of Education and Research, the Ministry of Transport, the rail industry, and the German Federal Railway. In this constellation, the German Federal Railway developed its vehicles independently. Developing new train systems is a complex process that can take up to ten years. Even after that, the production of locomotives and wagons requires a lot of time as well as highly specialized employees and machines. It is risky to simply develop and produce trains and then see whether they can be sold and at what price. The partnerships between the German Federal Railways and the rail industry served to encourage innovation and further development and to reduce costs and sales risk for the rail industry. The InterRegio and the ICE, Germany’s first high-speed train, are examples of successful developments that resulted from this partnership.

The termination of this partnership also meant the end of the national rail provider developing its own vehicles. A good 25 years later, it has become clear that left to its own devices, the rail industry primarily carries out “redesigns” rather than developing any new trains. There has also been little investment in machinery and personnel since 1994. Prices have continued to rise, however: While the per-seat production costs for the ICE 1 were €48,000 (adjusted for inflation), for the ICE 3 they had risen to €78,000. An additional consequence of this can also be seen at the regional transport level. If federal states want new transport services, they order trains to go along with them. However, the vehicle orders per state are small and therefore expensive. The providers buy the trains on credit and recover the capital costs from the states, insisting on long contract durations as well. Nevertheless, it is becoming more and more common that whenever there is a change in suppliers, there are too few trains available. The rail industry lacks incentives to expand its capacities, and so delivery times are long. Occasionally, some states respond to this state of affairs by building up their own vehicle reserves in an attempt to mitigate the consequences of privatization.

Successfully Fended Off: the IPO

Between 2005 and 2008, the German government seriously pursued its plan of of listing parts of DB on the stock exchange. The IPO became a strong driving force for accelerating the deterioration of assets. The DB management likely believed that investors would offer more if profits rose quickly. The owner association strengthened this incentive by offering so-called “carrots”, or salary bonuses, that railway board members would receive when privatization was completed. In order to increase profits by cutting costs, the maintenance of ICE trains was reduced to such an extent that there was an increase in axle breakages. The Berlin S-Bahn (city train network) was forced to undertake a cost-cutting programme by its parent company DB, which in 2009 resulted in half of all its trains being cancelled. The plans to help prepare for being listed on the stock exchange also included neglecting domestic services and turning towards the corporate goal of becoming a global player. Soon, DB AG was generating more than half of its revenues abroad, often via truck transport and air freight. The IPO failed, however. Initially, it was delayed by massive resistance, spearheaded by the “Rail for Everyone” coalition, and then it found itself caught up in the maelstrom of the financial crisis. But even after the IPO had been cancelled and lip service paid to the idea that DB would  return to its core tasks, or “bread and butter business” (as Deutsche Bahn CEO Rüdiger Grube put it), the company’s international orientation continued after 2008, as seen in its purchase of British rail and bus operator Arriva just two years later.

Lack of Management and Control

The German rail network is not sufficiently controlled by the government. Parliament’s efforts to gain access to relevant documents have met with limited success. Enquiries regularly go unanswered or are only answered incompletely, justified with reference to laws governing joint-stock companies, and key details are heavily redacted from company documents. Recently, DB even tried to evade the control of the Federal Audit Office by no longer issuing minutes of supervisory board meetings, but rather only summaries of the proceedings.

The world’s most exemplary rail network, Swiss Federal Railways (SBB), is a joint-stock company. However, the shares are 100 percent public-owned. A kilometre for a train passenger in Switzerland costs just under a third as much as in Germany, while at the same time investment in the rail network is much higher: €365 per capita compared to €77 per capita in Germany. Possessing 100 percent of a company’s stock certainly provides opportunities to have a strong hand in controlling its fortunes, even in joint-stock companies, an option rejected by every single federal government in office since the railway reforms. Instead, like a farmer putting foxes in charge of the henhouse, they have populated DB’s board of directors and supervisory board with nuclear power dinosaurs like former RWE boss Jürgen Großmann or investment bankers like Alexander Doll. The federal government also takes advantage of the DB as a place to park debt, and thus using its books as a shadow budget. According to the Federal Audit Office, DB’s net financial debt in 2019 already amounted to €25.4bn. This debt is not factored into the so-called “debt brake” or the European Fiscal Compact. DB’s interest costs for its loans are higher than for federal loans, with a long-term average of between two and three percentage points. If the federal government had taken on the debt itself since the 1994 reforms, it would have paid between €7bn and €10bn less than it did for the debt of its wholly owned subsidiary DB AG.

In order to keep up the appearance of being economically self-sustaining, in recent years Deutsche Bahn has even had been forced to pay the federal government an annual dividend usually in the region of €500m. At the same time, the federal government has been repaying DB around €4bn a year for investments, which amounts to little more than shifting money from the right pocket to the left. From 2020, this amount will even be increased to €6.2bn per year. Nevertheless, DB continues to act as if it were a company capable of generating profits through its own business activities. It is fitting that DB’s by-laws do not mention any corporate goals oriented towards the common good. Satisfying transport needs? Protecting the climate? Forget about it.

Another Railway is Possible and Necessary

Criticism of DB AG has been www.bahn-fuer-alle.de/pages/bestandsaufnahme.phpsince the 1994 reforms, but never has the criticism been as widespread and fundamental as in the last twelve months. Even CSU groups are questioning the joint-stock company as being the correct form of enterprise. The background is that DB is faced with not only moral but also economic bankruptcy. There is now a broad consensus that the use of modes of transport which are harmful to the climate, such as cars, trucks, and aeroplanes must be quickly and extensively restricted. The underlying assumption is that rail transport could accommodate these millions of passengers instead. Given the way rail travel is currently organized in Germany, however, only a few will voluntarily switch. The new solution proposed by the German government is to provide rail with more equity and more subsidies, and otherwise leave everything as it is. Even small changes could be of massive benefit. Once new trains have been procured, their frequency could be increased, disused lines could be reactivated, and train class like the InterRegio could be reintroduced. In the medium term, however, the structure of the railway must undergo significant reform. Such measures should have the following components:

Firstly, DB should be more effectively managed and committed to the common good. This requires a democratically legitimized leadership, which could be realized by making DB subject to public law. The long-distance railway law stipulated in the German Basic Law should finally be passed and supplemented by additional federal guidelines.

Secondly, railway infrastructure must be significantly upgraded. Destructive large-scale projects must be halted. In their place, the network must be expanded to provide the basis for a nationwide regular service and all lines must be converted from operating on diesel to electricity. Congested junctions and loading and unloading plants for freight transport should be better developed, and passing tracks, railway points, and sidings should be reactivated or new ones created. A dense network of night trains should be developed in tandem with neighbouring countries’ public rail networks of neighbouring countries to offer an alternative to air travel. In return, DB should transfer their holdings in these networks to the neighbouring countries’ own public transport companies.

Thirdly, a number of necessary administrative decisions must be taken and resources mobilized in aid of their implementation. DB should enter into a new partnership with the rail industry to ensure the long-term supply of good train equipment to Germany. Federal states and regions must be allowed to award their transport services directly to publicly owned rail companies. Where desired and technically feasible, regional railways and networks must be handed over to the relevant local authorities.

Representative opinion polls repeatedly show that people in Germany are tired of the privatization of public infrastructure and services, a process which 80 percent reject (dbb Beamtenbund und Tarifunion 2015, 30). A reversal of rail privatization and an expansion of rail networks are necessary prerequisites for a genuine transport turnaround, and would likely be met with broad approval among the general population.

Bibliography

dbb Beamtenbund und Tarifunion, 2015: Bürgerbefragung öffentlicher Dienst, at: www.dbb.de/fileadmin/pdfs/2015/forsa_2015.pdf

Bernhard Knierim/Winfried Wolf, 2019: Abgefahren. Warum wie eine neue Bahnpolitik brauchen, Köln

Wüpper, Thomas, 2019: Züge fahren seit Jahren über abrissreife Brücken, in: Der Tagesspiegel, 22.7.2019