National railway infrastructure projects

In the case of national railway infrastructure projects, investments have to be agreed between
the Federal government and the infrastructure company of the German railways, the DB Netz
AG. The DB Netz AG has been formed after the Railway Reform of 1994 and is part of the
DB AG holding (German railways), which is still 100% state owned but operates as a public
limited company.

As a general rule, the federal government funds infrastructure construction
costs for priority projects included in the transport master plan as an interest free loan for
which the network company has to back the annual depreciation. The share of the state
contribution to the construction is negotiated between the company and the federal
government with a possible elimination of projects if negotiations fail. The project
implementation then lies with the DB Netz AG. As a consequence of heavy cost overruns on
some projects, subsequent financial problems of the company and reduced maintenance of the
existing network which lead to considerable problems with the reliability of rail services, also
part of the reinvestment is paid for by the government (Rothengatter, 2005b). Overall, the
efficiency of investments has improved due to the profitability interest of the DB AG (KCW
et al., 2005).

A major point of criticism is the vertical integration of the track and train
operating companies under the auspices of the DB AG, introducing a discrimination potential
in favour of investment decisions which would primarily benefit DB AG transport services.
Moreover, the integration is regarded particularly critical in connection with a potential stock
market flotation1 of the integrated DB AG with regard to its impact on network maintenance
and competition as well as distributional effects (see e.g. KCW et. Al, 2005).
Regional railway services have been the responsibility of the federal states since
regionalisation in 1996.

Services have to be announced by invitation to tender, which has led
to a considerable increase in competition and transport volume in that market. For the
network company of the DB AG the policy of the federal states plays an important role in
their appraisal of the profitability of future investments.

In order to avoid sunk costs by
federal states deciding to terminate the subsidisation of services on certain routes and
subsequent loss of track charges, the DB AG requested “infrastructure securing contracts”
with the federal states, securing the provision of services and funding of reinvestments (see
Booz Allen Hamilton, 2006).