After 12 years operating in the form of a private company, DB AG is being groomed for a real transition to the private sector - should Parliament so decide. Decision time could be this month

'EXCEPTIONALLY positive' is how Dr Werner Müller, Chairman of the Supervisory Board of Deutsche Bahn AG since July 2005, describes the railway's trading position. At a mid-2006 meeting of the Board, Müller noted that 'we are continuing to succeed in attracting a greater volume of transport onto rail, and this year is no exception.'

Indeed, Chairman of the Management Board Hartmut Mehdorn believes this 'is going to be another record year for Deutsche Bahn'. Looking back on 2005 when DB AG beat its own financial targets, Mehdorn points to a turnover of €25·1bn, placing the group firmly in the league of mega transport businesses (Table I).

The transformation is not yet complete, as DB AG remains a state-owned company. But it is Mehdorn's fervent wish to see at least part of the business move into the private sector. He and his management team have spent the last few years preparing the railway for the transition - in the process turning a national railway into a multinational business whose reach extends deep into the fields of shipping and logistics.

The list of acquisitions that has swelled the group's turnover is dominated by Stinnes and Schenker which were acquired in 2003. The purchase of US-based BAX Global from The Brink's Co, completed in January 2006, added logistics markets in America and Asia, complementing the trading operations of Schenker with shipping and air freight.

In 2005 Railion, DB AG's rail freight subsidiary, added Alessandria-based Railion Italia to its portfolio - Railion Nederland having been acquired in 2000 and Railion Danmark in 2001.

All this makes for a mammoth business which critics and competitors argue is an unwieldy conglomerate. DB AG points out that its recent expansion is 'based on the consideration that the railway can only be successful in the long term if it has sufficient access to customers. In the age of globalisation, this means that restriction to a single national market is not an option, least of all in the transport and logistics industry.'

DB AG contends that it is now a profitable concern ripe for admittance to the private sector, although it is only fair to point out that substantial funds are still received from government and other sources. Tucked away at the back of DB AG's most recent annual report is a list of grants and subsidies - for 2005 these totalled €7·2bn (Table II). Surprisingly, substantial sums are still being spent on upgrading and modernising the eastern part of the network run until 1989 by Deutsche Reichsbahn. Nor should the cost of running the regional railways be forgotten - around €6bn to €7bn a year is channelled through the Länder to pay for these services (p561).

Nonetheless, DB AG looks an attractive candidate for the private sector in the eyes of a coalition government anxious to balance its own books. The national budget was so deep in the red that the EU was paying unwelcome attention, leading indirectly to cutbacks in the funding for regional rail services.

Mehdorn announced on August 14 that DB AG's turnover in the first six months of 2006 was up 19·1% on the same period in 2005 at €14·5bn, with passenger-km up 5·1% at 36·2 billion and Railion's tonne-km up 11·3% at 48 billion. 'With these excellent results we are creating the economic foundation for an initial public offering', he said. DB is now predicting a 2006 EBIT of €1·9bn, €300m higher than its last forecast in March.

Mehdorn continues to place strong emphasis on the need to obtain private capital for future investment, and there is no doubt about the railway's future spending needs. The gross investment total for 2005 was €6·38bn, of which €4bn was allocated to infrastructure. This year's infrastructure investment spend will be €3·6bn, according to Mehdorn.

How much will be spent in future years and where it will come from hinges on the outcome of the political debate that resumes this month. Increasingly it looks as if the decision will not be whether to privatise the railway, but how to go about it.

Mehdorn's vehement campaign to retain an integrated structure has won support from key members of the government, but it remains to be seen if this is enough to swing the final decision.

Transport Minister Wolfgang Tiefensee is on record that full separation is no longer favoured (RG 8.06 p440), and the issue now is whether the government hands ownership of track, signalling and other infrastructure to DB AG or whether DB AG will take possession on the state's behalf. The value to be placed on the network will be a critical issue, not least because DB Netz AG collects more than €3bn a year in access charges (Table III).

In a statement issued earlier in the summer, the Supervisory Board noted with satisfaction that the federal government had given credit to DB AG's commercial success and that parliamentarians had spoken out against full separation. Mehdorn's term lasts until 2008, by when he will know whether his ambition will be fulfilled.

Table I. Key figures for DB AG, 2000-05

2000 2002 2004 2005
Passengers carried million 1712·5 1657·2 1694·8 1785·4
Passenger-km million 74388 69848 70260 72554
Tonnes carried million 301·3 278·3 283·6 266·6
Tonne-km million 80634 77981 83982 83111
Staff 230615 224758 229830 220343
Turnover €m 15465 18685 23962 25055
Staff, material, depreciation and other costs €m 20588 23725 27606 27742
EBIT €m n/a n/a 1144 1352
Surplus/(loss) €m 85 (468) 180 611

Table II. Grants paid to Deutsche Bahn AG in 2005, €m

Third-party grants 717
Grants paid by the Länder under the Community Transport Finance Law for up to 40% of investment costs 'to improve community transport' 359
Federal grants for noise abatement measures 60
Federal grants for infrastructure work paid from road access charges through the Transport Infrastructure Finance Company 332
Federal grants for upgrading and modernising equipment and infrastructure of the former Deutsche Reichsbahn 1092
Federal grants under the Community Transport Finance Law for public transport 95
Federal grants under the Federal Railways Upgrading Law for investment in new lines or upgrading, or for other investment in the xisting network 4125
Federal grants paid to eliminate temporary speed restrictions and fund short-term signalling improvements 49
Grants from the EU 374

Table III. Access charges paid as internal trading between DB AG companies in 2005, €m

Track Station Energy Other access usage
Long-distance passenger 712 85 259 16
Regional passenger 1966 391 592 42
S-Bahn and suburban 172 79 36 1
Railion (freight) 454 0 354 145
Total track access charges paid to DB Netz AG, including special items 3307
Other infrastructure charges paid to DB Netz AG 207
Station use charges paid to DB Station & Service AG 555
Energy charges paid to DB Energie GmbH 1413