SURVEY RESULTS

Executive Rail Radar

The European rail industry

March 2013

The new Executive Rail Radar presents key insights into the rail industry We look forward to discussing the results with you
BACKGROUND AND INTRODUCTION
> In 2011, we conducted and published the first Executive Rail Radar to support industry leaders in identifying key issues that drive their industry, and to promote executivelevel thinking in the European rail industry > As a top strategy consultancy in the rail sector and other transportation industry segments, we aim at regularly providing fresh insights into the rail industry's current and most important issues > We have therefore put together a second Executive Rail Radar, 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 your strategic thinking and decision making. We would welcome the opportunity to have a more detailed discussion with you on any of the issues presented

THE EUROPEAN RAIL PRACTICE MANAGEMENT TEAM

Didier Brchemier Francesco Calvi Parisetti Jorge Delclaux Friedrich Demmer Alain d'Oultremont Roland Falb Pedro Galhardas Maria Mikhaylenko Andreas Schwilling Ren Seyger Martin Streichfuss Roland Zsilinszky (Paris) (Milan) (Madrid) (London) (Brussels) (Vienna) (Lisbon) (Moscow) (Munich) (Amsterdam) (Dsseldorf) (Prague)

The results are based on contributions from senior executives across the European rail industry
PROFILE OF RESPONDENTS
> The responses to the Rail Radar survey are well balanced in terms of participating countries: Austria, Belgium, Czech Republic, Denmark, France, Germany, Italy, the Netherlands, Romania, Russia, Slovak Republic, Slovenia, Switzerland and the United Kingdom > In addition, different rail segments are represented in the survey: 45% of responses are from integrated railways and 24% from municipal transport firms. The remaining survey participants are from train operating companies (17%), rail infrastructure providers (9%) and other segments (5%) > Almost two-thirds of the responses were provided by executives at top management level, 16% came from CxO level > The online survey was conducted between November and December 2012
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PARTICIPATING COMPANIES

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

> Topics at the top of rail executives' agendas in 2013 > Key changes versus previous survey

Innovation

Growth and expansion

Flexibility, efficiency Profitability, stability Quality HR management Asset management Financing

SELECTED KEY ISSUES IN FOCUS

> Detailing of selected broader industry issues: Planning process EU rail legislation Financing Homologation

Planning processes EU legislation

Homologation, TSI

Public private partnerships

Proximity of topics to the center indicates importance
4

Executive summary (1/2)

COMPANY'S AGENDAS IN 2013

> Profitability and financial stability remain at the top of rail executives' agendas this year, financing and asset management are subsequent priorities All of these topics became 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 importance of planning is showing a tendency to rise, while a broader scope and short-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 experience and reduce output parameters and forecasting periods > 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 in general, 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
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COMPLEXITY IN CORPORATE PLANNING

RECENT DEVELOPMENTS IN (DE)REGULATION

Executive summary (2/2)

FINANCING OF RAILWAYS AND MUNICIPAL 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 > PPPs are seen as both a blessing and a curse: Additional efficiency pressure and cultural change are appreciated, while the profitability expectations of private investors are seen as a key disadvantage at the same time > Railway stations and primary infrastructure of individual lines are considered to be most suitable for PPP investments in infrastructure > Functional privatization via dedicated service contracts is expected to prevail over other forms of privatization, material privatization with asset ownership is seen as an exception > The vast majority of rail executives considers homologation procedures lengthy, often problematic > Lack of efficiency is viewed as a similar problem in European countries, whereas other industries are considered to be more efficient in homologation > European initiatives for TSIs are generally appreciated by rail executives. However, faster and more intensive implementation is demanded for 2013
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HOMOLOGATION AND ITS EFFECTS

1) Technical Specifications for interoperability

TOPICS

a. b. c. d. e. f.

COMPANIES' AGENDAS IN 2013: Profitability and financial sustainability are top priority COMPLEXITY IN PLANNING: Importance and complexity of planning are rising RECENT DEVELOPMENTS IN (DE)REGULATION: Recast of first railway package viewed very critically FINANCING OF RAILWAYS AND MUNICIPAL TRANSPORT: Internal and public financing preferred over PPP HOMOLOGATION AND ITS EFFECTS: Procedures lengthy, other industries more efficient YOUR CONTACTS AT ROLAND BERGER: We will be happy to discuss the results with you

a. Companies' agendas in 2013

Profitability/efficiency, financing and asset modernization dominate rail companies' agendas in 2013 Broad variety of specific topics
TOP TOPICS ON COMPANY'S AGENDAS IN 2012-131)
1 2 3 4 5 6 7 8 9 10 Profitability, financial stability Financing (investment, public service obligations) Quality improvement Modernizing infrastructure Growth Innovation, innovative service offerings Improving flexibility, efficiency Geographic expansion Modernizing rolling stock HR management and development 28% 26% 22% 20% 19% 19% 15% 13% 13% 56%

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

Source: Roland Berger Executive Rail Radar

> Profitability issues are ahead of other topics on rail companies' agendas in 2013; cost cutting programs will be continued, extended or newly set up, networks and offers might be reviewed > In addition, two topics relatively specific to the rail industry come in second and third, i.e. financing and modernizing infrastructure, indicating impact from the European debt crisis and financing concerns > 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, ERTMS deployment or safety issues > The ranking of top topics is fairly similar across countries and company types
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a. Companies' agendas in 2013

Profitability, financing, asset and HR management gained importance versus 2011 Quality and growth lost, but are still in the top 5
CHANGES IN TOP 10 TOPICS VERSUS 2011 SURVEY
Rank rank 2012 vs. 2011 Topic
1 2 3 4 5 6 7 8 9 10 0 +5 -1 +2 -2 +9 -2 0 +1 +8 Profitability, financial stability Financing (investment, public service obligations) Quality improvement Modernizing infrastructure Growth Innovation, innovative service offerings Improving flexibility, efficiency Geographic expansion Modernizing rolling stock HR mgmt. and development -17% 4% 0% 0% 2% 9% -15% 5%

score vs. 20111)

8% 11%

> In 2011, we conducted and published the first Executive Rail Radar, asking the same question on the top topics on companies' agendas > Profitability was considered the most important topic in 2011 and has gained even greater importance since then > Asset management (infrastructure, rolling stock), financing, innovation and HR management gained strongly in importance

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

Source: Roland Berger Executive Rail Radar 9

b. Complexity in planning

The importance of planning has tended to rise, while a broader scope and a short-term nature are increasing planning complexity
IMPORTANCE OF PLANNING1)
Planning becomes more important, more complex environment Planning is intensified, more variables, inputs, parameters, etc. Scenario-based approach, uncertainties in environment Importance unchanged, reaction times more important Shorter planning periods, more frequent changes Other No change in importance of planning 11% 9% 6% 38% 36% 36% 32%

> The rail environment is becoming increasingly important, 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 more complex > As efficiency/profitability is high on companies' agendas, rail companies must despite the highly complex environment aim to reduce this complexity in planning processes

1) % of answers; multiple answers possible

Source: Roland Berger Executive Rail Radar 10

b. Complexity in planning

The planning of budgets and demand forecasts are considered particularly complex issues
MOST COMPLEX PLANNING PROCESS1)
Capacity planning Other 1% Long-term budget (e.g. 5-year period)

13%
Yield and revenue planning 14% 31%

19%
Passenger/cargo forecast

21% Annual budget

> More than half of rail executives consider processes for long and short-term budgeting the most complex issues in planning. Especially here, complexity should be reduced > Passenger demand forecasts are fairly simple on an overall level. However, on a route, day and time basis it becomes quite complex > Although revenue management has been introduced 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 their budgeting processes, making them more efficient

1) % of mentioning as top 1 topic

Source: Roland Berger Executive Rail Radar 11

b. Complexity in planning

To reduce planning complexity, rail companies avoid details, rely on past experience, and reduce parameters and forecasting periods
MEASURES TO REDUCE COMPLEXITY1)
Focus on flexible response, rather than details Extrapolate on basis of previous figures Reduce planning parameters (output) Reduce forecast periods Reduce inputs Use a randombased approach Other 4% 4% 17% 15% 34% 45% 45%

> As we have seen above, rail companies must offset the increasing complexity in planning processes > In particular, they acknowledge that the environment and planning assumptions can change quickly so that flexible reactions become more important than detailed planning > The extrapolation of previous figures is seen as an equally important way to reduce complexity For overall figures this is often fine, on a more detailed level this appears to be a critical/dangerous approach > Furthermore, rail companies also reduce output parameters, forecasting periods and input variables

1) % of answers; multiple answers possible

Source: Roland Berger Executive Rail Radar 12

c. Recent developments in (de)regulation

More than 40% of respondents criticize the recast as too much regulation, 36% consider it a good compromise, 17% think it is late/soft
OPINIONS ON THE RECAST OF THE FIRST EU RAILWAY PACKAGE
TOTAL SURVEY
All 43% 36%

17% 4%

BY SEGMENT
Integrated railway Train operating company Rail infrastructure Municipal transport
Regulates too much, adverse effects Good compromise between stakeholders in railway transport

63% 50% 25% 10% 25% 40%

Comes too late, stricter rules required Other

29% 33%

4%

4%

17%

50% 40%
10%

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
Source: Roland Berger Executive Rail Radar

> Recast in general viewed critically; especially executives in Germany, Switzerland, Denmark, Slovakia and Slovenia expect the recast to have a negative impact > As expected, executives from train operating companies and separated infrastructure operators have a more positive opinion on the recast than those from integrated railways > However, 25% of executives from rail infrastructure companies consider regulation too strict and expect negative impacts > 17% of the executives think that the recast comes too late and should be stricter. Unsurprisingly, nobody from an integrated railway shares this opinion > Interestingly, countries that are advanced in liberalization (according to LIB Index1)) view the recast especially critically
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c. Recent developments in (de)regulation

Feedback on the rules of the recast was mostly critical "Counterproductive" and "No significant effects" total > 70% for most rules
ASSESSMENT OF THE MAIN RULES OF THE RECAST1)
Strengthening power of regulators Requirement of more detailed network statements Independence of regulator from other authorities Extended competence of rail regulator Improved access to rail-related services Establishment of explicit rules on conflicts of interest Requirement of more precise infrastructure charging rules Requirement of nat. long-term agreements state/IM
Important and highly relevant 1) % of answers
Source: Roland Berger Executive Rail Radar 14

28% 27% 24% 23% 22% 18% 15% 12%

40%

51% 61% 51% 48% 49% 53% 56%

21% 12% 24% 30% 29% 30% 29% 48%

> For all eight rules, about half of the respondents feel that they will have no significant effects > All of the eight rules are assessed as being important and highly relevant by less than 30% > Given this overall negative assessment, more detailed network statements, the strengthening of the regulator and the independence of the regulator are regarded in a relatively positive light > Most negative feedback was received for the requirement of long-term agreements between state and infrastructure managers and for more precise infrastructure charging rules

Will have no significant effects

Counterproductive, negative impact on the industry

c. Recent developments in (de)regulation

Stricter regulation is in general viewed rather critically Stricter control of track access charges receives the broadest support
AREAS FOR STRICTER REGULATION1)
Stricter control of track access charges Separate legal entities for rail-related facilities Separate infrastructure from train operators No profit transfers allowed ETCS-differentiated track charging Other 7% 12% 26% 21% 21%

50%

1) % of answers; multiple answers possible

Source: Roland Berger Executive Rail Radar

> None of the specified rules is supported by more than 50% of rail executives > Stricter control of track access charges receives the highest support Interestingly, here the support from integrated railways is significantly higher than from train operating companies and infrastructure providers Note that rail executives oppose the infrastructure charging rules as formulated in the recast > Only 21% of rail executives support legal action for stronger separation from train operators This does not exceed 50% among infrastructure operators > Other areas mentioned are independent access regulation and stricter control of funding authorities and regulating bodies > Comparably broad support for stricter rules comes for instance from France and Slovakia Low support from Czech Republic and Switzerland
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d. Financing of railways and municipal transport

Railways consider internal sources of finance crucial, in particular productivity gains PPPs more important for municipal transport
OPINIONS ON MAIN LEVERS FOR FINANCING1)
ALL SECTORS
Improved efficiency and productivity of railways Public financing Price increases at railways Additional revenues, e.g. in stations Redesign network Increase price differentiation PPPs 42% 40% 35% 21% 16% 30% 20% 50% 60% 60% 50% 81%

MUNICIPAL TRANSPORT
90% 90%

> Rail companies emphasize sources they can influence themselves, i.e. productivity gains and additional revenues > Public financing remains among the top financing sources for railways > This can be interpreted as a reaction to insecure or even reduced public funding due the European debt crisis, i.e. as railways shift financing options to internal sources > PPPs come in last in total survey responses, but have a much higher importance for municipal transport

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

Source: Roland Berger Executive Rail Radar 16

d. Financing of railways and municipal transport

PPPs will gain importance and will be significant for developing countries, but public financing will prevail as the dominant source
IMPORTANCE OF PPPs IN THE NEXT FIVE YEARS1)
PPPs will not fill the gap, although public financing will be reduced Public financing will remain the dominant financing mode for railways PPP will be important for developing countries PPPs will be a unique form of financing worldwide PPPs will become a major financing mode in Europe, too Other 5% 31% 60%

40%

5%

5%

1) Financing of infrastructure projects and transport operations; % of answers; multiple answers possible
Source: Roland Berger Executive Rail Radar

> The responses point to a relatively critical attitude on the part of railway companies to PPPs; railways assume that PPPs will not be big enough to compensate for potential financing gaps from public sources > Potential reasons might be insufficient experience with PPPs and hence reservations, lack of access to PPPs, or structural reasons (PPPs not suited for general or long-term financing, rather for specific purposes) > Another reason is that respondents expect PPPs to better suit specific projects, e.g. stations or individual lines, i.e. where revenues and cost can be directly allocated to the project > Only 5% of respondents expect PPPs to become a major source of financing in Europe. The 60% majority expects PPPs not to fill the public financing gap
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d. Financing of railways and municipal transport

PPPs considered both a blessing and a curse: Pressure and cultural change appreciated, while expectations of private investors feared +
MAIN ADVANTAGES1)
Additional funding Pressure by Cultural change to private business investors culture Risk transfer

MAIN DISADVANTAGES OF PPPs1)

Complex structures, contracts, control mechanisms 98% Higher return expectations from private investors 93% 60% 48% Not suited for rail transport, public financing needed Public authorities lose control

95% 57% 51% 46%

> The key advantage of PPPs is the additional source of funding > Structural PPP items are a further key advantage: Move towards stronger business and private economy orientation
1) % of mentioning in top 3 1) % of mentioning in top 3
Source: Roland Berger Executive Rail Radar

> Almost all rail executives consider additional complexity to be one of the top 3 disadvantages > Rail executives fear higher return expectations, this view is shared by integrated railways, infrastructure operators, train operating companies and municipal transport alike
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d. Financing of railways and municipal transport

Railway stations and primary infrastructure of individual lines are considered to be most suitable for PPP infrastructure investments
INVESTMENT NEEDS SUITED FOR FINANCING INFRASTRUCTURE THROUGH PPP1)
Railway stations Primary infrastructure of individual lines Primary infrastructure of entire (sub)networks Secondary infrastructure 15% 28% 63%

55%

Other

8%

1) % of answers; multiple answers possible

Source: Roland Berger Executive Rail Radar

> Almost 2/3 of rail executives consider railway stations as suitable for PPP investments > More than half of rail executives believe that primary 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 an entire (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 important disadvantage of PPPs Hence, railway stations appear to be a rather profitable investment on average. Additionally, revenues and cost are comparably easy to attribute to railway stations
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d. Financing of railways and municipal transport

In PPPs, functional privatization (dedicated service contract) is expected to prevail over other forms of privatization
DEGREE OF PRIVATIZATION LIKELY TO PREVAIL IN FUTURE PPPs FOR RAIL FINANCING1)
Material privatization (permanent ownership transfer) Purely functional privatization (no ownership transfer)

22%

57% 22% Functional privatization with temporary ownership transfer

1) % of answers
Source: Roland Berger Executive Rail Radar

> The majority of rail executives expects purely functional privatization to prevail in the future: Partnership via service contract, e.g. for designing, building, operating and/or maintaining, without asset transfer > Less than half of rail executives forecast at least temporary asset transfer, less than 1/4 envisage material privatization prevailing (permanent transfer of ownership) > The result reflects the timescale that different stakeholders foresee for a PPP investment Private investors have short/medium-term expectations Public authorities take a medium/long-term interest

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e. Homologation and its effects

Homologation procedures are considered lengthy, sometimes even problematic Safety levels appear extremely high
ASSESSMENT OF HOMOLOGATION FOR RAILWAYS AND MUNICIPAL TRANSPORT1)
The safety level in my country is extremely high Homologation procedures are lengthy and cause significant problems for the industry Homologation procedures are lengthy, but not a problem Homologation procedures are efficient and fast Homologation is insufficient and represents a safety risk 5% 38% 45% 57%

5%

> The overwhelming majority considers safety issues to be fulfilled with current homologation practice 57% consider the safety level extremely high Whereas only 5% see a safety risk due to insufficient homologation > However, homologation procedures are widely considered to be inefficient More than 80% consider the process lengthy (esp. in Eastern Europe) Whereas only 5% view the process as efficient and fast (Austria, Switzerland) > Railway executives would support an improvement in efficiency in the homologation process without compromising on quality/safety

1) % of answers; multiple answers possible

Source: Roland Berger Executive Rail Radar 21

e. Homologation and its effects

Homologation is mostly seen as comparable to other European countries, but as more complex than in other industries
COMPARISON OF HOMOLOGATION1)
INTERNATIONALLY
More efficient and faster than in other European countries 21% About the same level as in other European countries 41% More complex, lengthy, competitive disadvantage for rail 38%

ACROSS INDUSTRIES
Lower than in industries with similar safety requirements 26% About the same level as in other industries 25% More complex, lengthy, needs to be redesigned 49%

1) % of answers;
Source: Roland Berger Executive Rail Radar

> On the one hand, rail executives see the complexity of homologation processes as similar across countries However, In Switzerland and UK, executives consider the homologation 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 assume homologation processes in rail to be more complex than in other industries like utilities, telecommunications, aerospace or automotive This is especially true for executives from Germany, France and Eastern Europe > Hence, an improvement of the homologation process should be targeted and for this, inspiration from other industries is more helpful than a crossborder comparison of national practices
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e. Homologation and its effects

European initiatives for TSIs are generally appreciated, but faster and more intensive implementation is demanded
RATINGS OF THE EUROPEAN INITIATIVES FOR TSI1)
On the right track, but too slowly implemented 66%

Make homologation more complicated and lengthy

32%

Other

2%

> About 2/3 of rail executives see the European initiatives for TSI pointing in the right direction, but consider implementation in national laws as too slow or insufficient > About 1/3 of rail executives expect the initiatives for TSI to make homologation more complicated and lengthy This assessment is common among executives from France, Germany and Switzerland > There are some worries that TSIs are not sufficiently specific and detailed to ensure technical convergence > Overall, there is acknowledgement of the European Railway Agency's efforts, while a faster transfer to national laws by member states is demanded

1) % of answers
Source: Roland Berger Executive Rail Radar 23

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