Hans-Werner Franz

1. Hans-Werner Franz

2. EMTAGeneral MeetingSeptember 17th, 2012Hans-Werner FranzCEO VBB GmbHPresident of EMTA The problem of vehicle procurement, funding and the task of organising competition

3. Competition goals ► More passengers Increases in passenger numbers by means of incentive systems ► More quality New or modernised trains on all networks ► More services Increase in train-km possible for the same price ► Same or Cost reduction potentialsreduced lie between 10% and 50 % financial requirement

4. Competition intensity in rail traffic 2012 EU-wide High Medium • Freely accessible regional rail passenger transport (SPNV) market in Germany • Germany: high SPNV competition intensity • Consistently good competition experiences • Currently 30 SPNV companies active • Long-distance rail traffic: hardly any competition Low or not present

5. Intensity of competition in rail traffic 2000-2012 by Federal State • Differing intensity of competition • Generally high dynamics • Expiry of "large-scale DB transport contracts"   Strong increase in number of contracts • 70 out of a total of 640 million train-km tendered annually • Currently, however, stagnating dynamics, causes: • too many procedures simultaneously • too few bidders • too few new or foreign bidders • lack of small and medium-sized companies •  Challenge for ordering authorities High Medium Low

6. SPNV competition in Berlin and Brandenburg 2012 (not inc. S-Bahn) SPNV operators in Germany SPNV operators in the VBB More than 91 percent awarded in competition! 6

7. Organisation of competition in Berlin and Brandenburg • VBB awards services on behalf of the Federal States of Berlin and Brandenburg, in part with other ordering authorities ► High synergy effects thanks to size • Public tenders are the rule ► Most legally secure and fastest path to the objective • VO1370 applied since 3rd December 2009 ► Securing social standards for employees • In the future, a rolling award system is intended  one procedure per year ► Foresighted management ► Planning security

8. Regional traffic: good marks from customers in 2011 ! ! Marked improvement in the last ten years! No incentive for SPNV operators to improve their services in the absence of competition! 8

9. Recognisable trends since 2008 RU1 RU1 • Permanently declining number bidders in tender procedures • Progressive bidder consolidation • Increasing risk due to DB monopoly on: network, stations and energy (infrastructure) • Increase in volume of services with ever larger size of networks • Problems with funding resources (vehicles, workshop) RU2 RU2 + = RU3 RU4 vs.

10. 10 The problem area of international traffic – for example Poland Szczecin Gorzów Wlkp. Poznań Problems • Different power systems • Different control command • Vehicle registration • SPNV underfunded in Poland • Although international traffic is a special challenge, it has considerable potential Zielona Góra Wrocław

11. The problem area of used vehicles • No existing market in Germany, one single provider • Diesel trains only. • Too much variety in vehicle requirements (entry height, interior fittings) for each Federal State and ordering authority. • High conversion costs for vehicles and new registration problems • Transport contract periods not harmonised • High downtime costs • No guarantee of vehicle acceptance Photos: Alpha Trains

12. The problem area of vehicles and workshops in general Vehicles • Considerable lead times and investment sums (effects of financial crisis) • Larger vehicle fleets due to larger tender networks • No vehicle requirement standardisation • Duration and problems of registration • Lack of a used vehicle market • DB Energy monopoly Workshops • Dealing with existing workshops • Depreciation period • Increasing problem with locations • Filling facilities

13. Problem area of SPNV vehicles Japan • Manufacturers' concentration on vehicle technology • Diesel: • Electric: • Foreign manufacturers: observing the market • delivering in 2014 first diesel vehicles for Netinera  a new impetus • Existing DB framework contracts with CAF, Stadler and Alstom • Leasing market: only one provider • Registration duration: 44 months • EU-wide registration not possible Poland Spain

14. The problem area of vehicle financing – market situation in 2012 • Gross distortion of the market caused by the dominating role of DB in nearly all tending procedures • Interest in vehicle financing slowly on the increase again • However: most banks possess no understanding of the SPNV market, therefore a conservative approach • DB's advantages • Top rating and top credit-worthiness (Federal enterprise) • plenty of transport contracts, low residual-value risks • direct access to financial markets, more favourable credit conditions • Intra-corporate financing strategy

15. Problem area: non-federally owned operator vehicle funding Payment default on part of PTO (public transport authority) during current contract  Demand for payment default protection Reactions Demands Definitive use of vehicles during transport contract duration not ensured Demand for guarantee of vehicle use Formal guarantee through PTO not affordable  High risk premiums by financiers  PTO offer markedly more expensive Reuse/continued use of vehicles upon expiry of contract uncertain/not foreseeable  Demand for fixed reuse guarantee • Other protection possibilities necessary Surety from parent group •  Of limited use only (foreign parent group) • Financial solvency of small PTOs not sufficiently high for large-scale sums •  Demand for high securities • Lengthy and arduous coordination •  Tender period not sufficient • No financing sum > 50 million EUR • Bank consortium

16. Ordering authority funding possibilities and aid Operate Lease (Lessor vehicle ownership) Ordering authority (PTA) vehicle pool (PTA vehicle ownership) Guarantee of re-use (PTO vehicle ownership) Undisputed assignment (PTO vehicle ownership) Financial Leasing (PTO vehicle ownership) Rhine-Ruhr PTA (VRR) model (PTA vehicle ownership) Loan/Capital market financing (PTO vehicle ownership) Refinancing aid via regional/development banks (PTO vehicle ownership) Vehicle provision model (Pool operator vehicle ownership) Residual-value guarantee (PTO ownership vehicle, as appropriate for 2nd TC with PTA) Purchase specification assurance (Lessor vehicle ownership) Development bank model (PTO vehicle ownership) Re-registration assurance (PTO vehicle ownership) Pool models classical models hitherto practiced Mixed forms, moderate aid

17. Practical example 1: The LNVG (regional transport company) vehicle pool • LNVG vehicle pool • Infra-structure • Energy • Servicing and maintenance contract Vehicle delivery contract • Transport contract • Contract • Contract • Subcontract Practical Tasks Vehicle manufacturer • PTO • No representation of the contractual relationships between LNVG, OHE (East Hanover Railway) and PTO for maintenance of double-decker trains in Uelzen plant

18. Practical example 2: The VRR model • Bank • Loan contract at local authority loan conditions • VRR • Joint body • Vehicle delivery contract • Leasing contract • Framework contact • Transport contract Technical advisors • PTO • Controlling • Vehicle delivery contract • Contract • Contract Vehicle manufacturer • Infra-structure • Energy

19. Practical example 3: Purchase specification assurance for vehicles in replacement contracts Purchase specification form in replacement contracts Acceptance of quotation • Transport contract • Quotation in tender • PTO • Leasing contract Lessor

20. Practical example 4: Guarantee of re-use • Why guarantee of re-use? • Minimising residual and re-use risks • Equal, uniform distribution of the vehicle financing costs over a period of two transport contracts feasible • Ensuring the vehicle financing • Basic structure of re-use guarantee • Optional use by the PTO • Assumption of residual-value risk by PTA • Binding vehicle specifications for successive tendering of services Transport contract II Transport contract I t

21. Application of ordering authority contiguous vehicle financing in Germany • Ordering authority contiguous financing is becoming increasingly popular in Germany • In this regard, all the models discussed are in use • Up to now a clear East-West gradient recognisable • Excepting Bavaria: so far successful tenders even without financial aid Source: KCW Vehicles owned by ordering authority Provisioning by third-party Guarantees Access to old vehicles 30-year contract (S-Bahn)

22. Dealing with alternative financing models • Ensuring vehicle financing essential through the ongoing financial crisis • Responsiveness of the PTAs to maintain or increase the number of bidders • Taking account of the differing credit-worthiness of the PTOs • Restricting the aid to sensible cases of application • Selecting the financial aid according to procedure and framework conditions Vehicle pool or re-use guarantee / re-registration undertaking + debt servicing guarantee • Large investment volume (size of fleet markedly in excess of average subnetwork size) • Special vehicles (not usable everywhere in Germany, e.g. S-Bahn at 90 cm standard, direct current or dual-voltage vehicles, tilting technology) Re-use guarantee / Re-registration undertaking • Medium investment volume with universal standard vehicles • Medium-term periods No guarantees or assistance • Smaller specifications with used and/or standard vehicles • Medium to short-term periods

23. Thank you!