32. Off-balance sheet arrangements

A number of investigations are under way against NS and/or group companies and various claims have been submitted which are being contested by the company. Where deemed necessary, provisions have been made for this. A number of important subjects are explained below.

Authority for Consumers and Markets (ACM)

In its judgement of 6 March 2015, the ACM concluded that NS had infringed Sections 67 and 71 of the Railways Act by not making a reasonable offer in the Limburg tendering process for a number of facilities. On 22 May 2017, the ACM ruled that NS had acted in violation of Section 24 of the Competitive Trading Act and Article 102 of the Treaty on the Functioning of the European Union. The ACM therefore imposed a fine of €40.95 million on NS. Based on a system of standards that the ACM itself devised, the ACM concluded that the offer by NS did not satisfy the ‘internal rate of return’ requirement. This approach taken by the ACM is new and has far-reaching consequences for the rail sector and future tenders and investments by NS. In view of this, NS lodged an objection to the decision. NS disputes the suggestion that it submitted a loss-making bid in the public transport tender in Limburg. The bid also satisfied the ‘internal rate of return’ requirement. NS therefore disagrees with the ACM’s ruling and the supporting arguments for the decision. NS submitted a notice of objection, asking the ACM to reconsider its decision. On 29 March 2018, the ACM dismissed NS’s objections. NS lodged an appeal against the ruling on the objection. The fine imposed was paid in 2017 and charged to the income statement in 2017. On 27 June 2019, the District Court of Rotterdam set aside the ACM's decision. The fine was annulled and repaid to NS in July 2019 and recognised in the income statement in 2019. The ACM has lodged an appeal and requested a period of time to supplement its arguments.

Public Prosecution Service

The Public Prosecution Service (specifically the National Office for Serious Fraud, Environmental Crime and Asset Confiscation in Den Bosch) started a criminal investigation in 2015 into possible criminal acts in connection with the tendering process for public transport in Limburg. The investigation focused on the actions and circumstances surrounding an alleged arrangement regarding the disclosure of business secrets. The suspected parties include the companies NS Groep N.V., Qbuzz B.V., Abellio Transport Holding B.V. and Abellio Nederland B.V. In February 2016, NS Groep N.V. received the final report of the criminal investigation. The Public Prosecution Service then issued NS Groep N.V. with a summons. The substantive proceedings took place in the second half of 2017. On 21 December 2017, the District Court of Oost-Brabant acquitted NS of two of the offences with which NS had been charged and ruled that the Public Prosecution Service was not allowed to prosecute in the case of a third offence with which NS had been charged.

The Public Prosecution Service has appealed against the ruling of 21 December 2017. At present, no reliable indication can be given of the outcome and the financial consequences (the amount of any fine, out-of-court settlement, etc.). As a result, no provision has been included for this.

Chromium 6

On Thursday, 31 January 2019, the National Institute for Public Health and the Environment (RIVM) presented the results of the Chromium-6 investigation into the reintegration project tROM in Tilburg. In that project, people on unemployment benefit worked on trains belonging to NS and the Dutch Railway Museum at the then NedTrain workshop in Tilburg between 2004 and 2011. The RIVM carried out an investigation in which NS cooperated. An independent committee drew conclusions on the basis of the results of the investigation and formulated ad hoc recommendations. The committee drew firm conclusions, including about the role of NS in the Tilburg project. According to the committee, the municipality of Tilburg, NS and the Railway Museum all cut corners. At the beginning of February 2019, the parties announced that they would come to an arrangement jointly and each on the basis of its own responsibility. The aim is to provide clarity to those involved as quickly as possible.

NS already provided for its share of the expected costs as at 31 December 2018 and remeasured this based on its understanding as at 31 December 2019. The movement in the provision is recognised in other operating expenses.

Furthermore, the police are currently carrying out a criminal investigation on the instructions of the Public Prosecution Service, in which NedTrain is one of the suspects. It is not clear at present what the outcome of this investigation will be.

Long-term contracts

There were a number of long-term financial commitments to third parties at year-end 2019, mainly concerning lease arrangements for trains, company cars and copiers. There are also long-term contracts for services by third parties in the areas of IT, maintenance and cleaning.

Energy contracts

As at the end of 2019, the purchase commitments under the energy contract in the Netherlands for the volumes already covered, the payments for the Programme for Responsibility and the surcharge for green electricity for the period 2020-2024 (the remainder of the 10-year contract) came to €235 million (compared with €218 million at the end of 2018). The amount expected to be required for 2020 and 2021 is fully covered. Transport costs and energy taxes are not included in the purchase commitments shown. If the difference between the market values and the contract value exceeds a given threshold, the Group or Eneco has to give the other party guarantees or provide cash collateral. Any payments and liabilities are netted, as they are both inextricably linked. As at year-end 2019, NS had received €9 million (year-end 2018: €65 million) in collateral in the form of margin money.

For more detailed information about the energy contracts, see note 26.

Tax group

For the purpose of corporation tax, all the Dutch subsidiaries belonging to the Group are part of the NV Nederlandse Spoorwegen tax entity. As a result, the Group is jointly and severally liable for all tax liabilities of the subsidiaries included in the tax entity.

Investment commitments

At the end of 2019, the Group had outstanding investment commitments of €1,312 million (2018: €1,377 million), primarily for purchasing and upgrading trains and investments in the areas around the stations.

Lease liabilities that have not yet commenced

The Group has various lease contracts that have not yet commenced as at 31 December 2019. The future payments under these non-cancellable lease contracts are €117 million within no more than one year, €683 million within no more than five years and €246 million thereafter.

Contingent liabilities

The Group has paid €28 million (translated) of its share in the issued share capital (€111 million after translation) of EUROFIMA AG. The Group has a liability for full payment on demand of the shares and other guarantee commitments totalling €278 million (after translation). Payment of the liability can be demanded if EUROFIMA AG’s own equity position gives reason to do so.

As a result of the agreements made with the Belgian carrier regarding the IC Brussels service in the context of the main rail network, the Group is making allowances for a negative balance for the Group in the settlement of the costs of commercial operation for this route. The amount of that negative balance depends on the commercial results on that route.

Guarantees

The Group has issued guarantees totalling €1,033 million (31 December 2018: €830 million) relating to the operation of the various franchises.

Franchises

The Group had the following franchises during 2019:

Explanation

Net contracts are contracts with a revenue risk concerning the revenue from passengers.    

Gross contracts are contracts with no revenue risk concerning the revenue from passengers.

Mixed contracts are contracts with certain protective measures for the revenue from passengers.  

The Netherlands

Main rail network

The main rail network franchise is awarded by the Ministry of Infrastructure and Water Management. It covers passenger transport by rail on the main rail network in the Netherlands. The old main rail network franchise and the HSL franchise (see the paragraph below) ended in 2014 and the ministry decided in December 2014 to award a new integrated main rail network franchise to NS for the period from 1 January 2015 to 31 December 2024. The train services on the HSL South have also been covered by this franchise from 1 January 2015 onwards. The franchise agreement stipulates that performance must improve during the term of the franchise. The interim evaluation and final evaluation will take place over 2019 and 2024 respectively. If NS does not achieve the target values for 2019 or 2024 respectively, NS will be obliged to pay a sum of €1.5 million for each performance indicator not attained up to a maximum of €19.5 million per evaluation. If NS does meet the conditions, a maximum bonus of €10 million can be earned for each evaluation. In addition, the Ministry can impose a fine of up to €6.5 million a year on NS if NS does not achieve the minimum baseline values for the franchise performance indicators. The performance indicators are measured for the following performance areas: general (customer satisfaction), the door-to-door journey, ease of travelling (transport capacity at peak times), journey information (in the event of disruptions), safety (including personal safety) and reliability (punctuality for passengers). NS recognised a bonus of €5.5 million for 2019 for the achievement of performance indicators.

The agreements made with the government include agreements on the production assets (rolling stock in particular) that are to be used for operating the main rail network franchise. Depending on the ownership situation and the form of tender, the production assets may be leased in the event of complete or partial loss of the main rail network franchise to a subsequent franchise holder, or sold at the carrying amount, and/or their leases may be transferred unchanged to the subsequent franchise holder.

The overall fees for track use and the franchise for the integrated main rail network/HSL South franchise were €157 million in 2019. The negotiation agreement of 2011 included an adjustment mechanism to avoid the liquidation of HSA. This adjustment mechanism has been included in the implementation agreement for the franchise. It works as follows. If the average return on investment for the franchise holder over a fixed period turns out to be lower than the threshold value (4%), the holder will be entitled to an adjustment to the franchise price (equal to the difference between the actual return and 4%, with the adjustment over the entire duration of the franchise being capped at the equivalent of €144 million at 2010 prices). There was no entitlement to any such adjustment over 2015. Any entitlement to an adjustment was first calculated in 2016 using the average return on investment for 2015 and 2016, and thereafter on a rolling basis using the previous three years. An entitlement to an adjustment to the franchise price deriving from the implementation agreement does not lapse if at any point in subsequent years the return on investment exceeds the threshold value. Payment of any entitlement that may have arisen through an adjustment to the franchise price will be spread in instalments, as per the implementation agreement. The adjustment mechanism for the average profitability is recognised during the franchise on a straight-line basis covering the entire franchise term.

The franchise also includes an adjustment mechanism for a settlement of any windfalls in energy price changes over the franchise period. This adjustment will be calculated cumulatively, with NS owing the Ministry of Infrastructure and Water Management 75% of the difference between the actual energy prices and the forecast energy prices according to the business case, with no adjustment being made if the cumulative actual return on investment falls below the cumulative norm return. Apart from the calculation outlined above, NS owes an unconditional one-off sum of €56 million to the ministry for 2016. This payment is amortised on a straight-line basis over the entire term of the franchise. This arrangement is capped at €290 million (including the one-off payment) and will never result in a payment to NS by the Ministry of Infrastructure and Water Management. No energy cost adjustment is owed for 2019 and previous years.

Gouda-Alphen aan den Rijn franchise

In 2019, NS operated the Gouda – Alphen aan den Rijn franchise, with a term until 11 December 2031. The franchise was awarded by the relevant province. A fee is received from the franchise authority for the operation of the franchise.

The franchise was awarded by the relevant province. A fee is received from the franchise authority for the operation of the franchise.

The United Kingdom

Merseyrail franchise

This franchise is operated as a 50:50 joint venture with Serco, a listed UK company. This is for passenger transport on the railway network in the region around Liverpool. There is an obligation to operate well-defined services (timetable, quality of the service) at a fixed fee that is paid by the regional authorities. An evaluation is carried out every five years, which reviews, among other things, whether the activities continue to be 'efficient'. Merseyrail has successfully completed three evaluations and one evaluation was performed in 2018. This franchise has a term of 25 years (until 20 July 2028). There is an option for an extension by five years. The annual payment from the government (the subsidy) is determined in the contract and is indexed annually.

Greater Anglia franchise (East Anglia)

Abellio was the operator of the previous Greater Anglia franchise, which expired in October 2016, and was awarded the new Greater Anglia franchise in August 2016. This franchise is operated by the full subsidiary Abellio East Anglia Ltd., which was awarded the new franchise for Greater Anglia in August 2016. In 2017, a total of 40% of the share of the franchise was sold to Mitsui. The franchise operates passenger transport in the railway network in the Anglia region in the eastern part of England. The new franchise commenced on 16 October 2016 and will run until 12 October 2025, with an option for a further extension of one year. There is an obligation to replace the entire fleet of carriages by September 2020 with new carriages for the Rural, Intercity, Stansted Express, West Anglia and Great Eastern routes. This will increase the number of seats. Other commitments include the obligation to invest GBP 120 million in the construction of storage sites and GBP 60 million in the modernisation of stations.

ScotRail franchise

Abellio was awarded the ScotRail franchise in October 2014. The franchise commenced on 1 April 2015 and has a term of seven years. The ScotRail franchise was awarded by Transport Scotland and is operated by the full subsidiary Abellio ScotRail Ltd, which provides intercity, regional and provincial passenger transport by train on the Scottish national railway network. There is an obligation to provide the specified services (timetable, quality of the services) at a fee determined in advance that is paid by the government (subsidy) and that is indexed on an annual basis.

In December 2019, the Scottish government decided not to agree to our commercially viable option for extending the franchise until 2025 and then used the break clause in the franchise agreement to terminate the ScotRail franchise at the beginning of March 2022.

West Midlands franchise

Abellio started operating the West Midlands franchise on 10 December 2017. The franchise runs until 31 March 2026. It covers the area around Birmingham and the services from London Euston to Crewe and from Liverpool to Birmingham. The franchise is operated by West Midlands Trains Ltd, a 70:15:15 venture between Abellio, East Japan Railway Company and Mitsui & Co Ltd. The franchise agreement stipulates that new trains need to be introduced in 2021 to provide room for more passengers during peak periods in Birmingham and London. The long trains offer more seats and more space for passengers. In this franchise, investments are also being made in a better ticket system and better journey information as part of the changes intended to improve passengers' journeys.

East Midlands Railway

Abellio started operating the East Midlands franchise on 18 August 2019. The franchise runs until 21 August 2027. The franchise comprises the Midland Main Line, which terminates at London St Pancras, from where the services to Derby, Leicester, Sheffield and Nottingham are operated. It also covers a network of local railway lines serving destinations including Grantham, Lincoln and Mansfield. The routes also comprise services to Luton Airport and East Midlands Parkway. The franchise agreement provides for the introduction of brand new trains to replace the entire existing intercity fleet and passengers will benefit from an 80% increase in the number of morning rush-hour seats in Nottingham, Lincoln and St Pancras. Passengers will also benefit from shorter travel times over long distances, a new express service from Corby via Luton to London, the introduction of improved compensation for delays and flexipass tickets for improved value for money.

London

Abellio London operates bus services in London from a number of depots (with a market share of 8%). The franchises have an average term of five years with an option for extension by two years, depending on the achievement of various performance criteria.

Germany

Abellio operates various train services in the North-Rhine Westphalia (NRW), Central and Southern Germany regions for a fee (subsidy) paid in advance by the government, which is indexed annually. The franchises have terms that expire at different times between 2028 and 2034.

The German part of the Niederrhein-Netz franchise , from Düsseldorf to Arnhem (the Netherlands), started in December 2016.

In June 2016, Abellio was awarded two routes of the RRX (Rijn-Ruhr-Express), the operation of which will commence in two stages. The first route, from Münster to Dortmund, Düsseldorf, Cologne and Aachen, started on 9 December 2018, and the second, from Düsseldorf to Dortmund, Paderborn and Kassel, in 2020.

In November 2016, Abellio was awarded the Stuttgarter Netze franchise. Abellio will operate the franchise from June 2019 with new trains in the Baden-Württemberg region.

In December 2016, Abellio was also awarded the DISA franchise (DISA) for the Saxony-Anhalt diesel network. Abellio started operating this franchise on 9 December 2018 on several routes in the Saxony-Anhalt region.

Abellio was awarded the S-Bahn Rhein-Ruhr franchise in July 2016. Abellio operates this franchise from December 2019 on a number of routes in the NRW region.

In December 2016, Abellio successfully defended its Ruhr-Sieg-Netz franchise. Abellio commenced operating the franchise with a number of trains as from 2019.

On 6 December 2017, the Group increased its interest in WestfalenBahn from 25% to 100%. WestfalenBahn is established in Bielefeld. With its Expresslines Emsland, it connects the cities of Braunschweig and Hannover in Lower Saxony with Bielefeld and Rheine in North Rhine-Westphalia. From Münster, there is a direct line via Meppen and Leer to Emden on the North Sea.