There is a risk that NS’s investments abroad cost money rather than bringing in money.
Abellio is a fully-owned subsidiary of NS that operates in the passenger transport markets in the United Kingdom and Germany. NS invests in these markets through this subsidiary. Abellio's priority is to achieve positive financial results and offer a high-quality product to local passengers and passengers travelling to and from the Netherlands, by controlling risks effectively and making sure that investments remain within the Capital-at-Risk framework. This framework, which was agreed with the Ministry of Finance in 2016, limits the size of the investments abroad by NS and the guarantees provided by NS.
In 2019, the ScotRail and Greater Anglia franchises in the United Kingdom yielded disappointing financial results. This effect was set off by adding the East Midlands franchise to the portfolio with effect from 18 August 2019. Despite various improvement initiatives, passenger revenues are lower than expected due to:
disappointing economic growth, in part owing to persistent uncertainty surrounding the consequences of Brexit;
passenger patterns deviating from historical trends, which has resulted in disappointing growth in passenger numbers compared with the expectations at the time of the bids;
dependence on Network Rail for the timely completion of infrastructure-related projects required to ensure timetable efficiencies that will help us accommodate growing passenger volumes.
Another issue in the Greater Anglia franchise is a dispute with the franchise authority about a risk-sharing mechanism that is resulting in an increase in the franchise fee. Finally, due in part to the delayed delivery of new trains and infrastructure issues, performance on the track is not up to the level agreed with the franchise authority and has also failed to meet the expectations of the public.
In Germany, revenue growth will be achieved over the next few years from €534 million in 2019 to approximately €800 million once all contracts are fully operational. This is due to a number of franchises won that will enter into operation between June 2019 and June 2020. Preparations are required during the mobilisation phase prior to operation, such as recruiting and training staff, purchasing trains and establishing workshops for the maintenance of trains. The substantial investments and mobilisation costs required affect the result because growth is so rapid. NS recorded start-up losses in Germany in 2019. In addition to high start-up and mobilisation costs, labour market shortages in Germany and new collective labour agreements led to higher personnel expenses and increased the need for staff on the trains. Combined with extensive maintenance work on the infrastructure, the shortage of first-line staff resulted in a higher penalties imposed by public transport authorities due to train cancellations and lower punctuality rates. The franchise authority compensates carriers through a price indexation for cost increases, but the current indexation does not cover the costs arising from the reduction in working hours, for example. The carriers are consulting with the franchise authorities on an adjustment of the index and a penalty system that only penalises issues within the carrier's control.
Based on the agreements made with its shareholder, NS limits the financial risk associated with Abellio’s operations to providing group guarantees and the invested capital within the Capital-at-Risk framework. The size of the risk for certain franchises in the United Kingdom is kept down by entering into strategic partnerships, as in the Greater Anglia franchise where Mitsui has a stake of 40%, and the West Midlands franchise where Mitsui and Japanese Railways East (JRE) have a joint 30% stake. Furthermore, Abellio has started various initiatives that should support the operating results.
In Germany, the mobilisations and efforts to optimise operations are being prepared thoroughly using a programme approach with experienced managers. Programme execution is also closely monitored so that the risks of delays and budget overruns can be managed. The experience and lessons learned from previous mobilisations are also incorporated in the programme approach for new mobilisations. If Abellio is to generate a reasonable return in the German railway market, it is essential that agreement is reached with the franchise authorities on adaptations to the personnel expenses index and a penalty system that only penalises issues within the carrier's control.
Risk control trend
The above-mentioned measures will bear fruit in the short and medium term. We still expect that all franchises will make a positive contribution to the result over the course of their term. There are no onerous contracts at present, even though Abellio Germany and ScotRail both did operate at a loss in 2019.