Report of the Supervisory Board
2021 was an intense year for NS and for the Supervisory Board. In addition to dealing with the more regular themes such as personnel, safety and IT, this year the Supervisory Board also addressed several particularly pressing themes such as COVID-19 and Abellio Germany and UK. The Board is pleased to note that NS has continued to perform its social task effectively in these challenging times.
The COVID-19 pandemic persisted throughout 2021. This has taken its toll in particular on our first-line employees, who are in direct contact with passengers in our trains and at the stations day in, day out and are directly affected by the social debate on the government's COVID-19 measures. The higher sickness absence among NS employees has added to the pressure of work. The Supervisory Board appreciates the commitment and resilience of all NS colleagues, who have once again continued to perform this year despite the difficult conditions and made sure that people who needed to travel by train could continue to do so.
At the same time, COVID-19 has caused a sharp decline in passenger numbers and has severely hit NS also financially. At the government's request, NS continues to provide train services. The availability payment (beschikbaarheidsvergoeding) it receives in return covers up to 93% of lost income, thus largely compensating for the financial deficit. Even so, NS expects to deal with a considerable financial gap until 2025. To mitigate this problem, the Executive Board first of all initiated a transformation process for NS. The aim is to cut expenditure by €1.4 billion in the period up to 2025 and to make NS a more agile organisation. The transformation is now well under way and is on the agenda of every Supervisory Board meeting. At the same time, it is important to get passengers back on our trains as soon as the COVID-19 crisis allows. Following the government's advice, many people, especially commuters, are still working from home. While we cannot predict the extent to which they will continue to do so, expectations are that home working will result in permanent changes in commuter behaviour.
The NS strategy
Over the next few years, NS will develop into a broadly oriented mobility company. NS has formulated several strategic themes, such as regaining passengers, providing reliable journeys, broad mobility, world-class stations and digitalisation & data use, as a basis for its efforts to keep the Netherlands accessible in the future. Despite the COVID-19 crisis, we managed to achieve progress on these themes in 2021. For example, the 2022 timetable provides for an Intercity service every 10 minutes between Rotterdam, Schiphol and Arnhem. NS will also increase the number of international connections and is testing New Generation Intercity trains in the Dutch rail network. Fleet modernisation is now in full swing. NS has also invested in upgrading passenger services at the stations. The station areas offer a wealth of opportunities to relieve the housing construction crisis in the Netherlands, both in terms of property development and new stations in residential construction projects. Digitalisation offers opportunities to further improve our services for passengers, for instance via the NS app. Challenges include the need to upgrade back-office IT systems, and to find and retain sufficiently qualified employees to ensure high-quality IT facilities for NS. In addition, IT security calls for substantial investments. The Supervisory Board has also identified plenty of opportunities for NS to contribute to the national climate targets and to make our own organisation more sustainable.
NS wants its operations abroad to serve the interests of passengers in the Netherlands, for example by means of cross-border transport options and better connections with cities elsewhere in Europe. Over the past year, the Supervisory Board extensively discussed the position of Abellio in Germany. Due to several external factors, such as current developments on the German labour market, the CLA and increased rail maintenance, operations in the German rail network incurred severe losses, as in 2020 and 2019. Abellio extensively consulted with the German public transport authorities on compensation for these external factors and to obtain certainty on the additional compensation that would be required to break even in Germany. Eventually, in consultation with the franchising authorities in two of the four regions where Abellio operates train services, and subject to provisional insolvency, a solution was found that will help to limit future financial losses. In the fourth region, North Rhine-Westphalia, it proved impossible to make new agreements despite support from shareholder NS and the tremendous efforts by our colleagues there. In all likelihood this will result in the insolvency, after all, of Abellio in North Rhine-Westphalia. This is a disappointment to the Abellio staff who have always been highly committed to ensuring the company's success. NS wishes to emphasise that, due to their character, it is impossible to predict the outcome of the insolvency proceedings in Germany and that this could potentially have a negative impact on future operating results.
The franchising system in the United Kingdom was reorganised in 2021. This involved contract terminations and the transfer to a system with management contracts and a new balance between risk and reward for carriers, the government and UK taxpayers. The UK government has made termination of the contracts conditional on the payment of termination fees. In 2021 this resulted in the partial release of the provision created in 2021 for the termination fee set by the UK government.
From a financial perspective, the risks of our international operations are within the boundaries of the capital-at-risk agreements made with NS's shareholder, the Dutch Ministry of Finance. With the Executive Board we discuss both the short-term consequences of various developments and their effects on our long-term strategy.
Safety is an important and recurring issue on the agenda of the Supervisory Board. In addition to railway safety, this also concerns the personal safety of passengers and employees and the availability of inclusive workplaces. The Supervisory Board keeps abreast of NS's safety policy by discussing it in meetings, studying documents and making working visits. In the past year, the Supervisory board extensively discussed NS's transition to a more proactive safety culture and ways to prevent safety incidents.
Fortunately, no major incidents occurred in 2021. The Supervisory Board did however discuss the investigation into the 49 DDZ trains that were decommissioned in late 2020 following reports by NS colleagues about vibrations. The DDZ carriages were fitted with a different braking system and a Real-Time Monitoring system. Since December, NS has been reintegrating the DDZ trains in its timetable in phases.
The Supervisory Board also talked at length about the reports drawn up by NS and ProRail in response to the tragic accident at an uncontrolled level crossing (NABO) near the town of Hooghalen, in May 2020. An NS train driver lost his life in the accident. One of the key conclusions from the comprehensive investigation into safety at level crossings of this type is that long vehicles, under certain conditions, do not have enough time to get across. Other key conclusions are that good visibility is a precondition for the safe crossing of road traffic, and that visibility can be improved. There is also room for improvement in the integrated sector-wide control of level-crossing safety, which calls for active involvement of a wide range of stakeholders. In response to the findings and conclusions, NS has taken several measures.
NS achieved a net profit of €339 million for 2021, which will be added to the other reserves. The net profit attributable to the shareholder is mainly due to the non-recurring gain of €355 million from the downward adjustment of the termination fee previously set by the DfT and to the consequences of the legislative amendment that provides for the unlimited carry-forward of tax losses, which largely compensates for the loss in Germany. Without this non-recurring gain, NS would have operated at a loss also in 2021 as a result of the effects of COVID-19. The loss in 2020 was €2,378 million and was attributable for the most part to an impairment and provision for onerous contracts of €2,332 million.
NS will continue to face major challenges in the years ahead, as a result of expected lower passenger numbers and revenues due to the COVID-19 pandemic. NS will adapt to these changed forecasts by adjusting its organisation in the coming years, which will result in the loss of 2,000 jobs. This places considerable demands on the organisation and our people. However, the agreements made and the effects of natural wastage give us confidence that NS will be able to continue meeting the high quality standards of the franchising authority and passengers, and pursuing its independent investment policy. However, this is only possible if NS achieves a reasonable return in the new franchise period from 2025. This is important for the Netherlands as a whole, given the consistent and significant upward trend in passenger volumes projected for the long term combined with the high sustainability ambitions of the government.
Changes in the Executive and Supervisory Boards
Eelco van Asch took on the role of Director of Operations on 1 March 2021. He is responsible for securing the high level of our operational performance, in the interests of our passengers. Tjalling Smit was reappointed in his position as Director of Commerce & Development for a 4-year term.
In line with the Dutch Corporate Governance Code, Pim van der Feltz was reappointed as a member of the Supervisory Board for another 4-year term. In view of the special challenges for NS posed by COVID-19, the term of office of the present Supervisory Board chair Gerard van de Aast has been extended once-only for a period of two years in 2022, on the recommendation of the Supervisory Board and in consultation with the shareholder.
Functioning of the Supervisory Board
Every three years, the Supervisory Board engages an external agency to evaluate its own performance. The Executive Board conducts internal evaluations in the intervening years. The next external evaluation is to be held in 2022. The relationship between the Supervisory Board and the Executive Board is professional and good. The Supervisory Board is involved in major and complex decisions in a timely and effective manner. The discussions also cover concrete dilemmas.
The functioning of the Executive Board and collaboration with the Supervisory Board
The Executive Board has functioned effectively under extraordinary conditions that demanded considerable flexibility and creativity, and performs its tasks well. The Supervisory Board has confidence in the Executive Board and professional relations between the two boards are good. Both the Supervisory Board and the Executive Board keep to their roles in the performance of their tasks.
Supervisory Board meetings
Owing to the exceptional circumstances caused by developments at Abellio Germany and COVID-19, the Supervisory Board held frequent online consultations outside regular meetings in 2021. In total, the Supervisory Board met 28 times in the past year. Virtually all of these meetings were attended by all the Supervisory Board Members, with average attendance amounting to 94%. The Supervisory Board has two permanent committees: the Risk and Audit Committee, and the combined Remuneration and Appointments Committee.
Risk and Audit Committee
The Risk and Audit Committee (RAC) consists of all Supervisory Board members and is chaired by Herman Dijkhuizen. The RAC met four times. The Chair and CEO, the Executive Board members for Finance and Risk, the Audit Director and the external auditor were also invited to these meetings. The external auditor attended all RAC meetings. In addition, in preparation for the meetings the chair, together with the CFO and the external auditor, held several prior consultations on important topics related to COVID-19, such as its impact on liquidity and solvency, and the use of the model and parameters to determine the potential (adjustment to the) impairment of assets and onerous contracts. Depending on the agenda, other individuals such as the directors of Legal Affairs, Group Control & Expertise and Sustainable Enterprise were also invited. In 2021, the RAC held discussions about the financial statements, the annual report and the yearly reporting for the Ministry of Infrastructure and Water Management, the six-monthly figures, the budget, risk management and risk appetite (see also the section in this report on Safety), the group plan for 2021-2025, periodic reporting by the I&C department, plans and reports of the Internal Audit department, reports prepared by the external auditor, and termination fees and new contract terms in the United Kingdom.
In addition, the RAC devoted considerable attention to the financial impact of the COVID-19 crisis on the group's liquidity and solvency position and our foreign participations. In particular, this concerned the consequences for NS Groep of the termination of the franchises in the United Kingdom and the associated termination fees, and the consequences of the provisional insolvency proceedings of the German activities and possible bankruptcy proceedings for the financial position of NS Groep and its reporting. Due to their character and duration, the outcome of the insolvency proceedings is hard to predict and could potentially have a material adverse effect on the operating result and cash flows compared with the estimates used for preparing the financial statements.
The RAC also discussed various different scenarios for the development of passenger numbers and customer appreciation. Within this context, on various occasions throughout the year the RAC also dealt with the reports on financing and liquidity, and the financing plan. Another regular item on the RAC agenda is cybersecurity in connection with home-working arrangements and the increasing risks in this area. The RAC also discussed rolling stock reports and the performance of the external audit function. A key focus in the RAC, based in part on the available I&C reports, was the progress made in addressing undesirable types of behaviour and preventing nuisance.
One important theme covered in the external auditor's management letter is the COVID-19 crisis and its impact on internal control, both within the main rail network and in the United Kingdom and Germany. The external auditor also highlights the potential impact of cost savings on the quality of internal control measures in the medium term and of the critical functions in the ‘three lines of defence’ model. The external auditor points out that further adjustments to the internal control framework are required, and that the improvements in the IT landscape are contributing to the quality of internal control within NS in the long term. The external auditor also considered the cybersecurity risks that NS has identified, as well as the associated measures and reporting. The most important topics from the year-end auditor's report that were discussed concern the results, solvency, financing and continuity of NS, the impairment of assets, the recognition of support measures and provisions in the context of termination fees in the United Kingdom, and the restructuring and insolvency proceedings of the German subsidiary.
Over the course of the year, the chair of the Supervisory Board and the chair of the RAC held several consultations separately with the external auditor and the shareholder.
Remuneration and Appointments Committee (combined)
The combined Remuneration and Appointments Committee is chaired by Janet Stuijt; its members are Gerard van de Aast, Nebahat Albayrak, Pim van der Feltz and Marike van Lier Lels. The committee met three times in 2021. The topics discussed include talent and leadership development, succession planning and the remuneration for the Executive Board. The committee also considered the remuneration report, target letters, the appraisal process, sickness absence and the Abellio Gain Sharing Plan. All members of the Supervisory Board are independent as defined in the Dutch Corporate Governance Code. The Supervisory Board broadly subscribes to best practice stipulations 2.1.7 through to 2.1.9 in the 2016 Code.
The Supervisory Board maintained good relations and regular contacts with the shareholder.
In 2021, the Supervisory Board met with the Central Works Council on several occasions. The Supervisory Board had two ‘Section 24 Works Council Act meetings’ with the full Central Works Council .
Relationship with the external auditor
As standard, the external auditor attends all meetings of the Risk and Audit Committee (RAC). The external auditor also attends the meetings of the full Supervisory Board when the financial statements and six-monthly figures are discussed. In addition, the RAC consults with the external auditor without the Executive Board being present. Every year, the RAC evaluates the external auditor's performance and issues a report to the Supervisory Board.
About this report
The financial statements for 2021, as prepared by the Executive Board, have been discussed within the Supervisory Board in the presence of the external auditor. The financial statements are accompanied by the Executive Board’s report. We invite the General Meeting to adopt the 2021 financial statements. We also invite our shareholder to discharge the Executive Board and the Supervisory Board from their liabilities. The Supervisory Board proposes adding the profit for the 2021 financial year to the distributable reserve.
The Supervisory Board would explicitly like to thank all employees, the employee participation bodies and the Executive Board of NS. Like 2020, this was another challenging year that took its toll on all of us. Nevertheless, NS delivered a world-class performance. 2022 will once again require a great deal of resilience on the part of our people, but passengers will always be able to count on NS.
Utrecht, 24 February 2022