1 Vertical separation and competition in the Dutch rail industry A cost-benefit analysis Machiel Mulder 1 , Mark Lijesen and Gertjan Driessen (CPB, Netherlands Bureau for Economic Policy Analysis; Didier van de Velde (Delft University of Technology, The Netherlands) Paper submitted to the Third Conference on Railroad Industry Structure, Competition, and Investments, Stockholm, 21 and 22 October 2005. ABSTRACT This paper gives a preliminary assessment of costs and benefits of structural changes in Dutch railways implemented in the late 1990s. Although the performance of Dutch railways has somewhat improved in recent years, the efficiency of the introduction of competition and separation of the industry is still subject to debate. Internationally, net welfare effects of vertical separation in the rail industry are highly debated as well. Vertical separation would only generate a positive net benefit if it has a strong impact on competition. If competition is hardly possible - due to, for instance, low traffic density - the benefits of vertical separation would be negligible while the costs of reduced economies of scope could be considerable. In order to contribute to that debate, we analyse both the magnitude of economies of scope in Dutch railways and the impact of institutional changes on efficiency. The literature on econometric analysis of costs and output of the vertically integrated railway firms is indecisive with respect to economies of scope between operations and infrastructure, mainly due to the quasi-fixed nature of the network. An analysis of recent institutional changes shows that the coordination of activities between the infrastructure manager and railway operators has improved. The introduction of competition in freight transport has increased both efficiency and performance. Passenger transport, however, has had difficulties in realising historical performance levels. One of the aims of the restructuring, i.e. reducing the dependence of the industry on state aid, has been achieved. As the Dutch railway industry is still in a transition phase, the final answer on the impact of the structural changes cannot be given yet. Further research should focus on institutional designs to reap the potential benefits of competition in passenger transport. Keywords: railways, competition, vertical separation, efficiency; JEL-codes:L51, D61, R48 1 Address corresponding author: CPB, P.O. Box 80510, 2508 GM The Hague, The Netherlands, e- mail: mmd@cpb.nl ; homepage: www.cpb.nl/goto/mmd. This paper presents preliminary results of a research project on competition in railways which has not yet been finished.