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News Release from: Chartered Institute of Building [CIOB] | Subject: Financing public transport projects
Edited by the Buildingtalk Editorial
Team on 09 March 2005
Financing public transport projects
world-wide
Growing difficulty of financing public transport projects around the world was main theme at international conference.
The growing difficulty of financing public transport projects around the world was a main theme at the recent international conference on public transport financing, held in Barcelona where the city has been developing new tramways over the past five years to supplement its Metro system Barcelona's investment in tramways so far has been of the order of 550 million and more lines are planned
This article was originally published on Buildingtalk on 12 Mar 2004 at 8.00am (UK)
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As Christopher Knowles, the European Investment Bank's director in Spain explained, this member of the European Union has been doing well on the scoreboard of public investment compared with the 15 pre-enlargement States.
Overall however the financial dilemma facing both European and Asian cities is one of growing requirements versus declining funds.
The general trend in public investment in the larger EU countries has been following a downward trend over the past 30 years, with the United Kingdom showing a steeper fall than most, from about 5 per cent of gross domestic product (GDP) annually in the 1970s to around 1.5 per cent since the turn of the century.
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Contrasting with that, the trend in Spain has been upwards, assisted by the substantial help it is receiving from the European Regional Development Fund towards modernising its economy.
The chart presented by Mr Knowles at the conference organised by the International Association of Public Transport (UITP) shows that in the past few years Spain has taken the lead in the proportion of GDP devoted to public investment.
In the meantime the European average has fallen to around 2.5 per cent, excluding the 10 new Member States where the average level of annual public investment has also been declining.
In these countries the proportion of public investment to GDP has held at around 3 per cent, though based on smaller products per head of population.
Basic rules of sound financing Wolfgang Reub, KfW IPEX-Bank's senior vice president for acquisition and structuring rail and road finance, gave the conference the benefit of the basic rules of sound project financing based on more than ten years experience in funding road and rail ventures worldwide.
The IPEX Bank has been established fairly recently as the project and export arm of KfW Bankengruppe with the intention it should be launched as an independent bank by January 2008.
The typical situation, said Herr Reub, is that the financial structure is dominated by capital cost, with farebox revenue nowhere near sufficient to cover the project's costs when asset replacement and dividends to shareholders are included.
Sooner or later a scheme of this kind is going to need some form of public support.
Citing experience with the Bursa light rail system in Turkey, where KfW Bankengruppe acted as arranger of finance and lender to the municipality under government guarantee, the bankers say it is imperative to have fixed-price contracts with local construction firms to limit cost overruns, and there must also be stand-by credits to cover contingencies.
The absence of these at Bursa had a great deal to do with the financial problems that developed during construction of the light rail system for which a Siemens consortium was awarded the turnkey contract in 1997.
The financing requirement at the outset was for a 280 million loan to build a tram system.
The lending was spread between KfW, Commerzbank and a consortium of Turkish banks, covered in part by export credit guarantees.
A change in the planned track routing and the lack of fixed price contracts for the local components of the work generated increased costs, a problem resolved by splitting the project into two parts and using the available funds to complete the first section.
This was inaugurated in 2002 but owing to a financial crisis in Turkey, financing of the second section was deferred until the European Investment Bank came up with a 55 million loan to the Turkish State.
Part of the Bursa light rail system is now operating, but it has taken about seven years to bring into operation a 21 km route, now planned for extension to 55 km.
As Wolfgang Reub pointed out, a lengthy construction phase such as this presents many risks in a volatile political and economic environment.
Bangkok: high costs and high fares In Bangkok the difficulties were multiplied due to the much bigger scale of the city's transit system opened at the end of 1999.
According to the KfW account, this privately-financed project initially required $1.5 billion derived from bank loans, with private sources providing 30 per cent of the investment as equity finance.
The eventual capital cost was more like $1.8 billion.
A 30-year build-operate-transfer contract was awarded to Siemens and a Thai construction company, with the ridership and exchange risks falling on the special purpose vehicle set up by the concessionaire.
Once again, during the six or seven years of the installation contract, a financial crisis occurred (1997/98) which brought about devaluation of the Thai baht.
Attempting to adapt to the new financial environment, the operator raised user tariffs to levels uncompetitive with other forms of transport.
Since its opening the system has functioned well but the tickets are too expensive to win the sort of ridership needed to meet operating costs, let alone service the debt.
Another lesson from the bankers: ensure proper integration of the new project with the existing public network to secure its acceptance; don't over-estimate a project's capacity to finance its capital cost out of ridership revenue.
This will never work as the builders of London's Jubilee Line extension have discovered.
Don Riley, who wrote the book Taken for a Ride, quoted at the Barcelona conference by Dave Wetzel, vice-chairman of Transport for London, was quite definite that the function of the fare-box is to pay the operating costs.
Any attempt to meet capital costs from the fare-box leads to trouble.
Fares that people can afford on the other hand tend to deliver the kind of riderships which promoters confidently forecast at the outset.
This didn't happen in Bangkok.
What has happened however is that property values soared as Thailand's most urbanised region continued to expand in population and demand for public services.
In this rise of values Dave Wetzel - now with his colleagues at Transport for London facing the problem of financing Crossrail among other expensive transport projects - sees a potential source of revenue which could be tapped to fund the infrastructure projects that are promoting economic growth.
Don Riley estimated that the rise of land values along the Jubilee Line in East London was more than sufficient to meet the capital cost of the Tube extension and leave plenty over for the landowners of which he was one.
In that light, Dave Wetzel argues that something like a location benefit levy should be employed to persuade owners to share the rise in value with the Londoners who generate it.
At the same time Mr Wetzel is totally opposed to a development land tax or planning gain supplement such as that proposed by Kate Barker in her Housing Supply report.
It's a question of finding the right mechanism to impose such a charge equitably, but the history of development levies up to now demonstrates that their only result is to frustrate the very development they are intended to promote.
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