IFC Transport INSIGHTS ELECTRIC VEHICLES 101 A series of transport notes on electric vehicle trends and opportunities from IFC Twists and Turns: New Business Models January 2020 The global bus fleet consists of about three million vehicles, mostly powered by diesel and compressed natural gas. By comparison, the global e-bus fleet remains small, with approximately 385,000 units in circulation, or about 13 percent of the total. Nevertheless, electric buses have been the fastest-growing electric vehicle segment over the past five years by a wide margin. The market is changing quickly as both national and local governments make new commitments to address climate change and the horrific air quality conditions that plague some cities. Well-intentioned initiatives such as the C40 Fossil-Fuel-Free Streets Declaration, the Zero Emission Bus Rapid-deployment Accelerator (ZEBRA), and other sustainable urban transport initiatives are also attracting followers, and the targets for fleet conversion are ambitious. To convert these ambitious commitments into reality, we need investable and bankable business models that work on a standalone basis. The state-heavy model, complete with lavish subsidies, won’t work for developing countries. So the marketplace needs to invent the wheel here. Based on our early work on electric vehicles, what are some of the business models taking shape? BUSINESS MODELS institutions can work with operators to provide concessional resources and blended finance to ● Electrifying the Status Quo: In general, cities have improve the economics of procuring electric complicated bus systems (aside from some places in vehicles. Longer tenors and better pricing can help Asia, like China, where new cities are being amortize the cost of the electric vehicle over longer developed from the ground up). These typically have periods and lighten the additional financial carry incumbent operators who have the right of first that comes from purchasing more expensive refusal if you’re planning to change their business equipment. Second, aside from the vehicle cost, the prospects. In such cases, there is generally no infrastructure needs to be in place. For e-buses, regulatory “stick” to push operators into electrics. well-structured municipal finance could help Instead, this audience needs to be presented with municipalities put the infrastructure and power “carrots” to make the leap. structure in place so that operators don’t have to In developed markets, the carrot has been grant- manage these risks and absorb the cost. based funding or other state support to subsidize ● Splitting Asset Ownership and Operation: For those the outsized, upfront cost of electric vehicles. In IFC municipalities with the appetite to restructure their markets, where this is generally not the case, there transit programs, the “unbundling” of bus ownership are a few ways to make this happen faster. First, and operations is gaining traction. These models development banks and development finance 1 have been borrowed from the airline and railway entities (capital providers and equipment companies) sectors, where rolling stock operating companies, or can provide the equipment under reliable service ROSCOs, own and maintain the assets while leasing contracts (complete with maintenance and them to operating companies. In the bus sector, the warranties) that take some of the guesswork out of ROSCO model could be replicated with a fleet the bus, and the battery in particular. Given that company that owns and maintains the assets while batteries today have to be replaced somewhere in retaining the risks related to vehicle and battery the middle of the useful life of the bus itself, a leasing performance. Meanwhile, the buses are operated by program that guarantees a level of range and concessionaires that provide drivers and manage performance could be the way forward. day-to-day performance. In developed markets, leasing programs are being Going further, municipalities can separate the piloted for electric vehicles and batteries. One provision of power and infrastructure into example is in the United States, where federal grant concessions and tender each under long-term funding is available for bus acquisition but is not contracts. These models are most developed in enough to pay the full cost of the more expensive places like London and Singapore, but we are now electrics. In these cases, battery leases are designed seeing new examples in Latin America, for instance, based on the peculiarities of the grant funding: in Colombia and Chile. Another benefit is that large paying for the bus purchase at par with diesel but capital providers may be able to enter the space procuring the battery through a leasing structure with fleet management firms, providing a that matches the lease costs with the operational combination of expertise on managing the savings of the electric. In markets where grants are equipment/technology, risk-sharing, and the not available, leasing would more than likely be for capacity to scale. the entire bus, and we are starting to see some initial proposals along these lines. The positive aspect of unbundling ownership and operation is that it allows everyone to do what they We have had many discussions with our regional do best. Operators operate. Fleet providers own and colleagues about scaling one of these leasing models maintain. Infrastructure providers make sure at a regional level to create economies of scale and capacity is available. The downside is that these more competitive costs for the buses. However, this programs can be quite complex, and they rely on a is a tricky proposition because of country-by-country high level of institutional capacity at the municipal legal and accounting peculiarities surrounding level to manage the complex division of labor and leasing, as well as the importation of equipment. For interagency coordination necessary to make them now, our scaling efforts are focused on larger work on the ground. in-country markets where there may be enough municipalities or other users interested in electric ● Lease-Driven Models: Given the substantial upfront vehicles to justify the creation of a leasing company. cost and pace of technological change in electric buses (and batteries, in particular), leasing models are becoming more prevalent in the discussion. Leasing can be a way to manage the large discrepancy ENTER IFC in upfront costs and spread the payments over time At this early stage of the game, there have been few in a way that better matches the operations and bankable or investible opportunities for IFC—or for maintenance savings of electric buses. Also, given anyone else for that matter. However, as electric that the technology is changing very rapidly, leasing proposals continue to gain traction and new concessions are bid, IFC is developing a toolkit to 2 accelerate the transition to cleaner vehicles. At present, technical and bankability problems, but the market there is a flurry of activity inside of IFC that includes seems to be learning quickly from some of these early advisory and investment activities. failures. We are starting to see more progress in terms of bankable structures, as well as solid technical and As we are at the early stages of development, IFC has financial players entering the game. With a little been most active providing advisory services offering persistence and risk appetite, we expect to see more technical, financial (bankability) and institutional green shoots from this early work. support in places like Cali (Colombia), Lviv (Ukraine), and Ho Chi Minh City (Vietnam), to name a few. IFC is developing internal capacity to manage these engagements but is also getting a handle on the best ADDITIONAL TRANSPORT NOTES IN external consultants and the best way to find technical THE ELECTRIC VEHICLES 101 SERIES assistance funding for electric vehicle development. An EV Playbook for Electric Buses Bumps in the Road: Challenges to E-bus Converting these advisory opportunities into Implementation investment pipeline is a work in progress with early successes through IFC subnational loans, and some E-Bus Economics: Fuzzy Math? early leads on financing electric bus concessionaires. Electric Buses: Why Now? Concession opportunities to date have suffered from This article was written by John Graham, Principal Industry Specialist, Global Transport at IFC. Follow us on LinkedIn @IFC Infrastructure and find us online at www.ifc.org/infrastructure 3