The court did not mince its words and described the ministry as negligent in its scrutiny of DB and for failing to adequately define transport policy.
DB is currently in the grip of a financial and performance crisis. While turnover in the first half of 2018 was up 2.3% at €21.5bn, Ebit fell 17.4% to €974m, and DB’s CEO Dr Richard Lutz expects the full-year result to be below target. DB Cargo, Europe’s largest rail freight operator, is losing money and its market share in Germany fell from 54 to 53% in 2017. Although DB Regio still retained 74% of the German regional passenger market in 2017, it is steadily losing ground to other operators. In contrast, DB’s long-distance passenger business is doing well with a 6% first-half increase in traffic, but punctuality was 18% below target in 2018 and well below 2017 levels.
Lutz instigated emergency spending controls in September and published a five-point plan in January aimed at boosting punctuality, along with information and service quality, expanding long-distance passenger services, turning around the rail freight business, and investing in infrastructure.
DB’s long-term debt has been rising inexorably and is currently around €20bn, which means it is paying around €800m a year to service the debt. In December, DB said it wanted to increase its debt ceiling from the €20.4bn previously agreed by the government, to €24bn. The court says DB is generating insufficient revenue to fund future capital investment.
DB has been looking at selling some of its subsidiaries, such as its international passenger business Arriva and freight and logistics specialist Schenker, which could raise up to €10bn. But the last time DB tried to do so in 2016, it was forced to scrap its plans due to political pressure. Another challenge is that Schenker accounts for one third of DB’s total turnover, so its sale would have a dramatic effect on DB’s financial performance.
Even though an IPO for DB was cancelled by the federal government 10 years ago, DB still behaves like a private company and has aggressively pursued an international expansion policy through a steady stream of acquisitions of private companies such as Stinnes and the Schenker Group for $US 1.5bn in 2002, British rail freight operator EWS for £300m in 2007, and Arriva for £1.5bn in 2010. DB has also bought numerous state-owned and private rail freight businesses throughout Europe.
The court points out that 73% of DB’s subsidiaries are outside Germany and DB generates more than 43% of sales beyond the German border. The court says DB has used the profits from these acquisitions to fund further international expansion rather than helping to fund its domestic business. The court therefore wants DB to sell what it describes as “unnecessary parts of its business” including Arriva and Schenker. The government faces a clear choice: sell some of DB’s subsidiaries to reduce the debt and fund investment or allow DB to continue to increase its debt.
The court is also scathing of the federal government for its failure to create the right conditions for DB to compete effectively and win freight traffic from road to rail, for failing to specify what kind of railway and how much railway it wants, its failure to develop a national intermodal strategy, and for failing to set clear guidelines for DB, and in particular whether it expects DB to pursue a strategy based primarily on making a profit or meeting public service obligations.
Last year, Mr Kay Scheller, president of the Federal Court of Auditors, also criticised DB’s infrastructure management through its DB Network subsidiary, which is the national infrastructure manager. Scheller wants the court to monitor DB’s finances, particularly because it receives e6bn from German taxpayers to maintain the network.
The court is calling for a radical reform and wants the government to investigate different models for running the railway. This could include finally ending DB’s position as one of the last remaining fully-integrated national railways in Europe by splitting train operations from infrastructure management.
Open-access freight and passenger operators have long complained that DB uses its position as an integrated railway to make life difficult for its competitors, yet the government has been happy to turn a blind eye to the complaints. Successive DB CEOs have also fought tooth and nail to prevent DB from being broken up, rightly pointing to the large number of private operators on the German rail network.
It is difficult to see the federal German government changing its ambivalent attitude towards DB and the rail sector, but at the very least it will have to decide what to do about DB’s growing debt problem, which could have far-reaching implications for its future rail strategy.
