Rail Reform Ripples: Czech Republic’s HSR Future Amid Regulatory Turmoil

In the unfolding controversy within the Czech Republic’s rail sector, involving the Ministry of Transport and the national rail regulator ÚPDI ^[1]https://cs-m-wikipedia-org.translate.goog/wiki/%C3%9A%C5%99ad_pro_p%C5%99%C3%ADstup_k_dopravn%C3%AD_infrastruktu%C5%99e?_x_tr_sl=cs&_x_tr_tl=en&_x_tr_hl=en-US&_x_tr_pto=wapp (Transport Infrastructure Access Authority), the situation has been further complicated by the potential rush in legislative processes. This development concerns the dismissal of ÚPDI’s President, Pavel Kodym, the subsequent plan to abolish ÚPDI and the sale of State land to the State as a mechanism for subsidy.

In the ongoing dispute within the Czech Republic’s railway industry, involving the Ministry of Transport and the national railway regulatory body ÚPDI ^[2]https://cs-m-wikipedia-org.translate.goog/wiki/%C3%9A%C5%99ad_pro_p%C5%99%C3%ADstup_k_dopravn%C3%AD_infrastruktu%C5%99e?_x_tr_sl=cs&_x_tr_tl=en&_x_tr_hl=en-US&_x_tr_pto=wapp (Transport Infrastructure Access Authority), the situation has escalated due to potential haste in legislative actions. This issue includes the dismissal of ÚPDI’s President, Pavel Kodym, the proposed elimination of ÚPDI, and the sale of government-owned land back to the state as a means of subsidy.

Background and Events

In the post-Communist restructuring of the Czech Republic’s railway system, České dráhy a.s., the Czech national railway company, inherited significant land assets, including land under and near railway tracks. This happened when the railway operations were separated from infrastructure management, leading to the establishment of Správa železnic (Railway Administration – SŽ), which was spun off to manage the railway infrastructure.

České dráhy (CD) has been in negotiations to sell land under and around railway tracks at about a thousand locations to the Railway Administration (SŽ). Both ČD & SŽ operate essentially under the purview of the Ministry of Transport. However, a pricing disagreement arose as České dráhy valued the land at 20 billion crowns, while the Railway Administration estimated it at only 6 billion. An independent expert institute was asked for an appraisal.  České dráhy then invoiced the Railway Administration for approximately 3 billion CZK for using the lands from 2017 to 2021. ^[3]https://www-railtarget-eu.translate.goog/technologie-a-infrastruktura/spor-mezi-cd-a-spravou-zeleznic-hadaji-se-o-miliardy-1453.html?_x_tr_sl=cs&_x_tr_tl=en&_x_tr_hl=en-US&_x_tr_pto=wapp  ^[4] … Continue reading. 

ÚPDI questioned whether this action violated European law, stating that České dráhy cannot fund train operations from land income, as this would give them an unfair advantage over competitors. Consequently, the office imposed their maximum fine of one million crowns on České dráhy for issuing this invoice. Pavel Kodym, Chairman of the office, alerted the European Commission about the potential illegal advantage being given to České dráhy through this land deal and the payment of rent, seeking the Commission’s opinion on the matter.

Pretty unbelievable if it is true that, as the independent rail regulator, you get fired because you do refuse to act partially and instead ask valid questions about payments that solely benefit just one operator in a competitive market.

Nick Brooks, secretary general of the Alliance of Passenger Rail New Entrants (AllRail)

Abolition of ÚPDI

The Czech Ministry of Transport, led by Minister Martin Kupka, announced plans to abolish ÚPDI, citing the reduction of bureaucratic burden and cost savings. This move is slated to take effect from January 1, 2024.

Dismissal of Pavel Kodym

The dismissal of Kodym, just before the start of his second term, came shortly after he raised concerns to the European Commission about the above transaction. Kodym’s inquiry pertained to whether this transaction, involving the sale and rental of inherited real estate by ČD, could constitute illegal state aid, potentially skewing the competitive landscape in favour of ČD.

Court Ruling and Legal Implications

1. Court’s Verdict on Kodym’s Dismissal: A Czech court found the non-reappointment of Kodym as unlawful and potentially retaliatory. The court recognized Kodym as a whistleblower, legally protected for his actions that questioned the legality of the transaction involving ČD.
2. Regulatory Independence Concerns: The plan to merge ÚPDI with the Antimonopoly Office has raised significant concerns about the future of independent railway regulation in the Czech Republic.

Rushed Legislation

In response to the court ruling and surrounding controversies, the Czech Parliament has been proceeding with the legislation to abolish ÚPDI. Some observers have characterised this process as potentially rushed, lacking in-depth discussion and scrutiny typically expected in legislative processes, especially for matters of significant public interest and regulatory impact.

That is because Minister Kupka, in his capacity as an MP rather than a minister, proposed to abolish ÚPDI and transfer its functions to the antimonopoly office. The manner of this action circumvented the standard ministerial procedure, which usually involves comprehensive internal ministry consultations and reviews before legislative proposals are made. This deviation has been criticized by anti-corruption organisations like Transparency International and Oživení, highlighting concerns over the ministry’s bypassing of established governmental processes for such significant regulatory changes. (Oživení ^[5]https://oziveni.cz/en/ is a Czech NGO of lawyers and analysts focused on promoting transparency, accountability, and protecting whistleblowers).

Reaction from Industry and Advocacy Groups

Organizations like ALLRAIL have expressed alarm over the developments, viewing the disbandment of ÚPDI as a regressive step for transparent and fair regulatory practices in the EU rail market. Transparency International (TI) and Oživení expressed scepticism about the decision to abolish the rail regulator ÚPDI and transfer its functions to the Antimonopoly Office.

This transition raises questions about the Antimonopoly Office’s capability to effectively handle these specialised matters without integrating ÚPDI’s experienced staff. The Ministry of Transport’s explanation that this reorganisation will lead to cost savings seems questionable. The Court did not accept this argument, either. 

The intricacies of rail regulation require specific expertise, and without retaining the skilled personnel from ÚPDI, the Antimonopoly Office may face significant challenges in upholding the same standards of oversight and fairness in the rail sector.

Mr Nick Brooks, secretary general of the Alliance of Passenger Rail New Entrants (AllRail) says: ‘Pretty unbelievable if it is true that, as the independent rail regulator, you get fired because you do refuse to act partially and instead ask valid questions about payments that solely benefit just one operator in a competitive market.’ ^[6]https://www.railjournal.com/policy/czech-republic-to-abolish-rail-regulator/

Broader implications & high-speed rail (HSR)

This case underscores critical issues around government transparency, regulatory independence, whistleblower protection, and adherence to EU directives. It also raises questions about the alignment of national actions with EU regulations and the overall integrity of competitive market regulation in the European Union.

The sale of railway land from the heavily indebted České dráhy (CD) to Správa železnic (SŽ) (both State enterprises) and the abolition of ÚPDI (Transport Infrastructure Access Authority) could have significant implications for the Czech rail sector. If SŽ acquires the property around the tracks at a substantial cost, this might necessitate increased track rental fees for all operators to recover the expenditure. Or, if these costs mean additional state funds for SŽ, it essentially looks like a fiscal manoeuvre – allocating funds to SŽ only for them to pay ČD – all for property that is State owned. Regardless, this funding to ČD might amount to unlawful state aid to the government’s own entity, to the detriment of the competitors. This is the heart of the matter.

Without ÚPDI’s regulatory oversight, there might be less resistance to such subsidies or fee increases, potentially affecting market fairness and competitiveness. 

The unfolding events have several implications for outside investors considering investments in High-Speed Rail in the Czech Republic (VRT). Regulatory uncertainty and legal and political risks, highlighted by the potential abolition of ÚPDI and the dismissal of its President, may signal instability in the rail sector. Concerns about market fairness and EU regulatory compliance could deter investment due to fears of anti-competitive practices and misalignment with EU regulations. Operational efficiency and infrastructure reliability, critical for high-speed rail, could also be affected by these changes. Additionally, issues of government transparency, regulatory independence, and whistleblower protection are increasingly crucial for investors, affecting the overall attractiveness of the investment climate.

For further details on this complex situation, including the court judgment and its wider implications, refer to the articles on ALLRAIL ^[7]https://www.allrail.eu/mediaposts/czech-republic-will-the-rail/ and Seznam Zprávy ^[8] … Continue reading.