Liberalisation of the railway markets. A challenge to finance railway systems Railway Days - WBSA, Railway Investment Summit 8 th October 2013, Bucharest (RO) Gilles Peterhans Secretary General UIP

2 Table of contents UIP: International Union of Wagon Keepers Regulatory framework: economic terms Rolling stock: the freight wagon market Rolling stock: asset financing Conclusions

 Acts as a promotional body for wagon keepers and rail freight;  Represents 14 National Associations and round 200’000 freight wagons;  Supports its members in improving regulatory framework that affects wagon keepers;  Supports its members in the development of technical questions relating specifically to wagons, as well as organisational and economic matters, in order to increase the real quality of rail freight transport services;  Aims at securing a continuous improvement in the safety and reliability of freight wagons; 3 UIP: International Union of Wagon Keepers Role

4 Table of content UIP: International Union of Wagon Keepers Regulatory Framework: economic terms Rolling stock: the freight wagon market Rolling stock: asset financing Conclusions

Financing railways: the role of Governements History th century 1991 Private capital Oil shocks Accumulated deficits (often +2% of GDP) Concerns about rail freight market decline States take over services Repairing war damages Rising costs Strikes EU policy … Competition from road transport begins Railways under various forms of public ownership New financing streams Eurofima Private lessor Economic expansions Divergent national policies Increase of public contributions  Government intervention in order to provide appropriate financing  Railways decisions mainly driven by government priorities  Private investments mainly in freight wagons for dangerous good transports  Eurofima to support the railways in renewing and modernizing their equipment

railway packages EU initiatives - Fostering competition LICENSES MARKET SAFETY INFRASTRUCTURE INTEROPERABILITY DIR 91/440/EC:  Independence from state  Accounting separation  Sound finances  1 st market opening DIR 95/19/EC:  Track access charges and capacity allocation:  Concept of capacity allocation body, allocation priorities and principles  Safety EU level DIR 95/18/EC:  Concept of license valid throughout the EU DIR 96/48/EC:  Interoperability of high speed rail DIR 2001/12/EC:  Unbundling  Greater opening to international freight market DIR 2001/13/EC:  Conditions for granting of licences DIR 2001/14/EC:  User-changes and allocation of infrastructure capacities  Safety certificate DIR 2001/16/EC:  Interoperability of conventional rail First package DIR 2004/51/EC:  Full opening of internat. & domestic freight services DIR 2004/49/EC:  Definition of safety rules at European level DIR 2004/50/EC:  Harmonisation and clarification of interoperability requirements Second package DIR 2007/58/EC:  Opening of international passenger transport DIR 2007/59/EC:  Certification of train drivers Third package … DIR 2008/110/EC:  Update of safety rules  ECM Art. 14 (a) DIR 2008/57/EC:  Interop conventional update DIR 2004/881/EC: ERA

DIR 2012/34/EC:  (1) strengthening the power of national regulators  (2) improving the framework for investment in rail  (3) ensuring fair access to rail infrastructure and rail related services COM 2013/26:  Normalisation of the accounts of RUs Last mile ? RECAST 1 st package 4 th package COM 2013/28:  Opening of the market for domestic passenger transport services by rail COM 2013/29:  Opening market for domestic passenger services by rail  Governance of the rail infrastructure COM 2013/27:  ERA regulation COM 2013/31:  Definition of safety rules at European level (RECAST) COM 2013/30::  Harmonisation of interoperability requirements (RECAST) EU initiatives – Towards Single Market LICENSES MARKET SAFETY INFRASTRUCTURE INTEROPERABILITY Intermodal level playing field ? – New TEN-T guidelines Connecting Europe Facility Freight corridors 913/2010/EC Infrastructure Improve framework Technical pillar

Table of content UIP: International Union of Wagon Keepers Regulatory framework: economic terms Rolling stock: the freight wagon market Rolling stock: asset financing Conclusions

9 Freight market growth and changes  Transport policy (objectives and their full implementation)  Global economic developments and transport demand  Major trends in logistics: o Deliver customized international transportation across frontiers o Demand for products individualisation and added services o Goods structure effect: away from heavy bulk commodities o Globalisation, automation and information processing: ICT requirements Market drivers Freight wagon is one of the most important resources for rail freight transportation to achieve higher economic performance and adapt to modern logistic chains requirements

European wagon fleet: based on GCU and keepers’ head office 25‘463 11‘113 3‘355 39‘548 37‘ ‘ ‘332 89‘714 6‘215 12‘832 35‘130 3‘936 2‘820 4‘183 1‘428 3‘ ‘384 13‘608 9‘077 3‘350 25‘ Total: 587‘069 wagons

European wagon fleet and market developments  SCI Verkehr: Freight Wagons - Global Market Trends 2013  Boston Consulting Group: World Rail Market Study 2012  Eurostat data, UIC data, National Vehicle Registry data Other available data sources Source: ERA EcoEv Unit: NSA questionnaire

 Procurement rates expect to be very low in the coming 5 years  New procurements mainly to replace old wagons  Incumbents (former state railways) still in a fleet downsizing process  Market share of freight wagon lessors (independent keepers) is rising sharply Market trends European wagon fleet and market developments  Adequate economic returns and availability of financing sources  Additional customers needs and pessimism-bias (tendency to be under optimistic)  Improvement in RU productivity  Fleet renewal rate and replacement needs (incl. policy driven)  Efficiency gains through wagon management systems and operational systems Drivers influencing procurement strategies

Table of content UIP: International Union of Wagon Keepers Regulatory framework: economic terms Rolling stock: the freight wagon market Rolling stock: asset financing Conclusions

14 Financing freight wagons: the sources Sources of finance  Own cash flow  Debt or equity from a State or an agency thereof  Grants or loans from supranational organisations (EIB)  Leasing or debt finance from private sector Private Sector Markets Bonds and Private Placement Fonds, SPV and Investors Specialized Banks

Interest - Lenders  Financial market conditions (interest rates, spreads, refinancing costs)  Creditworthiness and probability of default  Loan-to-Asset-Value and collaterals (intrinsic value)  Underlying contracts/concession  Available asset securitisation  Country and foreign exchange risks  Long disbursement and repayment (loan) periods (15 – 20 years)  Relative constant returns (recurring revenue streams)  High transaction volumes  More attractive than alternative assets (diversification), more value than corporate  Pledge of assets and political support seen as comparative advantage Financing freight wagons: risks vs returns Cost drivers - Borrowers Attracting private investments is possible but...

16 Financing freight wagons: as long as… Private investment will only be attracted for projects with revenue streams that are isolated from risks over which investors have little control o Independent regulatory authorities are essential to attract large scale private investments o Separate government’s sovereign functions of regulation from management and operation of railways o Policy makers to provide a stable regulatory framework and avoid over- regulation o Stakeholders to focus on fields with competitive advantage, improve productivity and service quality (in particular reliability, price and customer orientation) Ensure value for money

17 Table of contents UIP: International Union of Wagon Keepers Regulatory framework: economic terms Rolling stock: the freight wagon market Rolling stock: asset financing Conclusions

 Liberalisation aims at providing efficency in a Single Market.  Liberalisation is a challenge but also an opportunity in financing the railway system.  Still many problems to attract private investments: low margins, low returns, decreasing volumes. Conclusions A real revitalisation in today’s rail freight market and a better modal split for railways needs new realities!! + + –

EU initiatives - Liberalisation Structural changes are not enough to foster performance, efficiency and ensure more private investments:  Ensure regulatory stability  Ensure fair intramodal competition (freight vs passenger)  Ensure fair market conditions between transport modes  Remove remaining technical and administrative barriers  Reduce regulatory burden and barriers to entry UIP welcomed and fully supports the 4 th Railway Package and its objectives

4 th railway package – Expectations More interoperability, “interoperable” Safety & strengthened role for ERA mya bost investments:  Schengen for rail vehicles and railways  Same exams and same pass marks over Europe  Reduction of time to market and costs to market  Reduction of risks when launching new products  Clear framework of roles & responsibilities  Clear framework to limit national and protective rules Boost innovation Boost market access Boost productivity

21 Thank you for your attention! GILLES PETERHANS Secretary General

22 UIP – External Working Structure Environment Members: 14 national associations UIP UIC, CER, ERFA, UNIFE, UIRR, EIM, UITP, EPTTOLA, ESC, CLECAT, ETF,... OTIF, UNIDROIT, RSRD 2, national associations, etc. Council of the EU European Parliament Council of Transport Ministers TRAN Committee European Railway Agency (ERA) * EUROPEAN INSTITUTIONS Other int. associations Other organisations MEMBERS keepers workshops shippers manufacturers NoBo... ERA Administrative Board European Commission Commissioner for Transport RISC: Member States * ERA draft recommendations for EU COMMISSION on safety and interoperability