International Experiences with Urban Rail Funding, Institutional Frameworks

& PPP

Progress update and selected lessons

June 2016

Agenda

Sharing selected learnings3

Progress update2

Summary and objectives – why this initiative?1

Questions and discussions4

Summary and objectives

Why?Success of a metro is not in infrastructure alone.

Much more depends on the organization that operates it.

Operators perform miracles every morning and again every evening.

Their good deeds mostly go unnoticed BUT their imperfections are often widely publicized.

It is time to tell their story.

Service delivery & customer experience

Influenced by MANY external factors…

The Operator

Financing regime

Fares policy

Funding regime

Taxation regime

Current land use

Transport policy

Industry structure

Future land use

planning

Envir. regulation

Civil service laws

Unions & labor

relationsIntra-govt. relations Political

factorsProc. laws

& regulation

Industrial policy

Safety regulation

Electricity / other

utilities

Govt. approvals process

Legacy of prior

decisions

Natural conditions

1. Internationally, what factors make an Operator successful?

2. What can Governments do to help Operators succeed & perform?

3. What can Operators do to help Governments make good decisions?

Progress Update

Case Study Metros so Far

Hong Kong MTR

Metro São Paulo

Toronto Transit Corp.

Metro de Santiago

Bangkok BEM

(mini case)

Rapid KL

Guangzhou(mini case)

Transports Metropolit

ans de Barcelona

London Underground

Metrô Rio (mini case)

Sharing selected learnings

1.) Metro is a capital investment that never stops…

Development is a long game

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Km

pu

t in

to o

pe

rati

on

Year

L1 L2 L3 L4 L5 L9/10 L11

DEVELOPMENT OF THE BARCELONA METRO (LAST 50 YEARS)

Source: With Permission of Transports Metropolitans de Barcelona

Loosing a step when out of practice

0 5 10 15 20 25 30 35 40 45

Gre

ate

r Ef

fici

en

cy →

Years

= major project delivery

Asset management from day 1

Asset information

Planning & options

assessment

Refurbish / buy Timing Phasing Enhancement

options Supplier

options

“There is no such thing as an asset life.”

Clear options and

consequences for policy makers

“The biggest mistake to make is to just let a load of contracts – and that’s the

easiest thing to do”

What our case study metros have said

“Buy whole of life, don’t just buy first cost”

“It never crossed their mind that in 20 years time they’d need a big stack of money, and they never put it aside”

“If we cannot value our own assets, you can’t expect others to see that

value.”

Think of asset management form “day 1”

Decisions need to be taken with a 100 year view

“Every night for 4 hours the patient has to go through brain surgery, heart surgery, then get up in the morning,

run a marathon, and win.”

“Government finds it difficult to decide where the money comes from for

asset replacement.”

“The intention was purely to do a new line. They never think about paying it

back.”

“What’s really important is what capability you have to manage

obsolescence.”

2) Your metro will change land use. Plan on changing your metro when it does.

Better yet – plan to make changing land use beneficial to your metro and its

customers.

Example: <City Name?>

Opened in 1966

The triple win of TOD

Financial sustainability

•Captive ridership

•Recurrent revenue

•One-off revenue

Environmental sustainability

•Transit-oriented development

•Stimulate public transport use

•Reduce traffic

Social policy

•Cater to housing demand

•Reduce urban sprawl

• Increase ease of access to employment and services

Also developed nearby

How does Operator & Govt. make it work ?

Metro entrance

Cinema

Residential

Ma

ll

Hotel

Community pool

Healthcare

School

Green space

TSEUNG KWAN O STATION, HONG KONG

Public services

Extensive engineering

• Noise• Vibration• Fire safety

Legal framework• “Strata rights”• Contracts

Gobbling up cash to feed the railway

Rent

Fee

Fares

Div

iden

d

Res

iden

tia

l D

ev. r

igh

ts

Enhances location

Provides additional footfall

It’s never to late to integrateLarge car park with covered walkway to metro station

Driver drop-off area below elevated metro line

Bus station next to metro, with covered walkway link to adjacent office building

The NU Sentral mall links the LRT with the monorail

What our case study metros have said

“The first problem we have here is we don’t have an authority for transport”

“We have no authority on urban planning so it’s very hard to achieve a

balance”

“We decide where the metro goes so we are planning the city…”

“The bigger hole [in the ground, to enable non-fare activities] doesn’t add

much to the cost”

“Can we bring Disneyland to the last station of [new line]? Because at the end of the day, I’ll have ridership at

weekends.”

“In running the railway, ridership alone won’t be sustainable so we changed

our strategy to converting the stations into a gathering hub.”

Thinking commercially about TOD

Challenges to implementing TOD

3) Think of the politics and manage upwards (within the rules)

Example – anonymous metroDuring a mayoral campaign, transport was a key

election issue.

The Operator publically posted a list of 8 actions that could be taking to improve services in short / medium term.

All but 1 candidate adopted the Operator’s list as their electoral platform. The Operator is now implementing the improvements with political support.

Make good projects politically hard to kill

DfT (UK Govt.)

Business rate supplement

& Comm. Infra levy, 4.1

GLA/ TfL, 7.1

Other

0

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10

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18

GB

P b

illio

n

Local contributions present strong case for central gov. funding

Makes project very difficult to cancel (HM treasury would loose GBP 16 billion in investment but only gets GBP 4.2 billion back)

Critical to engage with elected leaders

What our case study metros have said

“TfL as a corporation is much, much bigger than City Hall”

“Infrastructure is long-term and strategic; politicians are short-term

and tactical”

“You need to convert the economic benefits to financial benefits, but you

need political will for that.”

“The discount is designed by government not by us…that is the

biggest challenge.”

“The Operator cannot sit back….they must be engaged with all the key decisions – including upstream

decisions”

Everyone is facing similar challenges

BUT metros that manage up seem to get what they want

“We try and find ways together with our government to finance projects.”

“TfL had to learn from central government about the process of

managing electoral change”

4) You get nothing more than the metro you pay for… but you can also get less

Capacity is the business & it costs money

Capacity costs money – tradeoff between building upfront or adding later

Cutting upfront CapEx often comes at expense of later OpEx. Decisions get locked in and are difficult to reverse

Mega cities need metros with capacity to support their growth. REMEMBER – it is difficult to shut down and expand a metro service once it is operating

London Jubilee line extension

Can India go here?

Heavy metros & not so heavy metrosP

PH

PD

5) Getting the service right takes the right people + the right

environment to enable them.

Automation for organizational transformation?

Barcelona’s new operating model

Customer Service Agent

Increased Job satisfaction:

Autonomy

Empowerment (ability totake decisions)

Client Oriented services

Increased operational efficiency:

Flexibility

Resilience

Drivers

Stations Chief

Tickets Sellers

Informers to the

client

Station activities

Technical Station

Supervisor

Technical Circulation

Supervisor (middle

managers)

Intermediate Managers:

Stations and Traffic

Head of Station

Ticket Office

Information Assistant

Drivers

Old model

Area Manager

Customer Service

Agent

Operative Technical

Manager /

Control Centre

New model

Zone Manager

First Line Supervisor

OLD MODEL NEW MODEL

Source: With permission from Transports Metropolitans de Barcelona

Beyond technology

Organization

Safety

Strategy

Project Management

Unattended Train

Operations Technology

Functional Concept

Source: With permission from Transports Metropolitans de Barcelona

London’s asset management organization

Asset management internal consultancy /

centre of excellence

Competence frameworks across TfL

Benchmarking, sometimes with other utility providers

Work with institute of asset management

Link training material with accreditation

Asset strategists

Set strategic vision for each asset area: track, civils, electric,

mechanical, depots, lifts, signalling, comms

20-80 year planning horizon linked with organisation's strategic vision

Translate to 10year plan balancing cost, risk, performance and work. Set

outcome for capital expenditure in renewals

Project sponsors

Critical friend providing oversight

Professional client

Open doors including escalation if needed

Ensure project lifecycle plan adhered to

What our case study metros have said

“It takes longer to train a well-rounded rolling stock engineer than a brain

surgeon”

“We see a lot of innocent people getting fined but we don’t see a lot of

corrupt people in jail”

“I didn’t want someone coming off a prison service contract running the

<system name>”

“In many ways a leader who understands is more important than a

clever process”

“This is not a civil service type of job, it requires practical action day after day”

5.) Funding and finance modality may be the most powerful influence on an

Operator

New metro lines cost more money than can be recouped from fares.

…but operational expenditure (including renewal) can be self-sustaining if fares are sufficient and there is a good level of non-fare revenue.

Sustainable fares policy is crucial as is the approach to managing subsidies

Simple and brutal economics of metro

Ways this is managed

Upfront subsidy in cash

Ongoing subsidy of debt obligations

Upfront non-cash subsidy

Different companies / balance sheets for Opex & Capex

London’s infamous “bat diagram”

In 2007 there was a funding agreement for

15 years

15 year funding agreement struck in 2007 (recently breached)

Rough estimates: 10% - 30% cost savings due to stability of funding

“When you look back at our success, a large part of it is down to stability of funding.”

PPPs do not create new money

Contract 1

Project company (SPV)

Contract 2

Contract …

Grantor (Government)

Grant or othersubsidy given

Premium / rev. sharereceived

Lenders

Interest & principlerepaid

Money lent

Sponsors

Equity invested

Dividendspaid

Users / other beneficiaries

Development partners

Tolls or other charges paid

Money lentInterest &

principle repaid

Grant or loan relief

1

INDICATIVE FUNDS FLOWS FOR PPP STRUCTURE OVER LIFE OF PROJECT…

Total cash in = total cash out

Except in case of investment loss:

Dividends to sponsors >equity invested

Interest + principle repaid

> money lent to project

Only three sources of cash potentially positive in net:

1. From users: fares / other charges

2. From government: grant or subsidy

3. From development partners: grant or loan relief

2

3

Public metro Operator

Regional rail Operator

Subtleties of getting PPP financing to work can hurt other Operators

Contracted surface operators

residual

residual

PPP concessionaire

Fares & subsidy

residual

“Sacking a PPP is difficult because of the vast levels of capital exposure”

“I’ve never seen such short-termism”

What our case study metros have said

“You can’t make long-term decisions if you don’t have stability of funding”

“Annualized funding is catastrophic for assets that need long-term care”

“There is no point asking a railway operator to continue to suffer.” – If

forecasts are not as expected, it will be necessary for government to mitigate

revenue risk directly or indirectly.”

“Because we’re financially sustainable we’re able to make investments in the existing network without third party

approval.”

“We have the resources to do what we think is the right thing to do.”

“Financial sustainability gives us the independence to keep reinvesting in

our own network.”

Finical independence can be a source of efficiency

Challenges faced when the funding is insufficient or unreliable

“This is what kills railway companies when they try to operate on a

commercial basis: the capital costs just pull the whole business down.”

Thank you!

Dominic PatellaTransport SpecialistTransport & ICTThe World Bank1818 H Street NWWashington, DC 20433, USAT: +1 (202) 458 4619dpatella@worldbank.org

QUESTIONS FOR YOU

Questions• How government help clear the way for different agencies

to coordinate from the planning stage through to implementation?– How to establish a multi-modal authority? What powers?– Could policy set out a clear hierarchy, e.g. “rail is the backbone

of public transport”?

• Can more sustainable fares policies be established in India, ensuring that fares do not decline in real terms?– Experience shows that regular application of a fare adjustment

mechanism could help.

• Could the Detailed Project Report for new metros be required to include location-specific recommendations for:– Direct integration with other local transport modes,– Station exit connectivity and transit oriented development, and– Allowances in design for non-fare revenue, especially station

retail?

6) Effectiveness is more important than efficiency, but you need both

What our case study metros have said

“At the same time we are charged for our inefficiency, and told to do things

that create inefficiencies”

“The State is not a regulator at all because it also provokes inefficiencies

in our company”

“It would be odd for something that is directly accountable to a politician to

have an independent regulator”

“You have to decide what type of efficiency you’re going for: capital efficient, operational efficient, or overall financial case efficiency.”