Liberalisation of rail freight services in France last year has provided a foretaste of the competition that can be expected in the future as EU policies come into effect. SNCF Chief Executive Guillaume Pepy tells Chris Jackson how this one-time bastion of state enterprise is facing the prospect of change

'SNCF IS IN the middle of a revolution', says Guillaume Pepy 'we are facing some very big changes at the moment.' The Chief Executive of French National Railways is grappling with the challenge of preparing the company to compete in an open and liberalised Europe, which means tackling a long legacy of traditions and legal constraints.

Prominent in Pepy's 12th floor office overlooking Paris Montparnasse station is a model of the V150 TGV trainset and his team cap, celebrating the French railway industry's triumphant smashing of the world rail speed record on April 3. But he knows that technical superiority alone will not suffice for SNCF in the future.

'All of our activities will be deregulated we know that there will be competition everywhere. We already have open access for freight, and international passenger services will be deregulated in 2010. Other passenger services will also be deregulated in time, although we don't know when. But we need to be ready, and this is the lever for some big changes within the organisation.'

At the same time, he explains, 'the market is expanding, not shrinking. There is a huge demand for rail transport, so we are very optimistic.'

Fret losses hit the results

Approved by the board on April 11, the railway's 2006 results recorded a 5% increase in turnover to €21·9bn. Strong growth at the passenger businesses - both long-distance and regional - produced a 17% improvement in operating margin, despite the 'desperate' situation at Fret SNCF, where 'an unexpected and brutal shock' saw losses increasing significantly.

Unveiling the results, SNCF President Anne-Marie Idrac said 'with these positive results for the third consecutive year, SNCF has consolidated its position as a strong and developing public group. We are able to self-finance all our investment needs to improve our quality of service and to prepare for the introduction of competition. And we have again reduced our debt levels.'

One big cloud hanging over the SNCF finances has been the need to meet international financial reporting standards with effect from this year, which required changes to the way in which SNCF accounted for its pension liabilities.

Despite continuing objections from the unions, Pepy confirms that 'the IFRS issue was settled in March'. He explains that whereas SNCF used to be its own pensions provider, 'now we have a separate pension fund, which is totally segregated'. This body has been structured as a wholly-owned subsidiary of the social security ministry, taking over liabilities estimated at €110bn which had not previously appeared in the SNCF accounts. As yet the company has not grappled with the generous entitlements and early retirement benefits enjoyed by French railwaymen, but Pepy says these will be reviewed in 2008 'by law'.

Last year Idrac made clear that better productivity would be essential to secure SNCF's future in the face of competition, and Pepy admits that 'we have challenges at a very high level.' As a first step, a four-stage programme known as de l'Oxygène was launched last year to review administrative procedures across the company with a view to reducing bureaucracy and simplifying decision-making.

Pepy says he is looking for efficiency improvements of between 20% and 30% if the ailing freight business is to be turned round in the next three or four years. 'It is a very big challenge, but it is feasible. If we are to be truly competitive, we will need to change our working conditions, and get more flexibility into job specifications. 'The recent changes at Fret SNCF have brought in new and proactive management - so I believe it will be achievable. It will certainly be necessary.'

Amongst the exceptional items impacting on SNCF's financial results in 2006 was a revaluation of the railway's freight assets. Pepy says that reflecting the true state of obsolescence of locomotives, rolling stock and terminal facilities cost €640m, 'which we have taken onto the balance sheet'.

But he admits that the impact of day-to-day freight operating losses 'is not yet settled'. In 2006 SNCF reported a loss of €260m on its freight operations (RG 5.07 p245), which Pepy puts down to 'struggling hard with the new competition'. His aim is 'to get freight back to break-even in three or four years' (p361).

As well as the management changes, he says an early decision has been to provide 'specialised production resources for the freight business', which he reports is already underway. 'Each business unit will have its own means of production, so there will be no interference between freight and passenger services.' Pepy believes that 'providing dedicated equipment for the freight business will allow it to become more proactive'. With orders placed for 400 electric locomotives, 400 diesels and 150 shunting locos, he predicts that 'in four years from now, 90% of freight traffic will be hauled by new locos'.

Regional growth dominates

SNCF's Passenger sector covers the Voyageurs France Europe long-distance/inter-city and the Transport Public business units. Both recorded strong growth in 2006, but Pepy says 'the most dynamic part is regional services. Growth in 2006 was over 8% and I expect this trend to continue.'

Local passenger services account for around 85% of all trains operated by SNCF, compared with 7% for TGV and a similar figure for freight. The Transilien suburban operations around Paris account for about 45% of the total, with the other 40% of local trains spread across the rest of the country. 'The number of trains operated in Ile de France is stable at present, but in the regions it is increasing by about 3% per annum', he reports. In its 2006 results, SNCF reported 9·6% growth in passenger numbers using TER services against 4% for Transilien.

The transfer of responsibility for promoting and funding of local services from central to regional government has helped to spur a widespread revival in the sector, backed by substantial funding for new equipment.

'Our customers were used to old trains and gloomy stations', says Pepy, 'but now it's an area of high investment. Over the past 10 years we have placed orders totalling more than k4·5bn for new rolling stock to operate regional services. By 2012, I expect that 90% of all regional services will be worked by new or refurbished trains - it's a very radical change.

'We are seeing growth across all areas, but there is more in the conurbations - particularly in the three regions around Lyon, Marseille and Lille, where people really do rely on the trains. It is getting more and more difficult to drive into the centre of towns and cities - local municipalities are taking steps to restrain car use, and people are looking for a real alternative.

'We now have passengers who are choosing to use the trains instead of their cars, whereas in the past it was mostly people who were obliged to use rail, because they had no car, no money or no alternative. This is a radical change for us, that people are choosing to use our trains. And we must not let them down.'

Pepy is optimistic about further growth, too. 'There are still a lot of opportunities', he insists. 'Cars still account for 91% or 92% of the local travel market, and there are lots of things that we can do'.

High speed expansion

The launch of revenue services on TGV Est on June 10 opens up further opportunities for SNCF to win business in the long-distance market, bringing the Paris - Strasbourg journey time down to 2 h 20 min (p357).

Pepy says TGV Est is a major step towards his ambition 'to establish high speed rail as the real alternative to air travel throughout Europe. It will fill a missing link in the network, connecting four countries: France, Luxembourg, Germany and Switzerland.'

He is 'very enthusiastic' about the Railteam concept, which he hopes will 'present seamless travel by rail across Europe'. In France, he says, 'TGV is already well-established - and is seen by the airlines as the low-cost carrier.' So his next challenge is to transfer the model to the rest of Europe.

'Our first step must be to reveal the true extent of the network of high speed services that is already largely there. It's just that it doesn't appear as a network, because everything is still fragmented. If we give it some flair, and some real visible benefits, Railteam could change the way people travel across Europe.' And TGV Est is a 'key lever' for the success of this emerging network, he believes.

With the Railteam concept already taking shape behind the scenes, Pepy is confident that it will go public within the next few months. 'We will sign the formal agreements in early July, and I hope we can roll out the first benefits in the summer', he predicts.

Asked whether the idea of railways co-operating to improve their attractiveness to passengers risks breaking EU competition directives, Pepy insists there is no problem. 'We have told the European Commission all about the project we don't need any legal clearance. We know the rules, and there are only two main ones:

'Firstly, the service network should be compatible with new carriers and open to new entrants. So Railteam will be an open service network and not a cartel. Anyone will be welcome to join.

'And secondly, there must be absolutely no co-ordination in the tariff area. Railteam will co-ordinate retailing, through ticketing and other facilities such as station lounges and hub interchanges. But there will be no attempt to standardise fares.

'To create an intra-European network, you need to convince the customers that rail is as easy as air. We will do it through co-operation - standardising ticket refund entitlements, co-ordinating seat reservations, and ticket exchanges, so that people can get on the next train easily. Operating in co-operation will make the services more attractive for customers.'

Half of SNCF's planned future build of 120 new TGV Duplex trainsets are to be equipped for international operation. So does Pepy expect SNCF to expand outside France, running services in competition with its neighbour railways?

'For the moment we see a lot of partnerships - such as Thalys and Eurostar, where we are already very active. But we will be in competition as well. For example Thalys will be competing with an alliance of NS and SNCB for Brussels - Amsterdam traffic, and is already competing with ICE between Brussels and Köln. We will have competition and co-operation. That is how the airlines work today, but for the railways it's an entirely new way to do business.'

Infrastructure contract renewed

SNCF has recently concluded a new contract with Réseau Ferré de France under which it will continue to maintain and operate the national rail network in 2007-10. Pepy reports that this deal is worth 'more than k10bn'.

He says that the 'very ambitious programme' envisages significant productivity improvements, of 'between 3% and 6% a year'. These vary by discipline, he explains, ranging from a 3% annual improvement in signalling operations to a 6% saving in the cost of major infrastructure renewals. Pepy believes that this can be compared to the productivity improvement targets set for Network Rail by the UK's Office of Rail Regulation.

At the same time, infrastructure maintenance work is to be stepped up on many secondary and regional lines, following the completion of an infrastructure audit last year which revealed the poor condition of much of the network. Pepy says the RFF contract makes 'extensive provision' to fund the renovation of local lines, with the additional budget growing year-by-year 'to more than k800m extra in 2010'.

At the same time, RFF is pushing ahead with an ambitious programme of high speed line construction. After the first phase of TGV Est will come TGV Rhin-Rhône, Montpellier - Nîmes and Angoulême - Bordeaux. 'There is a lot of work in front of us', comments Pepy. RFF is adopting PPP funding for some projects (p363), but elsewhere Pepy says the local authorities 'are extremely supportive. Lots of regions insist on putting their money into high speed rail instead of roads or airports.' He comments that regions such as Normandie and Auvergne, with no new lines in prospect, feel left out. 'Today it's only 3 h from Paris to Marseille, but it's still 3 h to Cherbourg. France and Europe are shrinking, but if your area is not shrinking you feel far away.'

Environmental innovation

Pepy is very keen to promote rail's environmental advantages, with Europe's first 'eco-comparator' on the SNCF website allowing passengers to compare the carbon footprint of their journey by road, rail or air. Further main line electrification is on the cards, although he insists that 'this is an RFF decision, and they have a programme.

'But there will still be a lot of diesel working, especially on secondary routes where we need access to local freight terminals.' So SNCF has launched 'an intensive programme for hybrid locos', from which Pepy highlights two major initiatives.

'The first will be to develop a hybrid shunting tractor we will build a prototype which can be powered by a variety of energy sources. The second is to develop biofuels. Today we are looking at two blends, using diesel mixed with 5% and 30% biofuel'. He says this second project is still very much in the research phase. 'One key issue will be the distribution of biofuels to the depots', he explains. One advantage of the prototype hybrid shunter is that it will be allocated to a single base, he adds, whereas main line locos must range much farther afield.

We need a regulator!

Despite comments from former freight customers welcoming the advent of on-rail competition in France, Pepy reserves judgement as to whether it has been successful. 'The key question is whether open access will transfer traffic from road to rail - which is what the European Commission wants - or merely shift market share between rail operators.'

He believes that 'it's still too early to answer. Today there are seven or eight competitors in the freight market. After a year and a half, they have about 2% to 3% market share', he reports. 'They are focusing on achieving 10% by 2010, which would be very fast growth - two or three times faster than was achieved in Germany, for example'.

Competition is coming to the international passenger business in 2010, but what about the local passenger market? With the French regions rediscovering rail, what are the prospects for putting the operating concessions out to tender, as happens in Sweden, Germany or the Netherlands, for example? Although international players such as Transdev, Veolia or Arriva might be interested, they will get little support from the French establishment.

'There will be an appetite', he admits, 'but it will be for the EU to decide on the timescale.' He says the original target date was 2017 'but they [the European Parliament] could not vote it through. No-one knows when it will happen, but it will come anyway.'

Pepy also dismisses any suggestion of privatisation, saying that 'there is no public or private interest in privatising SNCF.' He does not expect the recent presidential election to bring changes in the short term, noting that Idrac has a mandate until 2008 and all parties were committed to a similar national transport policy.

But one area where he is convinced that change is needed is the introduction of an independent economic regulator for the French rail system. 'At present there is no-one to arbitrate between SNCF, RFF and the competitors, except the fair-trading authorities, and that's a bit different - they only focus on competition issues. We need someone to arbitrate between all parties, and ensure that everyone is treated fairly.'

He discounts the recently-formed safety authority EPSF, which 'is not a regulatory body'. This, he says, 'is really part of the state, dealing with the administrative functions: safety licensing, clearance, authorisation and certification.

'SNCF is determined that there is a role for a regulator and I expect that it will happen', he continues. 'The UK experience of combining economic and safety regulation is going to be very helpful - excluding the competition side. People can relate to that experience.

'It's only an idea - there is not even a draft proposal yet - but SNCF is pushing hard for this. We believe the time has come.'

  • CAPTIONS: To celebrate the breaking of the world rail speed record on April 3, the V150 trainset was transported by barge through the centre of Paris on May 13 for a week-long 'floating exhibition' near the Eiffel Tower
  • Fret SNCF's multi-system electric locos are now running regularly into Belgium, but bringing the freight business back to profitability remains a significant challenge
  • Local authority investment in new trains and support for additional services has seen strong growth in regional passenger traffic. A Bombardier-built electro-diesel BGC trainset operates a TER service between Vierzon and Tours
  • Transilien suburban services around Paris account for around 40% of SNCF's passenger train operations, but almost 80% of passenger-journeys RER Line E services are operated by these MI2N double-deck EMUs
  • June 10 will see the start of regular ICE operation in France, on TGV Est services between Paris and Frankfurt as partners in the Railteam alliance, SNCF and DB will co-operate on some routes and compete on others, says PepyPhoto: Christophe Masse
  • A Veolia freight train crosses the Meuse at Verdun. There are now seven open-access operators in France, who expect to achieve a 10% share of the domestic rail freight market by 2010

La SNCF se prépare à faire face à la concurrence

L'an dernier, la libéralisation du fret ferroviaire en France a donné un avant-goût de la concurrence à laquelle il faut s'attendre à l'avenir tandis que les directives de l'UE entrent en vigueur. Guillaume Pepy, Directeur Général Exécutif de la SNCF, explique à Chris Jackson que ce qui fût jadis le bastion des entreprises d' Etat fait face à la perspective d'un changement. La réforme des retraites est en cours et l'épineux problème de la productivité du personnel doit être bientôt abordé si l'on veut que les améliorations prévues de 20 à 30% soient atteintes. Pendant ce temps, une croisssance soutenue du trafic régional et l'ouverture d'autres lignes à grande vitesse concourent à l'augmentation de la rentabilité du trafic voyageurs de la SNCF. Avec d'autres libéralisations prévues pour 2010, M Pepy pense que le moment est venu de créer un organe de régulation économique du marché ferroviaire français

SNCF rüstet sich für Konkurrenz

Die Liberalisierung des Güterverkehrs in Frankreich, welche letztes Jahr eingeführt wurde, hat einen Vorgeschmack gegeben, auf was erwartet werden kann, wenn neue EU-Richtlinien in Kraft treten. Guillaume Pepy, geschäftsführender Direktor der SNCF erklärt Chris Jackson, wie diese einstige Bastion von Staatsbetrieb sich für eine wechselhafte Zukunft rüstet. Eine Revision der Pensionskasse ist im Gange und das schwierige Thema der Produktivität des Personals muss demnächst angegangen werden, wenn die geplanten Verbesserungen um 20 bis 30% erreicht werden sollen. In der Zwischenzeit ist ein starkes Wachstum des Regionalverkehrs und die Eröffnung von neuen Hochgeschwindigkeitsstrecken für eine Steigerung der Profitabilität der SNCF im Personenverkehr verantwortlich. Mit einer weiteren Liberalisierung im Jahre 2010 glaubt Pepy, dass die Zeit reif ist für die Schaffung eines unabhängigen wirtschaftlichen Regulators im französischen Eisenbahnmarkt

SNCF se prepara para afrontar la competencia

La liberalización del transporte ferroviario de mercancías que se produjo el año pasado en Francia ha proporcionado una muestra de la competencia que se espera en el futuro cuando entren en vigor las políticas de la UE. El Director General Ejecutivo de SNCF, Guillaume Pepy, le explica a Chris Jackson cómo el que fuera una vez baluarte de la empresa estatal se enfrenta a los cambios. La reforma de las jubilaciones está en curso y debe tratarse lo antes posible el peliagudo problema de la productividad de la plantilla si se pretenden lograr las mejoras proyectadas de entre el 20% y el 30%. Mientras tanto, gracias al fuerte aumento del tráfico regional y a la inauguración de nuevas líneas de alta velocidad, se está mejorando la rentabilidad de la actividad pasajeros de SNCF. Debido a la liberalización que se producirá en 2010, Pepy opina que es el momento oportuno para introducir un regulador económico independiente en el mercado ferroviario francés