Initiatives to profit from the Fourth Railway Package

Munich, April 2017

Winning from liberalization

Transportation

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EU-wide railway market liberalization is in its final stages – Existing players need actionable plans on how to benefit from this scenario

1st council directive

2001 2004 2016 2012 1991 2007

1st railway package

2nd railway package

3rd railway package

Recast directive

4th railway package

Context market liberalization

> Enable connected rail traffic across Europe

> Liberalize rail traffic and open it up to further operators

> Increase efficiency of the railway system

> Establish open access principles for international rail freight and cross-border passenger service

EU regulation efforts have pushed market incumbents to improve operations efficiency and quality of service

Past – Cope with increased impact of regulations and initial opening of markets

> Understand the current market environment and respective impacts from most recent railway package

> Identify key levers for successfully navigating through the on-going push for liberalization

> Re-shape organizational set-up to allow for a more powerful, flexible and lean decision-making process

> Benefit from measures to improve operations efficiency and profitability

Market incumbents will have to lay out a strategic concept on how to benefit from regional openings

> Define a common approach towards rail safety regulation

> Create prerequisites for interoperability

> Separate infrastructure mana-gers and transport operators

> Found common representation of interests, i.e. the European Union Agency for Railways (ERA)

The European Union (EU) to… The market incumbents to…

Now – Win from full liberalization of domestic and regional passenger transport

2019

Full liberalization target – On-going PSCs/PSOs not affected until max. 2034

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As of today, the degree of rail market liberalization within the EU is still quite diverse – UK and Sweden with full liberalization

Degree of market liberalization

Full

Large

Partial

Quasi

None

Competitors (non-incumbent)

Fully liberalized markets

> All pkm are in open access or all Public Service Contracts (PSCs) are competitively tendered, e.g. Sweden and UK

Largely liberalized markets

> More than 33% of pkm are in open access or correspond to competitively tendered PSCs, e.g. Austria, Germany and Italy

Partially liberalized markets

> Less than 33% of pkm are in open access or correspond to competitively tendered PSCs, yet new entrants have taken up a significant share of the liberalized market, e.g. the Netherlands, Czech Republic and Portugal

Quasi-liberalized markets

> The whole market is open for access, but there is no effective competition in the market

> New entrants operate directly awarded PSCs, e.g. Denmark and Poland

Non-liberalized markets

> Incumbent operates all commercial services and Public Service Obligations (PSOs), e.g. France, Spain, Belgium and Finland

Source: European Parliamentary Research Service, IRG Rail

Note: Analysis based on overall share of total pkm; respective focus on regional or inter-city transport with potential to slightly distort the picture; Czech Republic considered increasing its share of tendering for PSCs; Estonia, Latvia, Lithuania and Slovakia all PSCs should henceforth be de jure competitively tendered; in reality, only the incumbents participated in the tenders; Germany, the amount of train-kilometers of PSOs competitively tendered has progressed to 51%; Switzerland and Norway both with a share of 18%

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# 17

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Now, the Fourth Railway Package targets a fully open domestic and regional passenger transport market as of 2019

Content of the Fourth Railway Package

Expansion of ERA's powers

> European Union Agency for Railways as One-stop-shop for rail suppliers and operators

> Wide-spread implementation of harmonized signaling system

> EU-wide vehicle authorizations and single safety certificates

Enhancement of rail governance structure

> Immediate access to the passenger markets in the EU by 2019 for suitable rail operators

> Reinforcement of infrastructure managers

Introduction of risk control measures

> Implemented by all rail contractors, infra-structure managers and entities in charge of maintenance

> Reinforced powers over national authorities allowing ERA to carry out audits and inspections

Liberalization of passenger transport

> Mandatory public tendering and non-discriminatory access to rolling stock

> Voluntary introduction of integrated ticketing and information exchange schemes

Maintenance of a skilled railway workforce

> Mandatory take over of workforce of public services

Improvements to ERA governance

> Establishment of an Executive Board and independent board(s) of appeal

> New sources of funding

The Fourth Railway Package

Governance and market pillar Technical pillar

Source: UNIFE World Rail Market Study 2016, European Parliamentary Research Service

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Opening domestic passenger markets is thought to increase com-petition, resulting in better prices and higher customer satisfaction

Elements of liberalization

1

3 2

New entrants

Operational amendments

Mandatory tendering

Liberalization of domestic passenger transport

1 New Entrants

> Allow companies to either offer competition in the market, meaning they can provide competing commercial services, or to give them the chance to compete for the market, meaning they can bid for public service rail contracts

2 Mandatory tendering

> Authorities will be mandated to publicly tender public service rail contracts, a significant change from the current situation with many contracts being awarded directly, which only in some exceptional situations will be allowed in the future

3 Operational amendments

> Encourage authorities and railway operators to set up integrated ticketing schemes on national levels

> Requirement for authorities to take over the financial risk of the rolling stock's residual value and thus ensure non-discriminatory access to suitable rolling stock

More attractive prices

Increased customer satisfaction

Source: UNIFE World Rail Market Study 2016

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Decreasing subsidy needs will further support the regulatory push for liberalization in the regional rail transport sector

Competitors Deutsche Bahn

Operating performance in RRTS1)

[in million train km] Subsidies in RRTS1)

[in EUR cent per pkm]

1995 1997 2015

13.8 13.6

2009 2011 2013 2005 2007

17.0

14.3

1999 2001 2003

14.9 15.8

14.1

-22%

16.6 16.6 17.1 17.3

Source: Deutsche Bahn AG

Effects of liberalization – Example Germany

2007 2011

633 643 644 629

2009 2013

654

2015

500

2005

633

2003

619

2001

599

1999

555

1997

526

1995

+8%

Competitors' market share

3% 6% 10% 24% 29%

1) Regional rail transport sector

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Regional rail transport incumbents will need to apply five key levers to benefit from liberalization

1 2 3 4 5

Key levers for rail incumbents

Marketing and Lobbying

Competence centers

Transformation

Personnel

Maintenance

> Following key account management principles, marketing and lobbying is to be intensified with key regional authorities and clients

> Functional descriptions of services are set up to define the desired target state, yet leave room for entrepreneurial decision making

> Cross-regional task forces are to be implemented to increase hit rate on any tender-related topics

> Transfer of cross-regional competence principle also onto other topics such as efficiency assessment of regional infrastructure and assets

> Business restructuring on target costing basis to ensure lean organiza-tional structures and hierarchies, allowing for an improved responsive-ness and decision-making towards tender-related topics as well as adaptation of operation networks, following a change in competition

> Increased competitiveness of personnel tariffs despite anticipated resistance from employee/union representatives

> Focus on work-force flexibility as well as reliability and conditions of service

> Competitive target costing principle to be applied also for maintenance

> Innovative concepts such as preventive maintenance, mobile mainte-nance teams, etc. must be introduced to reduce maintenance costs and increase vehicle availability

Implement future

oriented target operating

model

Develop powerful,

flexible and lean tender-

response setup

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A stringent setup ensures pro-active account management and proposal delivery as well as effective aftersales activities

Tender-response setup

Market potential evaluation

> Tenders and schedules overview

> Network/route profitability analysis

> Competitive landscape screening

> Strategic roadmap and "battlefield" setting

Organizational design

> Cross-regional synergy assessment

> Governance structure review/re-design

Operational adjustments

> Outcome-related down- or up-sizing

> New operations setup definition

> Process blue book update

Professional tender management

> Focus on market-oriented tender planning, bidding and winning

> Strategic marketing unit to spearhead future tender management efforts

> Business unit restructuring to bundle core competencies for increased impact and success rate

> Dedicated cross-regional key account management for large-sized "VIP" customers

> Tender task force set-up

Concept focus on

> Excellence

> Efficiency

> Profitability

> Impact

> Responsiveness

> Flexibility Aftercare solutions

> Proposal refinement (if needed)

> Communication of outcomes and learnings

Governance excellence

Feedback

Operations leadership

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Future oriented target operating model

Learning from new competitors…

…to ensure sustainable competitiveness in liberalized markets

A B Operations leadership

Governance excellence

> Performance bench-marking and continuous process improvement measures

> Organizational restruc-turing to ensure lean/flat hierarchies and less bureaucracy

> Target costing-based process restructuring for front- and back-end units/services

> Impactful transfer of decision-making powers and capabilities, e.g. as part of task-force setting

> New business model generation and adjacent, added-value service offerings

> New partnership models setup, JV opportunities screening and innovation focus

Exemplary advantages of new railway players entering the market:

> Flat hierarchies and more flexible decision-making structures

> Lean and agile operational processes approach, based on e.g. greenfield set-up opportunities

> Focus on profitable core business with established network of partner-ships for supporting services, e.g. maintenance and handling

> Possibility of Day-1 outsourcing, automation and digitization of e.g. non-core business items

> Lower-to-no legacy costs

In addition incumbents will have to aim for operations leadership and governance excellence to ensure sustainable competitiveness

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Your contacts at Roland Berger

+33 (1) 53670-926 Didier.Brechemier@rolandberger.com

Didier Bréchemier Partner, Paris

+55 (11) 97203-7337 Gustavo.Lopes@rolandberger.com

Gustavo Lopes Partner, Sao Paulo

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+86 (21) 5298 6677-871 Sarna.Yeung@rolandberger.com

Sarna Yeung Partner, Shanghai

+31 (20) 7960-620 Rene.Seyger@rolandberger.com

Rene Seyger Partner, Amsterdam

+49 (30) 39927-3316 Tobias.Schoenberg@rolandberger.com

Tobias Schönberg Partner, Berlin

+1 (514) 875-2000-213 Alexis.Gardy@rolandberger.com

Alexis Gardy Partner, Montréal

+49 (89) 9230-8364 Andreas.Schwilling@rolandberger.com

Andreas Schwilling Partner, Munich

+49 (211) 4389-2193 Martin.Streichfuss@rolandberger.com

Dr. Martin Streichfuss Head of Transportation, Düsseldorf

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In particular within the European RRTS, various RB projects have already tackled the inevitable impact of market liberalization

Selected Roland Berger project portfolio

Market studies > Creation of a strategic overview on European regional public transport

> Identification of current and future market size and volumes

> Development of relevant market entry strategies and prerequisites

Strategy development

> Assessment of future business model relevance and partnership opportunities

> Evaluation of Joint Venture candidates for more profitable market coverage

> Organizational and operational design of joint fit-for future business setup

Value chain optimization

> Benchmarking of key financial and performance indicators to identify value drivers and threads

> Business model re-design, incl. pricing, for services and production units within the value chain

> Development of measures and tools to ensure successful steering and monitoring

Improvement potential identification

> Analysis of loss-making operations following a series of new operating license acquisitions

> Conception of a restructuring framework to improve profitability levels

> Organizational and operational re-design to monetize on newly found volume increase

Commercial re-franchising

> Assessment of commercial opportunities and risks of a franchise model restructuring

> Financial impact calculation including probability assumptions on e.g. payment default

> Identification and recommendation of potential opportunities for diversification of operations