Insights on the liberalisation of Italian railways

The resistance of national governments to relinquish their sovereignty over the railway sector has been particularly pronounced in continental legal systems, characterised by a long-standing tradition of conceiving public utilities as administrative services, aimed at guaranteeing constitutionally protected rights, and managed exclusively by public bodies.

In the reform process, France and Italy followed similar paths in several respects. Unlike other countries, such as Great Britain, they started the liberalisation process to comply with their obligations under European law. The two States have been subjected to infringement proceedings by the European Commission and were sanctioned by the Court of Justice for the insufficient independence of the infrastructure manager from the railway operators. Both have only recently attributed supervisory and regulatory powers to a body independent from political powers. In the two countries, a key role in promoting competition in the sector has been played by the national antitrust authority, which recommended that the governments adopt structural measures to ensure impartial management of the rail infrastructure, and appropriate sectoral regulation to guarantee such impartiality.

In Italy, the privatisation process started at the beginning of the 1990s, with the adoption of a private legal form (joint-stock company) that replaced the previous public body. The reform, however, did not modify the public control over the company: the 100% of the stocks were (and still are) owned by the Treasury. The relationship between the State and the railways’ operator was regulated by a seventy-year concession, supplemented by a programme contract between the Minister of Transport and the company.

The concession of the entire national rail transport activity did not allow the development of competitive dynamics, limiting the possibility of operating on the market to the national company alone, under an exclusive regime, both in terms of infrastructure and transport services.

European law has substantially narrowed the possibility of granting privileged or exclusive regimes to companies in markets where competition forces may apply. Since the 1990s, European legislation paved the way for a progressive liberalisation of rail transport services, which developed in the following years with the adoption of four railway packages (of 2001, 2004, 2007 and 2016). It compelled an accounting separation between network operation activities and transport services, leaving member states free to adopt a more incisive separation (organic or institutional separation). The right of access for railway undertakings has been gradually extended, from freight services, where it is easier to create the conditions for the effective deployment of competitive forces, to passenger transport. In the latter field, Community policies have been more cautious, only recently introducing prospects for liberalisation.

According to European legislation, Italian law established that "the railway infrastructure manager is an autonomous and independent subject with respect to the undertakings operating in the transport sector". It also guaranteed the right of access to the network to undertakings licensed for transport services liberalised at the European level. This was followed by a corporate split and, later, a proper corporate separation between the service operator (Trenitalia) and the infrastructure management company (Rete Ferroviaria Italiana s.p.a. – R.F.I.) which remained, however, under the control of the same holding, Ferrovie dello Stato (F.S.).

In 2000, the first passenger transport licence was issued to the national company Trenitalia. The network manager remained the only entity operating under a concession, and it was in charge of allocating and negotiating the use of infrastructure capacity with the transport companies (including the collection of access fees), according to the principles of transparency, fairness and non-discrimination.

As observed by the relevant literature, however, the concessionary regime, even if confined to the management of the network, can produce serious distortions of competition. For example, network access fees and infrastructure investments were not the result of an autonomous choice of the operator but were authoritatively determined by the public administration.

The Italian financial law for 2001 extended the authorisation system, in place of the concessionary system, to all rail transport activities carried out by national and international railway companies (the latter subject to reciprocity), opening up the market also to passenger transport services, even before the liberalisation of that market was imposed at a European level. However, in the passenger sector, a separate and additional authorisation title was envisaged with respect to the licence envisaged by European directives.

In Italy, the abrogation of exclusive rights and the introduction of authorisation instruments to carry out transport services were aimed at creating the conditions for competition 'in' the market for medium and long-distance transport services (without prejudice to the possibility of intervention in unprofitable sectors through public service contracts).

However, similarly to France, the liberalisation of passenger transport was, in fact, hampered by the ownership structure of the industry and the absence, for a long time, of a truly independent regulatory authority.

In Italy, the central functions of network access regulation were entrusted to R.F.I., a formally private company, controlled by the same group as the incumbent in the downstream market (Trenitalia). This structure created a potential conflict of interest between the profit maximisation of the F.S. group, through a vertically integrated production, and the liberalisation of transport services, imposed at European level. For this reason, on numerous occasions, the Italian network operator has been sanctioned by the Italian and European antitrust authorities for abuse of its dominant position.

In this context, the need of a regulatory body, third and independent of the interests at stake, appeared evident. Legislative Decree No. 188 of 8 July 2003, implementing the so called “first railway package”, established a regulatory body, within the Ministry of Infrastructure and Transport, with the functions of supervising competition in the railway service markets and controlling the activities of the infrastructure manager, especially with regard to network access and the allocation of infrastructure capacity. This led to the creation of an Office for the Regulation of Railway Services (URSF), operating under the direct authority of the Minister of Infrastructure and Transport. The choice of the Italian government recall that of the French one that, in 2003, created the Mission de Contrôle des Activités Ferroviaires, inside the Ministry of Transport.

Given the property structure of the industry, entrusting the economic regulation of the railways to an office within the Ministry of Transport did not ensure its neutrality to the interests of the companies. The above-mentioned Ministry exercised shareholder rights over the F.S. corporate group, together with the owner Ministry of Economy and Finance, in addition to being the grantor of the network management activity and performing numerous functions in relation to it.

In June 2008, Italy, together with France, incurred in an infringement procedure started by the European Commission for not having correctly implemented the railway liberalisation directives. Both countries were claimed to lack the independence of the subjects appointed to perform the essential functions connected with access to the railway infrastructure, those relating to the allocation of train paths and the imposition of network access charges. Also, the powers and autonomy of the regulatory body were not considered sufficient to comply with European law.

In response to the infringement proceedings, while France, in 2009, has established an independent regulatory authority (Autorité de régulation des activités ferroviaires - ARAF), Italian government merely strengthened the functional and financial autonomy of the existing regulatory body, which remained part of the Ministry.

In July 2011, the European Commission brought Italy before the Luxembourg Court, so, finally, the Italian government created an independent administrative authority for the transport sector, entrusted with various tasks in relation to fair and non-discriminatory access conditions to railway infrastructure. However, the members were only appointed in August 2013 and the Authority did not become fully operational until January 2014.

Notwithstanding the creation of an independent regulatory body, the infringement proceedings resulted in both Italy and France being sanctioned by the European Court of Justice.

Italy was condemned for the insufficient neutrality of the Italian network manager. The imposition of tariffs for access the national infrastructure was established by the Ministry of Infrastructure and Transport, not allowing the network manager the sufficient negotiating autonomy required by the EU directives. Moreover, the proprietary control exercised by the F.S. group over both the network management and the transport service management companies was considered an obstacle to a fully independent management of the infrastructure (although the Commission waived this censure following a favourable ruling by the Court of Justice in a similar case).

At the same time, the Court of Justice has condemned France for the insufficient independence of the railway company SNCF, that was in charge of conducting the technical studies necessary for the allocation of train paths.

In 2015, Italian government, expressly provided that the network manager acts "in full autonomy and with independence of judgment and assessment" and clarified the Authority's functions and institutional relations.

Italy and France have recently implemented some structural reforms of the industry.

In 2020, SNCF, formerly made up of three Epic (Établissement public à caractère industriel et commercial) and their subsidiaries, has been unified in a group, made up of five Epic: SNCF (the parent company), SNCF Réseau, SNCF Gares & Connexions, Rail Logistics Europe, and SNCF Voyageurs. The State still owns the entirety of SNCF, whose capital is non-transferable, and SNCF owns all the companies directly or indirectly.

The Italian F.S. 2022-2031 Business Plan envisaged four Business Poles, with the aim of “developing an increasingly integrated and sustainable infrastructure and mobility system for the benefit of the country”. The Holding Company performs the function of direction, coordination, strategic and financial control over the sector parent companies, which, in turn perform a function of direction, coordination and operational control over the Companies belonging to the Pole. A new International Department will interact with the four operating Poles, with the task of coordinating all the Group's foreign activities.

France and Italy have maintained a vertically integrated industry set-up, strongly linked to State power. The justification for this organisational choice is based on the necessary coordination in the industrial management of the railway sector due, among other things, to the technological integration between the various infrastructure elements, the need for a long-term investment policy, the dependence on public subsidies to cover the high costs of maintaining the infrastructure, the need for coordination in the allocation of paths on the single network, and the need to ensure the safety of transport services and compliance with public service obligations .

Nevertheless, the model adopted in France and Italy has unquestionable negative effects on the competitive regime in the sector. The conflict of interest between the profit maximization of the vertically integrated company and the opening of downstream services to competition inevitably hinders truly impartial infrastructure management.

In this context, the national sector-specific authority assumes an essential role in ensuring network neutrality and compliance with liberalisation rules. The close link between the companies operating in the sector and the state (in France formally and substantially public entities, in Italy formally private entities, but substantially in public hands) requires regulation independent of political power to ensure effective third-party status with respect to the economic interests at stake.

The tradition of significant State intervention in public utility sectors seems to have influenced the institutional model adopted for the regulation of railways. In both France and Italy, the establishment of a sector regulatory authority with effective independence from political power was only recently envisaged (in 2009 in France, in 2011 in Italy), only after the European Commission initiated infringement proceedings for violation of liberalisation directives.

Both countries were sanctioned by the European Court of Justice in 2013 for the insufficient independence of the entity in charge of key network access regulation tasks, such as allocating and negotiating the use of infrastructure capacity with transport companies (in the case of France, for giving the dominant railway company the investigative functions on access applications, in the case of Italy, for excessive ministerial interference in determining network access tariffs).

Mixed elements emerge from the experiences reviewed. On the one hand, technological integration between rolling stock and infrastructure elements must be taken into account, as well as the need for coordination in investment policies, network management and infrastructure capacity allocation. On the other hand, European liberalisation directives require the adoption of a regulatory system that ensures transparent and impartial network management in order to liberalise the market for transportation services.

These contrasting goals became evident during the preparation of the fourth railway package. The numerous studies and consultations carried out by the European Commission, particularly on the effects of separating the functions of infrastructure manager and railway undertaking, have yielded mixed results. In particular, the report presented on the U.K. rail system found that the fragmentation of the sector has caused an increased burden on users and the State (as also shown by Prof. Tony Prosser’s post in this blog). In that case, the need for more intensive involvement of public authorities in the integration of fares, timetables, route distribution, and so on, was highlighted. On the other hand, however, among the examples of ineffectiveness of the separation obligations between the network operator and the service operator imposed at the European level, the Commission highlighted precisely the cases of Italy and France, with their repeated sanctions by their respective competition authorities.

This shows, once again, how much the diversity between the basic conceptions of rail service, as a competitive market open to private capital, or as a public service to be reserved to the State, has had a decisive influence on the model of management of the sector adopted in the different jurisdictions, as well as, consequently, on the development of European policies in this area.

Greater harmonization of national disciplines in the sector, in line with European liberalisation objectives and increasing the competitiveness of the rail sector with respect to different modes of transport, presupposes the identification of a shared regulatory model. This appears to be extremely complex, as demonstrated by the considerable tensions, political and institutional, that have prevented the approval of the fourth railway package for several years.

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