EU's unsolved problem

EU's unsolved problem

The European Union's admission of 10 additional nations on May 1 expanded the single market's reach, but the EU is still struggling with problems of overstretched infrastructure and the need to inject competition into protected transportation sectors.

Signs of the developing crisis can be seen in European ports struggling to cope with a surge in traffic driven by a boom in two-way trade with China. Shipowners are growing nervous about European ports' ability to handle double-digit traffic growth that will be boosted by the new generation of 8,000-TEU ships.

Ted Wang, European managing director of Orient Overseas Container Line, complained recently that Hamburg was unable to fulfill OOCL's requirements for its big new ships. He added that Le Havre is "not a major container port" and that Southampton is "the worst." As it prepares to deploy a dozen 8,000-TEU ships in Europe by 2007, OOCL is considering all options, including investment in its own dedicated terminal.

Moving containers to and from the waterfront is becoming increasingly difficult as the key highways from northern ports to the trans-Alpine passes linking Germany, France and Italy, the continent's three biggest economies, get clogged. Rail freight remains an alternative only on paper as shippers complain of poor service by state-owned companies. Air-cargo and express carriers, meanwhile, are constrained by European prohibitions on night flights.

At the same time, major transportation projects are being scrapped or delayed. The U.K. government recently refused to approve a privately financed $18 billion truck shuttle railway from the Port of Liverpool to a distribution hub in northern France that Central Railway had been developing since 1991. Frankfurt, Europe's largest air-cargo hub, admits that new concerns about safety could delay its expansion, including a new runway, beyond the planned start date of 2007. Ambitious plans to expand Rotterdam's container and distribution facilities are still trapped in the labyrinthine Dutch planning system, nine years after outline plans were first published.

To make matters worse, European transport operators are mired in regulatory uncertainties as market-opening measures are blocked or diluted by labor unions and their political supporters. The latest victim was a plan to inject competition into ports in a bid to reduce handling costs, which account for a quarter of the cost of transporting a container. The initiative was narrowly defeated in the European Parliament. With the current European Commission, the EU's executive arm, ending its term of office in November, there's little chance it will be revived soon.

The on-again, off-again saga of a technically plagued German highway toll system for trucks has unsettled transport operators. That's the case especially for forwarders that had drawn up plans to shift freight to rival modes, including rail and short-sea shipping, to avoid possible 15 percent cost increases from the toll road.

The toll will now be phased in from 2005 and won't be fully operational until 2007. Meanwhile, there's no word on the status of the European Commission's long-dormant plan for a European system of road charges for trucks to reflect the costs of congestion and introduce more fairness between roads and other forms of transport.

There's a growing awareness of the financial cost of Europe's inadequate transport infrastructure. The Confederation of British Industry, the U.K.'s leading business organization, warned recently that the nation's transport system is at "breaking point," with growing congestion and delays to rail and trucking deterring foreign investors. The British Chamber of Commerce said road and rail delays are costing British business $27 billion a year.

The government is two years into a 10-year program to spend $325 billion improving the road, rail and air network, but critics argue it's too late and too little to make a significant impact.

Pumping money into the system appears to make little difference unless accompanied by market-opening measures, especially in rail. Europe's rail network attracted some $100 billion of government spending between 1996 and 2001 and will receive more than any other transport mode in current EU programs until 2006. Yet its share of the EU's freight market has crashed to around 8 percent from 21 percent in 1970. Many industries have given up on using rail to move their goods.

Thirteen years after publishing its first market-opening provisions, the commission is still trying to increase competition in its rail network. EU transport ministers agreed in March to a new raft of measures to fully deregulate the rail freight market by January 2007. This means that any European rail operator will be able to pick up and unload goods anywhere in the 25-nation EU.

The package also aims to harmonize technical and safety standards to allow trains to cross borders faster, without the current three-hour wait to change locomotives and engineers. The commission says the average speed of international freight services has fallen to 11.25 mph, "slower than an icebreaker opening up a shipping route in the Baltic Sea."

The dire performance of the state railways has forced some enterprising shippers to set up their own services, with mixed results. IKEA, Sweden's giant global home furniture company, launched its own service from its Almhult, Sweden, plant to Duisburg, Germany. The original idea was to expand the rail link into a pan-European network, but this year IKEA handed the operation over to Van Dieren Maritime, a Dutch logistics firm. Germany's Rail4Chem, a private railroad operator that hauls chemicals for foreign clients in Belgium, France, Austria, Switzerland, Poland, Slovakia and the Netherlands, continues to operate as a shipper-run service, but earlier hopes for a big push by cargo owners into the rail industry have been dashed.

In another significant move, Eurotunnel, the operator of the Channel Tunnel, in February became the first private company licensed to operate trains through France, the EU's most protectionist rail market, for a U.K.-Italy service. And Eurotunnel intends to operate the railcars itself instead of using locomotives from state-owned monopolies, as other operators are forced to do. The announcement of the service, slated to start in 2005, sparked demonstrations by French railway workers, underscoring the depth of opposition to deregulation in a country wedded to government monopolies.

State-controlled monopolies still control 95 to 98 percent of European freight movements, according to Loyola de Palacio, the EU's transport commissioner. Britain's rail freight industry is fully privatized, and Germany has more than 20 private companies challenging DB Cargo, Europe's largest rail freight operator. But in some countries, there is zero penetration by private rail operators, de Palacio said. Private firms find it extremely difficult to obtain licenses to cross borders - a process that Matthias Raith, Rail4Chem's managing director, calls "an unbelievable adventure."

The EU's promotion of short-sea shipping as an alternative to trucking has met mixed results. Most shippers still prefer the flexibility and choices offered by truck transportation.

But it is not all gloom in Europe's transport system. Several major projects are nearing completion, notably the Betuwe line, a $5 billion rail freight corridor linking Rotterdam to the German railway network, that is expected to trigger a significant shift of container traffic from trucking. And in another major breakthrough this month, the Italian and French governments agreed to co-finance the $15 billion construction of a 26-mile trans-Alpine rail link between two of Europe's largest industrial hubs, Lyon and Turin.

Moreover, Europe boasts an increasing number of world-class transport companies, including Deutsche Post, which is challenging the global supremacy of UPS and FedEx; P&O Ports, one of the largest port-operating companies; the recently merged Air France-KLM, the biggest airline in terms of revenue; Maersk Sealand and Mediterranean Shipping Co., the leading global container shipping lines; BAA, the world's largest airport operator; and Lufthansa Cargo, the top international airfreight carrier.