Abellio’s strategy helps NS to achieve its objectives and has 3 pillars: earn, learn and prepare, whilst effectively balancing risk and reward of its foreign activities by means of a portfolio approach. Ultimately the Dutch passengers will benefit from Abellio’s activities abroad because of the experience gained in these markets and the return on investment that NS wants to achieve.
In the early 2000s, NS decided to enter the deregulated railway market to prepare for the liberalisation of European markets, in line with legislation such as the EU’s Fourth Railway Package. Since then, Abellio has built up a strong position in the United Kingdom and the regional railway market in Germany. At the same time other European rail companies, such as DB and SNCF, are active in the Dutch public transport market. With its clear focus on the key rail markets in Northwest Europe, NS is developing a strong position in the European market through Abellio and seeks to find opportunities that will also contribute to the public transport and passengers in the Netherlands, for example cross border connections.
NS is learning from Abellio’s experience operating in highly competitive and commercial environments. At the same time, Abellio incorporates best practices from the Netherlands in its bids and when running its operations. This means that both NS and Abellio learn from the experience of bidding for tenders, as well as through operating franchises.
Abellio’s strategic priority is to achieve positive, sustainable financial results through effectively managing risks and keeping investments of NS at an acceptable level. The ultimate objective is to create a diversified portfolio of long-term sources of income, and to realise solid levels of profitability.
All of Abellio’s franchises in the United Kingdom and Germany are expected to be profitable over their contract periods. This is a result of our targeted approach to achieving growth, and effective balancing of risk and reward based on a portfolio of contracts. In the United Kingdom, passenger railway contracts are tendered as net contracts, meaning that passenger revenue risk is taken by the operator and any subsidy received is calculated on costs net of revenue. In Germany, most passenger railway contracts are tendered as gross contracts, meaning that passenger revenue risk is retained by the tendering Transport Authority and subsidy received is based on the gross costs of the contract.
Capital at risk
In 2018 Abellio worked within the capital at risk framework which was agreed in 2016 with the Dutch Ministry of Finance and NS. With this framework NS and Abellio can develop foreign activities whilst balancing acceptable risks and results. The framework stipulates how much capital at risk can be invested in the United Kingdom and Germany. Foreign franchises and concessions, like Dutch activities, involve (financial) risks. The Dutch State as shareholder, represented by the Ministry of Finance, has agreed with NS rules to limit the financial exposure in foreign activities. The core of the agreement is that an upper limit has been set for the capital at risk that NS, as the parent company of Abellio, may allocate for its foreign activities of Abellio. This consists of € 500 million for invested capital and regular guarantees. The total amount of invested capital and regular guarantees is € 451 million as at 31st December 2018. An additional limit of € 500 million applies to the bids in the United Kingdom for specific parent company guarantees that the franchise provider requires from the ultimate shareholder. These guarantees can be seen as a contingent contribution in capital which can be drawn as subordinated shareholder loans to support investments in the franchise and maintain required liquidity ratios. No capital contributions or equity investments are required at the start of a franchise. The total amount of parent company guarantees is € 326 million as at 31st December 2018 of which an amount of € 64 million has been drawn.