Description
The risk that NS’s investments abroad cost money rather than bringing in money.
Explanation
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 by controlling risks effectively and making sure that investments remain within the Capital-at-Risk framework. This framework was agreed with the Ministry of Finance in 2016 and limits the size of the investments abroad by NS and the guarantees provided by NS.
In 2018, the ScotRail and Greater Anglia franchises in the United Kingdom yielded disappointing results. Despite various improvement initiatives, passenger revenues are lower than expected due to:
disappointing economic growth, in part due to 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;
dependency on Network Rail’s ability to deliver infrastructure projects on time.
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, there have been delays in the delivery of new trains for the ScotRail franchise and performance on the track is not up to the standards agreed with the franchise authority and expected by the general public, in part because of deficiencies in the infrastructure.
In Germany, revenue growth will be achieved over the next few years from €358 million in 2018 to over €800 million in 2021. This is because a number of franchises have been won that will become operational in the next few years. 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. This requires substantial investments, which affect the result because growth is so rapid.
Measures
Based on the agreements made with the shareholder, NS limits the financial risk associated with Abellio’s operations to providing group guarantees and the invested capital. The size of the risk for certain franchises is kept down by entering into a strategic partnership, as in Greater Anglia where Mitsui has a stake of 40% in the franchise, and in West Midlands 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 are being prepared thoroughly using a programme approach with experienced managers. The 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.
Risk control trend
The above-mentioned measures will bear fruit in the short and medium term. It is still expected that all franchises will make a net positive contribution to the financial result over their term, but the results for ScotRail and Greater Anglia in particular were disappointing in 2018.