FRANCE already has a unique relationship between its two main railway players - French National Railways (SNCF) and French Rail Network (RFF) - due to the fact that RFF was set up primarily to manage SNCF's long-term debt rather than as a conventional infrastructure manager. As a result RFF is a lean organisation of managers, engineers and planners purely responsible for building new lines and upgrading the existing network, leaving SNCF to operate and maintain the infrastructure as well as the trains. The reform process aims to create a fully-fledged infrastructure manager and a national train operator under a still to be fully defined umbrella organisation.

Pepy"This will be a French model rather than a German, Belgian, British or any other model," explains SNCF president Mr Guillaume Pepy. "The idea of having one single system for Europe is foolish. Each country has its own history and the needs of countries such as Germany and Luxembourg differ greatly. The reform will strictly comply with existing European regulations and will be an element of the European Union's Fourth Railway Package."

The reform process was launched by the previous Sarkozy government and has been taken up by the current government of President François Hollande. It is a slow process because it has to be discussed by a wide range of individuals and organisations with an interest in rail. Draft proposals will be published by the government this month and presented to parliament by the end of the year with a view to implementing the reforms in 2015.

The overriding objective is to improve the quality and efficiency of the national railway to drive down costs and generate more revenue. Pepy says the current set up has been a great driver of cost and complication, resulting in a system which few people understand fully. "I think the French system has suffered from complexity, misalignment of interest, and inefficiency," Pepy explains. While the new system will be designed to ensure the new infrastructure manager and national operator work together as partners, the government is adamant there will be a level playing field for all train operators, whether state-owned or private, to avoid discrimination.

The reform will have three aims:

• to fund the rail system properly and deal with debt issue

• to implement the principle of "who pays decides," and

• to prepare the railway for competition.

While Pepy says SNCF's debt of €7.3bn in 2012 - down from €8.3bn in 2011 - is manageable because the organisation generates sufficient revenue and profit, RFF still has long-term debts of €31bn which need to be stabilised and eventually reduced over the next few years. A study is currently underway to see what can realistically be achieved. "There will be no attempt to hide the debt - the goal is to finance the system properly and set up a real business model," Pepy says. "We believe a balance can be achieved."

France will implement EU regulations to introduce competitive tendering for the provision of local and regional services in 2019. At present, the French regions pay out a lot of money for these rail services, but have little say in how the money is spent and no control over fares. The regions also lack the authority to integrate rail with other modes. "Without waiting for 2019, the responsibilities of the regions will be expanded and two of the regional presidents will have seats on the infrastructure manager board," says Pepy.

SNCF has also started working more closely with RFF in anticipation of the reform, for example by trying to optimise train paths. "This is one of the main problems on the network especially for freight trains where their paths are often severely damaged by the paths given to regional trains," Pepy explains. "Freight trains need fixed paths allocated in advance."

Recession bites

The worsening economic situation in Europe is starting to take its toll. French consumption fell by 1.5% in the first quarter of this year leading to a reduction in mobility. Railfreight suffered a 3% drop in volume while passenger traffic declined by between 1 and 1.5%. "This is the first time in a decade that we have suffered such a dramatic impact from the economy," Pepy declares.

SNCF has reacted swiftly by launching two initiatives designed to reduce production costs by €800m over five years, and headquarters and administrative costs by €700m during the next three years. The objective is to gain two points of Ebitda.

The French railway system operates with around €100bn of capital of which €60bn is for infrastructure and €40bn rolling stock. Pepy says this makes it vital to improve what he describes as capital rotation. In other words either reducing the asset base or getting more out of assets for example by improving rolling stock utilisation.

One of the casualties of the economic downturn has been SNCF's prestigious TGV network where the annual growth, which the steady expansion of the network has delivered since the launch of the first high-speed services in 1981, has ground to a halt. Pepy says he is not worried in the medium term because the four new lines scheduled to open in 2017 will restore the TGV system to growth. "We generally get a 30% jump in traffic when we open a new line, half from air and half from the generation of new business," says Pepy. In the meantime, the challenge is to weather the current crisis. This is part of the rational for launching Ouigo, SNCF's low-price high-speed initiative to attractive new users to rail by appealing to people who still want to travel but find it increasingly difficult in the current economic climate. As the following article explains, SNCF is very pleased with the results so far.

Pepy also sees Ouigo as an initiative which will help SNCF maintain its leadership in high-speed rail. TGV accounts for around half of all high-speed rail travel in Europe. "We want to retain our position in the high-speed market by giving Europeans a choice versus air," he says. "Our ambition is not domestic - TGV is an opportunity for Europeans, and Europe is an opportunity for TGV."

But the real growth driver for SNCF is mass transit or what Pepy describes as daily mobility. "This now accounts for one third of our activity and this is where we are putting our money, intelligence and creativity," says Pepy. However, he freely admits that SNCF been slow to develop and improve commuter services, and is now trying to make up for lost time with heavy investment underway in Paris.

Railfreight has long been SNCF's Achilles' heel as it has continued to haemorrhage traffic despite numerous attempts over the years to revive the business. Pepy says SNCF is making some progress as it has managed to reduce the losses by one third during the last four years. "We will not give up with this business as we think it is absolutely vital," Pepy affirms. "We conducted a very interesting study with Bain which showed that between 2007 and 2011 the seven major railfreight operators in Europe accumulated losses of more than €5bn." Pepy argues it is definitely a question of European transport policy. "What does it mean for fair competition when on one hand we have a completely deregulated system for road, and a hyper-regulated system for rail on the other?" he asks.

Pepy is keen to point out that SNCF is now a mobility business rather than simply a national railway with rail accounting for 60% of turnover and other modes 40%. SNCF is also focused on developing its international business either on its own or with French partners. International business accounted for 23% of SNCF's annual turnover of €33.8bn last year and Pepy wants to increase this to 30%. In addition to the potential offered by the so-called Brics countries, Pepy is very excited about Australia where SNCF already has a foothold through its Keolis subsidiary in a joint venture with Downer EDI which operates the huge Melbourne tram network and will run the Gold Coast light rail line when it opens next year. "Light rail is one of the most dynamic railway markets globally, and France is now number one in the world for light rail," says Pepy.

Finally, I asked Pepy where he sees SNCF in the next few years. "I have a dream that in two to three years from now door-to-door travel will no longer be the sole preserve of road transport because public transport will be in a position to provide a real alternative. The question is how to connect the different systems and personalise the service so that at any moment you can decide whether to use your car or public transport. It is a big, big challenge, but it is a very exciting prospect."