May 12, 2015

Business as usual for FS

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Buoyed by a strong balance sheet, Italian State Railways (FS) is currently embarking on an ambitious programme of restructuring, infrastructure investments and service improvements. A year since his appointment as CEO, Michele Elia speaks exclusively to Kevin Smith about how the railway is progressing with these plans.

IN March 2014 Mr Mauro Moretti, CEO of Italian State Railways (FS), proudly told IRJ that FS Group had bucked the national trend as one of the few Italian companies to report positive economic growth in the years following the global economic crisis.

Fast forward a year and Moretti has left FS following a 36-year career with the company, and eight years as CEO, to take over at state-owned conglomerate Finmeccanica. While this could have sparked a period of instability at the railway given Moretti's hands-on management style, the transition appears to have had little impact.

With FS set to report its seventh consecutive year of growth in its 2014 financial results, during a visit to Rome in March, FS mangers told IRJ that it remains business as usual since the appointment of Mr Michele Elia as Moretti's successor.

eliaElia began work in his new role in April 2014, stepping up to the top job following eight years as CEO of FS subsidiary and infrastructure manager Italian Rail Network (RFF), in a 40-year career with the railway. He says that the 2014 results are in line with the company's business plan to achieve 3.5% annual growth up to 2017 and he reflects on FS' 2013 Ebitda margin of 24.5%, which he says is much higher than the other major railways in Europe.

Elia says this factor along with its consistent financial performance is setting the railway on the path to significant investments in the next few years under its 2014-2017 strategic plan.

"After years of deep restructuring, we are now ready to face new challenges," Elia explains. "Our business plan foresees investments of €24bn, €8.5bn of which is self-financing and our motto for the next few years could be 'to create value in transport in order to help Italy's growth.' We have got the instruments, willingness, and resources to achieve our ambitious goals such as completing the high-speed lines, improving regional transport, restructuring freight transport, and international expansion."

Inevitably following such encouraging performance, reports that FS could enter private ownership have gathered pace in recent months. Elia says this remains an objective for FS and the Italian government, with the Ministry of Finance taking responsibility for this process.

Indeed the ministry has already appointed the legal and financial advisors for this transition and Elia confirms that FS was due to appoint an industrial advisor by the end of last month following a competitive tender. "A task force is working to examine divestments in progress within FS Group and to outline the path to privatisation, which will take place during 2016," Elia says.

Watershed

With FS set for private company status, it could mark a watershed moment for rail services in Italy. Fares on regional services are extremely low to the extent that these services report extensive losses, with the problem particularly pertinent in southern Italy.

Elia says that reforming local transport is FS' "top priority," with a thorough review of business models resulting in a clear definition between what are defined as "market services" and "universal services."

"As far as we are concerned, the regions are responsible for funding regional transport," Elia says. "They decide every feature of the service: how many trains, how many funds to allocate from their budget, and how many resources from tickets. There have been some difficulties with reductions in subsidies from central government to the regions. By our hand, we are renovating most of the regional fleet with €3bn of our business plan devoted to this."

As FS' operating subsidiary, Trenitalia is responsible for these regional services. CEO Mr Vincenzo Soprano says the problems with low fares are compounded by the quality of rolling stock on offer, with people understandably reluctant to pay more to use the same old trains.

However, with the regions unable to finance an entire new fleet themselves, it is left to FS to foot the bill, with Soprano referring to the current tendering situation in Emilia Romagna where the state is attempting to encourage Arriva to issue a rival bid.

"In Emilia Romagna they want a new fleet of trains which requires €600m of new investment and we have to pay this €600m two to three years before we start the service, which is a problem for us," Soprano says.

Mrs Barbara Morgante, FS' director of central strategy, who is overseeing the privatisation process, says that once it becomes a private company, and with the individual regions overseeing competitive tenders for regional services, FS would have the option not to bid for these services, leaving other private operators to offer an alternative.

Morgante feels this could finally force the change in culture and attitudes desperately required in Italy. However, she admits that given experiences with competitive tenders so far where no other bidders have come forward, it remains difficult to attract private parties to bid for these services.

"In circumstances where there are no bidders for these contracts we would be obliged to offer a service," Morgante says.

Forthcoming infrastructure investments may serve to improve the attractiveness of these services, particularly in southern Italy. Construction is set to begin by the end of this year on a new line between Naples and Bari, with work expected to take up to 2022, three years ahead of the initial schedule. A journey time of two hours will be on offer on the new line, a significant improvement over the current 3h 50min journey via Caserta with no through-trains available.

Elia was appointed special commissioner through a decree issued by the Italian government for the Bari - Naples project and for the new Palermo - Catania - Messina line in Sicily, which allows him to finalise decisions on work in order to speed up the construction process. Work on the Sicily project is set to start in October, with the line set to offer a journey time of 1h 45min from Palmero to Catania, and 45 minutes from Catania to Messina.

Bond issue

Part of the financing for the Naples - Bari line will come from a European Medium Term Note (EMTN) issued on the Dublin stock exchange in February. The bond was placed with institutional investors and will raise up to e1.5bn, with these funds also supporting construction of the remaining sections of the Milan - Venice high-speed line as well as the procurement of new rolling stock, including Jazz regional EMUs from Alstom and the Bomardier/ AnsaldoBreda ETR 1000 Frecciarossa high-speed trains.

"Our investments will be devoted almost exclusively to the development of infrastructure on the rail corridors defined by the European Union (EU) and in metropolitan areas, as well as the purchase of new trains and development of technologies that will support railway transport," Elia says adding that "a new governance for freight and logistics services" will be established but not revealing any further details of how this might look. "This will focus more and more on the most important European routes," he says.

For high-speed, work is progressing on projects to complete the network, particularly the Milan - Venice corridor.
Contracts for construction of the Brescia - Verona section were awarded in January with Cepav, a consortium of Saipem (52%), Società Italiana Condotte d'Acqua (12%), G Maltauro (12%), and Pizzarotti (24%), securing a €786m contact. Civil works on this €3.95bn project are expected to begin in the first half of this year.

A second civil works contact for the Verona - Vicenza section of the Padova high-speed line was awarded to Iricav, a consortium of Fintecna, Salini Impreglio, Lamar Contracts, Astaldi, and Pipelines. Construction on this section is expected to begin by the end of the year and the total budget for the project is €4.15bn, which includes €190m for connections to the conventional network in the Verona area. Work is also expected to start in June on the third of six construction packages for the 53km Torotona/Novi Ligure - Genoa high-speed line, which is part of the Rhine Alpine corridor.

In addition a key step was taken in February on the long-awaited Turin - Lyon high-speed project. France and Italy signed an accord for the €26bn scheme, with the two countries creating a new company to run the project, Euralpine Tunnel Lyon - Turin (Telt), a 50:50 joint venture between Italian State Railways (FS) and the French state.

The 140km line will have 87km of tunnels including a 57km twin-bore base tunnel between St Jean de Maurienne, France, and Chiomonte in Italy. The cross-border section extends for 18.1km on the Italian side, 12.5km of which will be in the base tunnel. Beyond the Italian portal, there will be a 3km link to the existing line at Bussoleno, including a 2.1km tunnel and a new station at Susa.

France and Italy will seek to co-finance the €8.5bn base tunnel through the EU's Connecting Europe Facility (CEF) for 2014-2020, with up to €3.4bn coming from the EU, €2.2bn from the French government and €2.9bn from Italy. The line is expected to open in 2028, and will reduce Lyon - Turin journey times from 3h 30min to 1h 47min.

Trenitalia services on the new international link might well utilise the new Frecciarossa 1000 high-speed train which is set to make its inaugural passenger journey on April 25 coinciding with the opening of Expo 2015 in Milan. Full passenger services will begin in mid-June with the start
of the summer timetable.

The trains have a design speed of 400km/h and a 360km/h operating speed was initially envisaged. However, tests have taken place at 350km/h and it is expected that the sets will initially not operate at above 300km/h.

Expansion to neighbouring countries is similarly reflected in the success of FS consulting subsidiary Italferr in advising on some of the world's most prestigious projects since 1984. FS is also acting as a private operator in the German regional market through Netinera, which it founded in 2011 following the purchase of the German activities of Arriva after the takeover of the British group by German Rail (DB).

Elia says FS "is very satisfied" with the performance of Netinera, which is currently the third largest regional operator in Germany, and he is aiming to expand its operations. "Our strategy is to increase our presence in this market, trying to win more regional and suburban operating concessions in Germany," Elia says.

While FS is keen to look beyond its borders for future opportunities, it is set to invite many of the world's leading engineers and researchers to sample its offerings when it hosts the 11th World Congress on Railway Research in Milan next year.

Elia says that with the future of railways dependent on continuing innovation and research, it is a great honour and opportunity for FS to host the event. Inevitably the best of Italian railway technology and latest thinking will be on show with FS set to play a major role in presenting its views, not just of the current situation but how it sees the development of the sector up to 2050. With new trains ready to hit 350km/h+, and reforms to freight and regional services underway, FS and Elia will have an important role to play in shaping this debate in Europe and beyond.

"The goal of this global discussion is to make railway transport safer, more efficient and sustainable," Elia says. "We also hope to promote inter-modality with other transport modes and the development of interoperability between the different railway systems in various countries."

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