As the world experiences rapid urbanization, there is growing interest in using Mass Rapid Transit (MRT) to solve urban transportation problems. Yet developing MRTs is a complex and capital intensive process. Governments and public authorities are using a variety of public-private partnership (PPP) models to leverage resources and expertise.

MRT is a bus or rail-based public transport mode operating on fully or partially exclusive rights-of-way—also known as the “alignment.” This alignment can be at-grade (i.e., surface-based), elevated, or underground. Some of the most common forms of MRT are metros, streetcars, tramways (sometimes referred to as light-rail transport, or LRT), and bus rapid transit (BRT).

Benefits of MRT

MRT solutions are increasingly preferred by policymakers because they provide high carrying-capacity coupled with energy efficiency. MRTs support strategies for reduced air pollution and encourage higher density development and better use of scarce, expensive urban space. They can also promote greater equity and mobility for a larger segment of the population.

Critical success factors

MRT solutions are typically customized to a particular city or transportation corridor. Coordination is necessary among various levels of central and urban governments that have overlapping responsibilities and policies. Managing such complexity and the associated risks can be a daunting challenge for even the most experienced and sophisticated public authorities. Critical success factors for MRT schemes include:

  • Completing robust engineering feasibility studies to ensure viable technical design solutions (particularly for elevated and underground MRT).
  • Having a good understanding of the minimum passenger volumes (ridership) so that the system and its operations can be dimensioned accordingly.
  • Ensuring that the operation of the system is responsive to customer needs such as comfort, speed, and punctuality, and that the system is safe and reliable.
  • Understanding the fare structure and how that structure may affect demand.
    Designing operations and maintenance to maximize the system life, and adequately budgeting for regular operations and maintenance expenditures.
  • Considering continued investment in the system design and contractual mechanisms that allow for this investment.
  • Considering integration of the MRT scheme with other transportation modes (pedestrian links, parking, rail, and airport links) to ensure a comprehensive urban transport strategy.

Together, these factors can ensure that the MRT solution, and the PPP mechanism in place to deliver it, are tailored to the particular needs of a city or transport corridor.

 

The economics of MRT

MRT projects involve large capital expenditures for the design and construction of the system, along with significant operation and maintenance costs (O&M). Revenues generated by the system (known as farebox revenues) are generally set by public authorities with political, social, transport, or urban planning objectives in mind. As a result, farebox revenues rarely cover operating expenses, and rarely cover the full cost of the project. As the graphic to the right shows, for a project to succeed, more often than not the funding gap must be met by some form of government subsidy.

A common misconception is that the gap between the farebox revenue and the cost of service can be made up with other forms of revenue, such as advertising and real estate development. Typically, revenues from advertising in stations and trains are not significant. Figures represent around 4 percent of farebox revenue; station concessions such as small kiosks, newsstands, and vending machines may generate an additional 7 percent. Similarly, real estate development or capturing increased land values directly linked to MRT presents challenges.

 

Trends in MRT PPPs

PPP models for MRT projects can range from full system concessions, where the private sector takes design, construction, and operation risk, to outsourcing of operation and maintenance, where the role of the private sector is limited to operations risk. Appropriate risk allocation is a defining quality for a successful PPP—risk should be transferred to the party that is best suited to manage it.

Some of the advantages for cities developing MRT projects through PPP structures include placing the risk of development and construction with the private sector to achieve improved system design, faster completion, and lower cost, and leveraging the diversity of expertise and experience of a worldwide operator. Together, these can help achieve more innovative and cost- effective approaches to service delivery.

More recently, the trend for MRT PPPs is a move away from full concession and investment risk, toward public financing of capital investment with private operation and management. These contracts, which would appear to be easier to structure and manage, pose their own inherent challenges. Although under an O&M contract structure, ownership of the assets remains with the government metro authority and some or all of the operation and maintenance risk of the metro system is transferred to an O&M operator, the typical commercial incentives are not present. This is because the operator has not had a financial stake in the development of the project and its payments are normally not directly linked to the revenue received from the system’s customers.

This structure also does not allow lenders to watch over the operator, which acts as a form of internal oversight. Care needs to be taken to ensure that the contractual terms avoid the potential for “asset sweating,” where the operator defers maintenance on assets to reduce costs.
Contracts can be designed to overcome some of these issues by incentivizing the operator to behave as if it owned the system. One method of accomplishing this is through a financial structure that encourages ridership, thereby creating the incentive for the operator to ensure the system’s performance is attractive to customers.

Another method is through a carefully-defined regime of key performance indicators (KPIs) that covers a variety of O&M areas, such as punctuality of train services, and ensures the best use of the system’s assets. Payment deductions and bonuses would be based on the operator’s performance, incentivizing the desired behavior. In many instances, both of these methods (ridership incentive and KPIs) are used in tandem.

As MRT becomes a tool for urban expansion, it is important to take stock of its record. Understanding the importance of effectively allocating risk between the public and private parties, and developing structures that are flexible and responsive to the public’s needs, will power MRTs forward in a rapidly urbanizing world.


4 heavy rail/metro PPPs

wellington-cable-car_evan-goldenberg_cc

Seoul’s Metro Line 9

The Seoul Metro Line 9 Corporation developed, operates, and maintains the Seoul Subway Line 9 Section 1, a 25.5 km subway line with 25 stations. The company benefits from minimum revenue support from the government for the first 15 years of the 30-year concession. The other eight lines are publicly owned and operated. The Seoul Metropolitan Government concessioned Line 9 to a private operator to increase productivity and set a benchmark for the public operators of the other lines.

Bangkok’s Skytrain

Bangkok’s extraordinary levels of traffic congestion suggested that demand was robust enough to support a large, complex rail system. But debt and equity investors in Skytrain eventually suffered considerable losses when actual ridership figures fell well below preliminary estimates. Why? Poor integration with other modes of transport and difficult access to the system for users. Once these problems were addressed, ridership improved.

Stockholm’s Metro

The Stockholm Metro ran successfully for years under a purely public sector model. In 1990, Stockholm Transport awarded five- to ten-year operations and maintenance contracts for its three metro rail lines, its light rail system, the suburban railway service, and commuter rail services. This approach has allowed Stockholm Metro to improve service and reduce costs through competitive tendering, and to tap into private sector expertise to chart the course for the system’s next 50 years.

Sao Paolo’s Yellow Line (Line 4)

By 2012, a critical section of São Paolo’s Yellow Line, built by the ViaQuatro consortium, will be 12.8 km long. The concessionaire has spent $450 million on equipment and rolling stock, and estimates that its total investment will reach $2 billion during the 30-year operating contract. During the opening celebrations, officials predicted that São Paulo’s urban rail network would reach 420 km by 2014. The Yellow Line was implemented as a PPP to share development and operational risks with the private sector and to reduce the state government’s capital expenditure, allowing investment in other priority projects.

2 light rail PPPs

Wellington’s Cable Car

The Wellington, New Zealand cable car carries around 3,000 passengers each day from the Central Business District to the university and suburbs on the steep hills above the capital city. The cable car was built with private finance by the Upland Estate Company (UEC). The cable car was completed in 1902, at an estimated cost of £17,479 (equivalent to $1.6 million today). By 1926, annual rider-ship was 2 million. However, by the 1940s, competition from council-run buses resulted in the purchase of the cable car by the Wellington City Council.

The Council operated the cable car for 44 years until 1991, when national legislation required council-owned passenger transport services to be corporatized or privatized. This led to the formation of the council-owned Wellington Cable Car Limited (WCCL). WCCL initially tendered out contracts for maintenance and operation to private firms. Serco had the operating contract from 1997 to 2007, and since 2007 WCCL has managed it. Operations and maintenance take place in-house.

Washington D.C.’s Tram

For 100 years, streetcars were a common mode of transportation in Washington, D.C.—until the system was dismantled in 1962 as part of a switch to bus service. In the late 1990s, however, the city began considering a series of rapid bus, light rail, and streetcar projects. Plans for a 60 km eight-route tram network were unveiled in 2010 and three low-floor cars were purchased from Czech supplier Skoda-Inekon. The first two lines will be built along blighted commercial corridors. Initially, the system will be funded and owned by the District of Columbia Department of Transportation (DDOT), and operated by a third party. The trams will operate on-street.

In July 2012, D.C. selected a private contractor to run the first phase of its streetcar system. RATP Dev McDonald Transit Associates will be paid $4 million a year to handle the day-to-day opeations of the 2.2 miles of track along the H Street N.E. corridor for five years. The company will also oversee training and maintenance facilities. DDOT will retain ownership of the line and control fares. Construction of the line is expected to cost $50 million and open in the summer of 2013. DDOT is considering a PPP to speed up the development of the rest of the system.

Sources: Railway Gazette, Washington Examiner, and Wikipedia.