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2018 Special purpose report – Federal government targets guiding negotiations with the Deutsche Bahn AG on the service level funding Agreement III for the existing railway infrastructure

Dec 07, 2018

Symbolbild - Bahninfrastruktur

0 Executive Summary
The federal government concludes service level funding agreements (“Agreement/s”) with Deutsche Bahn and its rail infrastructure managers. In such an Agreement, the government commits itself to make available annual budget funds of several billions of euros. These funds are given to infrastructure managers and serve to finance rail infrastructure investments. In return, the rail infrastructure managers have the duty to maintain high-quality rail infrastructure and make the renewals needed for this purpose. The Agreements set forth that a quality indicator system and sanctions for poor performance are to be applied to control the use made of federal funding. If the key indicators are not achieved, financial sanctions may be imposed. If the indicator targets are achieved, this achievement is taken as evidence to substantiate the proper use of federal funds.

Agreement I entered into force in 2009. Since then, infrastructure managers have received almost €30 billion for maintenance and renewal investments. The annual grants have continually increased over time. Agreement II expires at the end of 2019. Negotiations for Agreement III started in November 2017. Deutsche Bahn announced that in the current negotiations it would demand an annual funding increase of more than €1 billion.

The federal government through the Federal Ministry of Transport and Digital Infrastructure (“the Ministry”) has been conducting the negotiations.

The Ministry intends to structure Agreement III largely in line with Agreement II. The Ministry intends to postpone far-reaching amendments to a later date when Agreement IV will be effective as from the year 2025.

In an advisory report, the German SAI recommended that the Ministry address the shortcomings identified already in Agreement III. The Ministry chose not to implement our recommendation. The Ministry stated that it would not amend applicable regulations, because Parliament had endorsed the structure of the Agreement as it stood. The Ministry stated that the federal government would have to take over the leadership of the railway companies to implement our recommendations. This approach, however, would contradict the will of Parliament as expressed in the railway reform.

We have alerted the Ministry to structural shortcomings in the Agreements. These include in particular

  • insufficient information on the condition of the railway infrastructure;
  • lacking controls of whether funds have been put to efficient use;
  • inadequate incentives susceptible to neglecting maintenance at the expense of the federal government;
  • poor effectiveness of the sanctions agreed and lacking outcome evaluations.

Our advice and recommendations are set out below:

  • Insufficient information on the condition of the railway infrastructure
    In accordance with the provisions of the Agreement, reporting of the Deutsche Bahn and the infrastructure managers to the federal government is largely limited to the quality indicators agreed. However, these indicators cannot give a full overview of the actual rail infrastructure condition. For example, the quality indicators show an improvement in the condition of the rail infrastructure even if the condition has deteriorated. Since relevant information is lacking, the federal government is neither in a position to assess funding needs reliably nor to better target federal funding.

    One of the key objectives of concluding the Agreements was to tackle the high backlog demand for rail infrastructure renewal. In fact, however, the backlog has increased in the period of the Agreements. If you take railway bridge maintenance for example, there is a considerable need for retrofitting structures. This backlog poses major risks to the federal budget.

    The Ministry confirmed the growing backlog in terms of maintenance. The Ministry stated that the reason for this was a rise in construction costs. The Ministry confirmed that quality indicators and relevant sanctions served their purpose well and that it intended to develop a supplementary indicator.

    We make the point that the contracting parties had concluded the Agreement to ensure that infrastructure managers drive efficiency to set off any cost increases. A new indicator is a welcomed first step in the right direction, but we are not yet confident that it will be sufficient unless the Ministry refines the entire system of quality indicators and sanctions.

  • Lacking overview of whether funds have been put to efficient use
    According to the Agreements, the infrastructure managers have the duty to put the federal funds to efficient use. However, provisions of the Agreements do not impose on the Ministry the duty to conduct a retrospective outcome evaluation. Rather than that, the contracting parties assume that federal grants have been used efficiently once the target values of the quality indicators underpinned by sanctions have been reached (output control). The option included in Agreement II that limits the reimbursement of federal funds wasted to cases of gross negligence or willful misconduct is unusual for grant provisions. We feel that in practice this clause fails to safeguard the federal interests or to change mindsets.

    We hold that there is a lack of key data to conclude from the achievement of the target values that the federal funds have provided good value for money. There is no way to ensure that the infrastructure managers comply with the Agreements and spend federal grants wisely. We recommend that sample reviews be conducted to check whether the federal funds have been used efficiently.

  • Inadequate incentives susceptible to lead to neglecting maintenance
    According to the Federal Railway Infrastructure Expansion Act, which is the legal basis for the Agreements, the rail infrastructure managers shall bear the costs for maintenance operations, while the federal government bears the cost of renewal investments in full. As a result of this disincentive, the infrastructure managers may be tempted to neglect maintenance and opt for early federally funded renewal instead.

    The Ministry holds the view that the infrastructure managers themselves are keen to ensure the efficient use of federal funds, as otherwise it would become more costly for them to accomplish the quality indicators set and to avoid any sanctions.

    This is not convincing for us, because the quality indicators and sanctions are set in such a way that they can be accomplished even if maintenance has actually been neglected. The Ministry should consider abolishing the flawed incentives and reasonably reallocate the funding burden.

  • Lacking effectiveness of the sanctions agreed
    We hold that the level of sanctions provided for poor compliance with the Agreements are by far not commensurate with the amount of federal funding at stake. It is therefore doubtful that these sanctions provide effective performance incentives to Deutsche Bahn and its infrastructure managers to fulfil their duties.

    The Ministry points out that it must reach consensus with Deutsche Bahn and the infrastructure managers on the details of the Agreements and that this is only possible if the rights and duties of the contracting parties are reasonably balanced.

    In our view, the Ministry's reference to the consensus with the infrastructure managers is not convincing. After all, the federal government is the sole owner of Deutsche Bahn and in this role can bring momentum to bear on the other contracting parties to ensure that the interests of the federal government be duly taken into account. Should the Ministry have difficulties in asserting the federal interests in the negotiations, we suggest considering the pros and cons of amending the Federal Railway Infrastructure Expansion Act that stipulates how to proceed.

  • Lacking outcome evaluation
    Budgetary law demands evaluating the success of a funding project. For this purpose, the law provides specific requirements such as evaluating target achievement, impact and value for money of the project. The Ministry has not yet conducted such an evaluation of the outcomes of the Agreements. In particular, no evidence is available to attribute the interventions funded by the federal budget to the impact of the mandatory quality indicators.

    The Ministry intends to wait for the results of a study commissioned by Deutsche Bahn to gain better insight into the cause and effect relationship.

    We think the Ministry could do more. The Ministry itself must monitor the success of the Agreements in accordance with the requirements of budgetary law and draft the Agreements accordingly. The Ministry is not authorised to delegate this task to the grant beneficiary.

We see an urgent need for action and have delivered this report to Parliament. We recommend not postponing remedial action until the year 2025, but implementing recommendations for improvement in the period of Agreement III.

If restructuring takes more time, the period of Agreement II should be extended accordingly so that the federal government does not simply roll out a flawed system for another five years.

Dec 07, 2018

Symbolbild - Bahninfrastruktur


Railway infrastructure is deteriorating
while federal grants are rising


Tackle major grant funding shortcomings now, not only in 2025

"For years, rail tracks have been subject to excessive wear and tear. Today, railway infrastructure is in poor condition and the investment backlog is growing. A lot goes wrong when it comes to maintenance. The Federal Ministry of Transport does not know how the subsidiaries of Deutsche Bahn use the billions in federal grants to maintain railway infrastructure. For the time being, the Ministry does not want to change anything” said Kay Scheller, President of the German SAI when forwarding a special report on the negotiations of the federal government with Deutsche Bahn to Parliament.

As to how maintenance is to be financed and structured for the 2020 to 2024 period, the Ministry intends to continue the previous contractual system with Deutsche Bahn without addressing key weaknesses in the system. The Ministry does not intend to make major changes until the period of Agreement IV, starting in the year 2025.

We consider this procedure to be little useful and risky. There is a risk that the rail infrastructure condition will continue to deteriorate despite increased federal funding.

A central goal of the Agreements concluded between the federal government and Deutsche Bahn is to reduce the renewal investment backlog of railway infrastructure. This goal has been missed. In fact, the investment backlog has grown significantly, although the federal government has continuously given more funding for renewal to Deutsche Bahn.

Since 2009, €30 billion from the federal budget have been paid into the Agreements. Whereas in 2009 it was around €2.5 billion, €4.15 billion have been earmarked for 2019. In early summer, Deutsche Bahn had announced that it would demand more than €1 billion more annually from the federal government for the new contract.

"In view of the serious shortcomings in the system, the attitude ‘going on like before’ is not acceptable," Kay Scheller said. "The current system is not transparent, not meaningful and creates disincentives. The federal government now has the opportunity to improve the system. It must ensure that its funds are spent wisely. Their use must sustainably secure and improve the infrastructure. That is what the negotiations on Agreement III must be about now".

In our report, we point out major weaknesses in the existing system. We call on the Ministry to remedy these in the new Agreement from 2020. These include

  • Lack of meaningful indicators: Contractually agreed quality indicators should indicate whether the railway infrastructure is in a high quality condition. So far, however, the key indicators do not adequately reflect the actual infrastructure condition. They show a continuous improvement of the infrastructure, although the investment backlog has been growing. For example, according to one indicator, 97 per cent of the railway network is in good condition since only specific shortcomings are recorded. However, these are taken into account only after a period of 100 days. It is not possible to identify the actual condition of 97 per cent of the network. The network can function flawlessly or be in a poor condition.

  • Inadequate incentives due to separate financial burdens: While Deutsche Bahn has to pay for maintenance from its own resources, the federal government bears the costs of replacement investments. This scheme provides an inadequate incentive for Deutsche Bahn to run on wear and tear, which means to neglect maintenance and opt for early replacement with federal funds. It would make sense to give up the separate funding responsibilities and instead share both maintenance and replacement investment expenditure between Deutsche Bahn and the federal government.

  • Ineffective sanctions: If Deutsche Bahn fails to meet the target values of the quality indicators, the Ministry can reclaim the funds in part. However, the agreed amounts are small in relation to the federal funds granted. According to the current Agreement, 875 bridges, for example, need to be renewed fully or partially. If this target value is not reached, only a one-off sanction of €15 million is provided for. It does not matter whether Deutsche Bahn does not retrofit a bridge at all or just falls short of the targeted value. We therefore doubt that the amounts for recovery provide a sufficient incentive to strive for achieving the target values.

  • Value for money and impact remain unclear: So far, the Ministry has not evaluated the value for money of federal funding or the success of the Agreements. The Ministry should at least conduct sample reviews to check whether Deutsche Bahn has used the funds efficiently. In addition, the Ministry should check whether funding is achieving the objectives set and whether federal funds help accomplish the quality indicators.

According to the Basic Law, the federal government must ensure that the expansion and maintenance of the railway infrastructure takes due regard to the common weal, in particular to transport needs. The Ministry must seize the opportunity of contract negotiations to urge for any needed improvements to the Agreements. If necessary, the current funding term of the contract should be extended. A similar procedure was used for a previous contract. The Ministry needs to be aware that Deutsche Bahn management lies within the responsibility of the federal government.

The Ministry intends to submit the draft Agreement to Parliament for approval in autumn 2019. This present report serves to advise Parliament on the Ministry's little ambitious negotiating goals even while current negotiations are still underway. As a result, the need for amendments can be discussed now and not only when the draft Agreement has been finalised.

Dec 07, 2018

Symbolbild - Bahninfrastruktur


made by Kay Scheller, President of the German SAI 

The Federal Ministry of Transport is negotiating on the future of the German railway infrastructure with Deutsche Bahn and its subsidiaries DB Netz AG, DB Station & Service AG and DB Energie GmbH. The purpose of the negotiations is to find ways to maintain and enhance this vital national asset. Current negotiations cover the 2020 to 2024 funding period and deal with federal funding for replacement investments and mission performance of the three subsidiaries in this work. Negotiations also focus on rail infrastructure components that can no longer be maintained in their current condition, but need to be renewed or retrofitted in part. Bridges, rails, signal boxes, overhead lines, railway stations. Germany has about 25,000 railway bridges and 5,600 stations. The network has an operating length of around 33,000 km (20,000 miles), the track length is 60,500 km (37,600 miles). So there is a lot at stake.

The volume of funding at stake is also considerable. Since 2009, €30 billion of federal funds have been granted to the three railway subsidiaries for replacement investments. Annual grants have increased as a result: In 2009, some €2.5 billion were spent on the project, nearly €4.2 billion are proposed for 2019. And what about the future? In early summer of this year, Deutsche Bahn publicly announced that it would demand an annual increase in federal funding of over €1 billion for the new contract.

So today we are talking about the Agreement. The service level Agreement. Lump sums worth billions of euros without proof of use. This system has been in place since 2009. Agreement II expires in 2019. Negotiations on Agreement III for the period of 2020 to 2024 are now underway.

These negotiations are flawed from our point of view. In the negotiations, the Ministry pursues little ambitious goals. These present high risk. The Ministry simply wants to continue with the existing contractual system without addressing any key weaknesses in the system. The Ministry does not want to implement major changes until the next but one Agreement from 2025.

For us, this is incomprehensible. There is a risk that the rail infrastructure condition will continue to deteriorate – despite increasing federal funding.

And all this against the background that the infrastructure is already in poor condition. It has been subject to excessive wear and tear for years. The investment backlog is growing.

Take the rail bridges, for example. These bridges are not only characterised by a large investment backlog. The bridges also illustrate the weaknesses of the Agreement, the shortcomings of the Ministry and of Deutsche Bahn.

Germany has about 25,000 railway bridges with an average technical service life of 122 years. This means that over a five-year period some 1,000 bridges need to be renewed.

For Agreement II, however, the Ministry and Deutsche Bahn agreed on a target of 875 bridges to be renewed between 2015 and 2019. However, DB Netz AG has only retrofitted 363 of these. By the end of 2019, 512 bridges still need to be renewed. This is a lot.

One of the main goals of the Agreement was to reduce this investment backlog. The Agreement has obviously fallen short of that goal. So far, the Agreement system has not produced the desired impact.

Still, the Ministry is rather reluctant to change anything for the better in Agreement III.

The Agreement is a system where control sets in after the fact and looks at the result. In 2009, this system replaced the traditional grant scheme of submitting applications and proving use of the funds received. The aim was to enhance value for money and take account of the private sector environment in which the railways operate.

In principle, it is a good idea to focus on the output or outcome and see what has become of the infrastructure, whether its condition has actually been maintained or enhanced. However, the associated key indicator system must also work for the entire network and the data available must enable painting a full picture.

This is currently not the case.

So far, only little light has been shed on only some aspects of the infrastructure. What is more, the key indicators currently signal a continuous improvement in the infrastructure, while the investment backlog is actually growing.

Here we see a central weakness in the Agreement. Only a meaningful reporting system creates the necessary basis for planning replacement investments, setting priorities and catching undesirable developments in good time.

In addition, in the current system, the financial burdens are misbalanced and unevenly split.

While Deutsche Bahn has to bear the cost of maintenance, the federal government bears the cost of renewals. This funding scheme creates the inadequate incentive for Deutsche Bahn to run on wear and tear which results in neglecting maintenance and opting for early replacement with federal funds instead.

We recommend giving up this funding separation. Deutsche Bahn and the federal government should evenly split the expenditure – both for maintenance and for renewals.

Deutsche Bahn and the federal government should share the expenditure - both for maintenance and for replacement investments.

There are other weaknesses in the system that we may also talk about in a minute. For example, a system of rather soft sanctions.

In any case, one thing is certain for us: 'Going on like before' is not a solution if you look at the serious shortcomings in the system. The current system is neither sound nor transparent and provides inadequate incentives. Now the moment has come for the federal government to enhance the system. Government must ensure effectiveness of its funding. That is what needs to be settled in the negotiations on Agreement III.

The Ministry intends to submit the final draft Agreement to Parliament for approval in autumn 2019 – shortly before the proposed conclusion of the Agreement.

We think Parliament should be informed at an early stage. This is why we are reporting tomorrow. Now there is still some time left to make the amendments needed. If necessary, Agreement II can run a longer period. What is important, though, is that we do not continue using a system for another five years that obviously does not deliver what it promises. We cannot put at risk the railway network that is a vital national asset for the citizens and the entire economy.


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