The two specialist parliamentary commissions on 22 March unanimously approved the appointment of Guillaume Pépy as SNCF CEO for a  further  five years until 2018, or one year before the theoretical end of the operator's monopoly on the French rail passenger transport market. The company is gearing up for the competitive battle whilst the Government is preparing a substantive reform aimed at re-incorporating rail-infrastructure management into SNCF. Moreover, a new collective bargaining agreement for the entire rail sector will have to be thrashed out.

So Guillaume Pepy (54) will officially be reappointed  SNCF CEO by  end March for a second five-year term (2013-2018), a decision unanimously endorsed by the Senators and MPs who auditioned him that day. There is no denying that Guillaume Pépy has successfully steered the railway company through his first five crisis-ridden years, and that he knows his company inside out. How could it be otherwise for a man who had already served the company for seventeen years including ten as General Manager and  five as CEO. Given the challenges that lie ahead, his experience is a priceless asset. To quote a sector professional ...".... his will not be an easy task but Guillaume Pépy is a smart captain. Any other choice would have delayed by two years the rail-sector reform which the government is preparing."

His roadmap has yet to be finalised but the end-objective is clear: Guillaum Pépy  must ready SNCF for the opening of the French rail passenger  market to competition as from 2019. As he himself stated during his parliamentary audition ..."My remit is to prepare the company  for the opening to competition so that we can take it in our stride when it comes  and are not caught unawares by it" . Coming after the liberalisation of the domestic rail freight market in 2006 and of the international rail passenger market end 2009, this reform will mark the last phase of sector liberalisation within the EU against the background of the European Commission's proposal last January " to open-up all domestic passenger transport lines to new entrants and service providers with effect from December  2019", this being the central plank of the " fourth railway package of measures designed to improve the quality of railway services in the EU and diversifying the services on offer".

Deutsche Bahn  ready to do battle

Consequences of the EU decision : the SNCF monopoly on regional, inter-regional and high-speed routes will terminate at the end of the decade, perhaps even earlier, given that the implementation calendar can technically be brought forward. As explained by FIF Delegate-General Jean-Pierre Audoux, once the fourth railway package (in other words the                  adjustments made to Directive 2012/34 and Regulation OSP/1370/2007) has been approved, the Directive must then be transposed into domestic  law. That done, competition then becomes a "de jure" reality. Final responsibility for deciding timeframes will rest with the Government, which can then expect to face strong pressures from some quarters. As explained by a Brussels-based expert in the field, " Given the clearly-expressed ambitions of Deutsche Bahn, German lobbying for an opening-up in 2015 cannot be ruled out". That in fact was a scenario imagined by the Fillon administration which did not preclude earlier abolition of the SNCF monopoly with liberalisation of inter-regional train services (TET) in 2014 ,and of TER services in 2015.  The present government begs to differ and will not budge from the 2019 timeframe.

In the view of Transport Minister Frédéric Cuvillier ".. What has happened in the rail freight sector clearly shows that an operator inadequately prepared for competition becomes simply destabilised, which is why we want to strengthen SNCF so it is better  equipped to face competition."

Since the rail freight market was opened to competition in 2006, the new entrants have grabbed a  30% market share including 20% for Euro Rail Cargo (a DB subsidiary) while an already-ailing SNCF Cargo continues to haemorrage despite successive restructuring plans. For the record, SNCF Fret has engulfed cash worth € 2.9 billion and getting it back on an even keel will of course remain a challenging task for Guillaume Pépy, who  readily concedes that "the company has failed to pave the way for an effective development of the rail freight business", and pleads for "intermodal complementarity with road."

Trimming costs to reduce prices

SNCF, to avoid enduring the same mishaps in the passenger transport field, must take on competition whilst being competitive itself and after having improved the quality of its services. Arguably a simple recipe, at least on paper, so causing a SNCF Director into conceding that the company "...must do better and be more cost-effective". "We need to trim our costs to lower our prices" confirms Guillaume Pépy, who is consequently "working on an industrial performance recovery plan" for the 2014-2018 period, to be submitted to the SNCF Board next June or July. This plan will incorporate the current budgetary programme, with its targeted  € 150 million savings in 2013 and €700 million by 2015 impacting on four cost centres (property, IT systems, procurement, overheads). «We  will also bring industrial efforts to bear on our core trades", explains  Guillaume Pépy, "without this impacting on the quality of our services". His aim during his second term of office is to "grow the company's operational margin from 9.5% to 10.5/11% , representing a gain of  € 1- 1.5 billion by 2020." This one percent gain will reduce the debt to € 5-5.6 billion (currently € 7 billion plus).

"Nn social dumping "

However in addition to its in-house efforts, the railway operator can expect to benefit from the sector reform which should be enacted into law this year. Improved quality of service should result from infrastructure modernisation and help limit the cost differerential with new entrants. A key component of this bill is the inclusion of a text defining a new social framework for the entire sector. However much  the 1940 law governing rail transport is modified, the status of railway personnel will be safeguarded.

The ensuing phase will involve drawing-up  a  collective bargaining agreement for the entire rail sector under the aegis of the Union of Public Transport (UTP), which will then be transposed into SNCF texts through company-specific agreements. « All railway undertakings will strive to develop a harmonised social framework", explains UTP President Michel Bleitrach, who is keen to safeguard the specific attributes of each main sector : freight, infrastructure management and passenger traffic, inasmuch as working conditions can differ appreciably. That said, there is no risk of seeing the rail sector reproducing the discrepancies observed in shipping or air transport. " No social dumping » is the message hammered by the government and SNCF Unions who insist on upwards harmonisation , particularly for all that pertains to work organisation (number of rest periods, working-time amplitude, effective working times, etc.).  At the same time, " the agreement level will not be set exactly at the the current SNCF level but won't be that far away from it either, as otherwise industrial strife is a real risk...." warns André Milan, General Secretary of the CFDT Union Transport & Environment Division, for whom " the objective is to avoid distortions in the conditions of competition". This work phase, which should last a good two years after promulgation of the law in question, is therefore crucially important  for the future competitiveness of SNCF , bearing in mind that the "working conditions" debate will obviously need to address  the issue of future possible productivity differentials with its competitors. Guillaume Pépy faces a tough challenge here for even if there is upwards harmonisation, he will need to loosen the SNCF social straightjacket whilst avoiding to set the house on fire. but he "... is quietly confident in the capacity of  the social partners successfully to negotiate a collective-bargaining agreement".

Return to an integrated system of  governance

The other key dimension to the reform lies elsewhere, and involves improving the very organisation of the rail system which in turn should translate into an enhanced quality of service. " Our trains must simply run on time ! », is the message trumpeted by SNCF even though this not a readily attainable target given that the French conventional railway network is "almost clapped-out". Achieving this level of operational efficiency is necessarily predicated upon the deployment of  a massive infrastructure modernisation effort.

French Railway Infrastructure Manager RFF has succeeded in halting network ageing through annual investments  worth € 1.7 billion between 2007 and 2012, yet the situation today remains acute. There are currently  over 1000 track-related schemes in progress across the network, including four high-speed lines, which is twice more than ten years ago....and this level of commitment is expected to continue until 2018-2020. Last October the Government considered increasing the investment package to € 2 billion annually, but who knows whether this programme will remain unaffected by the planned budgetary cuts.

In the meantime RFF is due to submit next April a network modernisation plan as input, inter alia, to work on defining an infrastructure governance system capable of delivering productivity gains. Sector governance will consequently be modified by law through the creation of a unified infrastructure manager attached to SNCF, and which will regroup RFF, the rail-traffic management body and SNCF personnel tasked with infrastructure maintenance. The new entity will employ 50 000 people within an integrated system, so calling time on the organisation introduced in 1997, with RFF as the infrastructure manager instead of SNCF and the latter continuing to be entrusted with operational management of the infrastructure (through its infra division). Admittedly this two-headed  governance of rail infrastructure has resulted in multiple cases of duplication and of uncoordinated services. The system was therefore costly, and deficient to boot. The French railway debt currently aggregates some € 40 billion (RFF: € 32 billion; SNCF :€ 7 billion) and growing by €1.5 billion annually. As a consequence "the French railway sector faces a € 5 billion shortfall which will  therefore have to be made good somehow or other, facilitated by the introduction of a more efficient, more integrated system" is the buzzword coming from the SNCF camp which pressed hard for this outcome under the able leadership of Guillaume Pépy, for whom  "....this unification of the infrastructure management can translate into a productivity gain of 1 to 2% equivalent to a saving of € 1 to 2 billion for a  capital of € 100 billion (equally shared between  SNCF and RFF)."

At best a 15% market share for competitors?

Be that as it may, France will need to deploy the necessary safeguards that ensure this infrastructure manager, whilst attached to SNCF, remains "eurocompatible" and guarantees fair and balanced treatment for all new entrants. " Let's wait and see" , suggests the CEO of Thello, the only private French company to venture into the international rail passenger transport market.

The burning  issue is whether the French domestic market will truly open-up, remembering that the "entry fee" is very high indeed. As pointedly remarked by  Michel Bleitrach ".... The rail passenger transport  business is a very capital-intensive business that will not easily attract many operators. For new entrants to capture a 15% market  share in the long run would already be an outstanding performance in itself". The one certainty in all this is that Deutsche Bahn aims to penetrate all French rail market segments, and whilst SNCF will probably face competition on some high-speed lines, the battle looks like being fiercest  on regional public transport routes. The Regions, as transport sponsoring authorities since 2002, will effectively have the possibility to delegate this public service to any other than SNCF. Yet the Regions are perplexed: is switching to a highly-complex but more cost-effective open-access regime better than opting for a costlier public-service delegation formula much simpler to implement because of the expertise built-up in negotiations with SNCF?

To put  it bluntly, they are weighing-up the cost of the tendering process against the return in terms of quality of  service. The Brussels  response to this questioning is to say that "... on some liberalised markets, contracts awarded on the basis of tendering calls have translated into savings of 20%-30% at equivalent service level". A potent argument indeed in these days of budgetary discipline. Guillaume Pépy is warned. The ball is now firmly in his court.

The two specialist parliamentary commissions on 22 March unanimously approved the appointment of Guillaume Pépy as SNCF CEO for a  further  five years until 2018, or one year before the theoretical end of the operator's monopoly on the French rail passenger transport market. The company is gearing up for the competitive battle whilst the Government is preparing a substantive reform aimed at re-incorporating rail-infrastructure management into SNCF. Moreover, a new collective bargaining agreement for the entire rail sector will have to be thrashed out.

So Guillaume Pepy (54) will officially be reappointed  SNCF CEO by  end March for a second five-year term (2013-2018), a decision unanimously endorsed by the Senators and MPs who auditioned him that day. There is no denying that Guillaume Pépy has successfully steered the railway company through his first five crisis-ridden years, and that he knows his company inside out. How could it be otherwise for a man who had already served the company for seventeen years including ten as General Manager and  five as CEO. Given the challenges that lie ahead, his experience is a priceless asset. To quote a sector professional ...".... his will not be an easy task but Guillaume Pépy is a smart captain. Any other choice would have delayed by two years the rail-sector reform which the government is preparing."

His roadmap has yet to be finalised but the end-objective is clear: Guillaum Pépy  must ready SNCF for the opening of the French rail passenger  market to competition as from 2019. As he himself stated during his parliamentary audition ..."My remit is to prepare the company  for the opening to competition so that we can take it in our stride when it comes  and are not caught unawares by it" . Coming after the liberalisation of the domestic rail freight market in 2006 and of the international rail passenger market end 2009, this reform will mark the last phase of sector liberalisation within the EU against the background of the European Commission's proposal last January " to open-up all domestic passenger transport lines to new entrants and service providers with effect from December  2019", this being the central plank of the " fourth railway package of measures designed to improve the quality of railway services in the EU and diversifying the services on offer".

Deutsche Bahn  ready to do battle

Consequences of the EU decision : the SNCF monopoly on regional, inter-regional and high-speed routes will terminate at the end of the decade, perhaps even earlier, given that the implementation calendar can technically be brought forward. As explained by FIF Delegate-General Jean-Pierre Audoux, once the fourth railway package (in other words the                  adjustments made to Directive 2012/34 and Regulation OSP/1370/2007) has been approved, the Directive must then be transposed into domestic  law. That done, competition then becomes a "de jure" reality. Final responsibility for deciding timeframes will rest with the Government, which can then expect to face strong pressures from some quarters. As explained by a Brussels-based expert in the field, " Given the clearly-expressed ambitions of Deutsche Bahn, German lobbying for an opening-up in 2015 cannot be ruled out". That in fact was a scenario imagined by the Fillon administration which did not preclude earlier abolition of the SNCF monopoly with liberalisation of inter-regional train services (TET) in 2014 ,and of TER services in 2015.  The present government begs to differ and will not budge from the 2019 timeframe.

In the view of Transport Minister Frédéric Cuvillier ".. What has happened in the rail freight sector clearly shows that an operator inadequately prepared for competition becomes simply destabilised, which is why we want to strengthen SNCF so it is better  equipped to face competition."

Since the rail freight market was opened to competition in 2006, the new entrants have grabbed a  30% market share including 20% for Euro Rail Cargo (a DB subsidiary) while an already-ailing SNCF Cargo continues to haemorrage despite successive restructuring plans. For the record, SNCF Fret has engulfed cash worth € 2.9 billion and getting it back on an even keel will of course remain a challenging task for Guillaume Pépy, who  readily concedes that "the company has failed to pave the way for an effective development of the rail freight business", and pleads for "intermodal complementarity with road."

Trimming costs to reduce prices

SNCF, to avoid enduring the same mishaps in the passenger transport field, must take on competition whilst being competitive itself and after having improved the quality of its services. Arguably a simple recipe, at least on paper, so causing a SNCF Director into conceding that the company "...must do better and be more cost-effective". "We need to trim our costs to lower our prices" confirms Guillaume Pépy, who is consequently "working on an industrial performance recovery plan" for the 2014-2018 period, to be submitted to the SNCF Board next June or July. This plan will incorporate the current budgetary programme, with its targeted  € 150 million savings in 2013 and €700 million by 2015 impacting on four cost centres (property, IT systems, procurement, overheads). «We  will also bring industrial efforts to bear on our core trades", explains  Guillaume Pépy, "without this impacting on the quality of our services". His aim during his second term of office is to "grow the company's operational margin from 9.5% to 10.5/11% , representing a gain of  € 1- 1.5 billion by 2020." This one percent gain will reduce the debt to € 5-5.6 billion (currently € 7 billion plus).

"Nn social dumping "

However in addition to its in-house efforts, the railway operator can expect to benefit from the sector reform which should be enacted into law this year. Improved quality of service should result from infrastructure modernisation and help limit the cost differerential with new entrants. A key component of this bill is the inclusion of a text defining a new social framework for the entire sector. However much  the 1940 law governing rail transport is modified, the status of railway personnel will be safeguarded.

The ensuing phase will involve drawing-up  a  collective bargaining agreement for the entire rail sector under the aegis of the Union of Public Transport (UTP), which will then be transposed into SNCF texts through company-specific agreements. « All railway undertakings will strive to develop a harmonised social framework", explains UTP President Michel Bleitrach, who is keen to safeguard the specific attributes of each main sector : freight, infrastructure management and passenger traffic, inasmuch as working conditions can differ appreciably. That said, there is no risk of seeing the rail sector reproducing the discrepancies observed in shipping or air transport. " No social dumping » is the message hammered by the government and SNCF Unions who insist on upwards harmonisation , particularly for all that pertains to work organisation (number of rest periods, working-time amplitude, effective working times, etc.).  At the same time, " the agreement level will not be set exactly at the the current SNCF level but won't be that far away from it either, as otherwise industrial strife is a real risk...." warns André Milan, General Secretary of the CFDT Union Transport & Environment Division, for whom " the objective is to avoid distortions in the conditions of competition". This work phase, which should last a good two years after promulgation of the law in question, is therefore crucially important  for the future competitiveness of SNCF , bearing in mind that the "working conditions" debate will obviously need to address  the issue of future possible productivity differentials with its competitors. Guillaume Pépy faces a tough challenge here for even if there is upwards harmonisation, he will need to loosen the SNCF social straightjacket whilst avoiding to set the house on fire. but he "... is quietly confident in the capacity of  the social partners successfully to negotiate a collective-bargaining agreement".

Return to an integrated system of  governance

The other key dimension to the reform lies elsewhere, and involves improving the very organisation of the rail system which in turn should translate into an enhanced quality of service. " Our trains must simply run on time ! », is the message trumpeted by SNCF even though this not a readily attainable target given that the French conventional railway network is "almost clapped-out". Achieving this level of operational efficiency is necessarily predicated upon the deployment of  a massive infrastructure modernisation effort.

French Railway Infrastructure Manager RFF has succeeded in halting network ageing through annual investments  worth € 1.7 billion between 2007 and 2012, yet the situation today remains acute. There are currently  over 1000 track-related schemes in progress across the network, including four high-speed lines, which is twice more than ten years ago....and this level of commitment is expected to continue until 2018-2020. Last October the Government considered increasing the investment package to € 2 billion annually, but who knows whether this programme will remain unaffected by the planned budgetary cuts.

In the meantime RFF is due to submit next April a network modernisation plan as input, inter alia, to work on defining an infrastructure governance system capable of delivering productivity gains. Sector governance will consequently be modified by law through the creation of a unified infrastructure manager attached to SNCF, and which will regroup RFF, the rail-traffic management body and SNCF personnel tasked with infrastructure maintenance. The new entity will employ 50 000 people within an integrated system, so calling time on the organisation introduced in 1997, with RFF as the infrastructure manager instead of SNCF and the latter continuing to be entrusted with operational management of the infrastructure (through its infra division). Admittedly this two-headed  governance of rail infrastructure has resulted in multiple cases of duplication and of uncoordinated services. The system was therefore costly, and deficient to boot. The French railway debt currently aggregates some € 40 billion (RFF: € 32 billion; SNCF :€ 7 billion) and growing by €1.5 billion annually. As a consequence "the French railway sector faces a € 5 billion shortfall which will  therefore have to be made good somehow or other, facilitated by the introduction of a more efficient, more integrated system" is the buzzword coming from the SNCF camp which pressed hard for this outcome under the able leadership of Guillaume Pépy, for whom  "....this unification of the infrastructure management can translate into a productivity gain of 1 to 2% equivalent to a saving of € 1 to 2 billion for a  capital of € 100 billion (equally shared between  SNCF and RFF)."

At best a 15% market share for competitors?

Be that as it may, France will need to deploy the necessary safeguards that ensure this infrastructure manager, whilst attached to SNCF, remains "eurocompatible" and guarantees fair and balanced treatment for all new entrants. " Let's wait and see" , suggests the CEO of Thello, the only private French company to venture into the international rail passenger transport market.

The burning  issue is whether the French domestic market will truly open-up, remembering that the "entry fee" is very high indeed. As pointedly remarked by  Michel Bleitrach ".... The rail passenger transport  business is a very capital-intensive business that will not easily attract many operators. For new entrants to capture a 15% market  share in the long run would already be an outstanding performance in itself". The one certainty in all this is that Deutsche Bahn aims to penetrate all French rail market segments, and whilst SNCF will probably face competition on some high-speed lines, the battle looks like being fiercest  on regional public transport routes. The Regions, as transport sponsoring authorities since 2002, will effectively have the possibility to delegate this public service to any other than SNCF. Yet the Regions are perplexed: is switching to a highly-complex but more cost-effective open-access regime better than opting for a costlier public-service delegation formula much simpler to implement because of the expertise built-up in negotiations with SNCF?

To put  it bluntly, they are weighing-up the cost of the tendering process against the return in terms of quality of  service. The Brussels  response to this questioning is to say that "... on some liberalised markets, contracts awarded on the basis of tendering calls have translated into savings of 20%-30% at equivalent service level". A potent argument indeed in these days of budgetary discipline. Guillaume Pépy is warned. The ball is now firmly in his court.