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2019 special purpose report – structural development of the Deutsche Bahn AG and focus on the federal government’s interests

Jan 17, 2019

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0 Summary

0.1

When reforming the German railway system in 1993 and 1994, the Deutsche Bahn AG (German railways) was established as a corporation wholly owned by the federal government. Deutsche Bahn operates as an integrated contract-based group of companies providing both rail infrastructure and transport services. This legal structure became possible following an amendment to the German Constitution (Article 87e). The overall objective was to shift traffic to the railway system and to alleviate the strain on the federal budget.

The federal government shall ensure that the federal rail companies take due account of the interests and especially the transportation needs of the public in developing and maintaining the national railway system and in offering services over this system (guarantee laid down in Article 87e of the German Constitution). As held by the Federal Constitutional Court in November 2017, the federal government is also responsible for the entrepreneurial activity of Deutsche Bahn (cf. 1).

0.2
Key objective to “shift traffic to railways” not achieved – market share continues to decline in Germany

Deutsche Bahn failed to achieve a modal shift from road to rail. The percentage of rail freight transport has even declined since 1990 although the rail system had been reformed (cf. 2.1). Deutsche Bahn must fight to keep its position at the German rail (service) market. It is true that there is hardly any competition in long-distance passenger rail services and Deutsche Bahn has been able to increase the number of passengers in this segment. However, its market share in local passenger rail services and freight services constantly declines due to intense competition from other companies (cf. 2.2).

0.3
Expansion of international activities and of those outside the core business

In addition to that, Deutsche Bahn ramped up its international presence and expanded its activities to other transport segments – which is not covered by the constitutional guarantee to be observed by the federal government. For example, Arriva plc., a subsidiary company of Deutsche Bahn, offers local transport services across Europe via road, rail and, in various cities, waterways (water taxis). Another subsidiary company, Schenker AG, globally provides freight and logistic services via road, sea and air. Ultimately, the federal government bears the economic risks linked to such activities. As part of its internationalization strategy, Deutsche Bahn, i.e. the federal government, today conducts business in more than 140 countries. The group's non-domestic sales volume totals some 43 per cent, and the share of subsidiary companies based abroad is 73 per cent (cf.  2.3). The global business activities of Deutsche Bahn as yet have no positive effect on the group’s net value and earnings in Germany (cf. 4.1.1).

0.4
Financial goals not achieved – Deutsche Bahn highly indebted

As early as in November 2016, the Budget Committee of the German Parliament found that the federal government had also failed to achieve the financial goals of the railway reform. Although Deutsche Bahn had no debts at the time of incorporation and has regularly received financial support by the federal government, the group currently has debts amounting to almost 20 billion euros – and the trend is rising. The cash flow from operations is too low to fund necessary business investments. This is true for both current and future investments (cf.  3).

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Federal government needs to play a more active role

The misdirected developments described above cannot only be attributed to the group’s past decisions. In fact, the decisions and failures of the federal government also contributed to the current situation. For example, the federal government

  • created a legal framework for the various modes of transport that makes it difficult for rail companies to shift traffic to the rail in a competitive environment;
  • has always accepted the group’s excessive international activities – rather than to question as to whether such activities are in line with the constitutional provisions and the federal government’s interests as the owner; and
  • has never intervened when Deutsche Bahn used federal grants for the acquisition of company shares abroad or for activities outside the rail business, and not for core business activities relative to the provision of rail services in Germany.


Instead, the federal government needs to get actively involved with a view to ensuring that the group’s activities are in line with federal interests and that the federal government’s function is fulfilled.

0.6
Federal government without a viable strategy

In November 2016, the Budget Committee stated that there was a need to enhance the group’s structure. The federal government presented several development options. However, the federal government has not yet tabled a concrete proposal or developed an overarching action plan. In October 2018, the federal government informed us that the political opinion forming process was still ongoing (cf.  4.1). We note with concern that the federal government remains inactive despite the growing political pressure for action. The federal government urgently needs to act on its responsibility as the owner of Deutsche Bahn instead of leaving it to the group’s management to do whatever they think is best (cf.  4.2 and 5).

0.7
Recommendations

Against this backdrop, the federal government needs to get active at several levels:

a)   The federal government should set the objectives at the federal level, i.e. live up to its constitutional mandate to observe public interests and needs. This includes preparing rail policy guidelines and a strategy covering all modes of transport (cf.  6.1).

b)   On the basis of these objectives, the federal government should decide on the future structure of the rail system in Germany. The current corporate structure of Deutsche Bahn is to be called in question. This also includes giving an answer to the socio-political question as to which one of the two key targets – profit orientation or to safeguard public interest – is to be pursued by Deutsche Bahn in the first place. As a first approach, alternatives and potential legal structures are to be examined in a comparative manner and a “separation of infrastructure and operation” is to be considered (cf.  6.2).

c)   The federal government needs to define and safeguard its interests as the owner of Deutsche Bahn. Subsidiary companies that are no longer necessary should be fully divested, such as Arriva plc. and Schenker AG. This would free up billions of euros that Deutsche Bahn could invest in new trains etc. and bring its business model in line with the federal government’s constitutional mandate. The federal government’s key objective should be to better steer and control Deutsche Bahn. To this end, it is also necessary to eliminate the break-up of the group into many separately run companies (cf.  6.3).

d)   Finally, the federal government needs to ensure that it uses legal leverage in a proper manner. This includes defining the corporate purpose in the legal documents of a body having an appropriate legal structure and ensuring the development of a business model that is in line with the federal government’s objectives (cf.  6.4).

17.01.2019

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Federal government does not act on its responsibility as the owner of Deutsche Bahn

Objectives of railway reform not achieved

“The federal government and the Deutsche Bahn failed to achieve the key objectives of the railway reform which was initiated 25 years ago. In particular, they did not manage to shift traffic from other modes of transport, especially the road, to the railway. The percentage of rail freight transport has even declined since 1990”, said Kay Scheller, President of the Bundesrechnungshof, when communicating a special purpose report on the structural development of the Deutsche Bahn to the German Parliament. “They also failed to alleviate the strain on the federal budget: Although Deutsche Bahn has regularly received financial support by the federal government running into billions, the group currently has debts amounting to some 20 billion euros – and the trend is rising", said Scheller.

The misdirected developments are not only attributable to the group’s past decisions. In fact, the decisions and failures of the owner, the federal government, also contributed to today’s difficult situation of the rail system and Deutsche Bahn. The legal framework established by the federal government for the various modes of transport makes it difficult for rail companies to respond to competition.

In particular, the Federal Ministry of Transport and Digital Infrastructure rather left it to the group’s management to do whatever it thinks is best without control from the owner. The Ministry also failed to call into question key decisions made by Deutsche Bahn. For example, it has always accepted the group’s excessive international activities and has never intervened when Deutsche Bahn used federal grants for the acquisition of company shares abroad or for activities outside the rail business, and not for core business activities, i.e. the provision of rail services in Germany.

“While the federal government allows Deutsche Bahn to do business at a global scale and across multiple sectors, the objectives of the railway reform are far from being achieved. The federal government fails to fulfil its constitutional mandate”, said Scheller. According to the German Constitution, the federal government shall ensure that federal rail companies take due account of the interests and the transportation needs of the public in developing and maintaining the national railway system and in offering services over this system.

Scheller claims: “The federal government urgently needs to live up to its constitutional mandate and to act on its responsibility as the owner of Deutsche Bahn. To this end, the federal government must also play a more active role. It is difficult to understand why the federal government fails to clearly define the strategic direction and the way the Deutsche Bahn operates – ten years after cancelling the group's initial public offering.”

We believe it necessary to enhance structures of Deutsche Bahn and to place more focus on the federal government’s interests.

The federal government should, in close coordination with the German Parliament, clearly define the group's corporate objectives as a German rail service provider. This includes a strategy covering all modes of transport that brings fiscal and regulatory framework conditions in line with the plans to strengthen rail transportation.

This strategic redirection is also crucial for determining the future structure of the rail system in Germany. To this end, the federal government should examine alternative options (in terms of legal structure, organisational setup) to the group’s current corporate model and consider a separation of infrastructure and operation.

In addition to that, subsidiary companies that are no longer necessary should be fully divested. This is particularly true for Arriva plc. and Schenker AG. This would free up billions of euros that Deutsche Bahn could use to reinvest.

For the future, the federal government needs to clearly define the group’s corporate purpose and to ensure that business activities are in line with the federal government’s objectives.

In the past 15 to 20 years, Deutsche Bahn has, for the most part, ramped up its international presence and expanded its activities to other transport segments (e.g. by acquiring Arriva plc. that offers local transport services in many European countries or Schenker AG that provides freight and logistic services throughout the world). The group hence became a “global player” conducting business in more than 140 countries. The share of subsidiary companies based abroad is 73 per cent (513/700 companies).

The group's non-domestic sales volume totals some 43 per cent (18.6/42.7 billion euros). The global business activities of Deutsche Bahn, though, have no positive effect on the group’s earnings and net value in Germany. So far, Deutsche Bahn has reinvested foreign earnings abroad, instead of using them to finance rail infrastructure and services in Germany. Furthermore, economic risks linked to the international activities of Deutsche Bahn may adversely impact the development of the German rail system or the federal budget.

Deutsche Bahn will face increasing financial challenges in the next few years due to plans, for example, to modernise the ageing rail fleet and to respond to rail network deficiencies and staff shortages. Operating cash flows are though too low to finance such investments.

After having urged the federal government to grant more funds to support investments in the rail network in December 2018, we underscore in our recent special purpose report that the federal government should play a more active role as the owner of Deutsche Bahn.

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© 2019 Bundesrechnungshof