Upstream vs. downstream grants — The role of public contributions in improving railway efficiency in Europe

The level of government support significantly influences the performance of European railways. However, prior analyses have largely focused on the sector as a whole, neglecting the distribution of public budget contributions between the infrastructure manager (the ‘upstream’ network provider) and railway undertakings (the ‘downstream’ service providers). This study employs a two-stage procedure involving Data Envelopment Analysis (DEA) to measure efficiency, followed by regression analysis to evaluate the relationship between funding structures and performance. Using a dataset covering eight European countries from 2001 to 2022, the results indicate that railways achieve higher efficiency when government funds are primarily allocated to the infrastructure manager rather than to railway undertakings. This can be attributed to the mitigation of double marginalization and soft-budget constraints, as well as the stimulation of intra-rail competition enabled by lower infrastructure access charges. Furthermore, while a higher overall level of operating subsidies consistently correlates with better efficiency, the impact of capital investment grants is less uniform. These findings underscore the importance of balanced funding strategies that prioritize infrastructure support to foster competition and promote the efficient use of public resources. • Distinguishes between the effects of upstream infrastructure grants and downstream subsidies. • Rail systems typically achieve higher efficiency when funding prioritizes infrastructure. • Infrastructure support reduces access barriers and fosters market competition. • Total operating contributions – spanning both infrastructure and public service – enhance efficiency, unlike investment grants.