TAKING a regional train in Germany has changed significantly in the past 20 years. Increasingly passengers are greeted by new trains donned not in the traditional red and white livery of German Rail's (DB) regional subsidiary, DB Regio, but new privately-operated brands, which are often backed by state-owned railways from other European countries.

Since market liberalisation commenced in 1995-96 many operators have seized the opportunities on offer. Abellio, Keolis, Netinera (formerly Arriva), Veolia and Metronom, are all now well established after gradually winning various tenders across the country since the early 2000s. And with around half of the market set to come up for tender in the next few years, they are all primed for growth.

National Express is the latest operator to enter the market, expanding from a former major player in the British franchise arena where it now only holds one franchise down from five a few years ago, to North Rhine Westphalia. It is one of the few truly private operators currently active in Germany and is due to take over services in the Ruhr on Regional Express Line 7 (RE7), the Rhine-Münsterland Express, and Regional Line 48 (RB48) for 15 years from December 2015 after it was awarded a contract by Rhine-Ruhr Transport (VRR) in February 2013.

The company will operate around 5.1 million train-km per year, and the executive director of National Express Germany, Mr Tobias Richter, says it is eyeing various other tenders over the next few years.

"We have spent a lot of time and money on the Berlin S-Bahn tender while the S-Bahn network in North Rhine Westphalia is set to be tendered next year, and the Rhine-Ruhr Express (RRX) network is coming up soon," Richter says. "We also consider Baden Württemberg as our second key market. Although there are strong competitors in the market, we believe that the number of new contracts is so huge, that even if we work on 10% of them, we still have a realistic chance of increasing our market share."

Introducing passenger concessions has coincided with an increase in services and patronage on German regional networks. For example, VRR's North Rhine Westphalia network now records 101 million train-km annually, an increase of 17.4% from 86 million in 1995, while it carried 1.16 billion passengers in 2013, compared with 865 million when concessioning began, an increase of 34%.

Abellio---ImageIt's a similar case in Bavaria. Unlike North Rhine Westphalia, which is Germany's most populous state and is made up of three public transport authorities (PTAs) - VRR, Westphalia-Lippe Local Transport (NWL), and Rhineland Local Transport (NVR) - Bavaria has just one: Bavaria Railway Authority (BEG).

In 1996, when the process of liberalisation commenced in the state, Bavaria was recording 80 million train-km annually. This has since grown to 120 million with a 70% increase in passengers, a result that BEG's executive director Dr Johann Niggl says is the direct result of introducing competition.

"We now have 25 tenders for railway operations across Bavaria and by using efficient prices through the power of competition, the railway companies have organised and brought the costs of these operations under control," Niggl says. "These price savings enabled us to order more train-km allowing us to offer a timetable which more-or-less guarantees that at least one train will leave every station across Bavaria every hour."

Despite these changes and the obvious improvements in performance and standards on local services, many questions remain, not least the role of DB in this market, and its relationship with local transport authorities and its prospective competitors.


The story of liberalisation in Germany began 20 years ago with the restructuring of the reunified railways of West Germany's German Federal Railway (DB) and East Germany's German State Railway (DR) into DB.

DB remained a state-owned operator of long-distance services in Germany, with ownership and responsibility for maintaining infrastructure given to its subsidiary, DB Networks. DB Schenker was established as a freight and logistics subsidiary, while DB Regio would operate regional passenger services.

As part of DB's restructuring, it adopted a private management structure as the company was gradually geared up to compete at home in tenders for local regional services, and eventually operations abroad through the acquisition of Arriva in 2010. DB International was established to provide overseas consultancy services.

The poor financial condition of Germany's local passenger services, which were heading towards financial disaster in 1995, led the federal government to delegate powers to the states. As a result 27 regional and local PTAs took on responsibility for developing timetables as well as outlining the conditions for and management of the tender process, including specifying the introduction of new rolling stock. Under the new regional rail structure, the states receive funding from the federal government, which currently amounts to €7.4bn annually.

Competitive tenders were slow to take off with DB Regio initially operating all regional services. But in 2003 with Arriva's entry into the market, which was followed by Keolis and Connex (later Veolia), Niggl says that in Bavaria things really began to pick up, a trend mirrored in other regions.

Nevertheless the ability of the smaller operators to compete with the might of DB, with its superior financial clout and considerable influence over politicians and decision makers, has long been a thorn in the concession process, and continues to irk prospective outside operators.

Abellio launched legal proceedings against VRR in 2011 after a contract for the S-Bahn network in North Rhine Westphalia was directly awarded to DB Regio, which would continue to operate the network up to 2023. VRR also decided that Regional Express services would remain closed to competition for the foreseeable future.

"This would have resulted in a non-accessible market for a long time, for decades in some cases, which was obviously unacceptable from our perspective," says Mr Stephan Krenz, Abellio Germany's managing director. "We successfully proceeded against the award of the contract to DB Regio, and obtained a judgement from the Federal Court of Justice, the Abellio ruling, which clearly states that all lines in Germany must be tendered."

Mr Martin Husmann, chairman of VRR, says he welcomed the court's ruling, stating that open tendering and not direct awards was always the intention for the process. In North Rhine Westphalia Husmann feels that a level-playing does now largely exist. However, he says some PTAs in certain regions have been slower to adopt competitive tendering and remain heavily influenced by DB.

"Sometimes they [the PTAs] are influenced by politicians who are influenced by trade unions because members of trade unions are voters," he says. "If elections are coming up, it can mean that they have strange ideas about competition."

Husmann cites VRR's adoption of a rolling stock financing package as a critical step in its efforts to allow private companies to compete more effectively with DB following a drop off in competition in the aftermath of the 2008 financial crisis.

Providing new rolling stock is a major component of most regional tenders in Germany. However, following the financial crisis, it became much more difficult for smaller operators to secure finance from banks for these investments. For example Richter says that now when an operator asks for financing for rolling stock it has to include contingencies for incidents such as floods, earthquakes and nuclear catastrophes, which makes the process much more complicated. "They want to see that it covers all risks, which makes it expensive and difficult for private operators," he says.

With state-owned DB still able to secure finance at lower rates, sometimes even below that of the PTAs, the incumbent often has an advantage, which Husmann says was limiting the number of bidders for contracts, driving up costs.

VRR responded by offering to assume responsibility for rolling stock financing and lease the fleet back to the operator, a move that Husmann admits has not made him the most popular man at DB headquarters in Berlin, but has been welcomed by the other firms.

"Our rolling stock financing model helps us to make sure that competitors have the same opportunities as DB when making their strictly-calculated offer," Husmann says. "Although it is designed purely to make competition possible, it could be interpreted as being against DB, and these measures have clouded the atmosphere between ourselves and DB because DB believes it is not fair. We disagree. In our view it puts all of the competitors on the same level which increases competition and forces everybody to deliver a higher quality standard."

The results are encouraging. In the five tenders since the scheme was launched in 2009, Abellio secured two concessions using the financial model, Line RB47 and the Lower Rhine Network encompassing lines RB33 and RB35, while National Express used the model to win its Line RE7 and Line RB48 concessions. Abellio competed with two other bidders in both of the tenders it won, and National Express had one competitor. DB Regio secured the other two contracts, with two rival bids from companies using the financial model made in each contest.

The success of VRR's financing model has led Baden-Württemberg Public Transport Authority (NVBW) to adopt the model for its tenders, which Richter describes as an encouraging move. However, he decries the situation in Berlin where Berlin-Brandenburg Transport Authority (VBB) was forced to directly award an interim contract for the S-Bahn ring service to DB Regio subsidiary S-Bahn Berlin, which he says was the result of not one bidder being able to afford the e800m required for new rolling stock. VBB cited expected difficulties with supplying the trains before 2017 for its decision due to the unusual 650V dc electrification system in Berlin, even though the authority was critical of S-Bahn Berlin for its poor performance, which gave rise to the tender in the first place.

BEG is also conscious of the implications of financing in its concessions, and Niggl says that as a result the authority issues guarantees in its "important tenders" for the use of rolling stock beyond the 12-year contract period.

"The operator is faced with the risk of what they will do with the rolling stock if they do not win the tender after 12 years," Niggl says. "We take over that risk by guaranteeing the reuse of that rolling stock independent of who wins the tender."

Niggl adds that BEG's guarantee is critical for bidders to secure an AAA finance rating, the same as DB, which he says is imperative to provide equal opportunities and present the best possible conditions for competition.

Gross versus net contracts

Another area that he says is currently under review is the introduction of more gross elements into BEG's net contracts. Under EU law, the auctioneer can specify either a gross or net contract. In a gross contract the operator bids for the full operating costs and all revenue goes to the authority. In net contracts the operator is granted all revenue and bids only for the necessary difference in fare revenue and that required to make the desired profit. Niggl argues this would make bidding more attractive for operators, which currently face problems in projecting revenues on contracts that can last up to 12 years, by reducing their exposure to risk.

Richter feels the availability of passenger usage information in Bavaria and other areas which predominately use net contracts is in desperate need of improvement and is currently putting many off bidding for its net contracts. He says that in many cases at present it is almost impossible for operators to calculate the prospective level of ticket income because they do not have access to current data from the incumbent operators or the PTA. "In Munich they have 600 seats per train, and if we are 20% wrong in our calculations, it will bust our budget for the next 20 years," he says.

Krenz also thinks that more needs to be done to improve certain conditions that continue to favour DB.

"Take the used vehicles for example, which are required in some tenders," he says. "There are very few available on the market while DB has a significant pool due to its size and history. Or ticket sales. There is only one country-wide tariff available which is under the regime of DB. Every private operator has to cooperate with DB on this matter. Thus there is still some work to do to create a level playing field."

Niggl admits that as the incumbent and with reams of data available from its services, DB is at an advantage in many areas. He also says the situation of "Chinese Walls" between DB's subsidiaries is far from ideal because the reality is that people working in the same company can and will talk to each other.

Another potential issue is access to rolling stock maintenance facilities. With more and more operators entering the market, the need to access depots will increase, which Niggl says may not be forthcoming from their competitors.

"Currently when companies win a tender, they look for a location for their own depot," Niggl says. "It is clear that in a long-term perspective it is impossible to double, and double again depot facilities. It is not economical and it is also often not possible because you have to find suitable areas with links to the railway network and there are not too many available. We are at the beginning of this process. There are federal regulations stipulating free entrance to depots but they are clearly not working so we have to find new solutions where existing depots are transferred to the winner of a tender."

In spite of these challenges, Husmann says that he feels that private operators are offering a higher level of service than DB, which is evident in performance league tables, which measure items such as punctuality and cleanliness of trains, and gauges public opinion. He says this is predominately due to their greater capacity to innovate. However, overall performance among operators including DB is rising, which he credits to the competition process.

Niggl also says that the speed at which other operators can make decisions compared with DB is a significant advantage and that DB has had to play catch up to meet similar efficient levels of production.

"The overheads of DB Regio are a lot bigger than private operators, which may allow them to take on greater risk in their bids than private operators can allow, but it can also mean that their decision making process is a lot slower," Niggl says. "What we see is that the private operators are faster and stronger at making decisions, and while they have improved somewhat in the last 20 years, DB still has a long way to go to match them."

Innovations in service are apparent to anyone using a privately-operated train. With only limited ability to alter ticket prices and provide special offers, and with no responsibility for managing stations which could offer additional revenue streams, the primary means of boosting revenue for operators is to get more passengers onto more trains.

By introducing new and faster rolling stock, concessionaires have been able to reduce journey times through improved train pathing. This is attracting more people to rail and expanding the size of the commuter belt in many German cities.

There is also an emphasis on improving the onboard journey experience for passengers. New trains which are compatible with the varying platform heights on the German network and incorporate facilities for disabled passengers as well as toilets and improved lighting are all reducing the barriers to train travel.

Layouts that maximise seating capacity and minimise dwell time at stations by offering more doors to ease the boarding and disembarking process, are also major improvements, as is passenger information that goes beyond onboard announcements of the next station. Connection information, as well as extra content such as news and weather, both of which incorporate advertising, is now widely available. In addition some operators are paying significant attention to the quality of their onboard service.

This includes Netinera's Alex, which on its Munich - Lindau service created a concept of "servitality" a mixture of service and hospitality. The company's staff were trained in customer etiquette at a Swiss hotel which they have replicated onboard the trains.

"Without competition it would have been really hard to push DB to introduce these changes, and if they had managed them it would have been terribly expensive for regional authorities," Husmann says. "With the possibilities afforded to us by European law to not only tender the concessions but set the quality standards, PTAs are now in a position to push forward with these quality improvements and enforce them."

Enhancements to services are clearly in the interest of PTAs aiming to increase use of public transport networks in the future. Significant progress has certainly been made in the last 20 years. And more is expected.

With more and more routes set to open to competition over the next few years, and additional international operators attracted by the smaller contracts on offer in Germany - Niggl says Britain's Go-Ahead is already preparing to enter the market, while he has been approached by Asian operators interested in finding out more - authorities such as VRR and BEG, and ultimately their passengers, are set to continue to benefit from an expanding market.

Rolling stock approval problems persist

THE introduction of new rolling stock is proving a major advantage of the concession system in Germany by speeding up the replacement of out-dated equipment with new efficient trains. However, delays in certifying new vehicles for use on networks have been a major issue in recent years, much to the frustration of operators and public transport authorities.

Krenz says certification of the nine Alstom Coradia Lint DMUs it ordered for its S7 concession between Wuppertal and Solingen in North Rhine Westphalia, which entered service in December 2013, was only received 34 hours before the start of operation. This was in spite of ordering a standard vehicle - Alstom had delivered 760 of the trains up to the end of last year - with no indication forthcoming on whether they would receive certification before the start of the contract.

"Obviously we were forced to prepare a comprehensive replacement using hired vehicles, and it required an extraordinary effort to move back from the replacement concept to the original concept in only 34 hours," Krenz says. "This example clearly shows that we need a smoother certification process. The signed memorandum of understanding between the German Railway Industry Association (VDB), the Federal Railway Authority (EBA), German Rail (DB), and the Association of German Transport Companies (VDV) clearly goes in the right direction, but this needs to now become a reality in daily life."

Talent-2The agreement, which aims to accelerate the certification process, was reached in June 2013 and in a report a year later, the VDB says progress is promising. Specifically it points out that a new locomotive assessed under the new rules is now capable of receiving approval 11 weeks after the submission of all documents.

However, the organisation urged the swift legal adoption of the reforms to provide a pragmatic and predictable approval process for rail technology in Germany in line with EU directives.

Both Husmann and Niggl are optimistic that politics will solve the certification problems. However, Niggl also urged manufacturers to do more to improve the situation. He says that if they take possible delays into account in their delivery estimates for new rolling stock, some situations where trains were not delivered on time might have been avoided.

"Typically they estimate 36 months for delivery but we are in advanced contact with the manufacturers to extend this to 42 or even 46 months to give manufacturers more time to deliver the vehicles," he says. "I don't know if this will work, but we felt that we had to do something because the unavailability of vehicles is one of the most critical challenges we face because the old vehicles have been reassigned to other networks and we still have passengers to transport."