January 16, 2015

French rail restructuring reunites infrastructure and operations

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January 1 sees the start of a major restructuring of French railways with a return to integration of train operations and infrastructure albeit within a holding company organisation. In an exclusive interview with IRJ, Jacques Rapoport, who heads the new infrastructure subsidiary, explains the benefits of the new setup to David Briginshaw.

THIS month marks a watershed in French railway history as the national operator, French National Railway (SNCF) and the infrastructure manager, French Rail Network (RFF), are brought together as part of a new state-owned holding company called SNCF. From January 1, the name RFF disappears, and it becomes SNCF Network with increased responsibilities, while SNCF Mobility is the new train operating subsidiary. In addition, the role of the French rail regulator (Araf) is being strengthened to enable it to guarantee free and open access to the network.

The new organisation will now be controlled overall by what in France is known as a public, industrial and commercial establishment (Epic). "The term Epic is strange for people outside France," explains Mr Jacques Rapoport, who until December 31 was president of RFF, and from January 1 became both deputy chairman of the SNCF Epic executive board and president of SNCF Network. "The goal is to have a holding company with autonomous subsidiaries, but in France we have a speciality in public-sector organisations called an Epic which is a public company without capital."

Both subsidiaries will produce profit and loss (P&L) accounts which will be integrated into SNCF Epic's overall results. "Up to now, when the old SNCF made a profit, as it has done for the last few years, one part was a dividend for the owners [the state], one part was tax, and one part was for the network. In the new organisation, all the profits will stay within the company and will be used to fund the network."

SNCF Epic is headed by Mr Guillaume Pepy, president of the former SNCF. Pepy is also president of SNCF Mobility, which has four divisions: passenger, logistics including the Geodis logistics operation and SNCF Fret railfreight division, Keolis which operates passenger concessions and franchises both in France and abroad, and finally performance.

The last restructuring in France took place in 1997 when RFF was set up as the national infrastructure manager. However, RFF was different from Europe's other infrastructure managers in that while it was responsible for managing the network and building new lines, signalling and train control along with infrastructure maintenance remained with SNCF. Indeed one of the main reasons for setting up RFF was to take on and manage SNCF's long-term debt, which had built up through the construction of the high-speed network.

This anomaly is being addressed in the new organisation, as Rapoport explained to IRJ. "RFF will expand to become a real infrastructure manager. RFF was the head of an infrastructure manager but without the legs as well."

Responsibility for signalling, train control and maintenance will transfer to SNCF Network. However, stations will remain with SNCF Mobility, and this was one of several concerns raised by Araf in a critique of the French rail reorganisation it published on December 8. Araf's main worry is that SNCF Network will lack independence which could adversely affect the ability of other train operators to access the network thereby hindering the development of competition. Araf believes the danger lies in the centralisation of information systems, possible cross-subsidies between SNCF Mobility and SNCF Network, and a lack of transparency of financial flows within SNCF.

"I understand the position of Araf, but I don't think their fears are justified, and we will work each day to ensure this," Rapoport responds. "Both Guillaume Pepy and I completely agree with fair competition - it will be guaranteed. We have a special organisation inside the company to ensure fair competition."

However, Rapoport points out there are currently no domestic open-access passenger operators in France, and although 35% of freight traffic is carried by open-access operators, SNCF operates 95% of all trains in France. "We can't be separate on this basis," Rapoport says. "You can when you have a lot of companies operating on the network as happens in Britain, but this is not the case in France where there are great links between the network and the transport company. This is why we are in favour of integration."

SNCF-TERRapoport says there is considerable uncertainty when France will have to grant independent domestic passenger operators access to the network. "Today it is a proposition of the Fourth Railway Package, but it is unclear when it will be adopted as it is not going very fast. The problem is knowing when and if there will be passenger competition in France. Nevertheless it is absolutely certain we will be in a position to deliver capacity. I'm not saying whether competition is good or bad, this is up to the government, but we don't have the visibility yet on this issue."

Pepy and Rapoport believe the new organisation will bring major benefits in terms of better quality of service for customers and substantial productivity gains. "With the separate companies of RFF and SNCF, we had opposing interests," says Rapoport. This was most acute in the way that responsibility for the network and its maintenance was shared between the two organisations. Rapoport says it was very difficult to modernise the conventional network efficiently, with the result that it has become degraded after 17 years under the former regime. "It is a huge task to modernise the network and we need to integrate the organisation to achieve it," Rapoport points out. "You can't provide a good service with an old network and old equipment."

Pepy and Rapoport have set themselves the goal of improving productivity by €1bn during the next five years, split equally between SNCF Mobility and SNCF Network, which equates to a 2% annual improvement in productivity. This target will be included within a new 10-year contract which will be agreed soon between SNCF and the government.

As far as SNCF Network is concerned half of its productivity improvements will come from being able to conclude more long-term contracts which will increase efficiency. A quarter of the savings will result from integration, as Rapoport explains: "We had a lot of contracts between SNCF and RFF when we were working as client and contractor, but in future we will be working as colleagues."

The final 25% improvement in productivity will be achieved through the industrialisation and modernisation of infrastructure maintenance. "We have an important project to digitise our systems, and we will be doing more maintenance at weekends in 60-hour possessions rather than through short overnight possessions during the week which will allow us to introduce new technology," Rapoport says.

Contract goals

In addition to improving productivity, the new contract will include two more goals: to raise service quality and modernise the network. "We already have a large high-speed network, but the classic network is old and our main goal is to modernise it," Rapoport says. He believes the new organisation will be better at prioritising investment, and not only deciding what to invest in but also which technology should be used. "Before, RFF had to decide what to do alone as SNCF was not included," Rapoport explains. "We made mistakes in the past and the old organisation didn't permit industrialisation."

The contract will also set out the level of government funding available to finance the investment, but this could prove to be a sticking point. "Between 1980 and 2000 we spent around €1bn each year on the existing network, but in the last five years we invested €2.5bn annually, and for the next 10 years we want to spend an extra €1bn each year to increase it to €3.5bn a year," says Rapoport. "We are now discussing this with the finance minister. The problem is that the finance minister doesn't agree yet with the total amount needed, or how it should be funded.

"The additional investment could be funded either by increasing fares or government subsidies," Rapoport continues. "But it is not possible to increase fares with the current state of the market, so we are asking for more subsidy either from the French government or the European Union."

Rail investment in France is currently funded by debt, and RFF's accumulated debt currently stands at around €35bn, derived mostly from high-speed line construction. RFF's debt is less than that of other infrastructure managers such as Network Rail which recorded a net debt of £33bn (€41.6bn) for the financial year ending March 31 2014, but this was incurred entirely from upgrading the conventional network as Britain's only high-speed line was funded separately.

"I hope we won't have to fund the modernisation of the network by increasing debt, but I fear this will be the case," Rapoport says. "We pay less than 2% for 10-year loans, and there is no shortage of banks wanting to lend us money," Rapoport observes.

Three of the four new high-speed lines currently under construction, which are scheduled for completion in 2017, are being funded by public-private partnership (PPP) deals. "President Sarkozy was in favour of PPPs, but we don't do PPPs under president Hollande's government, so it is difficult to know what will happen if we decide to build any new lines in the future," says Rapoport. "It should not be a political choice but an industrial one, and we don't do the works ourselves as these are carried out by private contractors. But a public company can borrow at a much lower interest rate than a private one, so that when a private company funds a PPP, the cost is higher."

Rapoport hopes that the reorganisation can be completed by the end of the year, as he concludes: "The most important changes will be done in the first six months of 2015, but we will still have a lot to do in the second half. We need to complete it as soon as possible, because a reorganisation uses up a lot of energy and we need to concentrate on the real job of running a railway."

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