In mid-March, the COVID-19 outbreak in the Netherlands plunged the country into a deep crisis. The extremely sharp drop in passenger numbers took a heavy toll on our company. Due to the crisis, the activities of the Supervisory Board were very different than in normal years in terms of scope, nature and intensity.
Over the past year we held frequent and intensive consultations, both internally and with the Executive Board, the Ministry of Finance (NS's shareholder) and the Central Works Council. Apart from the COVID-19 crisis, these consultations also concerned a number of serious, fatal accidents. In addition, the Supervisory Board took time to consider other important issues, such as the adapted strategy in light of COVID-19, the railway and station structure and changes in the Executive Board.
The COVID-19 crisis
NS's performance in 2019 was unique in several respects. We transported more passengers than ever before, and customer appreciation figures and our financial situation were very satisfactory. We managed to attain virtually all our KPIs, thanks to the commitment of all our employees. In the first few months of 2020, this rising trend in our performance over the past few years looked set to continue as strongly as ever. Operational and financial performance figures were quite positive. Then COVID-19 struck, marking a turning point for our organisation. People stopped travelling practically overnight. At the government's request, NS maintained the existing service and timetable, adjusted to current circumstances. The Supervisory Board is impressed by the way in which NS employees continued to perform their tasks in a professional manner on our trains, at our stations and at home. Since the outbreak of COVID-19, we have held frequent consultations with the Executive Board (mainly online) to keep abreast of current developments as well as to provide advice and supervision, where necessary, on crisis management issues. It goes without saying that we held many and intensive discussions with the Executive Board, the Central Works Council and the shareholder.
The effects of the crisis are felt in many areas, including finance and operations. The Dutch government provides an availability payment (beschikbaarheidsvergoeding) to compensate in part for the costs in connection with the Dutch main rail network franchise. Other countries are taking a variety of measures to support service providers. It is uncertain what the long-term consequences will be, for how long and in what form the support measures will remain in effect and when passenger numbers will return to normal. This is why it is also incumbent on NS itself to formulate proposals on how to slim down and become more agile.
The COVID-19 crisis erupted not long after NS had presented its strategy entitled ‘Keeping the Netherlands accessible in a sustainable manner, for everyone’. That strategy rests on a strong and vigorous network, stations as hubs for mobility and quality of life, and flexible travel options supported by digital tools that give passengers control over their entire journey. Within that context, last year we commissioned new trains, opened new and modern stations and upgraded the NS App with features such as the Treinwijzer. Even so, the COVID-19 crisis somewhat overshadowed the launch of our new strategy. While new, the strategy is characterised by a familiar focus on passengers, high-quality services and an excellent and safe door-to-door product across modalities. These remain our top priorities.
Main rail network franchise
The core of our strategy for the past years – high-quality performance for passengers, resulting in financially healthy operations – forms the basis of the government's proposed decision to award the main rail network franchise to NS. We all did our very best at NS to achieve this. When NS passed the midterm review it earned a performance bonus of €6 million. A similar amount was divided among the employees. We are also pleased that NS and ProRail will remain jointly responsible for the stations, as this will allow us to ensure the best possible passenger facilities and optimise passengers’ travel experience.
Sadly, in 2020 two serious accidents occurred at NS involving the loss of lives. In May, a colleague died in an accident at an uncontrolled level crossing near Hooghalen. We are still awaiting the conclusions and recommendations of the investigation. The Supervisory Board supports the efforts of ProRail and NS to take permanent measures to improve safety at and around level crossings. In August, two colleagues and one passenger died, and six passengers were injured, in a derailment accident in Scotland, caused by a landslide following heavy rainfall. We are awaiting the results of the official investigation that is being carried out in the United Kingdom. Early in 2020, a DDZ train derailed in The Hague. The investigation report includes recommendations of a technical and organisational nature. A special programme, Risk Management, Deviations and Adaptations - Improvement Through Quality (also known as RAAK), has been launched to address organisational issues that emerged from the DDZ investigation, and reduce the risk of safety incidents.
Following an investigation into operational instability, the DDZ was temporarily decommissioned in December. We initiated an investigation to find out what causes this problem and under what conditions DDZ rolling stock can be safely used once again. The Supervisory Board carefully considered all the details of the derailment incident and supports the recommendations from the programme. For the Supervisory Board, too, passenger safety is of paramount importance, and a permanent item on the agenda. It goes without saying that we extensively discussed these accidents and the measures taken in response.
The performance and positioning of Abellio are a regular item on the agendas of the Supervisory Board and the Executive Board. The Supervisory Board regularly discusses the COVID-19 situation in the United Kingdom and Germany. In the United Kingdom in particular, the pandemic has had a considerable impact on performance and financial results.
Temporary emergency agreements have helped to compensate the enormous loss of revenue from passengers. It has since become clear that the existing franchise contracts will be terminated and replaced by a system of management contracts, establishing a new balance between risks and returns for carriers, the government and taxpayers. The UK government has made termination of the contracts conditional on the payment of termination fees. The NS management however disagrees with the provisional amounts imposed, believes they are unreasonable and unfair, and is engaged in consultations on the matter. The Supervisory Board is keeping close track of these developments and supports the management in its attempts to make the Department of Transport reconsider its decision.
The Supervisory Board also carefully monitored the situation in Germany over the course of the year There, the direct financial impact of COVID-19 has remained limited because the German franchising authority bears the loss-of-income risk. However, due to several other external factors, such as current developments on the German labour market, the CLA and increased maintenance works, operations on the German rail network have been difficult, as in the previous year. Abellio is continuing its consultations with the German public transport authorities on compensation for these external factors. The Supervisory Board expects that clarity will be provided in the short term as to the additional compensation required to cover the costs of operations.
From a financial perspective, the risks of our international operations are within the boundaries of the capital-at-risk agreements made with NS’s shareholder, the Dutch Ministry of Finance. Apart from COVID-19, a range of other external factors have an impact on our operations – from the introduction of new trains and Brexit to the study into the structure of the franchise system in the United Kingdom. As a result, the conditions in which we operate are in a constant state of flux. We consult with the Executive Board on both the short-term consequences of all those developments and their effects on our long-term strategy.
NS registered a net loss attributable to the shareholder of -€2,378 million this year, compared with a profit of €208 million in 2019. The net loss results in a sharp decrease in equity and solvency. For a large part, the net loss is due to the impairment and the provision for onerous contracts in the amount of €2,232 million. The impairment points to a series of major challenges awaiting NS in the years ahead, requiring the company to adapt to the changed circumstances resulting from the COVID-19 pandemic. This will have significant consequences for the organisation and for our planned investments. At the same time, NS will have to continue investing in order to meet the strict quality requirements imposed by the franchising authority and by our passengers. This represents a huge challenge as to our ability to maintain the current level of service without external financial support. Over the course of the year, the Supervisory Board critically assessed the results on various occasions and discussed them with the external auditor.
Changes in the Executive and Supervisory Boards
Chair and CEO Roger van Boxtel left NS as of 1 October 2020. The Supervisory Board is grateful to Mr van Boxtel for his deep commitment to NS and for helping the company regain pride and self-confidence after a difficult period. In consultation with all parties involved, Mr van Boxtel's term of office was extended by two months in the interests of the proper finalisation and transfer of issues such as COVID-19, station structure and the franchising process. Mr van Boxtel was succeeded by Marjan Rintel. We are pleased to have been able to find a person from our midst who has the experience required for this challenging position in these difficult times. In late 2020, it became clear that Ms Rintel's former position of Director of Operations is to be filled by Eelco van Asch starting on 1 March 2021. He will be responsible for securing the high level of our operational performance, in the interests of our passengers. The appointment of Ms Rintel coincided with the reappointment of Bert Groenewegen as CFO for a period of four years. Within the Supervisory Board, its members Janet Stuijt and Marike van Lier Lels have both been reappointed for a second term.
Functioning of the Supervisory Board
Every three years, the Supervisory Board engages an external agency to evaluate its own performance. The Executive Board conducts internal evaluations in the intervening years. This evaluation took place at the end of 2020. The results are positive. The members of the Supervisory Board cooperate effectively and their skills and experience are sufficiently complementary. The relationship between the Supervisory Board and the Executive Board is good. The Supervisory Board is involved in major and complex decisions in a timely and effective manner. The discussions also cover concrete dilemmas.
The functioning of the Executive Board and collaboration with the Supervisory Board
The Executive Board functioned satisfactorily and performs its tasks well. The Supervisory Board has confidence in the Executive Board and professional relations between the two boards are good. Both the Supervisory Board and the Executive Board keep to their roles in the performance of their tasks.
Meetings of the Supervisory Board and its committees
Owing to the exceptional circumstances caused by the COVID-19 crisis, the Supervisory Board held frequent consultations outside regular meetings in 2020. In total, the Supervisory Board met twenty times in the past year. Virtually all of these meetings were attended by all the Supervisory Board Members, with average attendance amounting to 96%. The Supervisory Board has two permanent committees: the Risk and Audit Committee, and the combined Remuneration and Appointments Committee. All committee meetings were attended by all their members.
Risk and Audit Committee
The Risk and Audit Committee (RAC) consists of all Supervisory Board members and is chaired by Herman Dijkhuizen. The RAC met four times. The Chair and CEO, the members of the Executive Board for Finance and Risk, the Audit Director and the external auditor were also invited to these meetings. The auditor attended all RAC meetings. In addition, in preparation for the meetings the chair, together with the CFO and the auditor, held several prior consultations on important topics related to COVID-19, such as its impact on liquidity and solvency, and the use of models and parameters to determine the impairment, assets and onerous contracts. Depending on the agenda, other individuals such as the directors of Legal Affairs, Group Control & Expertise and Integrity & Compliance were also invited. In 2020, the RAC held extensive discussions about the financial statements, the annual report and the yearly reporting for the Ministry of Infrastructure and Water Management, the six-monthly figures, the budget, risk management and risk appetite (see also the section in this report on Safety), the group plan for 2021-2025, periodic reporting by Integrity & Compliance, audit plans and reports prepared by the external auditor. In addition, the committee devoted considerable attention to the financial impact of the COVID-19 crisis on the group's liquidity and solvency position and our foreign participations. Several scenarios for the development of passenger numbers and customer appreciation were also discussed. Within this context, on various occasions throughout the year the RAC also dealt with the reports on financing and liquidity, and the financing plan. Other recurring issues on the RAC agenda were cybersecurity in connection with staff working from home, and the increased risks associated with this trend. The RAC also discussed rolling stock reports and the performance of the external audit function. A key focus in the RAC, based in part on the available I&C reports, was the progress made in addressing undesirable types of behaviour and preventing nuisance.
One important theme covered in the auditor's management letter was the COVID-19 crisis and its impact on internal control, both within the main rail network and in the United Kingdom and Germany. The auditor also highlights the impact of cost savings on the quality of internal control measures in the medium term and of the critical functions in the ‘three lines of defence’ model. In addition, the auditor points out that further adjustments to the internal control framework are required, and that the improvements in the IT landscape are contributing to the quality of internal control within NS in the long term. The auditor also considered the cybersecurity risks that NS has identified, as well as the associated measures and reporting. The most important topics from the year-end auditor's report that were discussed concern the results, solvency, financing and continuity of NS, the impairment of assets, and provisions in the context of termination fees.
Over the course of the year, the chair of the Supervisory Board and the chair of the RAC held several consultations separately with the external auditor.
Remuneration and Appointments Committee (combined)
The combined Remuneration and Appointments Committee is chaired by Janet Stuijt; its members are Gerard van de Aast, Nebahat Albayrak, Pim van der Feltz and Marike van Lier Lels. The committee met four times in 2020. Topics discussed include the job profile for Executive Board members and, in particular, the recruitment and appointment of successors to Roger van Boxtel and Marjan Rintel. Other topics included the remuneration report, target letters, the appraisal process and the Abellio Gain Sharing Plan. All members of the Supervisory Board are independent as defined in the Dutch Corporate Governance Code. The Supervisory Board broadly subscribes to best practice stipulations 2.1.7 through to 2.1.9 in the 2016 Code.
The Supervisory Board maintained a good relationship with the shareholder in 2020, with regular contacts in a professional setting.
In 2020, the Supervisory Board met with the Central Works Council on several occasions. This applies in particular to the two Supervisory Board members whose appointment was effected under the Central Works Council's enhanced powers of recommendation, and to the chair. The Supervisory Board had two ‘Section 24 Works Council Act meetings’ with the full Central Works Council.
Relationship with the external auditor
As standard, the external auditor attends all meetings of the Risk and Audit Committee (RAC). The external auditor also attends the meetings of the full Supervisory Board when the financial statements and six-monthly figures are discussed. In addition, the RAC consults with the external auditor without the Executive Board being present. Every year, the RAC evaluates the external auditor's performance and issues a report to the Supervisory Board. The external auditor has been reappointed for the period up to and including 2023. Before the end of that term, a new tendering procedure will be organised for the period after 2023.
About this report
The financial statements for 2020, as prepared by the Executive Board, were discussed within the Supervisory Board in the presence of the external auditor. The financial statements are accompanied by the Executive Board’s report. We invite the General Meeting to adopt the 2020 financial statements. We also invite our shareholder to discharge the Executive Board and the Supervisory Board from their liabilities. The loss for the 2020 financial year will be charged to the distributable reserve.
The Supervisory Board would explicitly like to thank all employees, the employee participation bodies and the Executive Board of NS for their excellent performance in these challenging times. Once more they have proven that NS is an extremely effective company: a wonderful organisation that plays a very significant role in Dutch society. The challenge for the period ahead is to stay calm and resume operations in the wake of the COVID-19 crisis, so that before long we will be able to focus once again on our great strengths. Needless to add, we hope we can also count on the undiminished commitment of all NS staff for our passengers in 2021.
Utrecht, 24 February 2021
The Supervisory Board