Organisational pattern

4In Switzerland, one of the most eye-catching characteristics of the railway industry is its twofold structure, including the state-owned Swiss Federal Railways (SBB) and a rather fragmented « private » sector consisting of some 60 varying stock companies, mainly – but not exclusively – owned by the cantons. Originally, all the railways were constituted as private companies, but the cantons and municipalities signed major parts of the initial capital in order to foster the local economic development. But in 1897, the Swiss voted for the nationalization of the five most important railway companies, thereby founding the Swiss Federal Railways SBB. As of 1902, the SBB operated about 3000km of tracks, while the remaining 2000km were still served by the so-called « private » companies. By then, the main lines of the railway network, which had generally been completed by the end of the 19th century, was in the hands of the Swiss central state. However, through the support of the cantons and municipalities, a number of small companies were established at the beginning of the 20th century in order to connect the alpine valleys and small towns with the main network. As in other countries, railway construction was part of the regional economic policies, but the federal government did not participate in bearing the costs of the new, rarely profitable railway companies. In accordance with Switzerland’s strong conviction of the principles of subsidiarity and federalism, the national administration was solely accountable for the SBB, leaving the by-lines of the railway system in the hands of lower levels of government. Thus, Switzerland’s private (or cantonal) railways basically operated the by-lines of the network – far from the big flow of goods and passengers – and connected the economically often underprivileged and peripheral alpine regions with the more prosperous regions of the central plateau. The foundation of the SBB brought about two, legally differing railway sectors showing various organisational patterns and started off from very unequal economic premises. Unlike in Britain, France and Germany, the nationalization of Swiss railways remained incomplete.

Figure 1

Length of railway networks in Europe, 1900–1990 Source: Mitchell B.R. et al., 2003, International Historical Statistics : Europe 1750-2000, (vol. 2), New York, pp. 674-683

Length of railway networks in Europe, 1900–1990 Source: Mitchell B.R. et al., 2003, International Historical Statistics : Europe 1750-2000, (vol. 2), New York, pp. 674-683

Figure 2

Labour and capital productivity of the Swiss private and federal railways, 1945-1982

Labour and capital productivity of the Swiss private and federal railways, 1945-1982

5As a consequence of the emergence of the motor carrier as a strong competitor on the transportation market following World War II, the railway networks in many European nations were gradually shortened to their trunk lines (Figure 1). In Switzerland, however, where the spur lines were exploited by the private railway sector, the network amazingly persisted as a whole, even though private railway companies faced severe financial difficulties, as did most European railways. The question remains as to just how the private railway industry managed to survive.

Small, unproductive and in economic troubles : Switzerland’s private railway companies

6Because the five corporations unified as the SBB represented the main axes of the Swiss railway network, it is not astonishing that the importance of the state railways for the entire transportation sector was incomparably higher than that of the private sector. From 1920 to 1980, the gap between the two sectors even deepened. While the SBB by 1980 had achieved an increase of their transport output to the fivefold amount of 1920, the private sector only managed to triple their services. Relative to the motor carrier and compared to the SBB, the private railways lost a disproportionate share of the transportation market.

7In its structure, the private sector presented itself extraordinarily fragmented. In 1920, an archetypal railway company operated only 22km of tracks. Due to a number of closures and mergers, which reduced the number of corporations in operation from 80 (1920) to 58 as of 1982, the average track length increased to 33km. In the 1950s, an average private railway company employed about 100 people and operated with 3 locomotives, 6 railcars and 18 carriages. Such companies, therefore, can be characterized as mere small-scale enterprises on the transportation market.

8However, neither the loss of relative market shares nor the fragmented structure of the private sector must necessarily mean that the private railway companies had to be less profitable than the larger state railways. It is evident that not the dimension of a company but their productivity decides over profit or loss. But, as Figure 2 shows, both labour and capital productivity of the private companies were inferior to those of the SBB and their increase of productivity in the second half of the 20th century was noticeably slower. Thus, until the beginning of the 1970s, the SBB managed to compensate the downward tendency of transportation prices by a sufficient enhancement of overall productivity, meanwhile being one of the most profitable railway undertakings in Europe, presenting balanced books of payment until the economic slowdown after the first « oil-crisis » in 1973 [5]. At the same time, the private railway sector as a whole indicated continual operating losses as transportation earnings and costs started to drift apart (Figure 3).

9The financial failure of the private sector had its consequences, but that did result in the closing of railway routes. Instead, Swiss Parliament forced the federal treasury to help the cantons concerned in balancing the books of those railways with highly devaluated capital (« Privatbahnhilfegesetz » / «Sanierungshilfen ») [6]. As a result of those financial amendments by the cantons and the confederation, private capital came to be more lastingly withdrawn from the railway industry and was substituted by public funds. For fully private corporations, bankruptcy would have been the logical consequence of the financial performance of Swiss private railway companies as demonstrated so far. Without a doubt, Switzerland suspended the functions of the free market in favour of the rail-bound transportation industry. But how and, above all, why did the Swiss save a good part of their economically obsolete railroad system ?

Figure 3

Costs and earnings per transport unit (t-km/personkm) SBB and private railways, 1945-1982

Costs and earnings per transport unit (t-km/personkm) SBB and private railways, 1945-1982

Public funds from World War I to the 1970s

10After a prolonged period of increased operating revenues, the Swiss railway industry again experienced low profitability when World War I broke out. On the eve of the war, most companies operated at a loss and would have filed for bankruptcy if even the mere thought of economic effectiveness and success had been prevalent [7]. But instead of taking into consideration the closure of at least a part of the whole network, a vast majority of the contemporary policy makers upheld the conviction that railways were an indispensable element of the national transport system. As a consequence, Parliament decided to intervene and conceived a concept of financial aid which has been applied since then [8]. After years of having been reluctant to grant public funds in favour of the continuation of the enterprises, albeit not in dispensing subsidies for their initial construction, the Swiss government renounced its former principles and provided generous funding, even for daily business operations. Finally, the first federal decree in aid of the afflicted companies was enacted by the Federal Assembly on December 18th, 1918, a step foreshadowing more ambitious initiatives in the following years and proving to be a real break through in the regulatory regime in Swiss railway policy [9].

11After this turning point, which obviously has to be seen in the context of wartime economy, three types of grants came to be established within the next forty years. Firstly, the legislature framed a so-called emergency aid for the maintenance of business (« Krisenhilfe zur Aufrechterhaltung des Betriebes »), covering the operative losses in order to prevent short-term cases of insolvency. As a result, companies confronted with failure were offered the chance to request governmental assistance as soon as the total amount of their operating expenses exceeded the revenues. However, due to the fear of benefits to private stockholders, it was not allowed to pay interest, return loans or distribute dividends at the expense of the state [10]. Secondly, due to these aforementioned restricting conditions and given the fact that most of the originally private companies were in the meantime state-owned, two Redevelopment Acts (« Sanierungshilfen ») were passed [11]. They met the demands for a consolidation of the balance sheets on which the equity ratio appeared too low and both the credit capital and the invested capital were too high. Indeed, such liabilities and overvalued assets eliminated any possibility to roll over or repay the obtained credits or even to attract investment capital for required improvements. Furthermore, for public redevelopments, the companies weighted down by debts would not have been financially viable in the long run [12]. Thirdly, as a further reaction to such paralytic symptoms on part of the companies, the state became engaged in technical modernisation, and the outcome was a first investment assistance (« Investitionshilfe »), the Electrification Act of 1919. Passed at a time when public interest in a fully functional transportation system was threatened by the post-war economic crisis and especially by a rise in the price of coal, this type of railway legislation rendered it possible to change the traction system towards domestic electricity [13].

12Nonetheless, in spite of this wide range of public funding, the underlying basic law on railways dating back to December 20th, 1872, neither foresaw state activities like these nor provided any further specifications about them. Therefore, whenever new financial measures were planned, Parliament – both the National Council and the Council of States – had to approve them each individual time by a specific act [14]. As a result, the rhythm of the subsidies granted did not follow a regular pattern but accelerated with the outbreak of extraordinary events, such as the Great Depression starting in 1929 or World War II a decade later. It therefore became mandatory to deal with the problem of an ailing rail industry. Nevertheless, the more the required sums were increased (Table 1), the more there was an urgent need for a sufficient basic law which would enable the granting of financial aid in greater amounts and, above all, at regular intervals [15].

Table 1: Public funds for railways, 1918 – 1957 (in million nominal Swiss Francs) Year emergency aid investment assistance redevelopment 1918 1 1919 32.8 1933 0.9 1939 140 1940 0.6 1951 3 1957 9 Total amount 14.5 32.8 140 Source: Hans Reinhard Meyer/Alfred Hess, Die staatliche Hilfeleistung, in: Eidg. Amt für Verkehr (Hg.), Ein Jahrhundert Schweizer Bahnen 1847 – 1947 (Bd. 1), Frauenfeld 1947, pp. 430 – 432; BBl 1957/I, p. 933.

13Hence, for the sake of a standardised form of subsidisation, all important trade associations, various labour unions, all political parties and the railways themselves pushed for a new, all-embracing law that would offer financial security to the railway system as a whole. Even in the early 1940s, they still hoped for a sudden increase of rail passengers and freight transportation, and they tenaciously refused any change in railway policy. Track shortages, mergers, or conversion to bus services were discussed but strictly refused, even by politicians who were generally in favour of a free market and extremely disinclined to regulatory measures. Therefore, following a perennial period of negotiations which were delayed by other ongoing law projects, the long-desired, renewed federal statute providing guidelines for the Swiss railways was passed on December 23rd, 1957 [16].

14Under the title of « Financial Aid », chapter VII of this act specifically perpetuated the existing public grants and offered the possibility – but did not impose an obligation (!) – of supporting all railway companies with regular financial contributions. Firstly, this involved the well-known emergency aid for the maintenance of business that was codified in article 58. Once again, the aim was to prevent the companies from collapsing, but now with the decisive difference that the depreciation and amortisation of fixed capital was counted as part of the operating expenses. As a result, the available funds as well as those paid remained on a continual increase for the next several years, especially as of 1972, when article 58 was integrated into the ordinary federal budget [17]. Secondly, the previous Redevelopment Acts and the investment assistance were merged into article 56, which thereby enabled companies to benefit from allowances for the technical improvement of their infrastructure [18]. Thirdly, as an amendment reflecting the predominant emergence of new modes of transportation, article 57 allowed the state to encourage the transformation of a company into a bus service through the aid of public funds. At first glance, it appeared that for the first time ever the state was signalling a renunciation of the heretofore existing insistence on an area-wide railway system. However, over the course of the next decades, this new trend proved to be a sheer dissimulation because in many cases neither the companies nor the policy makers invoked this article [19].

15In addition, the National Assembly extended the range of financial aid by creating a completely new form of public funds. Whereas the traditional ways had formed a pure ex post reaction to the malaise, the legislature now intended that enterprises could be prevented from getting into trouble. For this purpose, sector VI was inserted in the renewed Railway Act by the two Councils against the declared will of the government and the federal administration. It was reflected in article 51 on the premise that the railways should be paid compensation for the services they rendered to the general economy. Completely unlike the previous financial aid, this type of public allowances was not considered to be a subsidisation but a real indemnification (« Abgeltung ») of the so-called fundamental obligations (« gemeinwirtschaftliche Pflichten ») under which the companies had been since the time of the monopoly. In other words, most of the contemporary politicians, economists, and the companies themselves took the position that the railways, on the one hand, were rightly entitled to such a contribution and, on the other hand, that this would diminish the « real » public grants to a minimum [20].

16Instead, however, of the hoped-for heavy decrease and to the bitter disappointment of the actors involved, the federal expenditures for railway services and infrastructure actually skyrocketed within the next fifteen years (Figure 4). Even in the National Assembly, where the representatives of the remote regions of Switzerland had enforced the financial aid against the will of the administration, a certain scepticism arose and some very dissenting voices were soon heard. Nevertheless, the primary measures that had been taken against the financial constraints of the railways in Switzerland consisted in public funding for the benefit of all cash-strapped companies since 1918. As pointed out earlier however, in spite of this remarkable generosity, which lasted at least until the late 1970s, the Swiss state and the policy system did not succeed in bailing the companies out of their financial difficulties, as was also the case in other European countries.

Figure 4

Public funds for private railways, 1958 – 1972 (million nominal Swiss Francs)Source: Verkehrsstatistik 1974, S. 234 – 236; BBl 1970/II, S. 344

Public funds for private railways, 1958 – 1972 (million nominal Swiss Francs)Source: Verkehrsstatistik 1974, S. 234 – 236; BBl 1970/II, S. 344

Railway policy in the name of public utilities

17As a consequence of the rising subsidisation, the railway system as a whole increasingly came under suspicion of being sluggish, profligate and inefficient. Seen from this point of view, most of the companies aspired to obtain as much public funds as they could, whereas they failed to achieve increased earnings or at least to improve their performance [21]. Furthermore, referring to the ongoing deterioration of railways, the critics blamed the regulatory apparatus of the state both for stifling any innovation and for hampering intermodal competition. The critics claimed that the situation could not improve unless the financial aid, which they regarded as the very reason for the weakening rail economy, were to be stopped or at least reduced. Accordingly, signalling a fundamental change in policy, they urged an end to state control over the rail industry and asserted that a greater reliance on the market would be essential in order to achieve maximum utilisation of railways [22].

18To be sure, the clamour for restoring competition and, as a consequence, for privately operated railways was hardly audible in the 1960s and the 1970s. Although state authority had not been able to change the situation until then, only a few academic studies – influenced by the German transport economists who first called for deregulation and going-private of any transportation system – blamed railway regulation as neither benefiting carriers nor consumers. Amongst Swiss economists, Hans Reinhard Meyer (1910 – 2005), an associate professor at the University of Bern, was for a long time the only one who called for a reduction of governmental control and constantly pointed to a waste of public funds [23]. At the beginning of the 1990s, most of his colleagues, some progressive politicians and the liberal-minded media were disenchanted with the federal administration of the carriers. Regardless of whether they were aware of their predecessor or not, they resumed Meyer’s discussion and questioned the wisdom of public financial assistance to the railways, renewing the request for privatisation and embracing open markets. At the same time, railroads definitively gained the reputation of lacking entrepreneurial spirit, and again, the most common allegation made was that they were an idle beneficiary of the state wasting its money [24].

19However, considering the antagonism between exploding public grants and the scepticism which such a development provoked in the field of economic research, a critical history of transportation has to pose the question as to why Swiss policy makers were always reluctant to minimize the financial aid and, accordingly, why they still are. Furthermore, it is also worthwhile to analyse which business strategy the companies have adopted over the years : did they really behave so indolently and rely on the state as they were blamed ?

20As to the first problem, it is important to bear in mind its roots in the 19th century. The first railway lines were typically financed by local investors with the aid of state and local governments for the purpose of increasing commerce. Consequently, investors and government officials had a proprietary expectation that « their » company would primarily serve local interests [25]. This was mainly due to their conviction that railways would stimulate both the economy and the growth of the population all over the country – especially in remote areas – by keeping freight rates low. Transportation costs had been prohibitively high up to that time, this being caused by an energy input that was necessarily enormous. With the new railways it became possible for the first time to haul goods over long distances by land carriers [26]. Under these conditions, as local manufacturing was gradually replaced with worldwide market integration and international division of labour, it was only a short step to treat private railway companies as an instrument of commercial policy. Anxious to guarantee that not only the growing cities and the centrally located areas gained an advantage by rail transportation, the state soon decided to adopt a command-and-control approach towards the whole business [27]. The railway companies therefore became more and more saddled with a rigid regulatory regime that mainly consisted of the above-mentioned fundamental obligations. That meant that they were legally bound to carry each piece of freight and each passenger at any time and everywhere at equally low rates. Basically, the enterprises were not permitted to repudiate any of their potentially interested customers. Reflecting the strong conviction that railways touched the economic life of most people, this was targeted on ensuring an absolute equality in the conditions of transportation. No one should be discriminated, particularly because rail traffic had a virtual monopoly at the close of the 19th century [28].

21Fifty years later, in the interwar period and far beyond, the same attitude towards rail industry and its obligations had not changed, notwithstanding the first critical remarks in scholarly pieces dating from the late 1960s. Along with the promise of economic growth, railways still played a key role in the contemporary concept of transportation. Yet, with a renewed emphasis on their function of being promoters of the economic development, the railways were regarded as a public work, established by public authority and intended for public use and benefit, the use of which was secured to the entire community. Even the rise of the motor carrier as a strong competitor and the radical modification it caused on the market failed to prevent this opinion from being echoed by all political parties as well as by the media and, above all, by trade associations. Precisely these facts were the reason why the liquidation of any company was deemed totally unacceptable, even though the maintenance and modernisation of such enterprises gobbled up more and more public grants. Moreover, despite the obvious decline of most of the companies and the falling off of railway traffic, the legislature did not feel compelled to justify the financial aid in a detailed way. In fact, during the period between 1918 and the early 1970s, it became customary and absolutely sufficient to bring forward the argument of the railway that occupied – thanks to its fundamental obligations – a central place in the economic life of the entire country [29].

22However, in the late 1960s the general consensus on this issue began to crumble. Pursuing a new policy that shifted the emphasis slightly away from the hitherto accepted paradigms, some members of Parliament began referring to the public demand for protecting the environment, a matter which took on increased importance at that time. Under the impression that the accelerated economic growth and its by-products harmed nature and life and that it would be impossible to prolong it endlessly, politicians called for a change of course, especially in traffic affairs. The railways, which thus far had been continuingly squeezed out of the market by cars, turned out to be a panacea for finding the way out of the dilemma which maintained that freight and passenger transportation were absolutely indispensable on the one hand, but allegedly polluted the environment on the other [30]. From this perspective, the needs of both the economy and ecology could only be satisfied at once if at least the long-distance haulage was carried by rail while automobiles primarily served as a short-distance linkage. Therefore, the National Assembly insisted on their well-known strategy, according to which every railway company had to be prevented from falling into ruin, and they remained opposed to any idea of reducing the existing level of subsidy [31]. The public utilities which had justified the rising financial support and the state involvement up to that time no longer meant that the economic wealth throughout the country was fostered by railway transportation but rather assumed that the railway companies made a contribution to environmental protection. Thus, the late 1970s proved to be a real turning point regarding the argumentation in favour of the railways in Switzerland and their public grants [32].

23Nevertheless, with reference to the allegations made first by Meyer and with time by the vast majority of economists, the question arises whether the asserted bottleneck as well as the complete standstill of the railway companies should be revised in light of historical research. However, given the fact that the railway policy in the course of the 20th century shows conspicuous gaps in historiography, filling such an enormous space is obviously beyond the scope of this paper. Therefore, the problem can best be illustrated with the activities of the enterprises in view of their tariff structure during the 1940s and 1950s. For this purpose, the key to establishing such an understanding is to know that every change of freight and passenger rates, whether a reduction or a rise, required regulatory approval in the first place. Unlike the truck drivers who could bargain directly with shippers and passengers over scales, railways had lost that privilege and were not allowed any tariff reforms before they had worked their way through a system of public supervision. Furthermore, apart from this time-consuming procedure which lasted several months on the average, most of the national trade and industrial associations, such as the Swiss Farmers’ Union and the representative bodies of the coal, wood-working, or export-oriented industries, were given a say in all decisions on rates. That meant that whenever the companies planned to make any even minor adjustments, their plans first had to be discussed in the so-called Commercial Conference [33].

24A short glance at the very first all-out tariff reform, which took place from 1946 to 1952, reveals that this programme was originally initiated by the railways themselves. Once they realised that in the post-war period their legally founded rate structure did not meet their needs in the hard-fought transportation market, they wanted to revolutionize it. Above all, their efforts focused on adjusting all taxes to their real cost structure. Whereas lower charges for agricultural products had been made up for thus far by higher rates on other goods, this company-internal burden sharing had to be stopped as soon as possible. Pointing out the losses which they constantly had to bear, the companies attributed the necessary modifications to the fact that their inflated rates on high-priced goods had frequently been undercut by motor carriers in a kind of cream-skimming strategy. But as ambitious as they were, it was a dead duck in attempting to persuade their negotiating partners to accept their new tariff scheme. Both economic representatives as well as the deputies of the cantons refused to abandon the traditional rate system. Inasmuch as the policy makers were convinced that favourable rates should be fixed to assist ailing segments of the economy, the more lucrative freights should still contribute to the unprofitable charges without any restrictions. For instance, the Grisons Cantonal Council stressed the argument that public utilities would be predominant also in questions concerning transportation rates : « We feel strongly confident that the general interest of a country has to prevail over the profitable efficiency of the railway enterprises in any case » [34]. And likewise, Ernst Jaggi (1917 – 2004), director of the Swiss Farmer’s Union at that time, denied any claims by the companies to be operating at a profit : « It is not allowed to pursue a railway policy only on principles of profitability » [35]. In the end, such objections were taken into account by the Federal Council in their capacity as supreme authority upon being coerced to make a decision about the tariff issues due to the dissension within the Commercial Conference. In 1952, the rate structure of the railways showed the same peculiarities as previously and as it would continue to do until the late 1970s because of the failure of several ensuing reform projects. Therefore, most of the remote areas in the country as well as some of the industrial sectors – and above all, agriculture, which relied on the axiom of public utilities – seemed to be the only ones to profit from the Swiss railways policy. They all prevented the rail industry from working more efficiently, whereas the cost-conscious companies strove for increasing revenues and a higher profitability. As is evident, the scathing attack on the performance and management of the railways, primarily launched by Meyer and his successors, must be reconsidered and put into historical perspective at least for the period between 1945 and 1975 [36].