Roland Berger Executive Rail Radar 20130408

7/30/2019 Roland Berger Executive Rail Radar 20130408

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SURVEY RESULTS

The European rail industry

Executive Rail Radar

March 2013


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> In 2011, we conducted and published the first ExecutiveRail Radar to support industry leaders in identifying keyissues that drive their industry, and to promote executive-level thinking in the European rail industry

> As a top strategy consultancy in the rail sector and othertransportation industry segments, we aim at regularlyproviding fresh insights into the rail industry's current andmost important issues

> We have therefore put together a second Executive RailRadar, capturing opinions and responses on the key rail

industry topics> Here, we present the key findings and conclusions, and

trust you will find them insightful in supporting yourstrategic thinking and decision making. We would welcomethe opportunity to have a more detailed discussion withyou on any of the issues presented

THE EUROPEAN RAIL PRACTICE

MANAGEMENT TEAM

The new Executive Rail Radar presents key insights into the railindustry We look forward to discussing the results with you

BACKGROUND AND

INTRODUCTION

Didier Brchemier (Paris)

Francesco Calvi Parisetti (Milan)

Alain d'Oul tremont (Brussels)

Roland Falb (Vienna)

Andreas Schwil ling (Munich)

Ren Seyger (Amsterdam)

Maria Mikhaylenko (Moscow)

Pedro Galhardas (Lisbon)

Martin Streichfuss (Dsseldorf)

Roland Zsilinszky (Prague)

Friedrich Demmer (London)

2

Jorge Delclaux (Madrid)


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The results are based on contributions from senior executivesacross the European rail industry

PROFILE OF RESPONDENTS

> The responses to the Rail Radar survey are wellbalanced in terms of participating countries: Austria,Belgium, Czech Republic, Denmark, France,Germany, Italy, the Netherlands, Romania, Russia,

Slovak Republic, Slovenia, Switzerland and theUnited Kingdom

> In addition, different rail segments are represented inthe survey: 45% of responses are from integratedrailways and 24% from municipal transport firms. Theremaining survey participants are from train operating

companies (17%), rail infrastructure providers (9%)and other segments (5%)

> Almost two-thirds of the responses were provided byexecutives at top management level, 16% came fromCxOlevel

> The online survey was conducted between November

and December 2012

PARTICIPATING COMPANIES


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The survey yields key topics on rail executives' agendas for 2013and details selected broader industry issues

Profitability, stability

Financing

Growth and expansion

EU legislation

Public privatepartnerships

Homologation, TSI

HR managementQuality

Assetmanagement

Flexibility, efficiency

Innovation

AGENDA 2013

SELECTED KEY

ISSUES IN FOCUS

> Topics at the top of railexecutives' agendasin 2013

> Key changes versusprevious survey

> Detailing of selectedbroader industry issues:

Planning process

EU rail legislation

Financing

Homologation

Planning processes

Proximity of topics to the center indicates importance


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Executive summary (1/2)

COMPANY'S AGENDAS

IN 2013

RECENTDEVELOPMENTS IN(DE)REGULATION

COMPLEXITY INCORPORATE PLANNING

> Profitability and financial stability remain at the top of rail executives' agendas this

year, financing and asset management are subsequent priorities All of these topicsbecame even more important since the previous survey conducted in 2011

> Quality enhancement lost importance since 2011, but is still high on the agenda

> Innovation and HR management grew strongly in importance

> Cost cutting/efficiency programs will be continued, extended or newly set up in 2013

> The recast of the first railway package is viewed very critically by rail executives More than 40% even expect adverse effects, considering it too regulated

> All individual key rules of the recast are supported by (often far) less than 30%

> Although rail executives support the stricter control of track access charges ingeneral, they are opposed to the recast's infrastructure charging rules

> In 2013, railways will keep up intensive interaction with EU officials on the future

development of EU rail legislation

> The importance of planning is showing a tendency to rise, while a broader scope andshort-term nature are increasing planning complexity

> Budgeting is considered as being the most complex planning process

> To reduce planning complexity, rail companies avoid details, rely on past experienceand reduce output parameters and forecasting periods


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Executive summary (2/2)

FINANCING OF

RAILWAYS ANDMUNICIPAL TRANSPORT

> Rail executives aim at internal sources of financing infrastructure/operations through

efficiency and revenue enhancements. However, the need for public funding remains> As today, public-private partnerships (PPP) are considered to play an important role

in municipal transport, rather than for railway financing

> PPPsare seen as both a blessing and a curse: Additional efficiency pressure andcultural change are appreciated, while the profitability expectations of privateinvestors are seen as a key disadvantage at the same time

> Railway stations and primary infrastructure of individual lines are considered to bemost suitable for PPP investments in infrastructure

> Functional privatization via dedicated service contracts is expected to prevail overother forms of privatization, material privatization with asset ownership is seen as anexception

HOMOLOGATION ANDITS EFFECTS

> The vast majority of rail executives considers homologation procedures lengthy,often problematic

> Lack of efficiency is viewed as a similar problem in European countries, whereasother industries are considered to be more efficient in homologation

> European initiatives for TSIsare generally appreciated by rail executives. However,

faster and more intensive implementation is demanded for 20131) Technical Specifications for interoperability


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TOPICS a. COMPANIES' AGENDAS IN 2013:Profitability and financial sustainability are top priorityb. COMPLEXITY IN PLANNING:

Importance and complexity of planning are rising

c. RECENT DEVELOPMENTS IN (DE)REGULATION:Recast of first railway package viewed very critically

d. FINANCING OF RAILWAYS AND MUNICIPALTRANSPORT:Internal and public financing preferred over PPP

e. HOMOLOGATION AND ITS EFFECTS:Procedures lengthy, other industries more efficient

f. YOUR CONTACTS AT ROLAND BERGER:We will be happy to discuss the results with you


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Profitability/efficiency, financing and asset modernization dominaterail companies' agendas in 2013 Broad variety of specific topics

TOP TOPICS ON COMPANY'S AGENDAS IN 2012-131)

> Profitability issues are ahead of other topics on railcompanies' agendas in 2013; cost cuttingprograms will be continued, extended or newly setup, networks and offers might be reviewed

> In addition, two topics relatively specific to the railindustry come in second and third, i.e. financingand modernizing infrastructure, indicating impactfrom the European debt crisis and financingconcerns

> Growth and innovations are fifth and sixth,indicating room for expansion, top line and

service-related topics> Overall, a great variety of topics was noted by the

survey participants as being important in 2013,incl. sustainability, specific contracts, ERTMSdeployment or safety issues

> The ranking of top topics is fairly similar across

countries and company types

Source: Roland Berger Executive Rail Radar

HR management and development

Modernizing rolling stock

Growth

Geographic expansion

Improving flexibility, efficiency

Innovation, innovative

service offerings

Modernizing infrastructure

Quality improvement

Financing (investment,

public service obligations)

13%

Profitability, financial stability

13%

20%

15%

19%

19%

22%

26%

28%

56%

1) % of mentioning as one of the top 3 topics in a list of 20 topics

a. Companies' agendas in 2013

1

2

3

4

5

6

7

8

9

10

8


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Profitability, financing, asset and HR management gained impor-tanceversus 2011Quality and growth lost, but are still in the top 5

CHANGES IN TOP 10 TOPICS

VERSUS 2011 SURVEY


> In 2011, we conducted and publishedthe first Executive Rail Radar, asking

the same question on the top topics oncompanies' agendas

> Profitability was considered the mostimportant topic in 2011 and has gainedeven greater importance since then

> Asset management (infrastructure,rolling stock), financing, innovation andHR management gained strongly inimportance

Rank2012

rankvs. 2011 Topic score vs. 20111)

1) %-pts. of mentioning in top 3 topics in a list of 20 topics

HR mgmt. and development

Modernizing rolling stock

Geographic expansion

Improving flexibility, efficiency

Innovation, innovativeservice offerings

-17%Growth

4%

Modernizing infrastructure

0%

Quality improvement

0%

Financing (investment,public service obligations)

2%

Profitability, financial stability

9%

5%

-15%

11%

8%1

2

3

4

5

6

7

8

0

+5

-1

+2

-2

+9

-2

0

9 +1

10 +8

a. Companies' agendas in 2013

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The importance of planning has tended to rise, while a broaderscope and a short-term nature are increasing planning complexity

IMPORTANCE OF PLANNING1)

> The rail environment is becoming increasinglyimportant, complex and short-term oriented

> This has to be mapped in planning processes

Planning is intensified

Planning systems are made more flexible,aiming to cope with short-term changes

> Consequently, the planning itself becomes morecomplex

> As efficiency/profitability is high on companies'agendas, rail companies must despite the highly

complex environment aim to reduce this com-plexity in planning processes

No change in importance

of planning6%

Other 9%

Shorter planning periods,

more frequent changes11%

Importance unchanged,

reaction times more important32%

Scenario-based approach,uncertainties in environment

36%

Planning is intensified, more variables,

inputs, parameters, etc.36%

Planning becomes more important,

more complex environment38%


1) % of answers; multiple answers possible

b. Complexity in planning

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The planning of budgets and demand forecasts are consideredparticularly complex issues

MOST COMPLEX PLANNING PROCESS1)

> More than half of rail executives consider pro-cessesfor long and short-term budgeting the mostcomplex issues in planning. Especially here,complexity should be reduced

> Passenger demand forecasts are fairly simple onan overall level. However, on a route, day and timebasis it becomes quite complex

> Although revenue management has beenintroduced by many European passenger railways(DB, SNCF, SJ, Eurostar, Thalys and many more),only one in seven rail executives considers the top

line to be the most complex item in planning> Some rail executives note that public financing

can add complexity to any respective planning

> Rail companies might decide to work on theirbudgeting processes, making them more efficient


1) % of mentioning as top 1 topic


13%

19%

14%

31%Yield andrevenue

planning

21%

Annual budgetPassenger/cargo forecast

Capacity planning1%

Other

Long-term budget

(e.g. 5-year period)

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To reduce planning complexity, rail companies avoid details, rely onpast experience, and reduce parameters and forecasting periods

MEASURES TO REDUCE COMPLEXITY1)

> As we have seen above, rail companies mustoffset the increasing complexity in planningprocesses

> In particular, they acknowledge that the

environment and planning assumptions canchange quickly so that flexible reactions becomemore important than detailed planning

> The extrapolation of previous figures is seen as anequally important way to reduce complexity Foroverall figures this is often fine, on a more detailedlevel this appears to be a critical/dangerousapproach

> Furthermore, rail companies also reduce outputparameters, forecasting periods and inputvariablesOther 4%

Use a random-

based approach4%

Reduce inputs 15%

Reduce forecast

periods17%

Reduce planning

parameters (output)34%

Extrapolate on basis

of previous figures45%

Focus on flexible response,

rather than details45%




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More than 40% of respondents criticize the recast as too much regu-lation, 36% consider it a good compromise, 17% think it is late/soft

OPINIONS ON THE RECAST OF THE FIRST EU

RAILWAY PACKAGE


TOTAL SURVEY

17%

17%

50%

40%

4%

Municipal transport 10% 40% 10%

Rail infrastructure 25% 25%

Train operating company 50% 33%

Integrated railway 63% 29% 4%

All 43% 36% 4%

> Recast in general viewed critically; especiallyexecutives in Germany, Switzerland, Denmark,Slovakia and Slovenia expect the recast to have anegative impact

> As expected, executives from train operatingcompanies and separated infrastructure operatorshave a more positive opinion on the recast thanthose from integrated railways

> However, 25% of executives from rail infra-structure companies consider regulation too strictand expect negative impacts

> 17% of the executives think that the recast comestoo late and should be stricter. Unsurprisingly,nobody from an integrated railway shares thisopinion

> Interestingly, countries that are advanced inliberalization (according to LIB Index1)) view the

recast especially critically

Regulates too much,

adverse effects

Good compromise between

stakeholders in railway transport

Comes too late,

stricter rules required

Other

BY SEGMENT

c. Recent developments in (de)regulation

1) The LIB Index shows the relative status of liberalization of the rail transport markets in Europe.The respective study is conducted regularly by Prof. Kirchner/Humboldt University Berlin and IBM

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Feedback on the rules of the recast was mostly critical "Counter-productive" and "No significant effects" total > 70% for most rules

ASSESSMENT OF THE MAIN RULES OF THE RECAST1)


1) % of answers

> For all eight rules, about half of therespondents feel that they will have nosignificant effects

> All of the eight rules are assessed asbeing important and highly relevant byless than 30%

> Given this overall negative assessment,more detailed network statements, thestrengthening of the regulator and theindependence of the regulator areregarded in a relatively positive light

> Most negative feedback was receivedfor the requirement of long-term agree-mentsbetween state and infrastructuremanagers and for more preciseinfrastructure charging rules

51%

61%

51%

48%

49%

53%

56%

40%

29%

Requirement of nat. long-term

agreements state/IM

Requirement of more precise

infrastructure charging rules

12%

30%Establishment of explicit rules

on conflicts of interest

29%

24%

Improved access to

rail-related services

Independence of regulator

from other authorities

Extended competence

of rail regulator

Requirement of more detailed

network statements

18%

23%

Strengthening power

of regulators

12%

30%

15%

28%

24%

21%

22%

27%

48%

Will have no significant effects Counterproductive,

negative impact on the industry

Important and highly relevant


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Stricter regulation is in general viewed rather critically Strictercontrol of track access charges receives the broadest support


> None of the specified rules is supported by morethan 50% of rail executives

> Stricter control of track access charges receives thehighest support

Interestingly, here the support from integratedrailways is significantly higher than from trainoperating companies and infrastructure providers

Note that rail executives oppose the infrastruc-ture charging rules as formulated in the recast

> Only 21% of rail executives support legal action forstronger separation from train operators Thisdoes not exceed 50% among infrastructureoperators

> Other areas mentioned are independent accessregulation and stricter control of funding authoritiesand regulating bodies

> Comparably broad support for stricter rules comesfor instance from France and Slovakia Lowsupport from Czech Republic and Switzerland

26%

Stricter control of

track access charges50%

Other 7%

ETCS-differentiated

track charging12%

No profit transfers

allowed21%

Separate infrastructure from

train operators21%

Separate legal entities

for rail-related facilities


AREAS FOR STRICTER REGULATION1)


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Railways consider internal sources of finance crucial, in particularproductivity gains PPPsmore important for municipal transport

50%

20%

60%

90%

90%

50%

30%

OPINIONS ON MAIN LEVERS FOR FINANCING1)


1) Financing of infrastructure projects and transport operations; % of mentioning in top 3

d. Financing of railways and municipal transport

35%

40%Additional revenues,

e.g. in stations

81%

60%

16%

Increase price

differentiation21%

Redesign network

Price increases

at railways42%

Improved efficiency and

productivity of railways

Public financing

PPPs

ALL SECTORS MUNICIPAL TRANSPORT

> Rail companies emphasize sourcesthey can influence themselves, i.e.productivity gains and additionalrevenues

> Public financing remains among thetop financing sources for railways

> This can be interpreted as a reactionto insecure or even reduced publicfunding due the European debt

crisis, i.e. as railways shift financingoptions to internal sources

> PPPs come in last in total surveyresponses, but have a much higherimportance for municipal transport

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PPPswill gain importance and will be significant for developingcountries, but public financing will prevail as the dominant source

IMPORTANCE OF PPPs IN THE NEXT FIVE YEARS1)

Other 5%

PPPs will become a major

financing mode in Europe, too5%

PPPs will be a unique form

of financing worldwide5%

PPP will be important

for developing countries31%

Public financing will remain

the dominant financing

modefor railways

40%

PPPswill not fill the gap,

although public financing

will be reduced

60%


> The responses point to a relatively critical attitudeon the part of railway companies to PPPs; railwaysassume that PPPswill not be big enough tocompensate for potential financing gaps frompublic sources

> Potential reasons might be insufficient experiencewith PPPsand hence reservations, lack of accessto PPPs, or structural reasons (PPPs not suited forgeneral or long-term financing, rather for specificpurposes)

> Another reason is that respondents expect PPPs

to better suit specific projects, e.g. stations orindividual lines, i.e. where revenues and cost canbe directly allocated to the project

> Only 5% of respondents expect PPPsto become amajor source of financing in Europe. The 60%majority expects PPPsnot to fill the public

financing gap1) Financing of infrastructure projects and transport operations;% of answers; multiple answers possible


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PPPsconsidered both a blessing and a curse: Pressure and culturalchange appreciated, while expectations of private investors feared

51% 46%

95%

57%93%

60%48%

98%

Complexstructures,contracts,controlmechanisms

Higher returnexpectationsfrom privateinvestors

Not suitedfor rail trans-port, publicfinancingneeded

Publicauthoritieslosecontrol

Additionalfunding

Pressure byprivateinvestors

Culturalchange tobusinessculture

Risktransfer

MAIN DISADVANTAGES OF PPPs1)MAIN ADVANTAGES1)

1) % of mentioning in top 3

> The key advantage of PPPs is the additional sourceof funding

> Structural PPP items are a further key advantage:Move towards stronger business and private

economy orientation

> Almost all rail executives consider additionalcomplexity to be one of the top 3 disadvantages

> Rail executives fear higher return expectations, thisview is shared by integrated railways, infrastructure

operators, train operating companies and municipaltransport alike


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1) % of mentioning in top 3


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Railway stations and primary infrastructure of individual lines areconsidered to be most suitable for PPP infrastructure investments

INVESTMENT NEEDS SUITED FOR FINANCING

INFRASTRUCTURE THROUGH PPP1)

Secondary infrastructure

8%Other

15%

Primary infrastructure

of entire (sub)networks28%

Primary infrastructure

of individual lines

55%

Railway stations 63%



> Almost 2/3 of rail executives consider railwaystations as suitable for PPP investments

> More than half of rail executives believe thatprimary infrastructure of individual lines (e.g.airport connections, high-speed routes, cargo

routes) can be financed through PPPs> Only a limited number of rail executives can

imagine financing primary infrastructure of anentire (sub)network or secondary infrastructure(embankments, bridges, tunnels) in this way

> Other investments suitable for PPP include car

parking and cargo terminals> Earlier, we have seen that profit expectations of

private investors are viewed as the most importantdisadvantage of PPPs Hence, railway stationsappear to be a rather profitable investment onaverage. Additionally, revenues and cost are

comparably easy to attribute to railway stations


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In PPPs, functional privatization (dedicated service contract) isexpected to prevail over other forms of privatization

DEGREE OF PRIVATIZATION LIKELY TO PREVAIL IN

FUTURE PPPs FOR RAIL FINANCING1)

22%

Material privatization

(permanent ownership

transfer)

Functional

privatization

with temporary

ownership transfer

57%

Purely functionalprivatization(no ownershiptransfer)

22%


1) % of answers

> The majority of rail executives expects purelyfunctional privatization to prevail in the future:Partnership via service contract, e.g. for designing,building, operating and/or maintaining, withoutasset transfer

> Less than half of rail executives forecast at leasttemporary asset transfer, less than 1/4 envisagematerial privatization prevailing (permanenttransfer of ownership)

> The result reflects the timescale that differentstakeholders foresee for a PPP investment

Private investors have short/medium-termexpectations

Public authorities take a medium/long-terminterest


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Homologation procedures are considered lengthy, sometimes evenproblematic Safety levels appear extremely high

ASSESSMENT OF HOMOLOGATION FOR RAILWAYS

AND MUNICIPAL TRANSPORT1)

Homologation is insufficient

and represents a safety risk5%

Homologation procedures are

efficient and fast 5%


lengthy, but not a problem38%


lengthy and cause significantproblems for the industry 45%

The safety level in my country

is extremely high57%


> The overwhelming majority considers safetyissues to be fulfilled with current homologationpractice

57% consider the safety level extremely high

Whereas only 5% see a safety risk due toinsufficient homologation

> However, homologation procedures are widelyconsidered to be inefficient

More than 80% consider the process lengthy(esp. in Eastern Europe)

Whereas only 5% view the process as efficientand fast (Austria, Switzerland)

> Railway executives would support animprovement in efficiency in the homologationprocess without compromising on quality/safety


e. Homologation and its effects

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Homologation is mostly seen as comparable to other Europeancountries, but as more complex than in other industries

COMPARISON OF HOMOLOGATION1)


> On the one hand, rail executives see thecomplexity of homologation processes as similaracross countries However,

In Switzerland and UK, executives consider thehomologation process to be more efficient than

in other countries In Germany and Eastern Europe, the process is

seen as rather lengthy

> On the other hand, rail executives assumehomologation processes in rail to be morecomplex than in other industries like utilities,

telecommunications, aerospace or automotive This is especially true for executives fromGermany, France and Eastern Europe

> Hence, an improvement of the homologationprocess should be targeted and for this, inspirationfrom other industries is more helpful than a cross-

border comparison of national practices

INTERNATIONALLY

ACROSS INDUSTRIES

1) % of answers;


More efficient

and faster than

in other Euro-

pean countries

21%

More complex,

lengthy, competitive

disadvantage for rail

38%

About the same

level as in other

European countries

41%

26%

More complex,lengthy, needs

to be redesigned

25%

About the samelevel as in

other industries

Lower than in

industries withsimilar safety

requirements

49%

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European initiatives for TSIsare generally appreciated, but fasterand more intensive implementation is demanded

RATINGS OF THE EUROPEAN INITIATIVES FOR

TSI1)

Other 2%

Make homologation more

complicated and lengthy32%

On the right track, but too

slowly implemented66%


1) % of answers

> About 2/3 of rail executives see the Europeaninitiatives for TSI pointing in the right direction, butconsider implementation in national laws as tooslow or insufficient

> About 1/3 of rail executives expect the initiatives

for TSI to make homologation more complicatedand lengthy This assessment is common amongexecutives from France, Germany andSwitzerland

> There are some worries that TSIs are notsufficiently specific and detailed to ensure

technical convergence> Overall, there is acknowledgement of the

European Railway Agency's efforts, while a fastertransfer to national laws by member states isdemanded


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Roland Berger Executive Rail Radar 20130408

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