With strong economic growth forecast for Central and Eastern Europe over the
nextdecade, a reshuffling of European logistics markets is expected. In order
to assist inmaking this growth a future reality, vital improvements in
infrastructure are needed. In this paper we look at infrastructure development
across the key internal transportmodes, and how this fits within the EU’s
vision for freight transport across the continent,with particular reference to
likely environmental impacts in the future.


Road transport is a component of all supply chains. In most European markets
it is virtuallythe only mode, as Figure 1 shows. Latvia and Estonia are the
only countries where road isnot the dominant mode of transport.

From a supply chain perspective, road transport provides an efficient,
cost-effective meansof delivering goods from source – factory or port of entry
– to destination. While goods areunitised, the main carrier will be the Heavy
Goods Vehicle (HGV). Once a container loadhas been broken down, a whole range
of road vehicles are used, from soft-sided trucks tolight goods vehicles – the
white van of urban legend.

As the majority of freight is transported by road, alterations to driver hours
and workingtime legislation have changed the choice of optimum inland location
for logistics providers,especially for those seeking to distribute on a
pan-European basis.

By law, 4. 5 hours is the maximum permissible drive time for an HGV before a
break has tobe taken, a time that also represents the optimum threshold for a
one-day round-trip. Although road journeys are an inexact science due to traffic
delays and congestion,anywhere between 4 and 4. 5 hours drive one-way is
regarded as optimum. To date thishas significantly impacted upon where the
concentrations of logistics activity are located,especially the larger
facilities providing regional distribution services.


Looking at the distribution of GDP across Europe (Figure 2), it is clear that
the mostimportant area is the crescent that sweeps from the south east of the
UK, through the lowcountries, western Germany and the northern part of Italy.
France has centres of activityaround Lille, Paris, and in areas bordering
western Germany, Italy and Switzerland. Thereare equally high levels across the
Nordic countries, but in smaller concentrations. Thesame goes for the major
Russian cities of Moscow and St Petersburg.

These concentrations of activity have determined the location of the European
logisticsmarket to date, particularly as a result of drive-time needs. While
dramatic changes inWestern Europe’s distribution of GDP are not expected in the
next decade, rising economicgrowth in Eastern Europe will give rise to the need
for changes in the logisticsinfrastructure that serves it. As we can see from
Figure 3, the concentration of activity inplaces such as the Czech Republic and
Poland is set to rise, with pockets of growth inSlovakia, Hungary and Romania.

The extent to which these Central and Eastern locations can grow, not only to
servenational logistics needs, but also function as effective bases from which
other WesternEuropean locations can be served, will be driven predominantly by
improvements in roadand rail infrastructure, and the competitive/legislative
pressures between them.


Road Infrastructure

Generally speaking, the main road network in Western Europe is good, while in
EasternEurope it is poor. Some east European roads, particularly those in the
Czech Republic andthe Baltic states, are of a high standard, as are many of
those in Croatia and Hungary. Others, particularly those in Poland and Belarus,
are not – but improvements are being made. The development of a complete
motorway network is a priority for all central and eastEuropean countries as
the many expressways that currently exist are simply not designedto facilitate
a large volume of HGV traffic due to their lower load-bearing capacity. That is
why the majority of major planned roads, extensions, expansions and
improvements arefocused on Eastern Europe, especially roads connecting Eastern
Europe with WesternEurope. These include the east-west German link roads and
the Berlin-Brest road.

The most significant improvements are being carried out in Poland. The
majority of the A1highway, an important part of the Baltic-Adriatic Axis, will
be completed in 2013. And theA2 highway has recently connected the Polish
cities of Poznan, Lodz and Warsaw withGermany. However, the eastern part of the
road remains at the planning stage and is notexpected to be ready until between
2015 and 2020. These improvements will be critical inexpanding the potential
distribution locations of logistics operators across the central andEastern
European belt.

Rail Infrastructure

In many respects a resurgent rail freight industry cannot be restricted to
just one region,since rail distribution works best over medium to long
distances. Nevertheless, significantinvestment is required in Europe to cope
with long-term decline. There is also a dangerthat funds for rail investment
will be diverted to high speed passenger services rather thanfreight services.

In 2008 the EU identified a European rail freight network based on existing
and projectedflows of goods. For these corridors, investment co-operation
between infrastructuremanagers and the member states should result in an
optimised,Europe-wide system.

Most of the corridors are at an advanced planning stage. They’re also being
co-ordinated by a newbody – RailNet Europe. Each corridor has its own
objectives. For example, along the Rotterdam – Genoa corridor, the aim is to
doublethe volume transported between now and 2020, and increase punctuality by
26% while reducingtransport time by 20%.

Overall, the measures will facilitate 28 billion freight tonne-kilometres each
year to be transported by railrather than road.


The downsides of a mainly road-based distribution system are principally
congestion andpollution, and to a growing degree – fuel cost. As Figure 5
demonstrates, transportinggoods via HGV emits far more C02 than equivalent
journeys made by other transportmodes, except air. Consequently EU policy
prioritises rail and water transport over road and air transport, inorder to
reduce congestion, pollution and carbon emissions. A 2011 White Paper*published
by the EU sets out a number of key objectives for 2050:

— No more conventionally-fuelled cars in cities;

— 40% use of sustainable low carbon fuels in aviation. At least a 40% cut in

— A 50% shift in medium-distance intercity passenger and freight journeys from
road torail and waterborne transport.

All these objectives are intended to contribute to a 60% cut in transport
emissions by themiddle of the century, and reduce oil dependency significantly.
Clearly, they are also likelyto have a significant impact on a largely
road-based logistics industry. In terms of actual implementation, the White
Paper sets out a framework for the“internalisation” of all costs to road
vehicles. This will include internalising infrastructurecosts and congestion
costs, but most importantly C02 pollution (depending on the extent towhich any
future fuel taxes manage to fully attribute these costs to the vehicle). Given
the increased focus on the environmental damage of any journey (especially by
road), with the cost borne by taxes, this may well switch the argument in
favour of rail,with road use reserved for the beginning and end of a journey.


Figure 6 shows relative pricing for the main leg of a journey. These prices are
approximate, because of the complexity of pricing models and the discounts
available forregular loads and back loads, for example. It is clear, however,
that prior to factoring in thecost of modal shifts, rail and inland waterways
are more cost-effective transport methodsthan road over medium distances.


Despite the heavy reliance on road transport as the most flexible and
cost-effective mode over the past century, the cost and emissionefficiency
advantage of rail over road for medium distances (allowing for switching
between modes) should start to alter how goods aretransported across Europe in
the future. It is estimated that for non-bulk rail to break even against road
transport, it must travel around 300 km. Part of the reason for this is that
rail has higher levels of fixed costs than variable costs, which means the
marginal cost of going an extra mile by rail is much lower oncethe costs of
loading on and off the train have been paid. Rail is also a great fit for
intermodal shipping as it offers the best containerized fitbetween shipping and
the hinterland. Rail is also easy to electrify and therefore has a key role to
play in hitting EU carbon targets.

So while transport planners have sought to minimise modal shifts in order to
increase efficiency, thus favouring road-based solutions,this will have to
change if and when additional environmental costs are attributed more directly
to road freight. Although road freight willstart to benefit from the use of
bio-fuels and scheduling so as to increase load efficiency, the EU proposal is
to limit road freight to 300kmjourneys at most.

So from an environmental and cost perspective, the ideal scenario for European
logistics would appear to be:

> Sea freight to be point of entry for Europe;

> Road for intermediate distribution up to 300 km;

> For longer distribution use rail;

> Rail to larger hubs on city peripheries where ideally you can link to local
rail and tram infrastructure;

> Inner city distribution off the back of mini hubs in urban environments.

One key element of the supply chain which is required to enable this, is the
development of more efficient multi-modal hubs in and aroundmajor trading
sea-ports and large cities and conurbations. Of equal importance is the
development of inner-city infrastructure to allow forgreener distribution in
urban environments. Newly-green strategies of logistics providers have already
had a significant impact on the supply chain, as evidenced by fleetreplacement,
modal shifts to rail, and, to a limited extent, warehouse improvements.

Major developers such as Prologis and Goodman have committed to sustainable
property development. They are aiming to minimisenegative impacts on local
areas and reduce environmental footprints through lowering usage of energy and
water, increased recyclingand responsible waste disposal solutions. Notable
examples of sustainable warehousing include, Prologis Park Turin 2 in Italy
deliveredfor Huhtamaki, which received LEED® Gold certification in 2011; and a
warehouse built in 2010 for DSV by Goodman within the MunichAirport Logistics
Centre. The property is one of the most energy efficient warehouses in the
Munich region and the developer ispreparing a case for DGNB certification.

Lower costs suggest a role for rail,but road’s flexibility to win-out


It is clear that, across Europe, rail is the mode of policy choice,
particularly overroad. However, EU policy looks somewhat ambitious in this
respect, aiming for a 50%shift in medium-distance passenger and freight
journeys from road to rail andwaterborne transport, with policy detail on how
this will be affected thin on the ground.

On the plus side, however, for journeys over 300km rail is already cheaper,
and moreenvironmentally efficient, and with policy shifts in the future this
mode of transportwill become increasingly prevalent over these distances. From
a demandperspective, major corporates are very keen to reduce their
environmental footprint, andrail will support this over medium distances from a
cost perspective.

Carefully managed projects such as the EUfunded CREAM Project, managing
integrated rail services between Istanbuland the Benelux countries are a key
stepforward. The intermodal Bosphorous Europe Express (BEEX) between Istanbul,
Ljubljanaand Munich has been key in enabling increased trade between Germany
and Turkey tooccur using rail as the key mode.

Looking forward, the coordination of future cross-border investment in key
rail corridors byRailNet Europe should allow further expansion of freight
transport via rail.

The increasing development of rail-connected warehousing also makes it more
efficient,with some of the largest logistics developers committed to providing
these facilities inorder to serve clients with environmental targets to hit.

At present, however, due to the lack of appropriate modal shift infrastructure
outside ofEurope’s core port and distribution centres, rail cannot compete with
road. Road is farmore ubiquitous and flexible as a means of consistent
transport across all of Europe. Equally, investment is going into more
environmentally friendly road vehicles, which willpush back a little on the
shift to rail.

To conclude, the extent to which infrastructure and legislative support is
brought to bearacross the EU in favour of rail will be the key influence in the
long-run. In Russia, whereEU policy has no influence, rail freight will be left
to the whims of the market, so progressremains to be seen. This despite the
fact that for trans-national Russian traffic, rail freightwould appear to be
the obvious choice.

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