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Market opening presents opportunities and risks

01 Feb 2016 | by Mike George

The EU's Fourth Railway Package raises the prospect of significant market opening in the domestic passenger market across Europe. As Mike George of insurance provider Willis Group explains, this heralds a major opportunity for new entrants with entrepreneurial zeal - but only if they understand fully a panoply of operational and cultural challenges.

Currently wending its way through the legislative process, the EU's Fourth Railway Package raises the prospect of many of the continent's domestic passenger markets being opened up to competition from December 2019, subject of course to caveats about enforcement by member states.

For entrepreneurial operators, and prospective new entrants, the package presents an unprecedented opportunity. Yet capitalising on it hinges on the quality of their preparedness and a robust review of the risks, many of which may not be immediately obvious.

4RP promises to streamline the procedure of vehicle authorisation and cross-acceptance, which should help new entrants to understand better the availability of rolling stock and in turn assess possible service propositions and understand operating costs. While the harmonisation of infrastructure and train control is one of the key tenets of EU rail policy, new entrants in a given country will need to have a very clear understanding of the infrastructure conditions they are going to find on the ground. The promise of streamlined authorisations for rolling stock should make asset procurement a simpler process; it will also allow operators to acquire trains in a more competitive market free of local influence, although complex technical approaches are still going to be required.

As well as the varying quality of infrastructure assets around Europe, operators must also understand other risks to service delivery. Extreme weather is one factor accelerating up the list of priorities; how quickly can a new entrant come to terms with the risks this poses in a new market? Could contingency measures be implanted from day one of the service, and are short- and long-term response plans in place?

Other strategic challenges lie off the tracks, notably in the back office. Operators will need to ensure that the processes they inherit that manage ticket sales and commission rates are transparent so that their revenue streams are clear. They will also need to clarify the roles of third parties necessary to support the service, including any incumbent or national government agencies.

The business environment created by the legislation is likely to bring changes to the way each member state plans and manages its network, especially in those countries where there has been relatively little market opening to date.

Keep knowledgeable staff

In a market opening to competition, changing the culture of the workforce will be essential. Yet it is difficult to set a timetable for cultural shifts, and it will not be clear until tested whether staff and trade unions will go along with the change or resist it. New entrants will need to be determined but pragmatic in this area. But, perhaps more importantly, they may also need sufficient resources to endure whatever time it takes for any improvements to be reflected on the company's bottom line.

The demographic challenge is a significant one right across the railway industry. Experienced and knowledgeable people must be retained to manage the transition envisaged by 4RP, while greater dedication to career progression schemes and succession planning will help to develop the modern skillsets and innovative thinking that the industry continually needs.

Competition is expected to bring new ideas from other markets. One example of this is CCTV deployment; this can bring significant security and operational benefits, but in some markets there is real concern about its use on privacy grounds. New entrants must be sensitive to this and similar cultural issues.

For those operating longer-distance or cross-country services, more consideration will have to be given to supply chain risks. Unique and pragmatic partnerships may be needed; this could include forging co-operative services in one market with an operator that is a key rival in another, as in France and Germany where the national operator regularly performs both roles.

The way forward is complex, exposing new operators to varying degrees of strategic risk every step of the way. Risk transfer strategies will need to be carefully considered with insurance providers, who can offer local and specialised expertise. For some, 2020 may seem a long way off, but the experience gained from liberalisation in the UK, Sweden and elsewhere has shown that it is never too early to undertake a comprehensive review of all aspects of any new operation, including the hazard and liability risks.

  • Mike George is the Transportation Practice Leader, Risk Solutions, for the Willis Group.