09/20/2004

The rail markets of Central & Eastern Europe: Private enterprise to fuel growth

Vossloh presents in Berlin a new market analysis / German Chancellor opens Worldwide Rail Market conference

Alongside Asia, the nations of Central & Eastern Europe are among the most dynamic rail technology growth markets. This is the conclusion of a new Vossloh AG study presented by the Company on the occasion of the Worldwide Rail Market conference held in Berlin on Monday, and opened by German Chancellor Gerhard Schröder.

At around €13.2 billion, the C&E European market for rail technology is certainly inviting and the growth prospects are definitely encouraging. In Russia, raw materials demand is also fueling freight haulage. With a market volume in the region of some €6.3 billion, Russia is easily the biggest rail technology market in C&E Europe. Poland, the Czech Republic, Slovakia, Hungary and Slovenia are increasingly investing in the revamping of their regional and urban systems. This is a region which in the mid-term is expected to show the steepest growth rates in the rail technology markets. For the purpose of expanding its passenger transport services, Turkey has earmarked expenditures on an unprecedented scale. In fact, it is this uniquely buoyant market that makes Turkey such an attractive proposition.

"The Vossloh Group companies operate in close proximity to their markets. Very early on they identified and responded to the opportunities of the deregulating and growing rail technology markets within C&E Europe. We were involved even in the first projects for expanding the pan-European transit corridors," added Vossloh AG's CEO Burkhard Schuchmann in Berlin. Since then, the Group has been investing in infrastructure industrial capacities in Poland, Croatia, Hungary, and Serbia. And for the urban transit systems of the EU newcomers, Vossloh AG is supplying the tram and trolleybus equipment. Moreover, the Group's rail control and safety systems are helping to enhance rail transport efficiency.

C&E Europe is also one of the growth regions most difficult to assess-as underscored by the Worldwide Rail Market study, first launched by Vossloh AG last year. "This is reason enough to follow up with a realistic, detailed analysis of the new EU accession states, the markets of Southeastern Europe and the European CIS states," emphasized Schuchmann.

But there is also a downside to the rail technology markets of C&E Europe. "In many of these countries and segments, current expenditures are still not adequate to keep pace with the money needed for maintaining the existing networks and vehicles. In many of these countries, any downscaling of the pent-up spending needs of the past 15 years is still a far-off prospect," states the CEO.

Particularly in view of the growth of almost all the regions' economies, such unanswered needs are having negative repercussions. Demand for passenger and freight transport is growing; modernized, work-divisional economies are requiring properly working infrastructures and reliable modes of transport.

This is an issue likewise involving Vossloh AG-after all, this is the Group's very own market. In order to generate fresh growth momentum, Vossloh has not only analyzed the markets it has also reviewed the possibilities of spurring investments through Public Private Partnerships. The Group itself has acquired solid experience with such financing arrangements-as in its own locomotive pool set up together with the Royal Bank of Scotland.

"On the basis of this experience we are well aware that PPPs within the rail sector do not function automatically. They will only work provided they measure up to key entrepreneurial criteria such as an adequate ROI, a manageable risk ratio, and an acceptable debt burden," emphasized Schuchmann.

This is, however, where the rail sector faces specific challenges, especially since the infrastructure measures call for vast investment projects running over a very lengthy period-projects whose vast complexity requires a high degree of railway engineering expertise. "Classical user/license-style financing is possible only in exceptional instances and, moreover, the efficiency gains of private-enterprise solutions are mostly attainable only across the entire life-cycle-and not just through the advance funding," added Schuchmann.

On the basis of its rail industry background, Vossloh has therefore come up with two solutions that address the specific needs of rail

business. In the special segments below the all-in solutions, manufacturers of individual components (such as track switches) can take over integrated functions as engineering, manufacture and maintenance. In the process, they are paid according to criteria such as the train-kilometers driven. As part of the compensatory solutions, private partners can take over certain of the investments while operators may provide assets, licenses, rights of use in return.

"In this way, PPP projects may assist in closing the gap between transport needs and the available resources. The next step is then to work out together with local partners the specifics of such arrangements," continued Schuchmann.

Berlin, September 20, 2004