In 2017, the focus for NS was on delivering the best possible performance in all operational processes, so that we could further improve our service to passengers. NS is making good progress, although the results for the high-speed line (HSL) demanded considerable extra attention.
After the turbulent years of 2015 and to some extent 2016, 2017 was a stable year for NS and a return to normality. This was helped by the fact that both the Executive Board and the Supervisory Board were back up to strength with the appointment of Tjalling Smit to the Executive Board in 2017 and Pim van der Feltz to the Supervisory Board. The organisation must and can focus its attention once again on its core task of serving passengers as well as possible.
In 2016, the Supervisory Board approved the Spoorslags Beter strategy, which identifies three core tasks: improving performance on the main rail network (including the HSL South), creating world-class stations and making a contribution to the door-to-door journey. 2017 was all about implementing this strategy. The Executive Board, supervised by the Supervisory Board, is responsible for implementing the strategy. Please see the report by the Executive Board for a description of the strategy.
Main rail network
A central element in the strategy is achieving the aims and fulfilling the agreements with the Ministry of Infrastructure and Water Management as set out in the franchise for the main rail network. NS wants to perform well in the 12 franchise KPIs in the midterm review in 2019.
A quarter of the overall customer satisfaction score depends on customer satisfaction with stations. NS therefore works permanently on maintaining a high standard of facilities at stations in the interests of passengers. In the past few years, a number of stations, mainly larger ones, have undergone radical renovations. 2017 saw the completion of renovated areas of historical significance at Amsterdam Centraal, the refurbished entrances at Eindhoven station and the new station concourse at Tilburg station.
The door-to-door journey
More than 40% of rail passengers cycle to the station. When stations are renovated, bicycle storage facilities are often upgraded at the same time. The bike is also important for many passengers the final leg of the journey, from the arrival station to the ultimate destination. There was considerable demand once again in 2017 for the OV-fiets, the public transport bicycle.
After choosing to concentrate on three core activities in its strategy (Spoorslags Beter), NS has assessed its overall offering of services and products and made some clear-cut choices. One of these was to end its involvement in Qbuzz. The sale of the bus company Qbuzz to Busitalia was completed last year after a scrupulously careful process.
NS is concentrating first on delivering a good performance for the midterm review in 2019. In a meeting with international external experts, the Supervisory Board talked at length about how rail transport is structured in a number of countries and the allocation of roles and responsibilities to the different parties (the government, infrastructure operators and carriers). Of course this included a consideration of how this is done in the Netherlands. The Supervisory Board has also taken note of the coalition agreement and the sections it contains about the government’s plans concerning mobility and public transport. The Supervisory Board is closely involved in formulating the strategy of NS for after 2019.
The foreign operations through our subsidiary Abellio focus on two deregulated European markets: Germany and the United Kingdom. Good public transport is not just an export product, it also lets us import knowledge and experience. An important precondition is that the risks associated with Abellio must be controllable. We discuss this regularly with the Executive Board and our shareholder.
Aftermath of the NS irregularities in Limburg
In April 2015, following an internal investigation within NS, it transpired that there had been unacceptable conduct in the tendering process for public transport in Limburg. NS has explicitly distanced itself from these irregularities and immediately took far-reaching measures in its organisation.
The Supervisory Board considered the aftermath on various occasions in 2017. The Public Prosecution Service (specifically, the Office for Financial, Economic and Environmental Offences in ’s-Hertogenbosch) started a criminal investigation in 2015 into possible criminal acts in connection with the tendering process for public transport in Limburg. A summons was served on NS Groep NV. On 21 December 2017, the district court of Oost-Brabant acquitted NS of two offences with which NS was charged and ruled that the Public Prosecution Service was not allowed to prosecute in the case of a third offence with which NS was charged.This ruling was also made against the others involved in the case, insofar as they were charged with the same offences. The Public Prosecution Service has appealed against the ruling of 21 December 2017.
In 2017, the Netherlands Authority for Consumers and Markets (ACM) announced its decision following the investigation ‘Conduct by NS relating to the franchise for public transport in Limburg’. In the opinion of the ACM, NS violated the Competitive Trading Act. The ACM therefore imposed a fine on NS for this. NS disagrees with the ACM’s ruling and the supporting arguments for the decision. By submitting a notice of objection, NS has asked the ACM to reconsider its decision. Both the Supervisory Board and the Minister of Finance as the shareholder support this notice of objection.
The consultancy firm Alvarez & Marsal was commissioned by the Supervisory Board and the Ministry of Finance to carry out a thorough analysis of the effectiveness of the internal procedures, risk management, compliance and checks at NS and its subsidiaries. Based on Alvarez & Marsal’s final report in 2016, NS has taken a wide-ranging package of measures to tighten up internal procedures and checks. The company focused not just on things that go wrong but also on measures that have a preventive effect. An internal culture programme is a major element of this. NS made considerable progress with this last year. Now it is important to ensure the development and maintenance of a decent culture in which staff act ethically and can safely hold one another responsible for their conduct. NS regularly updates the Ministry of Finance on progress in the field of integrity and compliance.
Supervision in 2017
NS has 12 franchise KPIs for the main rail network that it must satisfy. NS has to deliver better performance every year in these KPIs. Each one of them is a challenge, but NS is making good progress.
In addition to the performance on the main rail network, the performance on the HSL South is on the agenda in virtually every Supervisory Board meeting and we regularly discuss this with the Executive Board. The Supervisory Board has studied the problems that are occurring here in detail. To get as good a picture as possible of the complex infrastructure, several Supervisory Board members accompanied a driver on this route to experience the situation in practice.
Safety is a topic that is regularly on the Supervisory Board’s agenda. The board looks not only at personal safety but also at railway safety. By attending internal practices in this area, board members can see how it functions in practice.
NS continues to gain experience on the railway market in other countries in part so that it can prepare for possible future developments on the railways. Topics discussed in the meetings included new and ongoing bids for franchises in Germany and the United Kingdom and the performance in franchises that have been granted and are operational, such as ScotRail.
The Supervisory Board regularly discussed NS’s tax position and phasing out the system, as discussed with the shareholder, whereby the rolling stock for the main rail network is leased via the NS subsidiary NSFSC, which is based in Ireland. As a result of the accelerated transfer, all rolling stock used on the main rail network had been transferred to NS in the Netherlands by the end of 2017. The Supervisory Board also considered the improvement of risk management in the widest sense and the risk profile that is appropriate for NS in the view of the Executive Board and Supervisory Board.
Collective labour agreement
In 2017, NS and the trade unions negotiated a new collective labour agreement. The Supervisory Board was kept closely involved in the preparations for the negotiations and the negotiations themselves, acting as a sounding board for the Executive Board. The line of approach taken by NS was a balanced, affordable collective labour agreement with attention to measures that can keep staff healthy and at work for longer.
The Supervisory Board monitors large investments closely. The board debated various investment proposals in 2017, such as the purchase of new rolling stock and modernisation of existing rolling stock in the VIRM 2 and 3 series of double-decker trains.
The meeting timetable in 2017 was more or less as normal, which is appropriate for the relatively stable business conditions. The cooperation with the Executive Board was both pleasant and constructive.
Functioning of the Supervisory Board
The Supervisory Board reflects regularly on its functioning (both the board as a whole and the individual members) and the fulfilment of the supervisory task by the entire board and its committees. This topic is also addressed in contacts in between the formal meetings and verbal evaluations among members, which fits with the board’s aim of making continual improvements. Once every two to three years, the board evaluates its functioning in a structured process with external support. At the end of 2017, an external firm was asked to perform this evaluation again in 2018.
In the past year, the board has paid several working visits both within and outside NS. For example, the board visited the renovated Amsterdam Centraal station and Delft University of Technology to look at mobility innovations, some Supervisory Board members travelled on the HSL and members attended a safety practice. This increases the Board’s knowledge of the company and engagement with it, which helps the Board better fulfil its role as supervisor and adviser.
The Supervisory Board had regular, constructive contacts with the shareholder in 2017.
The board had frequent contact with the Central Works Council during the difficult period of 2015 and to some extent 2016. Last year, the number of contacts was reduced by mutual agreement to the normal frequency of two to three meetings a year. Relations are good.
Relationship with the external auditor
The external auditor attends all meetings of the Risk and Audit Committee as a matter of course. The external auditor also attends the meetings of the entire board when the financial statements and six-monthly figures are discussed. The Risk and Audit Committee also talks to the external auditor without the Executive Board present. Following publications by the Netherlands Authority for the Financial Markets (AFM) on the quality of audits of financial statements by accountancy firms, the Risk and Audit Committee put questions to the external auditor and discussed progress in improvement programmes initiated by the external auditor.
Changes to the Executive and Supervisory Boards
NS adapted its management structure in 2016 in line with the new strategy. The Executive Board has been expanded from two members to five. A two-person Executive Board is vulnerable in terms of organised counter-arguments and continuity in staffing and is therefore (according to the board) not a suitable solution for NS, given the complex societal, political and legal arena in which it operates. With the appointment in 2017 of Tjalling Smit as the Director of Commerce & Development and a member of the Executive Board, the Executive Board is now up to full strength with five members.
With the appointment as of 1 May of Pim van der Feltz as the sixth Supervisory Board member, the Supervisory Board is also up to full strength with the intended number of members. As is usual for new members, Mr Van der Feltz followed an extensive programme within the organisation with the aim of becoming acquainted with all aspects of the company.
Meetings of the Supervisory Board and its committees
The board met fifteen times in 2017, of which four meetings were by phone. With only occasional exceptions, all members of the Supervisory Board were present at all the meetings. The average attendance of these meetings was 95%. The Supervisory Board has two permanent committees, namely the Risk and Audit Committee, and the combined Remunerations and Appointments Committee. All the committee members attended all committee meetings (100%). The Supervisory Board also set up an ad hoc committee for strategy in December 2017. This committee will advise the Executive Board in formulating the strategy for after 2019. The current strategy (Spoorslags Beter) applies through 2019.
Risk and Audit Committee
The Risk and Audit Committee consists of Jeroen Kremers (chair and the board’s financial expert), Gerard van de Aast and Marike van Lier Lels. The committee met four times. These meetings were also attended as a matter of course by the CEO, the Finance Director and the Chief Governance, Risk & Compliance Officer as well as several staff department directors (Legal, Business Control Group and Internal Audit) and the external auditor. The main topics were the financial statements, the annual report, the six-monthly figures, the budget, the group plan for 2018-2022, risk management (including the outcomes of the stress tests) and risk appetite, audit plans and reports, reporting and management letters from the external auditor, progress in IT projects and risk control, the tax position and progress in the project implementing the recommendations made by Alvarez & Marsal (NS in Control).
Remunerations and Appointments Committee
The combined Remunerations and Appointments Committee has Paul Rosenmöller as its chair and Janet Stuijt and Gerard van de Aast as members. The committee met three times in 2017. The topics discussed included filling the remaining vacant positions in the largely renewed Executive Board and Supervisory Board, the pipeline for senior management positions, the line of approach for the collective labour agreement negotiations in the autumn of 2017 and the functioning of the Executive Board, both as a team and the individual members.
All members of the Supervisory Board are independent, as defined in the Dutch Corporate Governance Code. The Supervisory Board broadly subscribes to the best practice stipulations 2.1.7 through to 2.1.9 in the 2016 Code.
NS achieved a net profit of €24 million this year, compared to a profit of €212 million in 2016. The underlying result (disregarding one-off items) fell from €145 million in 2016 to €131 million in 2017. A proposal has been made to pay a dividend of €8 million, which is 35% of the result for 2017. The board has made a critical assessment of the results and discussed them with the external auditor.
NS has an ambitious investment programme of nearly €4 billion euros over the coming years in the Netherlands. These are long-term investments, largely in new rolling stock, that NS will finance partly with loan capital. As a result, NS will improve quality for the passengers. NS is also investing €3.5 billion abroad, in particular in the leases of rolling stock.
About this report
The financial statements for 2017, as prepared by the Executive Board, were discussed by the Supervisory Board. The external auditor (EY) was present during the discussion. The financial statements are accompanied by the Executive Board’s report. We invite the General Meeting of Shareholders to adopt the 2017 financial statements. We also invite our shareholder to ratify the work done by the Executive Board and the Supervisory Board. The profit appropriation proposed by the board can be found in explanatory note 24 to the financial statements.
Thanks to the efforts and the contributions made by all NS staff in the Netherlands and abroad, NS has been able concentrate once again this year on providing passengers with the best possible performance. NS ended the year positively by achieving all the franchise KPI targets. The Supervisory Board would like to thank all staff and the Executive Board, and hopes it will be able to count on their great dedication and enthusiasm in 2018 as well.
Utrecht, 28 February 2018
The Supervisory Board