January 1 2005 may see Belgian Railways split into separate infrastructure and operations companies, but Chief Executive Karel Vinck told Chris Jackson that implementation of his four-year business plan is likely to take longer

'I SEE A lot of potential for this company', insists Karel Vinck. Brought in to head Belgian National Railways 18 months ago, the tough industrialist spent his first few months getting to grips with why the state-owned monolith was racking up astronomical debts. Now he must implement his reforms whilst piloting the railway through a period of profound change. 'Fortunately, I have had a lot of experience of restructuring', he notes wryly.

Over the next few years SNCB faces the emergence of on-rail competition and the creation of a separate infrastructure authority. It also needs to develop innovative forms of funding for much-needed investment. Vinck's reporting line has also changed. The May 2003 elections swept away Green transport minister Isabelle Durant, and the SNCB Chief Executive now reports to two socialists: Minister for Public Enterprise Johan Vande Lanotte and Minister for Mobility & the Economy Bert Anciaux.

But Vinck is optimistic. 'When I joined SNCB, my first task was to analyse the situation. We are in a service market that is growing - there is increasing demand for mobility. And with our high-tech support services there is a great potential for success - if we can balance our revenues and costs.

'We faced big financial problems last year. There was a negative cash flow of over €1bn, after investment and debt service. But when you actually look at the loss, only 20% was due to the operating deficit, and 80% to debt servicing, investment and so on. Productivity was also poor, and the corporate culture was not open enough to accept liberalisation along the lines of the European directives.'

Unlike many other European railways, SNCB's debt was not taken over by the government in the 1990s, which Vinck attributes mainly to the risk of breaching the euro stability rules in the Maastricht treaty. Given the need to finance high speed lines to France, Germany and the Netherlands, this put SNCB in a difficult position. 'The 2001-12 investment plan totalled €17·2bn, but the funding was not all guaranteed. And the state of our balance sheet meant we could not go to the market.

'My goal was to make the financial situation transparent. We also needed to stop the losses as soon as possible, improve productivity and cut costs. And if we are going to boost our revenues, we need to maintain or improve the quality of our services.

'After 18 months, I can say that the finances are clear and transparent. The 2002 results were very clear, and at the end of that year the debt stood at €5bn. If nothing changes, I would expect that debt to have doubled by the end of 2006. So we have now agreed with the government that it will take over 70% of our debt by the end of 2005, corresponding to the historic debt. Hopefully, this will be approved by Parliament. We have also introduced internal mechanisms to control costs, and we are gearing our expenditure to match our financial means.'

Move more slowly

In July 2003 Vinck set out his objectives for SNCB in a business plan known as Move 2007 (RG 7.03 p413). He emphasises that the restructuring is not just about financial issues, but about operational and social change as well. The plan envisaged a 7% increase in domestic train-km to boost patronage by 13% and passenger-km by 20%. Freight traffic was to be 'stabilised' at 50 million tonnes a year, and around 12700 of SNCB's 40800-strong workforce would go.

After less than six months, a subtle change has seen the plan retitled 'Move', with the date commitment removed. Protests from the railway unions have forced concessions to extend the four-year timescale that Vinck envisaged. 'The first phase will happen in 2004-05 as planned, but then there will be a pause for evaluation to see how we move further'. The CEO still believes that 'the timescale should be as short as possible, because of the need to improve our financial performance.' Vinck expects Move to cut costs by 25% over the longer term.

In preparing the strategic business plan, 'we had input from all levels of management and departments right across the business.' Although there was a change of government between its preparation and publication, Vinck believes that the general thrust has been accepted by all parties. 'No-one has come up with anything else', he notes. Further negotiations with the unions are needed, but he insists that these will be about how to achieve the objectives, rather than changing direction.

Separation is coming

One big shift in government policy is the recent decision to create a separate infrastructure company. Durant had wanted to keep the national railway intact as far as possible, by setting up a department at the ministry responsible for operator licensing, network capacity allocation and investment policy. Vinck believes this would 'not have been the best way to do it', as it would have put SNCB's Infrastructure (maintenance) and Network (operations) departments in the invidious position of having to balance the possibly conflicting demands of two masters.

After studying the approaches followed in other countries, Vinck convinced the new government that the Infrastructure and Network departments should be hived off intact to form the basis of a new infrastructure authority, in a way that retained all the expertise and asset knowledge. 'That concept has been accepted by the government', he says, noting that the draft law was due to be presented in Parliament before the end of 2004. Subject to Royal Assent, the separation should be implemented on January 1 2005.

By that time negotiations with the unions will have thrashed out the terms and conditions for the transfer of around 16000 staff to the new body, together with guarantees for continuation of benefits and other rights.

Separation of the infrastructure management would leave SNCB as an operating company able to compete on the European network. Vinck believes the EU is right to put the national railways under the pressure of competition, noting that compared to other industries 'the railways are some of the least European-minded companies around'.

However, he is concerned that as yet the railways are not able to compete with other modes on equal terms. 'Competition works in a structured market, but we have a starting handicap in that rail investment has been much lower than road for many years.' And that is not to mention the issue of different safety and signalling standards. Vinck is a firm believer in interoperability, noting the potential of developments such as ETCS to bring down capital and operational costs in the longer term. There may well be short-term costs, he accepts, but 'you have to start somewhere'.

Although there are constant rumours about splitting the railway operations in Flanders and Wallonia, Vinck says there is 'no pressure' at this time. He feels SNCB is already a small operator by European standards, squeezed between France and Germany. Making it smaller would not help competitiveness: 'we don't have the benefit of a large home market, although we do run a fairly dense passenger network.'

Passenger reform

SNCB's core business is domestic passenger traffic, with a very high percentage of peak-hour commuter business. Minister Vande Lanotte would like to give all commuters free rail travel to and from work, replicating on a national scale the low-fares policy that Steve Stevaert, the leader of the Flemish socialist party, has pushed through at De Lijn.

Vinck notes that the market conditions for the national railway are very different from those of a regional operator of local bus and tram services. Nevertheless, he would not be averse to free commuting, provided that the railway's costs are covered. 'Someone has to pay - if it's not the rider, it must be the taxpayer, or perhaps the employers through some form of special levy.'

SNCB has a formal contract with the government setting out the quality and operational standards to be met and specifying the payments to cover loss-making service requirements. However, the existing three-year contract has run out and has already been extended twice. Vinck hopes to have a new contract in place by March or April 2004.

Performance review

Every week Vinck and his top team review progress and performance, including the results of an externally-compiled customer satisfaction rating. The General Satisfaction index has risen from 69% in March 2002 to 73% in August 2003, which Vinck believes 'is the best confirmation of our policy - it 'shows that we must be doing something right'. Other factors reviewed include comfort, cleanliness, punctuality and price.

Asked whether he thought the government might move towards competitive tendering for regional services, Vinck says it is unlikely until the shape of the EU's third railway package becomes clearer. Although the aim is to liberalise the passenger market from 2008, he believes 'there will have to be a lot more discussions between the Commission and the national governments before that can happen'.

A long-standing SNCB objective has been the development of an RER network around Brussels. But 20 years on there is still no firm commitment. Vinck says many current infrastructure projects make provision for the RER network, such as quadrupling to segregate tracks on most main lines radiating up to 30 km from the capital. SNCB has been looking widely at rolling stock used on similar operations elsewhere, and has drawn up a functional specification ready to go out to tender.

The final piece in the jigsaw will be an agreement between the national and regional governments over funding the projected operating deficit. Once this is in place, Vinck says the railway could move quickly to order the trains; he hopes to see the RER up and running by 2010 at the latest.

Cross-border cuts

International passenger services present a less satisfactory picture, although Vinck is still optimistic about the long-term prospects. December 14 effectively saw SNCB pull out of the conventional international market, with the end of overnight services and all but two day trains to Chur and Milano via Luxembourg. Car-carrier trains to the south of France and Italy had already finished in September.

Vinck says it was no longer possible to carry the losses. 'Whereas in the past the different national railways shared the costs and revenue pro-rata, now one operator must carry the commercial risk. With infrastructure charges increasing in France, Switzerland and Italy, and revenues under threat from the low-cost airlines, our services were increasingly unviable.'

Vinck says his aim in future will be to concentrate on pushing volume on the high speed corridors to match the success of Thalys services from Brussels to Paris and Charles-de-Gaulle Airport. This will be especially important on the corridors to Amsterdam and Germany, where substantial investment is going into the infrastructure.

At present there is little to show for the investment on the eastern route, where journey times to K”ln over the Leuven - Liège high speed line opened in December 2002 are no faster than conventional services of 40 years ago. The dispute over routing German Railway's ICE3 sets over the new line remains unresolved, and DB's concerns over losses at Thalys may see the first and last K”ln services each day cut back to Liège or Aachen.

SNCB is currently reviewing its position in both the Thalys and Eurostar groupings, but Vinck says it is unlikely that it will pull out completely. 'It's not just financial - there are strategic issues as well. Brussels is still the capital of Europe'. It is also at the heart of the emerging PBKAL high speed network, and opening of further high speed line sections between now and 2007 should help to boost traffic. He points to the sharp jump in Eurostar patronage in the few months since opening of Section 1 of the UK's Channel Tunnel Rail Link.

Both groups will be evaluating ways to improve their performance during 2004. SNCB has agreed to underwrite the loss-making Thalys services to Namur and Oostende, which the other partners had wanted to discontinue. Vinck believes that the international high speed services can ultimately be profitable, despite the high investment cost. 'We need to get patronage and revenues up, but it will take a long time'.

One recent move has been to offer free onward connections from Eurostar to any station in Belgium, helping to make the service more attractive and overcome the segregation from other rail services caused by separate ticketing and security issues.

Freight issues

Another priority in the Move package is the need to stabilise SNCB's freight operations, to stem the losses and restructure the business to cope with the impact of European liberalisation from March 15 2003. Vinck reports that 'we have already seen some good results'.

One of the big loss-makers was the ABX logistics business. This has now been restructured completely, with a change of management, and Vinck is hopeful that it will return to profit-ability by 2004. 'We have a more cost-effective position to focus on specific European markets', he says, with the warning that 'logistics is not really a core business for us'. In due course he hopes to seek a partnership with one or two other European firms.

At present rail has only 16% of the total road and rail freight tonnage in Belgium, but Vinck hopes to grow this over the next few years. He cites EU projections of 20 to 30% growth in freight by 2010, and says the already congested roads will be unable to cope.

Only one open access operator has begun running on Belgian tracks since March, although Vinck says many more have expressed interest. Pending creation of the separate infrastructure company, new operators are being licensed by the Ministry of Transport, using safety standards and technical specifications prepared by the railway. Any licensed operator can then apply to the ministry for paths.

With the small size of the country limiting the length of haul and profitability of domestic freight, SNCB is keen to look further afield. Vinck cites the three international corridors put in place from the port of Antwerpen to southern France, Italy and Eastern Europe as target markets, and suggests that SNCB 'is looking to form partnerships with other national railways'. Another target for growth is in specialist traffic, and as an example he says B Cargo has developed special expertise in hauling steel.

Infrastructure investment

Despite his remarks about the historic imbalance between road and rail spending, Vinck has already moved to trim back the overly-ambitious 2001-12 investment plan to achievable levels. He suggests that under the old regime 'the engineers came up with lots of brilliant ideas which were started without any proper economic analysis'.

Work is well advanced on the north-south link across Antwerpen (right), the high speed line north to the Dutch border and the new line east from Liège towards Aachen, all of which are due to be completed by 2006-07. Vinck says Vande Lanotte has accepted the previous government's commitment to the whole investment plan, and is now looking for innovative ways to finance some of the projects put on hold after his initial review.

One option is the so-called 'pre-financing' whereby schemes are funded by the regional governments until SNCB is in a position to buy back the assets and pay off the debts. Projects for which such funding may be a solution include the rail freight tunnel under the Schelde to link the two parts of Antwerpen harbour, the 'Diabolo' connections linking Zaventem Airport with the north and east high speed lines, and possibly the upgrading of the Brussels - Luxembourg - Strasbourg axis if an EU funding contribution is approved by the European Commission.

SNCB still operates under a ruling that all expenditure in Flanders and Wallonia must be matched 60:40, but Vinck says that this has not handicapped the investment programme so far. 'It has always been possible to find suitable matching projects', he reports.