Enhancing Financial Sustainability and Commercial Viability of Bus Rapid Transits (BRTs) in Sub-Saharan Africa (SSA): The Factor Analysis Report Hongye Fan Edward Andrew Beukes - -i- Report No. AUS0002278 © 2021 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions: The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “Fan. Hongye and Beukes. Edward Andrew. 2021. Enhancing Financial Sustainability and Commercial Viability of BRTs in Sub-Saharan Africa: The Factor Analysis Report. Washington DC. © World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522- 2625; e-mail: pubrights@worldbank.org. -ii- Acknowledgements This report was prepared by a World Bank team led by Hongye Fan (Transport Specialist) and Edward Beukes (Urban Transport Specialist) and comprising Philippe Neves (Senior Infrastructure Specialist) and Wenyu Jia (Senior Urban Transport Specialist), Xuanyi Sheng (Consultant) and Tatiana S. Daza (Senior Program Assistant), along with Pegasys Strategy and Development (Pty) Ltd. The report is supported by World Bank Transport Practice, under the valuable supervision and quality control from Benedict L.J. Eijbergen (Practice Manager, IAET1), and received strategic guidance from Riccardo Puliti (Regional director, IAWTDR). The World Bank’s Transport Practice managers Ibou Diouf (Practice Manager, IAWT3), and Maria Marcela Silva (Practice Manager, IAET2), Aurelio Menendez (Practice Manager, IAWT4), and Almud Weitz (Practice Manager, IEAT1) provided the team with insightful advice and encouragement. This report incorporates the generous and insightful contributions made by the many reviewers from the World Bank, including (in alphabetical order): Ajay Kumar (Consultant, IMNT1 ), Alejandro Hoyos Guerrero (Senior Transport Specialist, ILCT1), Ann Cecil Souhaid (Senior Transport Specialist, MNT1), Catalina Ochoa (Senior Urban Transport Specialist, IAET1), Fatima Arroyo Arroyo (Senior Urban transport Specialist, IAWT4), Frank Taillandier (Senior Urban Transport Specialist, IAWT3), Mustapha Benmaamar (Lead Transport Specialist, IAWT3), and Yonas Eliesikia Mchomvu (Senior Transport Specialist, IAET1). This report also received reviews and contribution from colleagues in the International Finance Corporation (IFC), including (in alphabetical order) Alda Rita Metrass (Investment Officer, CNGUP), Daniel Pulido (Senior Investment Officer, CNGUP), Jason Lee (Senior Investment Officer, CTAPH), and Pierre A. Pozzo di Borgo (Chief Industry Specialist, CN3S6). The World Bank’s Urban Mobility Global Solution Group (UMGSG) leads, Arturo Ardila Gomez (Lead Transport Economist, ITRGK) and Georges Bianco Darido (Lead Urban Transport Specialist, ITRGK) provided valuable advice and input on project scoping, implementation, and delivery. Pankaj Gupta (Chief Investment Officer, CUGDR, IFC) Jean-Francois Marteau (Country Manager, ECCKZ), and Transport Infrastructure Management and Financing GSG lead Daniel Benitez (Senior Transport Economist, ITRGK) provided useful instructions on the project development. The team benefited from in-depth interviews with key stakeholders in BRT projects in Cape Town and Dar es Salaam and would like to give special thanks to (in alphabetical order) Andre van Rensburg, Ernest Sass, Francois Meyer, Gilliard W. Ngewe, Patrick A.L. Mfugale, and Ronald M. Lwakatare for their generous support to the project. The report is co-funded by Public-Private Infrastructure Advisory Facility (PPIAF), the Africa Transport Policy Program (SSATP), and the Mobility and Logistics Multi Donor Trust Fund (MOLO). -iii- PPIAF is the only global facility dedicated to building institutions in developing countries that set the stage for private participation in infrastructure and enabling finance for subnational entities, by helping governments strengthen policies, regulations, and capacities. Established in 1987, SSATP is an international partnership that aims to ensure all Africans have access to safe, sustainable, and reliable transport systems. SSATP works in collaboration with its 42 African member countries, continental institutions such as the African Union Commission (AUC) and United Nations Economic Commission for Africa (UNECA), Regional Economic Communities (RECs), public and private sector organizations, and international development partners to address the main policy and capacity constraints to transport sector development in the region. SSATP’s Third Development Plan (DP3, spanning 2015-2021) is financed by the European Commission (EC) of the European Union, the Swiss State Secretariat for Economic Affairs (SECO), Agence Française de Développement (AFD), and the African Development Bank (AfDB), whose contributions are channeled through a multidonor trust fund administered by the World Bank. For more information, please visit: https://www.ssatp.org. MOLO is managed by the World Bank Group and supported by the governments of Switzerland (SECO), Germany (BMZ), Austria (BMF), and Poland (Ministry of Climate). -iv- Contents Acknowledgements........................................................................................................................................ iii Contents .......................................................................................................................................................... v Executive Summary ......................................................................................................................................... 1 1 | Introduction ...................................................................................................................................... 16 1.1 Overview ..................................................................................................................................... 16 1.2 Financial Sustainability and Commercial Viability Considerations .............................................. 17 1.3 Study Methodology and Report Layout ...................................................................................... 18 2 | Overview of BRT in Sub-Saharan Africa ............................................................................................. 21 2.1 Background ................................................................................................................................. 21 2.2 Overview of Selected BRT Initiatives ........................................................................................... 27 2.2.1 Accra ....................................................................................................................................... 27 2.2.2 South African Cities – Cape Town, George, Johannesburg ..................................................... 28 2.2.3 Dar Es Salaam.......................................................................................................................... 29 2.2.4 Lagos ....................................................................................................................................... 31 2.2.5 Addis Ababa ............................................................................................................................ 33 2.2.6 Dakar ....................................................................................................................................... 34 2.2.7 Luanda..................................................................................................................................... 37 2.2.8 Maputo ................................................................................................................................... 38 2.2.9 Windhoek ................................................................................................................................ 39 2.3 Financial Sustainability and Commercial Viability Challenges ..................................................... 40 2.3.1 Institutional Arrangements and Political Economy................................................................. 43 2.3.2 Legal and Regulatory Considerations ...................................................................................... 43 2.3.3 Contractual Arrangements...................................................................................................... 43 2.3.4 Paratransit Participation ......................................................................................................... 44 2.3.5 Business Model and System Design ........................................................................................ 44 3 | Case Studies ...................................................................................................................................... 48 3.1 Overview ..................................................................................................................................... 48 3.2 Stakeholder Engagement ............................................................................................................ 49 3.3 Cape Town ................................................................................................................................... 49 3.3.1 System Overview .................................................................................................................... 50 3.3.2 Stakeholder and Institutional Arrangements .......................................................................... 51 3.3.3 Legal and Regulatory Considerations ...................................................................................... 55 3.3.4 Contractual Arrangements...................................................................................................... 58 3.3.5 Paratransit Participation ......................................................................................................... 60 3.3.6 Commercial and Financial Aspects.......................................................................................... 63 -v- 3.3.7 Technical, Social, and Other Considerations ........................................................................... 69 3.4 George ......................................................................................................................................... 69 3.4.1 System Overview .................................................................................................................... 70 3.4.2 Stakeholder and Institutional Arrangements .......................................................................... 74 3.4.3 Legal and Regulatory Considerations ...................................................................................... 76 3.4.4 Contractual Arrangements...................................................................................................... 77 3.4.5 Paratransit Participation ......................................................................................................... 79 3.4.6 Commercial and Financial Aspects ......................................................................................... 79 3.4.7 Technical, Social, and Environmental Aspects ........................................................................ 81 3.5 Dar Es Salaam .............................................................................................................................. 82 3.5.1 System Overview .................................................................................................................... 82 3.5.2 Stakeholder and Institutional Arrangements .......................................................................... 85 3.5.3 Political Economy .................................................................................................................... 90 3.5.4 Legal and Regulatory Considerations ................................................................................... 91 3.5.5 Contractual Arrangements...................................................................................................... 92 3.5.6 Paratransit Participation ......................................................................................................... 94 3.5.7 Commercial and Financial Aspects.......................................................................................... 95 3.5.8 Technical, Social, and Environmental Aspects ........................................................................ 97 4 | Factors Influencing Financial Sustainability and Commercial Viability ............................................. 99 4.1 Fiscal Capacity ........................................................................................................................... 100 4.1.1 Insights From Case Study Cities ............................................................................................ 100 4.1.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities .................. 104 4.2 Legal and Regulatory Framework .............................................................................................. 110 4.2.1 Insights From Case Study Cities ............................................................................................ 110 4.2.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities .................. 113 4.3 Market Dynamics ...................................................................................................................... 116 4.3.1 Insights From Case Study Cities ............................................................................................ 117 4.3.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities .................. 120 4.4 System Design and Business Model .......................................................................................... 123 4.4.1 Insights From Case Study Cities ............................................................................................ 123 4.4.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities .................. 126 4.5 Policy and Political Will ............................................................................................................. 133 4.5.1 Insights From Case Study Cities ............................................................................................ 133 4.5.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities .................. 135 4.6 Institutional Capacity ................................................................................................................ 138 4.6.1 Insights From Case Study Cities ............................................................................................ 139 4.6.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities ................ 142 4.7 Incumbent Operators ................................................................................................................ 145 4.7.1 Insights From Case Study Cities ............................................................................................ 146 -vi- 4.7.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities .................. 149 4.8 Participation Model ................................................................................................................... 154 4.8.1 Insights From Case Study Cities ............................................................................................ 155 4.8.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities .................. 157 4.9 Adjacent Value .......................................................................................................................... 160 4.9.1 Insights From Case Study Cities ............................................................................................ 161 4.9.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities .................. 162 5 | Viability Assessment Tool ................................................................................................................ 167 5.1 Overview ................................................................................................................................... 167 5.2 Assessment Factors ................................................................................................................... 167 5.3 Tool Mechanics ......................................................................................................................... 174 5.3.1 Expansion .............................................................................................................................. 175 5.3.2 Limitations ............................................................................................................................ 175 5.4 User Guide ................................................................................................................................. 176 5.4.1 Financial Sustainability and Commercial Viability Scorecard ................................................ 176 5.4.2 Tool Utilization Examples ...................................................................................................... 177 References .................................................................................................................................................. 183 Public Transport Network and Operations Grants Frameworks ................................................................. 190 -vii- Executive Summary Introduction, Methodology and Structure of the Report 1 Rapid urbanization and urban population growth is placing increasing pressure on the transport systems of SSA cities. In response, major cities in the region have implemented or are in the process of implementing Bus Rapid Transit (BRT) systems, which is seen as an affordable way to address the mobility challenges. Based on current statistics for BRT projects 1 , the total length of BRT corridors under development in six SSA cities2is 342.55 km (including 141.4km under operation in four3 cities), with a total capital investment of US$ 1852.17 million. Two of these cities (i.e., Accra, Ghana and Lagos, Nigeria) have operational Quality Bus Services or BRT-Lite systems. 2 However, BRT implementation in operational cities in SSA has delivered mixed results, with several systems being faced with challenges with respect to their financial sustainability and commercial viability. These are often due to high upfront infrastructure costs and insufficient funding to maintain the desired quality of service. Private sector solutions have been explored to fill the financing gap, but the mobilization of private sector capital has been slow and difficult. Underlying factors for these difficulties include those related to the political economy, regulatory, institutional, technical, social and financial aspects of the project design. To enable a financially sustainable BRT system and mobilize private capital more efficiently, it is critical for SSA governments to have an in-depth understanding and comprehensive assessment of these factors to develop contextually appropriate, effective solutions. 1 Source: World Bank, ICR for Ghana Urban Transport Project (Report No: ICR00003821), January 26, 2017; World Bank, PAD for Dakar Bus Rapid Transit Pilot Project (Report No: PAD2209), May 4, 2017; World Bank, PAD for Dar es Salaam Urban Transport Improvement Project (Report No: PAD1464), February 14, 2017; Lagos bus rapid transit (BRT) system, Nigeria. Accessed here; Johannesburg, South Africa Case study. Accessed here; AfDB to finance Dar es Salaam BRT Phase 2, Tanzania. Accessed here. [Accessed September 2020]. Bus rapid transit in Africa presentation at UN Forum on Climate Change Mitigation, Fuel Efficiency and Sustainable Urban Transport, Seoul, Republic of Korea, 16 March 2010, by Lloyd Wright. Accessed here 2 Johannesburg (South Africa), Dar es Salaam (Tanzania), Lagos (Nigeria), Dakar (Senegal), Accra (Ghana) and Addis Ababa (Ethiopia) 3 Johannesburg (South Africa), Dar es Salaam (Tanzania), Lagos (Nigeria) and Accra (Ghana) -1- 3 This study aims to assist both public and private sector stakeholders to enhance the financial sustainability and commercial viability of bus rapid transit systems in SSA by: • identifying, framing and analyzing the key factors influencing the financial sustainability and commercial viability of SSA BRTs; and • developing a robust analytical tool to guide a high-level assessment of the factors influencing the financial sustainability and commercial viability of SSA BRT systems. 4 The study was conducted in five stages: 1) project inception, 2) desktop review, 3) stakeholder engagement, 4) factor identification and analysis, and 5) assessment tool development, as shown in Figure 1. Figure 1: Five Stages of the Study 5 Chapter 1 introduces the objectives and context of the project. Chapters 2 and 3 capture key findings for several major BRT initiatives, in particular in Cape Town (South Africa), George (South Africa), and Dar es Salaam (Tanzania), providing a basis for the characterization of challenges and factors that impact financial sustainability and commercial viability. Chapter 4 articulates nine fundamental factors and their associated key actions/recommendations to enhance BRTs’ financial sustainability and commercial viability. Finally, Chapter 5 provides a user guide for the Factor Assessment Tool that should be used by decision makers when exploring the possibility of developing BRTs as an urban mobility solution. -2- BRTs in SSA: Case Studies and Key Lessons Learned 6 The report reviewed BRT systems in nine cities and conducted a deep dive into three operational BRT systems: Cape Town, George and Dar Es Salaam. These systems were selected for their operational and geographic diversity and the relative maturity of their BRT systems, allowing for an analysis across more of the project life-cycle. Figure 2 summarizes active BRT projects in the region, categorized by the project development stage. 7 The analysis identifies the key challenges and lessons learned in financial sustainability and commercial viability in seven categories, namely a. System design High-specification system designs with heavy upfront capital cost and overestimated passenger demand leading to lower than expected revenue generation have resulted in low cost recovery on several BRT systems. b. Institutional setting and political economy The lack of dedicated and well capacitated public transport authorities and insufficient coordinated institutional support and political will has resulted in weak financial planning and short-sighted financial management of BRT systems. c. Legal and regulatory considerations The absence of an enabling legal and regulatory framework to support BRT implementation, private sector participation and managed coordination with incumbent operators has undermined the commercial viability of BRTs. d. Contractual arrangements Imbalanced risk and benefit allocation in contracts have put large fiscal pressures on government and provided little incentive for operators to improve service qual ity where gross cost contracts were used, and in the case of net-cost contracts has led to low levels of service and financially unsustainable operations. e. Paratransit participation Competition from paratransit operators and the fiscal burden of their integration with BRT services are barriers for BRT projects to achieve financial sustainability and commercial viability. f. Fare collection and financial performance has been affected by high levels of cash leakage, sub-optimal fare setting and adjustment regimes and insufficient consideration or robust planning for the coverage of longer-term operational and maintenance costs. -3- g. Social and environmental aspects Delays in land acquisition and the resettlement of affected businesses and residences escalates risks and costs for the project and has led to reluctance from the private sector to participate in projects at the early stage of BRT developments. Figure 2: Post-Concept BRT Projects in Sub-Saharan Africa -4- Factor Analysis and Recommendations to SSA Governments 8 This report identifies nine key factors impacting the financial sustainability and commercial viability of BRTs in SSA and provides recommendations to address these. The factors identified are: 1) the fiscal capacity of government, 2) the legal and regulatory frameworks, 3) market dynamics, 4) system and business model design, 5) policy choices and political will, 6) institutional capacity, 7) the treatment of incumbent operators, 8) private sector participation model, and 9) the exploitation of adjacent value opportunities. Under each factor, both SSA and international experiences were investigated. Fiscal Capacity 9 BRT projects always require robust, and often recurring, public financing support from the government. SSA BRTs’ case studies, combined with other international experience, underscore the importance of designing BRT systems within the bounds of longterm government fiscal capacity, including carefully coordinating public financial support needs with available financial support from development finance institutions. Key Actions to Promote Financial Sustainability and Commercial Viability • Government should have the fiscal capacity (balance sheet health, good track record of collaboration with donors/DFIs) to mobilize additional or alternative funding for the BRT system on practical terms as required. • Government should plan and/or implement mechanisms to mitigate against financial risk in the BRT system (such as guarantees on return for private sector investors, ring-fenced cash-flows to provide more certainty of return, currency hedging to minimize foreign exchange risk, etc). • Government should possess a successful financial track record in implementing and operating (including servicing financial commitments) large infrastructure projects of similar nature to the BRT system. • The necessary fiscal and fiduciary relationships and mechanisms should be in place between government stakeholders (e.g. to allow for the flow and governance of funds between city, provincial, and/or national entities) to facilitate effective, efficient, and sustainable project funding. • The local governments and central government should expand the funding resources for urban transport development such as fuel tax, parking -5- charges, and funding mechanism of land value capture. They should also consider dedicate financial resources to from central government through a development fund such as national urban transport fund/program in Mexico and Colombia to development of public transport, integrate land use and public transport development. • The central and local governments should consider establishing debt and contingent liability management system to enhance government liability planning and management. Legal and regulatory framework 10 The governing legal and regulatory framework is a primary enabler of BRT projects. Legal provisions and regulatory frameworks fundamentally influence BRTs’ institutional setup, including the role played by government, incumbent operators, and private sector partners. BRT projects can suffer from negative financial and commercial impacts, such as low private sector participation, low enforceability of concession contract’s obligations, high transactional cost, and poor integration of incumbents’ operators without a well-designed, clear, and effective legal and regulatory framework. Key Actions to Promote Financial Sustainability and Commercial Viability • A clear, organized, and efficient legal process must be in place for the arrangement of private sector participation in the BRT system. • The legal and regulatory provisions should be agnostic with respect to the nature, such as nationality, of the private sector participant (e.g. impartial and fair to an international participant). • The legal and regulatory framework should clearly stipulate requirements for the participation of incumbent operators and/or related affected stakeholders. • The city/country should have a successful regulatory track record in procuring, implementing, and sustaining private sector participation in large infrastructure projects of similar nature to a BRT system. • The legal and regulatory framework should enable the different options of contractual arrangements of PPP projects in public transport sector, allowing effective schemes for optimal risk allocation and investment return and considering sectoral context on demand risk and investment need. -6- • The legal and regulatory framework should clearly stipulate the requirements and responsibilities for government in implementing and operating a BRT system. • The broader business regulatory environment (e.g. key employment laws, tax obligations, investment protection regulations, foreign exchange controls, and etc) in the city/country should be conducive to efficient private sector participation (refer to the World Bank’s ‘Ease of Doing Business’ analysis). • The legal and regulatory framework should provide enforceable rights for private sector participants to secure/protect their investments (e.g. step- in rights). Market dynamics 11 A combination of transit demand and fares determines the revenue base upon which BRT projects are built, while trip patterns, bus technology choices, and operational needs define BRTs’ cost structure. The level of cost recovery achieved by each BRT is predicated upon the equilibrium, or lack thereof, of its revenue and cost. In this context, fare setting/level plays a vital role in achieving a BRT’s financial sustainability and commercial viability. There is a strong need to set fare at a level that can deliver both users’ acceptance (i.e., affordability) and optimal demand, while, at the same time, delivering a modicum of financial solvency to a BRT operator (i.e., with or without public upfront and/ongoing OPEX subsidies). Key Actions to Promote Financial Sustainability and Commercial Viability • The volumes and patterns of demand in the affected corridors and catchment areas of the BRT system should be sufficient (both currently and projected) to support high operational efficiency. • The BRT system should have sufficient capacity to optimally meet the expected demand. • The target market for the BRT system should be sufficiently willing and able to pay for services planned. • Modelling and market sounding should confidently indicate that the BRT system’s revenues and margins (underpinned by the above- mentioned demand, capacity, and willingness/ability to pay) would support and be attractive to private sector participation. • The BRT system fare levels should be dynamically adjusted, on an ongoing basis, to ensure the system can optimize the balance of profitability and affordability. -7- • Fare levels for the BRT system should not be controlled in a manner disconnected from market forces (e.g. increased operational costs). • Travel demand must be projected in a sound and credible manner, with full consideration for local context and experience of similar projects. System design and business model 12 A BRT’s system design and business model directly impact development and operational cost, revenue generation capacity, and the project’s ability to effectively integrate private sector participation. If the system design does not fit the local context (e.g., urban planning, mobility demand, climate condition, and integration with major transport modes, etc.), it often results in the project’s CAPEX and OPEX cost overruns. In addition, whether the BRT is a functional element of a larger public transport and urban planning exercise can impact its value for money. Key Actions to Promote Financial Sustainability and Commercial Viability • The BRT system design must consider the generation of regular operational profit over its lifecycle. • All BRT revenue opportunities (such as variable fares, advertising, leasing of shop space in stations or terminals and similar) should be comprehensively explored, and where suitable, developed and incorporated into the new BRT system’s business model. • The business model for the BRT system must be robustly and comprehensively stress-tested, and the underlying assumptions should be reasonable and defensible. • All direct and indirect risks to the BRT system in design, financing, implementation, operations, and maintenance (including environmental, climate, and social) must be identified, fully quantified/qualified, and appropriate mitigative actions put in place. • Competition (where relevant, such as from existing informal public transport providers, or private sector services) to the BRT system, and its impact on operational efficacy and commercial return, must be fully considered and factored into the design. • The consideration on mobilizing private sector investment should also be reflected in the system design and business model. • The BRT system should align with master strategies and planning for land use, mobility, and related development. • The projected outcomes of the BRT system business and financial model, specifically with regards to indicators around projected revenue -8- and costs over the lifecycle, should align with local and international BRT experience. • The design of the BRT system should be sufficiently flexible to allow for future expansion and changes as may be desired or required (e.g. to integrate with other modes of transport or upgrade with newer technology such as electric vehicles). • The BRT system must be clearly and comprehensively described in formal plans and related documents (such as a business plan, design plans, cost and financial models, environmental impact assessment, etc) to ensure all project information is captured and available to stakeholders. • Thesystemdesignandbusinessmodelneedtosystematicallyintegratethec onsiderations on the fiscal capacity, institutional capacity, market dynamics and the local political economy contexts. • There is a need to develop an integrated public transit plan and contracts to ensure proper coordination and performance of feeders. The government need to implement and enforce bans on informal transport providers and illegal use of BRT lanes. Policy and political will 13 Strong and continuous political support is fundamental to ensuring effective rollout of the BRT and interest from private operators/investors, local and foreign. Key Actions to Promote Financial Sustainability and Commercial Viability • Consensus and will amongst key government and related stakeholders (including at sub-national and national level governments, industry unions, existing transport operators, etc.) should exist to push the BRT project towards successful implementation and sustainable long-term operations. • Key stakeholders and their mandates and objectives should be clearly identified, and these should be consistent with the direction of the BRT system. • Over-arching city and country developmental policies and strategies should support and promote private sector participation in key projects such as the BRT system. • Strong and sustainable political support is essential to create a level playing field for private sector participation in BRT system. • Role-players such as unions, construction companies, vehicle manufacturers, existing transport operators, and similar, should wield -9- limited political influence over the project exigencies so as to have little long-term impact on the direction and success of the BRT system. • It is important to conduct early market soundings to gauge interest, identify key concerns and establish iterative dialogue processes with sponsors and lenders. • The government should explore support options from experienced transaction advisors and seek feedback early on from development finance institutions (DFIs) with respect to private sector financing. • The government needs to implement policies to discourage private vehicle use (e.g. taxes, congestion charges, circulation limits). Institutional capacity 14 Capable institutions can ensure that reasonable arrangements and monitoring processes are in place to improve BRT’s budget allocation, development, and construction activities and operations. Their proficiency in these matters reduces the risk of cost overruns. It also often optimizes the efficiency of any public subsidy scheme required to make a BRT project financially and commercially sustainable while bettering the chances of mobilizing the private sector’s financing and know-how. Key Actions to Promote Financial Sustainability and Commercial Viability • Appropriate institutional structures must be in place, defining and linking the roles of relevant government stakeholders (e.g. between national, provincial, local levels of government, and authorities overseeing public transport, roads, land, finance/treasury, BRT management agency, enforcement, etc.) to optimally implement and manage the new BRT system. • Government should have sufficient capacity and expertise to sustainably and successfully fulfil its role in the implementation and management of the new BRT system(e.g. in authorities overseeing urban and public transport, roads and infrastructure, land planning and development, policing and enforcement, finance, dedicated BRT management, and related). • Government should have sufficient capacity and expertise to sustainably and successfully facilitate and manage private sector participation in the new BRT system (e.g. a public-private partnership authority, BRT management agency). • An experienced and fully capacitated leadership/management cohort must be in place - a dedicated BRT management entity - with a clear -10- mandate to manage the implementation and operation of the new BRT system. • Effective plans and systems should be in place to retain and build government management capacity over the lifecycle of the new BRT system. • Government should have a track record of successfully delivering and managing large, multi-faceted, and multi-stakeholder flagship projects of similar nature and scale as the new BRT system. Incumbent operators 15 The integration of incumbent operators can have a significant impact on the financial sustainability and commercial viability of BRT projects (i.e., increase up- front CAPEX related to the professionalization of incumbent transport operators and compensation for the affected operators on the BRT routes). The involvement of incumbent and paratransit operators in BRT projects in SSA remains very challenging due to: i) the complexity of formalization processes, ii) the need to provide professional training to operators, and iii) compensation arrangements. Accordingly, there is a need to carry out a comprehensive diagnosis of incumbent operators’ risks and opportunities during the planning stages of BRT projects. Key Actions to Promote Financial Sustainability and Commercial Viability • Government should pay adequate attention to the impact of roll-out of the BRT system on current public transport providers, particularly in the informal sector, and be prepared to address the impact. • Existing public transport providers should not operate in competition with the BRT system. • An incumbent operator participation model, for partial or full integration into the BRT system, should be considered and be in place (where applicable). • Affected incumbent operators should generally be amenable to participation / integration into the BRT system. • It should be ensured that participation / integration of affected incumbent operators would have a minimal financial implication for the BRT system. • Government should have the plans, processes, structures, and funding (such as that to enable and oversee engagement and negotiations, business formalisation and capacitation, integration strategy, and operational performance) in place to sustainably support and manage -11- incumbent operator participation / integration over the BRT system lifecycle. Participation Model 16 The participation model directly determines the risk allocation and benefit sharing among the BRT’s stakeholders. Imbalanced risk allocation and benefit sharing among public and private stakeholders will lead to a lack of private sector participation, which will weaken the price discovery effect of the public-private partnership (PPP)model. Moreover, it will also exacerbate rent-seeking and contract breach risks when private sector participants accept unequal and unreasonable contractual arrangements. These issues will inevitably increase the transactional cost of BRT projects. Key Actions to Promote Financial Sustainability and Commercial Viability • Private sector participants in the new BRT system should be remunerated through some form (government payments and/or revenue) of guaranteed minimum income. • Up-front investment from private sector participants in the new BRT system should be a relatively low proportion of the overall total up- front cost of the project. • The level of return, or profit margin, on offer to private sector participants should be in line with typical market returns in comparable opportunities in more established markets. • The level of return on offer to private sector participants should provide government, third-party stakeholders (such as donors), and ultimately the public with value for money which is comparable to alternatives. • The governments and operators should explore feasible ways to reorganize the ownership of the BRT’s assets so as to encourage more effective market competition and improve the BRT’s operational performance. • The participation model should incorporate demand risk sharing in concessions (e.g., minimum revenue guarantee, availability payments). • For the first BRT corridor, it is preferable to bundle as many elements as possible to minimize interface risk and complexity in system and contract management. • The government should assess whether the incumbent operators have the financial strength to raise financing for the operations and infrastructure development, and be aware that this might be a market -12- constraint when deciding whether to impose a certain level of local operators’ participation among bidding consortia. • The government should consider strong technical and financial requirements in bidding documents that can be met with the participation of strong, experienced sponsors in consortiums with existing operators. Adjacent value 17 Considering the public goods nature of BRT services, the capture of adjacent value along the BRT corridors has a critical role in enhancing the project’s financial sustainability and commercial viability. The premise of adjacent value capture depends on the integration of urban planning, transit development, and economic activities. To date, leveraging adjacent value opportunities, particularly in the SSA context, has been limited due to complex land ownership arrangements and the high level of institutional capacity required to successfully monetize it. Key Actions to Promote Financial Sustainability and Commercial Viability • Opportunities to monetize the wider ecosystem created by BRT projects should be explored (e.g., land value capture through property development, data value capture through technology deployment, or green value capture through the rollout of renewable energy solutions). • If plans exist to bundle adjacent value opportunities into the implementation and operation of a BRT, then private sector participation model(s) to be employed should designed to facilitate and optimize such bundling. Assessment Tool for BRT Financial Sustainability and Commercial Viability 18 Based on the findings and conclusions of the factor analysis, a high-level tool has been developed using Microsoft Excel for planners, decision-makers, donors, and other stakeholders to guide the assessment of the key factors impacting the commercial viability of SSA BRT systems, particularly with respect to 1) attracting private sector participation/investment, and 2) sustaining private sector participation/investment. -13- 19 The assessment tool accompanies this report, “Enhancing Financial Sustainability and Commercial Viability of BRTs in Sub-Saharan African (SSA)”. The report provides the explanations and details of the terms, the analytical context, methodology, an overview of SSA BRT systems, in-depth case studies, and the factor identification and analysis as essential references for the use of this tool. 20 This assessment tool, together with the report, provides guidance for users to assess the key factors affecting the financial sustainability and commercial viability of BRTs in SSA in a systematic framework. In addition, this tool is also able to guide the users to diagnose the core issues impacting the operational performance of existing BRTs and the roll-out of new BRTs, as well as to begin to design solutions to address these issues in the SSA context. 21 The Excel-based tool comprises a number of detailed questions based on the nine key financial sustainability and commercial viability factors articulated in this report, including 1) fiscal capacity, 2) legal and regulatory framework, 3) market dynamics, 4) system design and business model, 5) policy and political will, 6) institutional capacity, 7) participation model, 8) incumbent operators, and 9) adjacent value. 22 The assessment results are communicated using a comprehensive scorecard and utilizing a traffic light indicator (red – yellow – green), representing the impact of a specific question or factor on the financial sustainability and commercial viability of the system. Using the question and factor ratings, an overall system financial sustainability and commercial viability score is also provided, using the same red – yellow – green modality. Within the bounds of the factors assessed in this model, a green rating indicates a system which is likely to be commercially viable and sustainable, while a red rating indicates a system that will require significant work in several areas for it to have a chance of becoming financial sustainable and commercially viable. 23 The scorecard provides the user with guidance on the overall conceptual financial sustainability and commercial viability of the bus rapid transit system in question, as well as specific areas of strength and weakness in this regard. This allows the user to quickly pinpoint elements of the system which require attention. 24 Given the diverse contexts of countries in the SSA, this tool is designed to be applicable after a BRT concept is conceived as an urban mobility solution, and to a wide variety of possible BRT and BRT-Lite scenarios with capacity for adjustment and expansion. In addition, the ’Answer Justification’ column is intended to require the users of the tool to provide some rationale and evidence of their input. This not only -14- allows the users and the evaluators to validate the inputs and outputs, more importantly, it assists them with identifying key challenges in their local context that can inform the selection of an appropriate configuration of features in the BRT system they are planning. -15- 1 | Introduction 1.1 Overview 25 Many cities in Sub-Saharan Africa (SSA) are experiencing substantial economic and population growth, placing increasing pressure on insufficient transport infrastructure and services. These cities experience congestion and excessively long travel times on overcrowded and unsafe services, and ultimately limited access to economic and social opportunities. These growing mobility challenges are constraining socio-economic development and resulting in increasing emissions. There is an urgent need to tackle public transport challenges across the African continent. 26 Some SSA cities are in the process of designing, planning or implementing Bus Rapid Transit (BRT) systems. As a core consideration, these cities are seeking guidance on how to better enable BRT projects and mass transit improvement initiatives more broadly through more effective, efficient, and sustainable funding and financing. However, BRT systems are typically infrastructure intensive and provide operationally complex services over long system design lifespans in challenging environments. As a result, such systems incur significant costs not only in infrastructure development, but also in ongoing operations and maintenance. 27 There are vastly different contexts across SSA in terms of access to funding for upfront capital costs and ongoing operational costs, as well as expertise and capacity in relation to the implementation and operation of BRT systems. It is becoming increasingly clear that capital, operational, and maintenance funding sourced from fare revenue and the public fiscus is often insufficient to ensure the effective delivery and long-term sustainability of these systems. In addition, in many cases there is a general lack of consideration and legal agreement to ensure that there is adequate long-term funding for operations and maintenance in comparison to the upfront funding for the capital investment need. 28 Enhancing financial sustainability and commercial viability of African BRT initiatives has therefore become a key area of focus for governments in SSA and their development partners, as they look to leverage private capital and technical expertise to facilitate the development and operation of BRT systems. The purpose of this study is to assist the public and private sector participants to enhance the commercial sustainability and viability of BRT systems in SSA by: - 16- • Identifying, framing and analyzing the key factors influencing financial sustainability and commercial viability, and private sector risk sharing for typical SSA BRT systems; and • Developing a high-level but robust analytical tool to assess the factors influencing the financial sustainability and commercial viability of BRT systems. 1.2 Financial Sustainability and Commercial Viability Considerations 29 The financial sustainability and commercial viability of BRT systems are critical issues in the design, development and operation of such systems. Although the two terms are closely related and referred to throughout this document, there are important distinctions, especially in the context of this study, summarized below. Definition of financial sustainability and commercial viability • A public transport system is financially sustainable when the costs of implementing and operating the full network envisaged of system can be covered by the revenue streams and available funding sources. The extent to which the government has the fiscal capacity to meet its financial responsibilities towards the project is a key determinant of whether a public transport system is financially sustainable. • A public transport system is commercially viable if the system generates sufficient financial returna to make participation worthwhile by external investors. The extent of private sector interest and investment will generally be determined by the extent to which the market is confident that this return will be realized. It is important to note that, for a BRT system to be commercially viable, it must also be financially sustainable. However, a financially sustainable system may not necessarily be commercially viable. aFinancial return is the profit made by the investor on their investment. - 17- 30 While participants 4 have shown interest in BRT systems in SSA, these projects typically have not demonstrated sufficient ‘bankability’ 5 to attract any significant market based private sector participation. This is often a result of project planners not fully understanding or accounting for the various factors that influence commercial viability, especially from a commercial risk-sharing perspective. It is therefore important for African BRT role-players to develop a more nuanced understanding of the key factors and issues affecting the financial sustainability and commercial viability of BRT systems. 31 This study provides a suite of widely applicable and practical recommendations to SSA national and city governments on how the sustainability and viability of ongoing and future BRT projects can be improved through design and implementation to motivate for the participation of the private sectors. Three case studies of operational BRT systems in SSA: Cape Town (South Africa), George (South Africa) and Dar es Salaam (Tanzania) underpin this study and the identification and characterization of the key financial sustainability and commercial viability factors. 32 This report is accompanied by a Microsoft Excel-based viability assessment tool that can be used by decision-makers to assess the likely financial sustainability and commercial viability of a BRT project. The tool highlights the keys factors and elements that should be addressed to improve the financial sustainability and commercial viability of BRT systems as well as the prospect of private sector investment. 1.3 Study Methodology and Report Layout 33 The scope of this study consists of five core stages as follows: 34 Stage 1 is the project inception during which the case study cities are confirmed, and the overall approach to the factor analysis and the design of the sustainability and viability assessment tool are developed. 35 Stage 2 is the desktop review. This stage included a high-level review of relevant literature to identify the underlying issues, challenges and opportunities 4 In the context of this report, private participants mainly include private investors and operators that assume some level of financial and operational risk in a BRT system. Operational services, in particular operations of the bus fleet, is the most common entry point for private entities into BRT systems, and therefore ‘operators’ are referred to extensively in this report. 5 “Bankability” can be defined as the ability to obtain financing from commercial banks. It also can be described at the point at which financiers or investors are willing to lend to or invest in a project. To reach this point, financiers must have sufficient confidence in the feasibility, viability, and readiness of the venture to commit investment. - 18- related to the financial sustainability and commercial viability of BRTs in SSA. The review focuses on characterizing the three case study systems and is informed by various source materials, including business and operational plans, system designs, financial models, contracts, funding agreements and operational reports. 36 The focus of the desktop review is to understand the system in each city to assess the core challenges and opportunities with regards to financial sustainability and commercial viability across different contexts. Through this process, a set of theoretical factors are identified to be confirmed and analyzed in the next stages of the study. 37 The desktop review aims to provide a robust base for the development of the case studies and it assists with identifying the data and information gaps which needed to be addressed through the stakeholder engagement process. The objectives and plans for engagement are also developed during this stage, including arranging key meetings. 38 Stage3 engages with key stakeholders in the case study cities. Having established a baseline understanding for each city, on-site engagements are undertaken with identified stakeholders to address remaining information gaps and to test the theoretical factors identified through the desktop review. Semi- structured interviews are used with questions prepared ahead of time by the project team. Engagement with stakeholders helps to develop a more detailed understanding of the emerging factors and their significance across different contexts. At this stage, the framework for factor identification and analysis is initially constructed. 39 The case studies in Stage 2 and 3 presented in this report are not intended to be the examples of good or bad practice. Instead, every example offers lessons that can be studied and learned from and that may present similarities to other contexts where BRT projects are being considered. 40 Stage 4 covers the identification and analysis of the factors. Based on the desktop review and the outcomes from the stakeholder engagements, the factors informing financial sustainability and commercial viability are diagnosed, defined, and mapped in a factor analysis framework. This includes a factor definition, a characterization of each factor in relation to the case studies, key implications for each factor, and a summary of core lessons to promote financial sustainability and commercial viability within the context of that factor. 41 Stage5 develops the financial sustainability and commercial viability assessment tool. In the final stage, a practical high-level analytical tool is developed - 19- based on the factor identification and analysis to assess the financial sustainability and commercial viability of SSA BRT systems. • The financial sustainability and commercial viability tool enables a ranked scoring to be developed for each factor and the overall system, enabling users to assess the factors that have impacts on the financial sustainability and commercial viability of BRT projects. • Theviabilitytoolisintendedforusebycountryandsub- nationalgovernmentsplanners and decision-makers, World Bank Task Team Leads, implementing agents, and broader sector practitioners. • A user guide is developed to explain the functionality of the financial sustainability and commercial viability tool for relevant stakeholders. • The viability tool is modular and can be expanded with additional information. 42 The outcomes of these study stages are captured in this report, and the accompanying Excel-based financial sustainability and commercial viability assessment tool. 43 Chapter 2 captures high-level findings from the desktop review of several major BRT initiatives across sub-Saharan Africa, including the case study cities. These initial findings provide a basis for the detailed case studies and identification and characterization of factors impacting on financial sustainability and commercial viability. 44 Chapter 3 expands on the early findings captured in Chapter 2 in the three case study cities, including Cape Town, George, and Dar es Salaam. The objective of the case studies is to unpack and analyze system characteristics and challenges. 45 Chapter 4 utilizes the findings of the case studies in Chapter 3 to articulate and characterize a number of fundamental factors that influence financial sustainability and commercial viability of sub-Saharan Africa BRT systems. Drawing from the case studies, a number of implications are analyzed and considerations are proposed to guide BRT participants in investing, developing and operating more financially sustainable and commercially viable BRT systems. 46 Chapter 5 describes and provides utilization guidance for the Financial Sustainability and Commercial Viability Assessment Tool accompanying this report. The tool is developed as a starting point for key stakeholders to make a simple determination of the financial sustainability and commercial viability of SSA BRT systems, particularly with respect to attracting and sustaining private sector participation and investment. - 20- 2 | Overview of BRT in Sub- Saharan Africa 2.1 Background 47 SSA is one of the world’s most rapidly urbanizing regions. The urban population is approaching 500 million and is expected to double over the next 20 years. The development and expansion of cities has proceeded rapidly, driven by the fast growth of the population, while individual household wealth has not kept pace. Amongst the challenges faced by SSA cities are that 1) much of the growth in SSA’s cities has been unstructured and much of the urban employment growth is in the “informal” sector; 2) the growing urban sprawl increases the pressure on the transport system while planning for public transport and land development lacks integration; 3) the public transport sector is a source of employment for many who can earn a living without much formal training or education; 4) shifting political economies has adversely affected effective and sustainable development of public transport systems. 48 In order to improve the development pace and quality of public transport systems, there is a need to enhance the institutional capacity of the relevant government agencies, to strengthen policy-making, and to integrate land use and transport planning. Moreover, the considerations made when planning public transport needs to take account of the informal public transport sector to ensure that the transport system design is compatible with the local context. 49 BRT was originally positioned as a panacea to the public transport issues faced by cities with promises of a system that would cover its operating costs with system revenue. All across SSA, it has been viewed by decision-makers a relatively affordable way of improving public transport quickly and addressing some of the key transport challenges facing cities in the region. However, the roll-out of BRT in SSA has been beset by several challenges, such as high upfront costs for infrastructure and difficulties ensuring sufficient funding to maintain operation of services over the long-term. With many lessons learned to date, it is now clear that successful implementation and sustainable operation of BRT is more complex than originally claimed by its proponents. -21 - Figure 2.1: Post-Concept BRT Projects in Sub-Saharan Africa 50 Several SSA cities are implementing BRT or ‘BRT-Lite’6 at various stages of development. A few cities such as Lagos (Nigeria), Dar es Salaam (Tanzania) along with several South African cities, including Cape Town, George and Johannesburg have operational systems, while others are at various stages of planning or construction. A summary of active BRT projects in the region is provided in Figure 2.17, categorized by cities with operational BRT systems, and those with systems in planning or implementation stages. 6 ”BRT-Lite” systems are those which adopt many high-quality characteristics of typical BRT systems, but in a less infrastructure-intensive manner. They can be considered to sit somewhere between the lower specifications of typical bus services found in SSA cities and high specifications of full BRT systems such as Cape Town’s MyCiTi, Dar es Salaam’s DART, and Bogotá’s TransMilenio. However, there is no formal range of specifications that stipulate if a system is or isn’t “BRT -Lite,” nor is the term formally or academically recognized. In an SSA context, the term “BRT-Lite” was first coined for the Lagos BRT-Lite system. The George system, one of this report’s case studies, could be considered a BRT-Lite system. 7 Does not include all the BRT initiatives in development in South Africa due to space constraints. There are active BRT or BRT-Lite projects in 13 South African cities. - -22 - 51 This chapter provides an overview of several BRT systems across SSA to date, as well as a high-level perspective on the emerging challenges faced by these systems from the viewpoint of financial sustainability and commercial viability. The selection of systems and cities explored are summarized and sorted by implementation status in Table 2.1, covering a range of projects and implementation scenarios in operational, late, and early planning stages and including some systems where development has been paused or suspended. -23 - City Status Overview Daily Pax Private Sector Funding Financing Participation Accra Operational • Quality bus service • 221,000 • Service operated by • Infrastructure: • Infrastructure: (Ghana) implemented company formed Government World Bank, from paratransit • O&M: Fares French union Development Agency (AFD) • Rolling stock: Government + private sector Cape Town Operational • Phase 1 • 64,000 • Service operated by • Infrastructure: • N.A. (South Africa) operational (Phase 1) several companies Government • Phase 2A in formed from • Rolling stock: development incumbent bus and Government paratransit operators • O&M: Fares + Government Dar es Salaam Operational • Phase 1 • Interim • Service operated by • Infrastructure: • Infrastructure: (Tanzania) operational Phase , incumbent bus Government World Bank (interim basis) 160,000- operator, with • Rolling stock: (Phases 1, 3 & 4) • Additional phases 185,000 participation of Private sector + African in development • Full Phase paratransit • O&M: Fares Development 400,000 • Procurement of Bank (Phase 2) additional operators ongoing George Operational • Three phases • 13,000 • Service operated by • Infrastructure: • N.A (South Africa) operational company formed Government • Fourth phase in from incumbent bus • Rolling stock: development and paratransit Government operators • O&M: Fares + -24 - Government Lagos Operational • Phase 1 and • 360,000 • Service was originally • Infrastructure: • Infrastructure: (Nigeria) extension (est.) operated by company Government World World Bank + AFD operational formed from Bank, AFD • Rolling stock: paratransit union • Rolling stock: Private sector • Additional 36 Private sector franchisees added • O&M: Fares • All franchise agreements then cancelled, and contract awarded to single private sector company Johannesburg Operational • Phase 1A and 1B • 50,000 • Service operated by • Infrastructure: • N.A. (South Africa) operational several companies Government • Phase 1C in formed from • Rolling stock: development incumbent bus and Government paratransit operators • O&M: Fare + Government Addis Ababa Late-stage • Corridor B2 in • 100,000 • None • Infrastructure: • Infrastructure: (Ethiopia) planning / development (est.) Government + AFD AFD implementation • Rolling stock: • Rolling stock: AFD Government + AFD • O&M: Fares (TBC) -25 - Dakar Late-stage • BRT Red Line • 300,000 • Proposed public- • Infrastructure: • Infrastructure: (Senegal) planning / (phase 1) in (est.) private partnership Government World Bank, implementation development (PPP) for bus • Rolling stock: European provision and Private sector Investment Bank operations, with • O&M: Fares • Rolling stock: involvement of local Private sector operators as shareholders Luanda Early-stage • Development • 5,000 • N/A • Infrastructure: • Infrastructure: (Angola) planning / paused/suspended passenger/ Government + Brazilian implementation hour/direc Brazilian Development tion Development Bank Bank • Rolling stock: N/A • O&M: N/A Maputo Early-stage • Development • 166,000 • N/A • Infrastructure: • Infrastructure: (Mozambique) planning / paused/suspended (exp.) Government + Brazilian implementation Brazilian Development Development Bank Bank • Rolling stock: N/A • O&M: N/A Windhoek Early-stage • Development • N/A • N/A • Infrastructure: • Infrastructure: (Namibia) planning / paused/suspended Government + German Agency implementation • Shift in focus away German Agency for for International from BRT toward International Cooperation bus reform Cooperation • Rolling stock: N/A • O&M: N/A -26 - 2.2 Overview of Selected BRT Initiatives 2.2.1 Accra 52 BRT in Accra is part of the Ghana Urban Transport Project supported by the World Bank and French Development Agency (AFD). The planned BRT corridor has not been completed or operationalized, instead, a Quality Bus Service 8 was launched on a separate corridor. A BRT Master Plan was completed in 2005 and included provision for eight corridors as shown in Figure 2.2. Figure 2.2: Accra’s BRT Master Plan (DHV, 2005) 53 Kasoa Corridor, running north-west from the central business district, was selected as the first corridor for implementation. However, the Kasoa Corridor was placed on hold and the overall project was restructured towards high-quality bus services (Amasaman Corridor) due to several factors. Primarily, this included limited progress in the establishment of the institutional structures and capacity necessary to plan and regulate public transport and a lack of agreement with private sector bus operators to provide planned services. In addition, the proposed 8 The high-quality bus services (known as ‘Type B’ in Accra) deployed in Accra were derived from a BRT design and utilise a number of infrastructure improvements, such as new or widened roads, improved junctions, and ‘queue jump’ priority interventions. -27 - quality bus system saw substantial cost increases following several design reviews, which necessitated an overall re-evaluation of the way forward. 54 The restructuring shifted the focus of the project towards the development of institutions, updating the regulatory environment, engagement with existing operators and the deployment of quality bus services along alternative corridors, at the expense of Kasoa. As part of this process, three companies were established from the three main operating unions in the City. Quality bus services have since commenced operations but have experienced significant issues, such as a suspension of services due to financial and operational issues and the procurement and deployment of an unsuitable bus fleet. Moreover, the government decided at the last minute to procure 250 buses from Scania for the project, at a cost that was more than three times what was budgeted in the business model. The procurement was opaque and not competitive, and the business model was not disclosed. 55 From a financial sustainability and commercial viability perspective, the key challenges to the development of BRT in Accra were the institutional constraints, a lack of political will and a lack of consolidated support for BRT. This included a lack of support and resources for the Greater Accra Passenger Transport Executive, which was established to implement and manage public transport initiatives, including BRT, and a lack of coordination between the three ministries involved in the project. This lack of support led to cost over-runs and implementation challenges, adversely impacting the sustainability and viability of the initiative. 2.2.2 South African Cities – Cape Town, George, Johannesburg 56 South Africa is relatively advanced in its implementation of BRT projects when compared to many of its SSA contemporaries. With the support of significant funding from National Government, 13 of the country’s largest cities have ongoing BRT or BRT-Lite projects. To date, services are operational in Cape Town, George, Johannesburg, Tshwane, with pilot services operating in Nelson Mandela Bay and Ekhuruleni. In all cases, the services are provided exclusively by newly established companies formed from incumbent bus and paratransit minibus taxi operators. The systems in Cape Town, Johannesburg, Tshwane, Nelson Mandela Bay and Ekhuruleni are full BRT, with dedicated rights-of-way and raised, closed median stations. The system in George, on the other hand, is more akin to a Quality Bus Service or BRT-Lite, with services adopting some of the features of full BRT systems, but with bus vehicles operating in mixed traffic and stopping kerbside. 57 Given the number of BRT systems operating or under development in South Africa, there are several insights which can be drawn to inform factors impacting on BRT financial sustainability and commercial viability. A key feature of the South -28 - African systems is that they require a high level of upfront and ongoing government subsidy, given the high-specification service design of the initial phases and sub- optimal demand patterns, mainly resulting from the dispersed urban forms. The financial performance of these systems has been much worse than originally envisaged. As such, significant attention is now being given to modifying the system design to improve long-term sustainability and value-for-money, including the exploration of opportunities to generate additional revenue through initiatives such as land-value capture. Another insight from the South African context is the cost and complexity of paratransit formalization and the inclusion of paratransit operators in the running of BRT operations, which has proven to be one of the most challenging and resource-intensive aspects of implementation. 58 In light of these challenges, the pace of implementation has been slower than expected. However, South Africa’s clear legal and policy framework, strong political will and the relatively high level of institutional and fiscal capacity are the key features which have contributed positively to the implementation of first-phase BRT routes in several cities across the country. 2.2.3 Dar Es Salaam 59 The Dar es Salaam Rapid Transit (DART) project comprises six phases, consisting of six major corridors in the City. Phase 1 has been partially operational since 2016, covering the main Morogoro Road and the two branches of Magomeni- Morocco and Fire Kariakoo. During this first interim phase, the ridership along the line reached approximately 294,000 passengers per day. When fully operational, Phase 1 is expected to carry over 400,000 passengers per day with the deployment of a total bus fleet of 177, eighteen meter trunk buses with a capacity of 150 passengers and 128 twelve-meter feeder buses with a capacity of 80 passengers. -29 - Figure 2.3: DART BRT Phase 1 (World Bank, 2018) 60 The BRT operation is overseen by the Dar Rapid Transit (DART) Agency which was established to oversee BRT implementation and operations, and the service is provided by Usafiri Dar es Salaam Rapid Transit (UDA-RT) under contract with the DART Agency. UDA-RT is a special purpose company formed by UDA and the two Daladala associations, the Dar es Salaam Commuter Bus Owners Association and the Association of Passenger Transporters in Dar es Salaam (”Umoja wa Wasafirishaji Abiria Dar es Salaam” – UWADAR) for the provision of interim services. 61 The implementation of the DART BRT service has experienced some challenges affecting the system’s financial sustainability and commercial viability. While the construction of infrastructure has been relatively successful, issues have been experienced with regards to the procurement of a private sector operator, political interference in the selection of the operator, insufficient institutional capacity, difficulties with paratransit integration and a lack of stakeholder alignment on key issues such as fare levels and subsidy. Governance challenges have also impacted BRT delivery and hence also its overall sustainability and viability. Responsibilities for BRT-related oversight are fragmented as is evident in the DART Agency’s lack of regulatory empowerment on issues such as license issuance and its inability to set fares (DART Agency, 2019). -30 - 2.2.4 Lagos 62 In Lagos there are currently two phases of BRT services operational. Under the auspices of the Lagos Metropolitan Transport Authority (LAMATA), the first phase of the city’s BRT system (a BRT-Lite service) has been operating since 2008, using 220 buses to move more than 200,000 passengers daily over a 22 km stretch. The route for this service is highlighted in Figure 2.4 below. 63 BRT-Lite is a lower-cost approach to BRT implementation, with limited upgrades to the road infrastructure, open stations, kerbside boarding, a cost- effective bus fleet and no control centre. The intent of this approach was to keep establishment and operating costs low. This was implemented with support from the World Bank and other development institutions (Mobereola, 2009). With the support of the World Bank and the French Development Agency, the second BRT project, a 13.5km extension of the existing service along the Mile 12 – Ikorodu corridor, is also operational and is planned to transport 160,000 additional passengers daily with 265 buses. This extension was designed with a higher specification than the original BRT-Lite. 64 The services are operated under franchise by a paratransit cooperative established by the National Union of Road Transport Workers (NURTW), with part of the vehicle fleet financed by a loan taken out by the cooperative. The services initially operated at a profit due to favourable demand patterns and low operating costs, which allowed the operator to quickly pay back the vehicle loans. However, a focus on short-term profits resulted in issues such as insufficient maintenance of the buses and profitability and service quality has subsequently declined overtime. Eventually, provision was made for additional private franchisees to operate the service and up to 36 additional franchise agreements were put in place to supplement the service provided by the NURTW cooperative. In 2016, LAMATA abruptly canceled these contracts, claiming that the operators were not meeting the terms of the franchise agreements and awarded the exclusive right to provide BRT services to a private company (AutoJosh, 2017). -31 - Figure 2.4: Mile 12 BRT (BRT-Lite) Route (Lagos Metropolitan Area Transport Authority, 2009) 65 Several key insights emerge from the implementation of BRT and BRT-lite in Lagos as potential factors in the promotion of financial sustainability and commercial viability of a BRT system. These include the importance of a capacitated institution to perform its functions and oversee the operation of private entities, the need for good governance and proper business management by private sector partners, especially those formed from incumbent paratransit operators, and the feasibility of operating a profitable service. -32 - 2.2.5 Addis Ababa 66 A BRT system has been in planning and development in Ethiopia’s capital, Addis Ababa for more than a decade. The city’s public transport plan, as highlighted in Figure 2.5, includes BRT and light rail corridors. The first corridor B2 is under construction, which was designed to carry 100,000 passengers per day and scheduled to commence opera- Figure 2.5: Addis Ababa’s proposed mass transit corridors (French Development Agency, 2010) tions in 2016, later postponed to 2019. The delivery of BRT has since been delayed further. The project is being implemented with the support of the French Development Agency, with a loan of approximately US$92m. The 16km north-south line is planned to be operated with 40 buses. Corridors B4 and B7 are set to follow. 67 The BRT program in Addis Ababa has experienced challenges with regards to institutional oversight and capacity constraints. This has already substantially delayed implementation and will ultimately impact on financial sustainability and commercial viability. Initially, the city did not have a dedicated agency or authority to oversee integrated public transport and the capacity with the Addis Ababa Road and Transport Bureau to manage planning and design was limited. Moreover, inadequate legal and regulatory enforcement of informal public transport operators and limited overall traffic management impacted on the effectiveness of formalized public transport services. -33 - 68 In addition, Ethiopian authorities strongly favor state provision of services, such as public transport thereby limiting the scope for private sector participation and investment and affecting the commercial viability of the BRT system. In response, the Addis Ababa Road and Transport Bureau underwent an organizational restructuring process in 2015, which also resulted in the establishment of three autonomous entities, including the Traffic Management Agency, the Public and Freight Transport Authority, and the Drivers and Vehicles Inspection and Control Authority. 2.2.6 Dakar 69 The phase 1 BRT service, known as the Red Line, is currently under development in Dakar, the capital of Senegal. The project originated from a two- phase mass public transport contextualization study that was conducted in 2014- 15, under the auspices of Conseil Exécutif des Transports Urbains de Dakar (CETUD), the Greater Dakar transport authority. The BRT Red Line will be 18.3km in length, connecting the central business district with the densely populated northern suburb of Dakar, shown in Figure 2.6. Figure 2.6: Dakar’s BRT - Red Line (CETUD, 2016) -34 - 70 The main challenge for the Dakar BRT system plan is that the dispersed bipolar urbanization spatial configuration places a strain on the market dynamics because of the imbalanced transport demand. The service is planned to transport 300,000 passengers per day. The objective is for the service to be operated by the private sector, who will also be responsible for procuring the bus fleet, and the service is expected to be commercially viable without operating subsidy. Local operators will also be given the opportunity to become shareholders in the operating company. The project is supported by the World Bank and the European Investment Bank and has a total cost of US$426m (World Bank, 2017). 71 In terms of financial sustainability and commercial viability, the key insights from the implementation of BRT in Dakar include the strong political support, conducive legal environment to the implementation of public-private partnerships, the institutional capacity to design and manage the BRT, and the existing basis for the integration of the paratransit operators. 72 Over the last ten 10 years, the Government of Senegal has made concerted efforts to introduce and promote PPP for the country’s infrastructure development. In addition, the Government of Senegal has established a Ministry of Investment Promotion and Partnership, a National PPP Committee, and a PPP Unit. Transportation is seen as a target area for PPPs, and there is a relatively good track record of urban transport projects with private sector participation, such as Dakar highway, Port of Dakar and the rail network. 73 Strong and continuous political support and commitment are also conducive to the roll-out of the Dakar BRT. The project was identified in 2015 as the only transport project to reduce greenhouse gas emissions in the NDC (Nationally Determined Contributions) of the Paris Agreement by the Government of Senegal and is championed at the presidential level since then. Benefiting from the strong government support, the decision-making process by the Minister of Transport and the Transport Authority was efficient and contributed to the smooth preparation of the project (World Bank, 2017). 74 The establishment of the CETUD in 1997 and its empowerment since that date has substantially helped strengthen the institutional capacity to design and manage a mass transit system. CETUD is indeed responsible for the planning and coordination of different modes of transport, the implementation of action plans and investments to improve traffic, road safety and the conditions and quality of the public transport fleet. Before launching the BRT system, CETUD has been engaged with local operators in a 15-year long and still ongoing program for the renewal of the 1607 vehicles from the minibus fleets. In addition, the CETUD in -35 - coordination with local authorities also integrated the design of the BRT infrastructure and service to the city planning, which enhanced sustainability and operational feasibility of the BRT systems from the perspective of urban planning 75 Daka’s ongoing bus renewal scheme and the professionalization of the informal public transport sector provided the basis for the integration and corporatization of paratransit stakeholders. Originally proposed to improve the bus service standards, the bus renewal scheme focused on encouraging paratransit operators’ consolidation, generating an improved system of route allocation, providing fleet management training to the paratransit operators and facilitating access to funding for the purchase of new vehicles. Minibus operators were required to form economic interest groups in order to receive a lump sum intended for the purchase of new minibuses and would be responsible for the loan repayment. Consequently, informal operators such as Cars Rapides and Ndiaga Ndiaye are gradually phased out, transforming into more formal private operators gathered into the Urban Transport Financing Group (Association de Financement des Transports Urbains; AFTU). 76 Through the bus renewal scheme and professionalization procedures, the operational capacity and the professional level of the minibus operators are significantly improved, lowering the barriers for their involvement in the BRT operations as feeder operators to the main corridor. Currently, the BRT routes are indeed operated by the AFTU’s operators and the state-owned bus company, Dakar Demm Dikk (DDD). The network will be restructured around the main corridor in a trunk feeder closed BRT system. 77 Dakar also provides pragmatic experiences on the engagement with local operators throughout the process of design of the business model and infrastructure system. The Dakar BRT project design and preparation are based on a consultative processes and stakeholder engagement at several levels, notably relying on a 20-year dialogue between the transport authority and local transport operators. Representatives of the National Government of Senegal, city authorities, local government officials, public transport operators, informal operators and local communities along the BRT corridor were the key stakeholders consulted during the preparation of the project. Based on the stakeholder engagement, the Dakar BRT designed a mitigation plan, which includes permanent communication and citizen engagement activities during all the project stages, the involvement of local paratransit operators in BRT system operations through the provision of feeder services, and participation in the capital of the private BRT operator. -36 - 2.2.7 Luanda 78 A total of seven BRT Lots were conceptualized as part of the Luanda Metropolitan Master Plan, with Lots 1, 2 and 3 planned to an advanced stage. A graphical overview of these Lots is provided in Figure 2.7, highlighting three locations, the Luanda central business district, main highway and ring road. Figure 2.7: Luanda BRT Lots 1, 2 & 3 79 Lot 3, a 12 km section of segregated BRT lane serving the high-priority central corridor from Kilamba to Viana, is the first to commence development and designed to transport approximately 5,000 passengers per hour in both directions when complete. Construction commenced in 2014 with operations initially scheduled to begin in 2017. However, the project was suspended due to corruption issues involving engineering company, and the project has come to a halt. 80 The case of Luanda highlights the significant risk of weak project governance and its significant impact on a project’s sustainability and viability. In this case, the future of Luanda’s BRT system is unclear, despite substantial expenditure on the already completed infrastructure. This emphasizes the critical need for robust governance to oversee BRT development from the beginning of the process. -37 - 2.2.8 Maputo 81 A BRT network is conceived as part of Maputo’s Master Plan and the corridor linking the Maputo central business district (CBD) to Magoanine is identified as a high priority. This project consists of the development of an 18 km corridor, with a dedicated rightof-way linking Maputo CBD to the Magoanine, in the north of the Municipality. This is one of the highest demand corridors in the city and it is in need of improved public transport services and capacity (Figure 2.8). The service is planned to carry a total of 166,000 passengers per day (Sitoe, 2017). Figure 2.8: Maputo BRT Corridor 82 As was the case in of Luanda, the BRT experience in Maputo demonstrates the importance of good governance in both the public and private sector for the successful implementation of BRT. Funding for the project was originally secured through a US$180m loan from the Brazilian Development Bank, with the Maputo Municipality agreeing to cover the remaining US$45 million. A construction contract was awarded to the Brazilian engineering firm Odebrecht. The project advanced to the detailed design phase but was stalled due to corruption allegations and investigations into Odebrecht and the debt crisis in Mozambique. In the aftermath of the financing and construction deal falling through, the project -38 - remains a priority and the Government of Mozambique is currently studying the viability of a lower-cost approach, such as BRT-Lite. 2.2.9 Windhoek 83 The Sustainable Urban Transport Master Plan (SUTMP) for Windhoek was developed in 2013 with the aim of improving public transport and non-motorized transport in the City over a 20-year period (2012 – 2032). The SUTMP was further developed through a Pre-Feasibility Study and a Corporate Plan in 2015. This study focused on the technical and financial requirements for the implementation of the rapid public transport network in Windhoek, while the Corporate Plan provided recommendations on the restructuring and improvement of the existing state- owned bus service. Figure 2.9: Proposed public transport network for Windhoek (Government of Namibia, 2015) -39 - 84 The proposed network for Windhoek is illustrated in Figure 2.9 and includes 9 urban bus lines and the phased roll-out of 5 high capacity lines. The high capacity lines, effectively BRT, are focused on the corridors that link the dense residential areas north of the City to the Windhoek Central Business District. With the first high capacity line only due to become operational in 2022, the current focus of the SUTMP is on restructuring and improving the existing bus service. 85 While the focus on the SUTMP was initially on implementing BRT, the affordability of this approach was placed in doubt by financial projections that showed that a large operating subsidy from Government would be required. Questions were raised about whether there was sufficient demand to justify BRT, noting that Windhoek is a relatively small city with a population of 200,000. Institutional capacity constraints were also an issue limiting progress and informed the shift in focus towards improving the existing bus service. 86 From a financial sustainability and commercial viability perspective, the small population and limited demand of Windhoek lead to concerns of a large subsidy requirement and questionable feasibility of BRT for addressing public transport challenges. Other approaches to public transport reform, such as improving existing conventional bus services, are being considered. In the Windhoek case, the ambitious plan for multiple BRT corridors seems detached from the city’s economic and demographic realities. 2.3 Financial Sustainability and Commercial Viability Challenges 87 Following the overview of a cross-section of African BRT systems, this section outlines the initial challenges identified for BRT implementation in SSA from a financial sustainability and commercial viability perspective. These findings informed both the detailed case studies and the subsequent factor identification and characterization that follow later in this report. Table 2.2 summarizes the challenges for BRT implementation in SSA from a financial sustainability and commercial viability perspective. Table 2.2: Summary of Key Challenges in Major BRT Systems in Sub-Saharan Africa City Key Commercial Viability and Corresponding solutions Financial Sustainability Challenges -40 - Accra • Institutional capacity • N.A. (Ghana) constraints • Lack of political will and consolidated support Cape Town and • Fiscal capacity pressure due • Exploration of the no- George to high upfront capital fare revenue generated (South Africa) investment, subsidy, and from managed parking cost on the integration of is ring-fenced for public incumbent operators transport by the City of • Excessively high Cape Town. specifications of system design • Sub-optimal market dynamics, e.g. insufficient demand • High cost and complexity of incumbent operator integration and formalisation • Limited exploration of adjacent value, e.g. property investment value along the BRT corridors Dar es Salaam • Limited fiscal capacity to • The DART agency is (Tanzania) provide subsidy developing capacity • Insufficient intuitional building plans to capacity, responsibilities for provide trainings to the BRT-related oversight are staff. fragmented • Lack of stakeholder • The roles of the alignment on key regulatory incumbent operator issues such as fare levels are planned into the • Sub-optimal market phase 3 and 4 of the dynamics, e.g. dispersed BRT operation. bipolar urbanisation and spatial configuration • Preference of participation model for local operators over international operators • Complexity of incumbent operator formalisation and inclusion in BRT systems -41 - • Limited exploration of adjacent value, e.g. property investment value along the BRT corridors Lagos • Limited institutional • Specific funds were (Nigeria) capacity to perform its earmarked for staff functions and oversee the training and social operation of private support9. operators • Tax funds were also put • Difficulties in achieving aside for the for profitable operation and maintenance and feasible business model operations of the BRT • Difficulties in the inclusion system which of incumbent paratransit generated confidence operators among private investors to engage more directly in the system through public- private partnerships. Addis Ababa • Limited Institutional • The establishment of (Ethiopia) capacity and oversight three autonomous ability entities, including the • Inadequate legal and Traffic Management regulatory enforcement on Agency, the Public and informal public transport Freight Transport operators Authority, and the • Preference of participation Drivers and Vehicles model for state provision of Inspection and Control service over private Authority. operators Dakar • System design as trunk • Restructuring the (Senegal) corridors might affect BRT overall urban transport ridership network around the mass transit corridors considered as backbones of the network Luanda (Angola) • Limited institutional • N.A. capacity 9 http://eprints.lse.ac.uk/103047/1/Harman_the_BRT_and_the_danfo_published.pdf -42 - • Improper business model design for stakeholder participation Maputo • Limited institutional • N.A. (Mozambique) capacity and oversight Windhoek • Lack of sufficient transport • N.A. (Namibia) demand • System design is detached from the market dynamics 2.3.1 Institutional Arrangements and Political Economy 88 Institutional capacity constraints and political economy have affected the roll-out of BRTs in SSA. In Accra, lack of political will and consolidated support became insurmountable challenges to implementation and resulted in a pivot away from full BRT implementation. In Addis Ababa, the BRT roll-out was delayed in part due to the lack of a dedicated agency or authority and the limited institutional capacity for BRT planning and design to oversee the development of an integrated public transport system. 2.3.2 Legal and Regulatory Considerations 89 The absence of an enabling legal and regulatory framework for BRT implementation introduces legal risks for private participation. In Tanzania, the regulatory system lacks clarity for guiding and encouraging both international and domestic private operators’ involvement in BRT operation, contributing to a challenging market environment and increasing the barriers to enhancing BRT operational capacity. 2.3.3 Contractual Arrangements 90 The issues of risk allocation and contract management put the systems’ long-term financial sustainability and commercial viability at risk. In South Africa, services are generally provided on a gross-cost basis by companies formed from incumbent formal and paratransit operators and procured via negotiated contracts. The Government of South Africa has taken on most of the risk, including revenue risk and risks associated with vehicle procurement. When there is a large viability gap, the government will inevitably face a significant subsidy burden. In addition, contract management issues have been identified across the SSA region, including poor delivery against contracted requirements (Lagos, Dar Es Salaam) and difficulties in enforcing contract penalties (e.g. Cape Town). -43 - 2.3.4 Paratransit Participation 91 Competition from paratransit operators and the fiscal burden of their integration in BRT services are barriers for the BRT operation to achieve financial sustainability and commercial viability. Paratransit operators are often the main providers of public transport services in cities across SSA. Without a feasible approach to integration, paratransit operators are likely to operate in competition with BRT systems, occupying BRT-exclusive corridors, undercutting fares, and poaching riders. Moreover, current approaches to integration result in heavy fiscal burdens for the government. In South Africa and Lagos, paratransit operators have been fully included in the various BRT initiatives, which has led to high government expenditure for formalizing and capacitating paratransit operators to deliver BRT. 2.3.5 Business Model and System Design 92 The financial performance of BRT systems is often exacerbated by a focus of decision makers on funding upfront capital cost of infrastructure without sufficient consideration and robust planning for the coverage of longer-term operational and maintenance costs. Current business models rely heavily on government subsidy and are not financial sustainable because governments cannot cover these costs as systems expand. 93 In South Africa, government subsidies have always been a key part of BRT capital and operational models. However, the actual realized demand, low fares to account for affordability and the higher than anticipated operational costs have put pressure on the sustainability of BRT systems. These factors have deepened South African BRT systems dependence on subsidies. In addition, the experiences of Cape Town and Dar Es Salaam have demonstrated how imbalanced land use patterns result in tidal travel demand patterns that generate high operational costs and affects the revenue-generating ability of these BRT systems. 94 The challenges of BRT implementation in SSA have also been encountered elsewhere on the globe. The experiences of rolling out BRT projects, especially in Latin America and Asia, are marked by both the remarkable transformation of urban mobility systems and constant struggles with the financial sustainability and commercial viability of the BRT systems. 95 Box 2.1 summarizes some of the international experience with these challenges, and briefly describes the solutions adopted to address those challenges. International experience can provide references that cities worldwide to learn from and apply to their business models. However, it is worth noting that BRT implementation is complex, highly sesnitive to contextual issues and that specific -44 - examples are not suited for direct transplant. BRTs operate under diverse political and economic realities and implementation approaches require adaption to local contexts and tailored project financing and risk management strategies. Box 2.1: International Examples of Challenges with the Financial Sustainability and Commercial Viability of BRTs Institutional Arrangements and Political Economy Hubballi and Dharwad (Hubballi-Dharwad BRT) and Pune and Pimpri-Chinchwad (Rainbow BRT) in India In India, the coordination of the planning and delivery of the BRT was a key determinant of the project’s success, despite the fragmented governance of the city and state. There was no dedicated entity in place to coordinate the implementation of BRT and manage the BRT assets for the Rainbow BRT system. As the BRT falls within two cities, Pune and Pimpri-Chinchwad, each city municipality developed the BRT infrastructure in their geographical limits. A public transport bus service provider operates the service in both cities, but without sufficient intercity support from the governmental authorities. The low operating capacity and deteriorating fleet eventually led to poor financial performance. On the other hand, Hubballi-Dharwad BRT implementation is more successful mainly because the state (Government of Karnataka) established a Special Purpose Vehicle (SPV) that coordinates the operation and owns the fleet assets. The SPV brings together the state government, municipal governments, urban development authority and a state-run bus operator, which can be regarded as an entity to align the objectives and interests of these stakeholders. Legal and regulatory considerations Lima (El Metropolitano BRT), Peru Legal conflicts and disputes impose significant risks on BRT implementation. Lima failed to provide the necessary components such as infrastructure and land before entering into contracts with operators, leading to risks of contract breach by the government. The contractual breach discouraged the participation of the operators and even impacted on the sustainability of the government budget. It was reported that the Metropolitan Municipality of Lima (MML), a public authority responsible for public transport and roads, faces breach-of-contract cases related to fare collection, natural-gas fuel supply and bus operation. The total liability due to the city’s Metropolitano BRT contracts was estimated at $170 million, nearly half of MML’s annual budget of $380 million. Contractual arrangements Colombia’s BRT systems and El Metropolitano BRT in Lima, Peru -45 - Net-cost contracts (NCC) applied in medium-sized Colombian cities and in Lima threatened the financial sustainability of BRT operations. In NCC cases, the revenue risk is borne by the operators, who are exposed to financial risk in instances of lower than expected ridership. When the operators experience financial difficulties, the quality of operations are ususally negatively affected. In these cases, the ridership was below the target during the early operating stage of El Metropolitano BRT and the private bus operator concessions did not include a minimum revenue guarantee, which resulted in declining operating capacity and poor quality of service. Paratransit participation Jakarta (TransJakarta BRT), Indonesia Parallel competition with larger minibuses – e.g., MetroMinim and Kopaja – caused low BRT ridership, directly affecting the financial performance of the BRT. Jakarta’s laissez-faire paratransit sector has resulted in a rich mix of paratransit services offering a wide variety of services and prices. This oversupply has led to significant competition for passengers for the TransJakarta BRT, that charges a set fare, and is exacerbated by TransJakarta’s inability to serve most trip generators across the metropolis. As a result, minibuses have a higher ridership than the TransJakarta system. The minibuses operate in parallel to TransJakarta routes with flexibility to stop as needed to pick up and drop off passengers near or in-between BRT stations. Business Model and System design Hartford Connecticut’s CTfastrak BRT, United States Complex busway design and construction, right-of-way acquisition costs and the high-quality finish of the stations dramatically increased Capex costs, making CTfastrak among the most expensive BRT corridors in the United States. The BRT is constructed along a former rail right-of-way (bought by Connecticut Department of Transportation in the 1980’s) and half of the corridor is on a permanent easement purchased from Amtrak (a national passenger railroad company). The farebox recovery rate is only 13% (US$3.2 million fare revenue with annual operating costs of US$25.1 million in 2018) and so the system relies heavily on state subsidy to cover the deficit and ensure the ongoing provision of the planned quality of service. The State of Connecticut provides an operating subsidy exceeding US$20 million annually. Adjacent value Istanbul (Metrobüs BRT), Turkey Phase 4 of Istanbul’s BRT system has significant land value capture potential as the corridor passes through an undeveloped area with great potential for developments. Despite this wonderful opportunity, the local government does not have value capture policies and relevant regulations in place to enable the BRT system to leverage the value created to financially reinforce the operation of the Metrobüs BRT. -46 - Source: ITDP (2019), Alpkokin and Ergun (2012), World Bank (2020), Jiménez et al (2019). -47 - 3 | Case Studies 3.1 Overview 96 This chapter characterizes the operational BRT systems in three case study cities from sub-Saharan Africa, namely Cape Town (South Africa), George (South Africa), and Dar es Salaam (Tanzania). These cities represent operationally, geographically, socially and economically diverse examples of more mature BRT systems in SSA. 97 The detailed case studies offer a more in-depth overview of the systems than what is provided in Chapter 2, exploring their development and operational contexts across seven categories, including 1) system overview, 2) stakeholder and institutional arrangements, 3) legal and regulatory considerations, 4) contractual arrangements, 5) paratransit participation, 6) commercial and financial aspects, and 7) technical, social and environmental aspects. This gives deeper insight into their real-world successes and challenges, in particular those influencing their financial sustainability and commercial viability. 98 Cape Town is chosen due to its operational maturity, its comparative success to date and the innovative thinking by the City of Cape Town to improve the operational and financial sustainability of the system. 99 George is an example of an ’infrastructure-light’ quality bus service (‘BRT- Lite’) in a secondary city and is chosen due to its broad similarities to smaller cities in the region, and the resulting distinctive differences from other SSA BRT systems. The George case study and findings provides a valuable and insightful contrast to those from Cape Town and Dar es Salaam. 100 Dar es Salaam is chosen because of its operational maturity, size (it is one of the largest BRTs in SSA in terms of daily passengers), complexity (numerous phases and stakeholders), and status as a rapidly urbanizing and growing regional hub. The experiences in Dar es Salaam are very different to those in Cape Town and George and are broadly representative of the challenges experienced in other low- income SSA contexts. - 48- 3.2 Stakeholder Engagement 101 To fully develop the case studies the project team engaged with relevant stakeholders in the three case study cities including government officials, operators and sector experts. A list of these stakeholders is provided in the Table 3.1. Table 3.1: Stakeholders engaged by the project team City Stakeholders Cape Town City of Cape Town Transport Directorate including representatives from the divisions for planning, infrastructure, regulations and industry transition Representatives from the Golden Arrow Bus Services (GABS), one of the main operators of BRT and conventional bus services in Cape Town George Representatives from the Western Cape Government’s Department of Transport and Public Works Dar es Salaam Representatives from the following key stakeholders: • Land Transport Regulatory Authority • Tanzania Roads Authority • Dar es Salaam Rapid Transit Agency • Association of Transporters in Dar es Salaam • Usafiri Salaam Dar es Salaam Rapid Transit • World Bank (local representatives) 3.3 Cape Town 102 Cape Town is a Metropolitan Municipality in South Africa’s Western Cape Province, with a population of approximately 4 million people (StatsSA, 2016). The City of Cape Town’s (CoCT) vision for public transport is driven by a policy agenda to integrate various modes of transport into a single effective and efficient service. The first phase of a full BRT system has been implemented and includes trunk services on dedicated rights-ofway supported by a mixed-traffic feeder network. 103 This BRT system, known as MyCiTi (see Figure 3.1 for an example of a typical MyCiTi bus and station), was intended to replace most existing incumbent services, including minibus-taxi (paratransit) and conventional buses. From a formalization perspective, existing operators were integrated into the bus operating companies. Despite significant funding support from Government of South Africa, the initial phase of the MyCiTi system has experienced considerable funding challenges, including larger than expected capital requirements and operating shortfalls. - 49- Figure 3.1: Cape Town’s MyCiTi system (Engineering News, 2018) 3.3.1 System Overview 104 The MyCiTi network forms part of the CoCT’s Integrated Public Transport Network (IPTN). In terms of South Africa’s National Land Transport Act (NLTA) , all municipal planning authorities are responsible for “the planning, implementation and management of modally integrated public transport networks and travel corridors for transport within the municipal area and liaising in that regard with neighbouring municipalities”. The IPTN 2032 is the long-term plan for the implementation of the multimodal public transport network in phases over time. Phase 1, the first part of which became operational in 2011, links the City Centre to the West Coast areas of Milnerton, Tableview and Atlantis, as well as to Hout Bay. 105 An express service was implemented along the N2 freeway corridor connecting outlying low-income southern suburbs to the city centre in 2014 to supplement the overcrowded rail service. However, the so-called “N2 Express” contract expired in 2019 and has not been renewed due to a breakdown in the negotiations with the participating operators. As a result of this contract expiry, the service is no longer operational; however, planning is underway to restore it. Figure 33 on the following page maps out the various routes and corridors of the CoCT’s Phase 1 MyCiTi service. 106 The MyCiTi system has been designed to support the shift from private to public transport by providing a high-quality of service. Key system elements include (Figure 3.2): • New vehicle fleet of trunk (18m and 12m) and feeder buses (9m) • Comprehensive network of scheduled, universally accessible services operating 12– 16 hours per day with free transfers - 50- • Infrastructure upgrades (dedicated trunk infrastructure, closed stations) and universal access • MyCiTi branding and passenger information • Advanced Public Transport Management System (APTMS) and Control Centre • Electronic ticketing systems using a smartcard Figure 3.2: MyCiTi key system elements (City of Cape Town (b), 2010); (City of Cape Town (c), 2012); (City of Cape Town (d), 2015) 107 In the 2018/19 financial year the MyCiTi service registered approximately 29.2 million passenger boarding with an average of 64,000 passenger trips each weekday. The system achieves this with a peak of 255 vehicles travelling 16.7 million revenue-earning kilometres annually. Further key operations, infrastructure and vehicle statistics are reflected in Table 3.2 and Table 3.3. Table 3.2: MyCiTi operational statistics (2018/19) (City of Cape Town (d), 2015) (City of Cape Town (e), 2018) Operational statistics Annual passenger trips (boardings) 29.2m Passenger journeys per average weekday 64 000 Annual revenue kilometres 16.7m km Drivers employed 559 Peak hour travel time: Table View to Civic Centre • By car >1 hr • MyCiTi all stops bus 35-37 mins • MyCiTi express bus 27-29 mins 3.3.2 Stakeholder and Institutional Arrangements The City of Cape Town is the primary stakeholder responsible for the planning, implementation and management of BRT infrastructure and operations in Cape - 51- Town. The MyCiTi Project Office was established as a dedicated unit to perform these functions on behalf of the City of Cape Town, and oversaw the initial implementation of MyCiTi BRT Phase 1, assisted by a clear mandate, capacitated staff, and effective linkages with supplementary institutions. Figure 3.3: MyCiTi system map – Phase 1 and N2 Express (City of Cape Town (a), 2019) Table 3.3: MyCiTi infrastructure and vehicle statistics (2018/19)(City of Cape Town (d), 2015) (City of Cape Town (e), 2018) Infrastructure and vehicles Number of peak vehicles 255 Bi-directional dedicated lanes 31.4 kms Number of MyCiTi stations 42 Number of MyCiTi routes 40 Number of MyCiTi depots 3 Kilometres of cycle lanes 140 kms - 52- Hectares of land purchased 20.3 108 Since the initial roll-out of MyCiTi Phase1, there have been a series of institutional changes within the CoCT that have impacted its capacity to deliver BRT. In 2013, the MyCiTi Project Office was incorporated into the CoCT’s broader Transport for Cape Town (TCT) structure, which subsequently restructured into the Transport and Urban Development Authority (TDA) with broader responsibilities for the CoCT’s transport, spatial planning, land-use management and certain housing delivery functions in 2017. This institutional structure was then dismantled in 2019, with transport functions reverting to the municipality’s Transport Directorate, including responsibility for MyCiTi. These changes were rapid and accompanied by changes in leadership and revised roles and responsibilities for departments, directors and line managers. These institutional instabilities coupled with the loss and non-replacement of key personnel and political volatility within the CoCT have materially affected its capacity to effectively deliver BRT. 109 In addition to the Cape Town City municipal government, South African’s National Government has also played an important role in the implementation of BRT by establishing the associated legal and policy frameworks and providing funding through an annual grant known as the Public Transport Network Grant (PTNG)10. The Public Transport Network Grant was introduced (in a variation of its current form – originally the Public Transport Infrastructure Fund) by the national government in 2007 in the run up to the FIFA Football World Cup 2010. There were thirteen cities receiving funding from this grant and these were selected at the National Department of Transport’s discretion. These cities include all the Metropolitan Municipalities, as well as important secondary cities, as listed in Table 3.4. 110 The participating cities apply to the National Department of Transport for funding from the grant annually and must comply with various stipulated conditions of the Division of Revenue Act (RSA, 2019) as well as the annual grant allocation framework. These stipulations include the need for alignment with the National Land Transport Act and Public Transport Strategy, and specific conditions on what infrastructure and operations components can be funded. For example, the grant cannot be used for the purchase of buses, except in exceptional cases with special approval. 10 The Public Transport Network Grant is a conditional grant, previously known as the Public Transport Network Operations Grant, allocated to municipalities in terms of Part B of Schedule 5 of South Africa’s Division of Revenue Act. Funds flow directly from South Africa’s National Treasury to the municipality in tranches attached to milestones stipulated in the municipality’s business plan for its BRT system. It is an ongoing grant, with a three-year horizon, and the total amount allocated annually is dependent on the national budget. A total of ZAR6.5 billion was allocated for the 2019/20 financial year. - 53- 111 The operations of the Phase 1 MyCiTi service are provided under contract by three private Vehicle Operating Companies (VOCs) that were formed from the incumbent public transport operators in the area prior to the implementation of the MyCiTi service. They are Kidrogen (formerly paratransit operators), Transpeninsula (formerly paratransit operators) and Table Bay Rapid Transport whose parent company also owns Golden Arrow Bus Services (a privately-owned local bus company). - 54- Table 3.4: Cities eligible for PTNG funding Province City Gauteng • Johannesburg • Tshwane • Ekurhuleni Western Cape • Cape Town • George Kwa-Zulu Natal • eThekwini • Msunduzi Mpumalanga • Mbombela Eastern Cape • Buffalo City • Nelson Mandela Bay Limpopo • Polokwane Free State • Mangaung North West • Rustenburg 112 The CoCT entered into Gross Cost Contracts with VOC’s, wherein the CoCT collects and retains the farebox and other system revenues and reimburses the operator through an agreed contractual rate structure. The negotiated contractual rates for Phase 1 were settled in 2013 and the CoCT signed a 12-year negotiated contract with each VOC. 113 Other key stakeholders contracted by the CoCT to run the system include private service providers for Station Management, Automated Fare Collection (AFC), and Advanced Public Transport Management Systems. The bus fleet was procured by the CoCT from several suppliers including Volvo, Scania and Busmark. The N2 Express service was contracted to a joint venture between Golden Arrow Buses Services and a consortium of minibus taxi associations based in the southern suburbs of Khayelitsha and Mitchells Plain. These key stakeholders and institutional relationships are summarized in Figure 3.4 below, which summarizes the key stakeholder relationships and institutional arrangements. 3.3.3 Legal and Regulatory Considerations 115 The implementation of BRT services in South Africa is governed by the National Land Transport Act (NLTA), which clearly allocates primary responsibility for the planning, implementation and management of modally integrated public transport networks, including BRT, to local government. The NLTA also provides the framework for contracting with private sector operators to provide public transport services, including empowering local government to enter negotiated contracts (e.g. sole-source contracts) with existing operators for a maximum period of 12 years. The NLTA stipulates that government can negotiate only once with existing - 55- operators, including paratransit, for the provision of public transport services. Subsequent VOC contracts must be procured competitively. Figure 3.4: MyCiTi key stakeholders and institutional relationships 116 For socio-economic and political reasons 11 and based on the NLTA stipulations, the City of Cape Town directly entered into negotiations with existing incumbent and paratransit operators to provide operational services for the BRT system. Because the incumbent and paratransit operators did not have the financial capacity to cover their reorganization and participation in the new system, government agreed to cover these costs. There was not much consideration given to designing and implementing a system that would be financially sustainable and attractive to external commercial participants. Per the NLTA, beyond the initial 12- year contract period currently in place, the CoCT will need to facilitate a competitive procurement process for the next operations contracts. This will likely require additional consideration of financial sustainability and commercial viability factors. A significant risk in this NLTA stipulation to move into a competitive procurement process is that the originally sole-sourced incumbent operator are very likely to protest against a competitive process. However, there are no stipulations in the NLTA to mitigate against and manage such risk. 117 The Public Transport Strategy published by National Government (RSA Department of Transport 2007) provides the regulatory framework for public transport improvement in South Africa and the promotion of BRT. This strategy also sets up several system parameters and benchmarks, including the proportion of 11 The City of Cape Town sought to preserve and improve the economic livelihoods of those employed in the incumbent public transport industry, as well as avoid the risk of unrest and detrimental competition from the influential paratransit operators. - 56- residents within walking distance of BRT stations, hours of operation, frequencies, universal accessibility, fare integration, and the integration of modes. Cape Town’s MyCiTi was designed to meet or exceed these parameters within a traditional BRT archetype, which drove high capital cost and ultimately influences the long-term system viability. 118 In addition, South Africa has laws, regulations and processes in place to enable risk-sharing schemes for Public Private Partnerships, including the Public Finance Management Act (PFMA) – Treasury Regulation 16, which governs PPPs at the national and provincial government level, and the Municipal Finance Management Act (MFMA) – Municipal PPP Regulations, which govern PPPs at the local government level. PPPs have been successfully implemented in the South African transport sector, including numerous toll roads and the development and management of the Gautrain, a rapid rail service in South Africa’s Gauteng Province. Consequently, South Africa’s PPP policy and legal frameworks have been shown to be effective and robust. However, since there have been no formal PPPs12 amongst the BRTs in South Africa the PPP laws have not been tested in this context. For the City of Cape Town and its BRT system, legislation is in place to enable and attract private sector participation in a PPP, but the BRT-specific details of such a contract remain to be determined. 119 MyCiTi fares are established according to the City of Cape Town’s Fares Policy (Transport for Cape Town 2014), which in turn is guided by stipulations in various legislation, including the NLTA, the MFMA, the Division of Revenue Act and its Framework Conditions for the Public Transport Operating Grant (PTOG). The core principles of the policy are to provide an effective, affordable, and accessible public transport service for all, while seeking to minimize the need for an operational subsidy and ensure financial sustainability of the system. Practically, the policy provides that the contract escalation rates included in agreements with VOCs be used as the basis for fare increases, as well as benchmarking with alternative modes of transport, and linked to minimum worker wage. Fares are distance-based but are designed to increase at a decreasing rate as distance traveled increases, to offset the spatial imbalances left by apartheid’s segregated city planning. 120 In order to be eligible for National Government funding, in the form of the PTNG and the PTOG, the CoCT’s BRT system must be compliant with the numerous stipulations set out in the PTNG and PTOG conditions (the conditions extracted 12Existing arrangements with the incumbent operators (who consolidated and organized as bus operating companies) are commonly referred to as concessions. The operators have 12-year contracts allowing them to provide BRT services in exchange for performance-based fees. However, there is no substantial risk allocation to the incumbent operator, and South Africa’s PPP legislation does not consider these arrangements to be formal PPPs. - 57- from the Division of Revenue Act and grant allocation frameworks for 2018-2019, are reproduced in Appendix A to this report). 3.3.4 Contractual Arrangements 121 The MyCiTi vehicle operating company contracts are gross cost contracts, where the CoCT collects the system revenue and pays the vehicle operators at a negotiated contract rate. MyCiTi vehicle operating company contracts are gross cost contracts, where the CoCT collects the system revenue and pays the vehicle operators at the negotiated contract rates. Under the gross contract model, the CoCT determines the network and services schedule, sets the fare price, and determines quality standards. However, the City takes the risk on revenue collection. If patronage/revenue is lower than expected the CoCT must make up the difference with other revenue sources. There is little incentive for VOCs to attract passengers and improve service quality, other than to avoid penalties. 122 Following the negotiated gross cost contracting approach, the CoCT designed a four-part cost model which allows them to control the variable costs without necessarily impacting on services. This four-part cost model13 remunerates VOCs based on: • A fixed cost expressed as an amount not linked to the number of kilometers completed or the number of vehicles used by the operator. • A single driver-related cost in respect of the 18m trunk vehicles, 12m trunk / feeder vehicles, and 9m feeder vehicles directly linked to the number of drivers used by the operator as scheduled by the CoCT’s driver optimization software. • Asinglevehicle-relatedcostinrespectofthe18mtrunkvehicles, 12mtrunk/feeder vehicles, and 9m feeder vehicles directly linked to the 13 Major cost components of a bus operation typically include overheads, peak vehicle(s), kilometers, drivers, and bus repayment costs. Overheads (fixed costs) don’t vary significantly with the scale of operations, whereas the other variable cost components do. In “single rate km” models, fixed costs are usually a component of the per kilometer rate and, therefore, increase as the number of kilometers increase/decrease. However, in multivariable models, fixed costs are separate and do not increase as kilometers increase/decrease. In addition, different services have different combinations of factors driving costs, e.g., feeders and trunks which are slower and faster requiring more and less buses irrespective of kilometers operated. Separating out cost components is more complicated, but this approach is better for managing risk. In single-rate models, operators will seek to maximize the per kilometer rate to manage uncertainty and reduce their risk. This is particularly relevant to the South African context where contracts were negotiated (not tendered). If single rate/kilometer rates are not well negotiated, inefficiencies are “locked in” for the full contract term and the only way to reduce costs is to cut services. Part of the rationale in Cape Town for following a multivariable model structure was due to the risk and uncertainty perceived by operators during the negotiated contracting process. Operators built in significant risk to the initially proposed single-rate model. Adopting a multivariable cost model allows the city to manage risk better as services (variable costs) can be adjusted without affecting the fixed cost component. - 58- number of peak buses required by the operator as scheduled by the CoCT’s bus optimization software. • A kilometer-related cost in respect of each of the 18m trunk vehicles, 12m trunk / feeder vehicles, and 9m feeder vehicles directly linked to the number of scheduled kilometers completed by the operator with a relevant vehicle, as scheduled. 123 These remuneration models are set out in the VOC contracts alongside agreed upon formulas and escalation indices covering items such as the fuel price, labor cost and general inflation. The contract rates are intended to fully compensate the operator for all costs and expenses incurred for the provision the services, with an agreed mark-up. The initial negotiated contracts for Phase 1 specify the service quality standards which the bus operators must adhere to. The APTMS system allows real-time remote monitoring of route and timetable adherence as well as several other operational performance indicators, such as speeding, harsh braking and acceleration, and emergency calls from drivers. It is to be noted that the CoCT’s ability to implement penalties is limited, as the accuracy and reliability of monitoring systems have been contested by bus operators (City of Cape Town (f), 2018). This undermines the CoCT’s ability to ensure that the desired high standard of service quality is achieved. 124 The supplementary N2 Express service was designed as a three-year interim contract because it was planned to be a medium-term “top-up” service to supplement the ailing rail service until the latter returns to full operations. An additional objective of the N2 Express was to develop operational expertise in running a scheduled bus company amongst incumbent paratransit operators, in preparation for the implementation of the Phase 2A of the MyCiTi network. 125 In addition to the negotiated VOC contracts, there are also various related contractual arrangements associated with the MyCiTi system, including the professional services contracts, such as bus maintenance, station management, AFC and cash management, APTMS, and advertising services. They are all provided by private sector entities on a fee basis and have all been procured through a competitive procurement process. The CoCT has also tapped the private sector to fill various institutional capacity gaps to appropriately fulfill its planning and oversight role. Table 3.5 unpacks the contractual arrangements for the MyCiTi system, including the professional services contracts. Table 3.5: Contractual arrangements associated with the MyCiTi system Contractual arrangements Type Vehicle Operator Company (VOC) contracts Negotiated • TBRT • Kidrogen • Transpeninsula - 59- • N2 Express Joint Venture Vehicle maintenance Tendered • Initially included in bus purchase, however these have expired, and separate vehicle maintenance contracts are now in place. Station Management (SM) inclusive in broader Facilities Tendered Management contract Cash Management Tendered Automated Fare Collection (AFC) Tendered Advanced Public Transport Management System (APTMS) Tendered Advertising contract (income and maintenance of shelters) Tendered Professional services contracts: Tendered • Project Management • Systems Planning • Industry Advisors • Business Planning • Conceptual and detailed design (engineering) • Construction (the local construction sector has sufficient capacity to deliver what has been required (spend >US$67m per year in Phase 1). The pace of construction is more often determined by design processes, procurement delays, and planning approvals. • Marketing and communications 3.3.5 Paratransit Participation 126 Paratransit industry participation and empowerment is a core principle underpinning South Africa’s BRT initiatives. The principle adopted was that no current minibus taxi operator would be worse off under new public transport systems. The establishment of the vehicle operating companies in Cape Town’s MyCiTi Phase 1 followed a process where existing licensed (legal) paratransit operators were offered options including: 1) becoming shareholders in newly established companies (buy-in), 2) exiting the industry (buyout), and 3) competing with the BRT system. Those who chose to buy-in or buy-out were financially compensated for surrendering their operating licences 14 (previously known as 14 In South Africa, public transport operators require an operating license from the government to legally provide services. As in the case in many cities across SSA, South Africa experiences high levels of “illegal” or unlicensed operators. - 60- permits), based on the projected revenue over the remaining life of the licence. Participating operators agreed not to compete with new BRT services. The participation and compensation principle is captured in Figure 3.5. 127 This approach influences the financial sustainability and commercial viability of Cape Town BRT in several ways. For example, the process to determine and agree the compensation payable to individual operators is complex. Government provides financial compensation, at significant cost estimated to be approximately ZAR 955,000 (US$ 115,000in2012) per operating license (von der Heyden, 2014), to affected informal minibus taxi operators for ceasing operations and giving up their licenses based on the projected revenue over the remaining life of the license. This sets a precedent which will be very difficult to sustain as the system expands, particularly for Cape Town which has more than 10,000 licensed incumbent paratransit operators. To fully compensate all incumbent operators, it would cost COCT about ZAR 10 billion (US$ 600 million in 2020). 128 InPhase1, two paratransit-based VOCs were established (Kidrogen and Transpeninsula). They are owned by former paratransit operators. Most of the VOC’s staff, such as bus drivers, are drawn from the pool of individuals who previously worked in the replaced paratransit industry. The approach towards the N2 Express service differed significantly from Phase 1 because it was planned to be a medium-term “top-up” service, without replacing existing services. A key innovation introduced by the CoCT was to undertake a series of pre- and post- implementation surveys to assess the impact of the N2 Express services on incumbent operators, as a basis for deciding whether operators were affected by the introduction of the N2 express and therefore entitled to financial compensation. 129 One objective of the N2 Express was to develop operational expertise in running a scheduled bus service amongst incumbent paratransit operators, in preparation for the implementation of Phase 2A. The operations of the N2 Express were provided under a joint venture between Golden Arrow Bus Service and several minibus-taxi associations and operated by the former as a subcontracted operator to the joint venture. Operations required approximately 40 buses at a negotiated rate and profit margin, while training and capacity building programs were provided to incumbent paratransit operators to the value of approximately US$2.7m over 3 years. - 61- Figure 3.5: Approach to operator compensation for MyCiTi Phase 1 (City of Cape Town (c), 2012) 130 The initial arrangements and operations were effective, however, Phase 2A planning and implementation had not progressed sufficiently, and a longer-term contract was not able to be successfully negotiated with incumbent operators when the interim contracts approached the expiry date (GABS, 2019). After the provision of training and capacity building was complete, proposals to extend the N2 Express service under a different business model could not be effectively negotiated between the respective parties, despite several contract extensions totaling an additional 24 months intended to facilitate the negotiations. 131 The misalignment of the stakeholders’ objectives during the contract extension process centered on issues of benefit-sharing and the implementation of the N2 express model. In the third extension of the contract, mechanisms were put in place for the profit of the service to be split equally between the shareholders (GABS, 2019). However, the participating minibus taxi associations proposed that the N2 Express service be expanded and that two new vehicle operating companies be established for the two paratransit groupings. This was a challenging prospect due to the limited economies of scale of the service (GABS, 2019). As a result, the proposals for an equal revenue share were not well received by all parties and proposals to create managerial positions to be filled by incumbent paratransit - 62- operators were rejected15. Notwithstanding, it was believed that the N2 express model could work if the partners were willing to participate and indicated a willingness to explore small-scale pilots with minibus taxi operators in under-served areas subject to certain provisions such as the allocation of operating subsidies and shareholding (GABS, 2019). 132 The lesson learned from the Cape Town experience is the necessity to effectively align objectives and equitably allocate the benefits amongst stakeholders. While the N2 Express is no longer operational, planning and negotiations are still underway at the time of writing to put in place a new N2 Express contract. 3.3.6 Commercial and Financial Aspects 133 The costs of MyCiTi are disaggregated into capital and operating costs, the latter comprising of direct and indirect operating costs, as summarized in Table 3.6. Funding sources for these include system revenue, national government funding through the Public Transport Network Grant, and local government funding that is predominantly from property rates. 134 MyCiTi Phase 1 capital and establishment cost were funded by the PTNG over a period of eight years. The CoCT is currently using a majority of PTNG funding for the design and construction of Phase 2A. Cape Town receives approximately ZAR950 million (USD56.5 million in 2020) in annual grant funding from the PTNG, aside from capital and establishment costs. PTNG funds also cover a portion of indirect operating costs. From a direct operating cost perspective, the MyCiTi system has historically experienced low cost recovery, in the region of 45%, as shown in Figure 3.6. 15 It is worth noting that the number of managerial positions which could reasonably be created was limited (approximately four) due to the small size of the service. - 63- Table 3.6: Description of MyCiTi operating and capital costs, and associated funding sources Cost Description Funding Sources Capital and Infrastructure, PTNG funding, funded up to establishment establishment, planning and 100% by National Government costs project management costs (deficits are appropriately including compensation and managed or covered by other industry transition municipal funds) costs, vehicle acquisition Direct The contract with the VOCs Funded from a combination of operating for the provision of public farebox revenue, system costs revenue (including advertising transport services, as well as vehicle maintenance and privately funded services). The shortfall is funded from the CoCT’s property rates revenue (capped at 4% - approximately US$20m in 2018/19) Indirect The contracts with service Funded predominantly by the operating providers to support service PTNG grant (National costs delivery and management Government), with the include station management, shortfall being funded by the monitoring and CoCT (50-80% funded by reconciliation through AFC PTNG) and APTMS systems, network management, marketing and communications. 135 Direct cost recovery is projected to improve going forward with the implementation of Phase 2A, as shown in Figure 3.7. From 2019 to 2034, the recovery is forecast to increase from approximately 42% to just above 70% as direct operational costs begin to level off in real terms, and patronage and revenue increase. However, even at 60-70% cost recovery, the system will still exhibit a shortfall of around ZAR250-300 million per annum (US$15 – 18 million in 2020). 136 Key contributing factors to low cost recovery are the demand patterns16, relatively low fares due to public affordability constraints, and the negotiated VOC rates that are considered to be high compared to competitive rates. In addition, the 161) Buses are full in one direction in the peak and empty in the opposite direction; 2) high peak to base ratio e.g. the peak makes up a very large portion of total travel indicating relatively low demand and utilization of assets during off-peak periods; and 3) low levels of seat renewal. - 64- system design based on a trunk-feeder model that seeks to provide comprehensive network coverage lead to high level of capital and operational cost. Figure 3.6: MyCiTi direct cost recovery 2014-2018 (City of Cape Town (e), 2018) 137 In terms of the VOC direct costs, the CoCT is obligated to pay VOCs for a minimum number of ‘guaranteed kilometres’ based on the fixed costs calculated under the Operator Contracts. The CoCT can therefore shorten or withdraw certain routes up to the minimum number of guaranteed km as operational dynamics and demands shift or switch the operations of a route from one VOC to another to lower priced offers from the other VOCs (within practical limits). The gap between the fare revenue and the direct operating costs are primarily covered by advertising revenues (which are small) and property taxes. 138 With the roll-out of MyCiTi Phase 2A, indirect costs related to the station management, fare system operations, maintenance, APTMS, and internal support are expected to increase. When these indirect costs are factored in, the overall cost (direct plus indirect) coverage falls substantially. Even taking total system revenue into account, including other revenue in addition to fares, overall recovery is around 25% in 2019 increasing to just under 50% in 2034, as show in Figure 3 8. 139 In planning Phase 1, the CoCT undertook extensive cost modeling based on cost and revenue estimates to optimize the system plan for financial viability. Initially, the modeling was based on estimated revenue figures using the CoCT’s transport demand model, which showed that vehicle operations costs could be covered by fare revenues to a significant degree. The project was approved on the basis that costs could be covered by the available sources of funding. While other system elements, including stations and station services, the APTMS, the fare system and the overall management of the system, would require funding from - 65- other sources. However, the financial performance of the system has been less favorable than the travel demand model predicted, resulting in significant real and projected future funding shortfalls (City of Cape Town (d), 2015). In addition, passenger preferences have not been well understood. In some instances, passengers have preferred to continue to use paratransit services, resulting in unexpected competition from illegally operated paratransit services on some MyCiTi routes (City of Cape Town (d), 2015). Figure 3.7: MyCiTi direct cost recovery projections 2019-2034 (City of Cape Town (e), 2018) 140 The approach to Phase 1 was full replacement of existing incumbent services on MyCiTi routes, which predominantly comprised paratransit operators. In light of the challenges experienced in this process, the CoCT is now pursuing a different model of paratransit participation and compensation for Phase 2A. Phase 1 demonstrates that the comprehensive provision of feeder services designed to replace existing public transport modes across the entire metropolitan area results in a very high financial deficit. Therefore, the CoCT’s 2017 IPTN Business Plan envisages a “hybrid model 17 ” for Phase 2A, with many of the feeder services provided by minibus taxis.(City of Cape Town (g), 2017). 141 Optimization processes have been successfully planned and implemented for Phase 1, which have resulted in improved cost recovery. This entailed an intensive review and adjustment of current operational practices and service 17 Per Phase 1, feeder road service is fully provided by the BRT operators by replacing existing operators. Hybrid model means some of the existing operators are retained to provide feeder service. - 66- characteristics, referred to as a ‘moderation’ exercise. This was undertaken in mid- 2014 to rationalize services and better balance supply with passenger demand18. Figure 3.8: MyCiTi overall cost recovery projections 2019-2034 (City of Cape Town (e), 2018) 142 In planning for future system expansion, the approach has been significantly adjusted based on practical experiences in Phase 1, which include: • Hybrid BRT trunk and complementary paratransit system design, BRT services must be designed to ensure a competitive service, without having to rely on law enforcement to keep illegally competing paratransit operators at bay; • Shift from mainly ‘feeder-trunk’ to ‘direct, trunk and feeder’ services18; and 18 Key changes introduced include: optimizing routes to increase bus capacity utilization (load factors), including changing vehicle sizes where appropriate and where larger vehicles are available, as well as introducing trunk extensions to reduce feeder bus requirements, curtailing routes and frequencies with low demand, smoothing peak differentials through peak pricing strategies, capping services in the peak and supplementing MyCiTi peak services on some routes by permitting taxis to operate in competition, reducing recovery/cycle times by improved signaling and other infrastructure changes, reducing staff numbers at stations by reducing kiosk hours linked to demand, and improving station door technology or maintenance, enhanced revenue protection measures, and investigating potential cost reductions resulting from improved bus: driver ratios (CoCT 2015). 18Efficiency between these options is determined by specific route demand profiles and route characteristics. In the planning process for Phase 2A, parts of the network have been identified as direct services which offer competitive advantages in terms of reduced transfers and faster travel times, which are more convenient for passengers. This is a departure from the original service design for Phase 1, which was largely designed around a trunk-feeder model, with a requirement for passenger transfer. - 67- • Improve operational efficiencies based on maximizing legal and practical bus capacities, optimal bus to driver ratio, system planning and infrastructure design to ensure optimal bus speed and bus efficiency. 143 Private sector participation outside of VOC systems in MyCiTi Phase 1 were limited to privately contracted routes servicing the Table Mountain Aerial Cableway, private development of the Century station, and advertising. Box 3.1 summarizes the practices of private sector participation in the transport sector in Cape Town. 144 Although this private participation outside of the VOCs and its financial investment/contribution is small compared to overall system cost, it does begin to indicate areas in which the CoCT can develop additional revenue streams. Box 3.1: Practices of Private Sector Participation in Transport Sector in Cape Town Commercially subsidized services: The direct operating cost of the shuttle route servicing the Table Mountain Aerial Cableway, a major tourist attraction, are fully funded by the cable car company (up to two buses). The service is provided for free to users because tourists do not have easy access to the MyCiTi smartcard, known as MyConnect, the associated payment facilities, and the shuttle service alleviates parking problems experienced at Cableway station. The annual cost of the subsidy is approximately US$100,000 per annum (CoCT 2018a). Century City Station: The Century City property developer funded the construction of the Century City BRT station. The capital cost was approximately US$1.3 million and was substituted for development charges that the developer would otherwise have paid to cover upgrades to the surrounding road network. The ongoing operating cost of the station are funded by the CoCT. Advertising: An advertising contractor pays the CoCT to advertise on buses and shelters (approximately US$800,000 per year), and is also responsible for maintaining bus shelters (CoCT 2018a). Concession for using the dedicated bus lane: Although not yet implemented, there has been a request from a private sector company to permit private operators to provide shuttle services on dedicated bus lanes (CoCT 2019b). The income could provide additional revenue for the system. However, an assessment would be required to determine the impact that this may have on bus operations. The impact is tentatively regarded as unlikely to be significant as there are passing lanes at almost all stations and shuttle services would not make use of stations. - 68- 3.3.7 Technical, Social, and Other Considerations 3.3.7.1 Fare management system 145 The MyCiTi fare system is distance-based with fares being set based on social affordability criteria, increasing at a decreasing rate as distance travelled increases to offset the spatial imbalance caused by apartheid.19 Fare collection is managed through an Automated Fare Collection (AFC) electronic ticketing system. This system was designed to comply with national regulations, which require interoperability across all municipalities and adherence to Europay, Mastercard, and Visa (EMV) standards. The intention of the national regulations was to integrate the public transport fare payment system with the banking system.20 146 The regulations require that the system undergo a prescribed certification process by the National Department of Transport (NDOT). The current system has not been as successful as anticipated by the NDOT. It has resulted in high cost (see Figure 3.8 for the contribution of the fare system to overall indirect operating cost) and low levels of convenience, with very few outlets providing the payment or “loading” facilities, almost entirely limited to station kiosks. Another issue has been the exclusion of cash-paying customers due to the exclusive use of smartcard payment. 3.3.7.2 Accessibility 147 MyCiTi trunk services are designed for universal accessibility, including level boarding for passengers using wheelchairs and various tactile installations to assist those with visual impairment. This is one of the conditions for eligibility for the national government’s PTNG. However, designing for universal accessibility across the system has added to the overall up-front and operational cost. 3.4 George 148 George is a secondary city in South African’s Western Cape Province with a population of approximately 200,000 people (StatsSA2016). A scheduled, Quality Bus Service, known as GoGeorge has been operational since 2013. Figure 3.9 shows several GoGeorge buses in operation. 149 GoGeorge is an infrastructure-light system and differs from conventional BRT in that it has no dedicated lanes or rights-of-way. However, the system design 19 Apartheid was the system of racial segregation that existed in South Africa prior to 1994. Under this system, people of different races were legally required to live separately. People of color were often housed on the urban periphery, a long distance from economic centers, which meant they had long daily commutes. Apartheid ended in 1994 with the advent of democracy. However, its spatial legacy remains largely intact with critical implications for transport. - 69- and business model are similar to other BRT systems, such as Cape Town’s MyCiTi. Hence it can be referred to as a “BRT-Lite” system. These similarities, combined with its distinct differences, are discussed in the following analysis and are able to provide a valuable and unique case along the BRT spectrum. 3.4.1 System Overview 150 Prior to the launch of GoGeorge in 2014 (also known interchangeably as the George Integrated Public Transport Network, GIPTN), public transport in George city and surrounding peri-urban areas was provided by three MBT associations21 and a single private 20Card users can load both transit products, to pay for public transport, and cash, providing access to an electronic payment mechanism without requiring a bank account. 21Uncedo, the George Taxi Owners’ Front, and the George Huurmo tor Vereniging. Figure 3.9: GoGeorge Bus Service bus company. Most trips were conducted on foot due to relatively short trip distances and public transport affordability constraints. Approximately 47 percent of trips were nonmotorized, 29 percent by private car, and 24 percent by public transport, as broken down in Figure 3.10. 151 MBT services in George presented several issues to commuters, including no formal scheduled services, unaffordable to a large portion of the community, reduced quality and safety, and limited availability in certain times and areas. GoGeorge was developed to address these issues and was designed to align with - 70- the public transport policy framework established by the NDOT. It was designed as an “infrastructure-light” Quality Bus Service to replace the existing MBT system. The system design emphasized a minimal investment in infrastructure and the prioritization of funding for operations, given the limited funding envelope for the project. Unlike the systems being implemented in larger South African cities (Cape Town and Johannesburg, etc.) and in some other major SSA cities such as Dar es Salaam, the GIPTN design does not include typical features of BRT, such as dedicated lanes or median stations. Rather, the system could be described as a Quality Bus Service, or BRT-Lite, with buses operating in mixed-traffic and using stops on the side of the road. The decision to implement a fit-for-purpose bus service was made because the City of George does not have the population, densities, passenger demand, or congestion levels to warrant full BRT. 152 The system design includes six coverage phases, as highlighted in Figure 3.11. The first phase covers the central business district and some of the peri-urban residential areas, while the latter phases extend service outwards to the east, west, and south of central George. Figure 3.10: Mode Share Prior to Implementation of GIPTN Source: DTPW 2019. 153 Three of the phases are operational, shown in more route detail inFigure3.12. The first phase was launched on December 8, 2014, and Phases 2 and 3 were operationalized thereafter. Currently, passenger trips on the GIPTN exceed 13,700 per day and 380,000 trips per month (DTPW 2017). The launch of Phase 4, the system’s largest by passenger demand, has been delayed by several years, partially due to the resistance from the minibus taxi industry and a lack of alignment between government stakeholders (further details are provided in Section 4.7.1). 154 The key system design elements of the GoGeorge system include: - 71- • A new vehicle fleet of varying capacities comprising standard, medium- capacity buses and minibuses • A comprehensive network of scheduled, universally accessible services operating between 12 and 18 hours per day with free transfers • Infrastructure upgrades • Branding and improved passenger information • Intelligent Transport Systems (ITS or APTMS) • Electronic ticketing or Automated Fare Collection (AFC) Figure 3.11: Full GIPTN Network Source: DTPW 2019. 155 The infrastructure requirements for the GoGeorge system are not as extensive as for a full-scale BRT system, but include: • Road upgrades to accommodate buses • Development of an interchange, stops, and shelters • Development of a depot • Nonmotorized transport upgrades (sidewalks, etc.) - 72- 156 With three phases currently operational, and a number of system efficiency modifications undertaken (“post-mod”), detailed service statistics for GoGeorge are broken down in Table 3.7. GoGeorge is currently running 62 buses across 20 routes, having completed just over 22,000 trips to date. The imminent rollout of Phase 4 will double the bus fleet and increase the number of routes operated by over 50 percent, and the number of passengers conveyed by approximately 110 percent. Phases 5 and 6 will cumulatively add another 17 vehicles, eight routes, and around 17,000 conveyed passengers to the overall system. When all six phases of the GoGeorge system achieve maturity, it is projected to run a fleet of 142 buses across 40 routes, conveying over 800,000 passengers per month. The service is also designed to provide comprehensive spatial connectivity by ensuring that at least 85 percent of the urban population of George is within 400 meters of a service, as well as linking residential areas to employment, service, and recreation nodes through main services20 and community services23. Figure 3.12: Current GoGeorge Service Coverage Source: DTPW 2017. 20 Higher demand routes linking key origins and destinations, typically provided by larger vehicles. 23Lower demand routes operating only in local communities with smaller vehicles. - 73- Table 3.7: Current and Projected Service Statistics - Source: DTPW (a) 2019. Monthly Service Phase 3 Phase 3 Phase 4 Phase 5 Phase 6 Statistics Pre-Mod Post-Mod Projected Projected Projected Fleet operated by 72 62 125 135 142 VOC Routes operated 15 20 32 36 40 Trips completed 25,920 22,396 37,290 40,680 44,070 Passengers 361,620 379,988 790,000 806,000 807,600 conveyed Revenue km 245,293 305,720 550,000 600,000 650,000 3.4.2 Stakeholder and Institutional Arrangements 157 In the South African context, municipalities have primary responsibility for delivering local public transport services. However, many do not have the capacity to fulfil the responsibility and so are supported by national and provincial government to perform these functions. As such, the planning, implementation, and management of the GIPTN has been delivered through a partnership between the Western Cape Government’s Department of Transport and Public Works (DTPW), as the lead government stakeholder, and the George Local Municipality. This partnership is formalized through legal agreements 21 outlining their respective roles and responsibilities. The project is governed by the GIPTN Management Committee with representatives from both government stakeholders. 158 The GIPTN Management Unit, a division of the provincial government, is responsible for the day-to-day management of the service and is supported by other provincial officials from DTPW and consultants. The municipality has a single official dedicated to the project, its operational role is very limited. Table 3.8 describes the key stakeholders currently involved in the GIPTN and their respective roles, aside from the Western Cape Government and George Municipality local government. This table also includes various entities within the South African National Government (including the National Department of Transport, National Treasury, and the Roads Agency), the incumbent public transport industry and newly formed GoGeorge bus operating company (George Link), and the supplier of the GoGeorge vehicle fleet and associated maintenance. 21 “There are two linked agreements signed between the DTPW and MoG: the inter-governmental agreement (IGA), which sets out the responsibilities of each party with respect to provision of functions and allocation of resources, and the Financial Agreement (FA), which sets out each pa rties’ obligations and commitments to costs and specifies how the finances of the GIPTN are run. Under the terms of the IGA, MoG and DTPW have agreed to jointly perform the functions necessary to ensure the effective implementation of the - 74- Table 3.8: GIPTN Stakeholders and Their Respective Responsibilities Stakeholder Key stakeholder Description of role group National Department of Transport • Project oversight and grant Government (subsidy) funding National Treasury • Budget allocation toward grants South African National • Provides access for GIPTN Roads Agency Limited services and bus stops on (SANRAL) property Western Department of Transport • Leads government stakeholder Cape and Public Works (incl. • Operator contract management (Provincial) GIPTN Management Unit) • Intelligent transport and fare Government management systems • Marketing & communications • Project budget and funding (subsidy) • Regulation through operator licensing • Bus fleet management Provincial Treasury • Provincial budget allocation Local George Municipality • Joint implementation partner Government • Infrastructure delivery • Safety and security • Public participation • Bus fleet ownership Public Paratransit associations, • Existing providers of public Transport operators & drivers transport services Industry George Link (Pty) Ltd • Private bus operating company providing the GoGeorge services Industry Advisors • Provides operational, business, transition and legal advice to George Link Vehicle Mercedes-Benz South Africa • Supplier of the vehicle fleet and supplier vehicle maintenance services 159 The complex institutional arrangements and large number of stakeholders that require coordination to ensure the success of the GIPTN may cause the uncertainties for the financial sustainability of the BRT system. The insufficient capacity at the local municipal level could be a red flag for its ongoing viability. However, the intensive involvement and support of the provincial government, working in tandem with both the local and national government over several years, - 75- could also be a positive attribute of the system, if it can be parlayed into the development of local capacity over time. 160 The service is delivered by a single private company, George Link, formed from and 100 percent-owned by incumbent public transport operators and mostly paratransit MBT owners. A 12-year negotiated contract was concluded between the provincial government and George Municipality (as the two government co- signatories), and George Link, as enabled by the National Land Transport Act. 161 The institutional and business arrangements with the single bus operating company, as well as between the other role players described previously, are illustrated in Figure 3.13 below. Through an intergovernmental agreement, local and provincial governments have joint responsibilities for planning, procuring rolling stock, and funding the BRT system. The operator of GoGeorge is contracted to the intergovernmental consortium (hereafter referred to as George Government Consortium). Although the bus operator is the major private participant in this arrangement, there are numerous other private sector service providers who are contracted to provide integrated fare management (IFM), intelligent transport systems, infrastructure construction, stations and facilities management, and vehicle supply and maintenance. 3.4.3 Legal and Regulatory Considerations 162 The legal and regulatory description provided for the Cape Town MyCiTi case study (see Section 3.2.3) is also largely relevant for the George system, as the main regulatory guidance at the national government level to GIPTN implementation derives from the NLTA, the national government’s Public Transport Strategy, and the Public Finance Management Act. 163 The NLTA allows for the bus operator, George Link, to be composed of incumbent operators. Similar to MyCiTi, the GIPTN operation was contracted to George Link for 12 years through a single-source negotiation. But for the operation beyond the 12-year contract, the George Government Consortium will be required to procure through an open and competitive process and give more consideration to the commercial viability of the - 76- Figure 3.13: GIPTN Institutional and Business Arrangements 164 system in order to attract and sustain appropriate private participation and investment. However, there is again a very real risk that competitive bidding will be resisted by the existing sole-sourced incumbent operator when the government agencies move into a competitive procurement process. 165 Similar to other South African PPP cases, the utilization of PPPs by GoGeorge would be governed by the Public Finance Management Act and Municipal Finance Management Act. Complications may arise in structuring such a partnership given the responsibility sharing structure of the intergovernmental agreement between provincial and municipal governments and the private sector’s perception of such complexity. 166 Although the specifics are not publicly available, the principles of fare setting in the GIPTN are very similar to those found in Cape Town’s MyCiTi, with planners seeking to balance socioeconomic imperatives of affordability and financial sustainability and commercial viability. As with Cape Town, these principles are guided by national legislation and policy, as well as conditions for applying for grant funding. 3.4.4 Contractual Arrangements 167 George government consortium uses private sector services for two key reasons, the first being a lack of internal capacity and the second being the need for specialized skills and expertise that are not cost-effective to build within the provincial government and George Municipality. Figure 3.14 illustrates the - 77- contractual arrangements for the GIPTN.22As depicted, various contracts exist between service providers and George Municipality (MoG), the Western Cape Government Department of Transport and Public Works (DTPW), and the joint MoG-DTPW entity, including contracts for operations, vehicle supply and maintenance, marketing and communication, facilities management, and provision of ITS and IFM. There are also several service-level agreements (SLA) between the joint entity and other government entities to allow GoGeorge to interface with or access national roads, the George International Airport, and the local university. Figure 3.14: GIPTN Contractual Arrangements - Source: Go George 2017 168 The operator contract with George Link is a gross-cost contract where in the George Government Consortium collects the revenue and pays the company a negotiated contract rate. In this approach, the George Government Consortium determines the network, services, and schedule, sets the fare, and stipulates quality standards. However, the George Government Consortium also takes on the revenue risk. The operator contract “specifies the conditions that the bus operator (George Link) must adhere to and quality of service parameters it must deliver. It also sets out the rates at which the operator is remunerated, and agreed upon formulas and indices (e.g., fuel price, labour cost, CPI 23 ) by which the rates escalate” (DTPW 2019). In the GIPTN, the VOC is remunerated based on fixed and variable cost. 22 The figure does not include the vehicle purchase contract. The bus fleet was purchased by the government using PTNG funding through a competitive tender process; the vehicles are leased to the bus operator. 23 Consumer Price Index is the measure of general inflation. - 78- 3.4.5 Paratransit Participation 169 MBT participation and empowerment is a core objective of the GIPTN. As is the case in Cape Town and in other cities across South Africa, the principle adopted is that no incumbent MBT operator would be worse off under the new system. 170 The George Government Consortium concluded an extensive seven-year engagement and negotiation process with incumbent operators which culminated in a negotiated contract with George Link, the VOC. The George Government Consortium provides extensive support for the establishment, capacitation, and capitalization of the VOC. Existing licensed (e.g., legally operating, as opposed to several illegally operating paratransit providers) operators are extended an opportunity to become shareholders in the VOC, with the option to buy in (participate), buy out (leave the industry), or compete with the system. 171 Those who chose to buy in or buy out were financially compensated by George Government Consortium for relinquishing their operating licenses and vehicles, at an average compensation value of ZAR260,000 ( US$30,000) per operating license for Phase 1 (von der Heyden, Hastings, and Leitner 2014). Participating operators also agreed not to compete with the new service. In addition, 90 percent of the VOC’s staff have been sourced from the MBT industry in George (DTPW 2017). To achieve this, the George Government Consortium was supported by a consulting team and covered the cost of advisers to the participating operators during negotiations and, thereafter, supported the establishment of the company and delivery of the service. 3.4.6 Commercial and Financial Aspects 172 The revenue generated by the GIPTN cannot cover the direct operating cost and, therefore, the system is dependent on ongoing subsidies from both the national and provincial government. National government funding is through the PTNG, which covers a portion of indirect operating cost, establishment cost, and capital infrastructure cost of infrastructure. The provincial government covers the remaining funding requirements of the project. A summary of the GIPTN’s financial performance is provided in Table 3.9, covering the financial years 2013-14 through to 2016-17. Given the operations had yet to commence in 2013-14, the expenditure in this year is entirely covered by national government funding. Rollout kicked off in 2014-15, scaling up into the following years. The figures in the table demonstrate the high dependence of the GIPTN on grants from national and provincial governments both for capital and operational cost. 173 The GIPTN’s direct cost recovery (revenue as a percentage of direct cost) is approximately 20 percent, 31 percent, and 32 percent for the years 2014-15, 2015- 16, and 2016-17, respectively, depicted graphically in Figure 3.9. If coverage of indirect cost is also factored in, recovery is even lower, sitting at around 24 percent in 2016-17. - 79- 174 GoGeorge is still highly dependent on external grant support for its ongoing sustainability. Any commercial participation by outside parties will also be reliant on the security of ongoing grant contributions. Fares are set to be affordable for low-income passengers and linked to the minimum domestic worker wage, and although escalated annually, are not expected to cover a large proportion of cost in the future. Table 3.9: Summary of GIPTN Financials 2013-14 — 2016-17 (ZAR, millions) 2013/14 2014/15 2015/16 2016/17 System Income Fare Revenue - 7.45 32.53 37.30 Other Income National Government Grants 265.02 122.25 116.33 156.24 Provincial Government Grants - 32.34 129.23 150.54 Interest - - 2.15 2.16 System Costs Direct Operating Costs - 38.15 106.19 114.92 Indirect Operating Costs - 8.27 14.23 43.33 Capital Costs Capital and Establishment Costs 265.02 122.02 163.82 130.33 175 Both national government funding (PTNG) and provincial government funding to GoGeorge is allocated on an annual basis, with indicative allocations provided for a further two years. The allocation methodology of PTNG has recently shifted to a formula basis which favors larger cities, generating uncertainty and risk in funding for the GIPTN going forward. 24 Figure 3.16 provides a high-level representation of the financial flows into and through the GIPTN system, reiterating and characterizing several of the transfers and relationships discussed above. 176 National grant funding is provided by the National Treasury via the National Department of Transport to George Municipality as the PTNG. The municipality also collects fare revenue. The Western Cape Provincial Treasury’s contribution flows to the Provincial DTPW, as part of the GIPTN joint government entity. The numerous 24 Seventy-five percent of available funds are allocated according to demand factors (population size, size of economy, number of public transport users), 20 percent share equally, and 5 percent according to direct cost coverage, passenger trips as ratio of population, and level of the municipality’s own funding. As costs, particularly establishment costs, do not scale linearly with many of these factors, this puts smaller cities at a disadvantage compared to larger ones. - 80- outsourced contracts are paid through the joint entity. There is still a lack of any financial flows from private sector participants into the George system, and, therefore, the overall reliance of the system on grant funding from the government (both national and provincial). 3.4.7 Technical, Social, and Environmental Aspects 177 The GoGeorge system was designed to be universally accessible, with both vehicles and infrastructure designed to meet these requirements and including features such as level boarding and the first universally accessible minibus in South Africa.25 In addition, the system includes an electronic ticketing system with an EMV-compliant smartcard. Payment onboard with cash is still possible, but the fares for this type of payment are higher. While all of these additions lead to a higher-quality and more accessible system, they also contribute to an overall increase in up-front capital and ongoing operational cost. Figure 3.15: GoGeorge Direct and Overall Cost Recovery Figures 2014-15-2016-17 25 The minibuses in the GoGeorge fleet are fully accessible for wheelchair users. - 81- Figure 3.16: GIPTN Financial Flows 3.5 Dar Es Salaam 178 Dar es Salaam is representative of numerous major economic centers across the African continent with high population growth, sprawling urban development, insufficiently maintained transport infrastructure, crippling congestion, prevalent paratransit operations, and growing private vehicle usage. 179 Dar es Salaam has one of Africa’s most high-profile BRT systems, Dar es Salaam Rapid Transit. The Dar es Salaam Rapid Transit is also called DART BRT system. Its first phase is partially operational and Phases 2, 3, and 4 are in development. To date, planning and implementation of DART has predominantly been financed by international development banks. The private sector, including former paratransit providers, is currently participating in DART service operations. Decision makers are exploring mechanisms for an increased role for private sector participants. 3.5.1 System Overview 180 Rapid population and economic growth in Dar es Salaam are driving increasing demand for mobility. Dar es Salaam is expected to become a megacity by 2030 with a population of more than 10 million (Huang 2017) and the city is the primary engine of Tanzania’s growth, with the largest concentration of economic assets (ports, airports, industry, universities, real estate, etc.). As the urbanization process continues, it is critical to establish a well-functioning mass transit network to accommodate the mobility demand and address congestion. - 82- Figure 3.17: DART Interim Phase 1 Operations - Source: ITDP 2017a. 181 Public transport services in Dar es Salaam are currently insufficient to cater to the demand for greater availability and quality. Public transport is primarily provided by 5,000 to 9,000 licensed (LATRA 2019a; LATRA 2019b), low- capacity, privately owned minibuses and minibuses commonly known as daladalas. There is a strong need to improve the quality and safety of the daladala service as well as the efficiency because the travel time on key corridors can be very long given the sprawling urban form of the city and the very high levels of congestion. In 2003, Dar es Salaam City Council (DCC) developed a plan to introduce a BRT system in the city called Dar es Salaam Rapid Transit or DART. 182 The DART BRT system comprises of six phases which cover the six major corridors/arterial roads in Dar es Salaam. Phase 1 has been partially operational since 2016 and covers the main Morogoro Road and the two branches of Magomeni-Morocco and Fire Kariakoo. Other phases to follow cover Kilwa Road, Ali Hassan Mwinyi Road, Bagamoyo Road, Nyerere Road, Nelson Mandela-Sam Nujoma Road, and Kawawa Road. These six DART phases are shown in Figure 3.1826. 26 It should be noted that a demand study was recently completed, and the system design is being revised accordingly (DART Agency 2019), which may alter the current planning. - 83- Figure 3.18: The DART Implementation Phases - Source: World Bank 2018a. 183 The first phase of the DART infrastructure project includes: 1) upgrading of 20.9 kilometers of road, including development of dedicated BRT lanes, on Morogoro Road from Kimara to Kivukoni (15.8 kilometers), Kawawa Road from Magomeni to Morocco Terminal (3.4 kilometers), and Msimbazi Road from Fire Station to Kariakoo Terminal (1.7 kilometers); 2) the construction of 27 bus stations, five terminals, three pedestrian bridges located in Kimara, Ubungo, and Morocco Terminals, and one depot, as per shown in Figure 3.19. Figure 3.19: DART BRT Phase 1: 2008-16 - Source: World Bank 2018a. - 84- 184 During this first interim operation, ridership along the line reached in the range between 185,000 and 200,000 passengers per day, with 33 percent of total boarding concentrated at five main stations, mainly by the terminals operating as interchanges. The system design for the full operationalization of Phase 1 includes several feeder routes. Two feeder lines, including Gerezani to Muhimbili national hospital, are operating. 185 Service capacity is currently limited during interim operation. The main issues include long queues and wait times, overcrowding, unreliable departure times, and crime and security issues, especially for women. Despite these issues, there is an overwhelming demand for the service due to the unidirectional demand during peak hours and limited service capacity. When fully operational, Phase 1 is expected to carry over 400,000 passengers per day with the deployment of a total bus fleet of 177 composed of 18-meter trunk buses with capacities of 150 passengers and 128 passengers and 12-meter feeder buses with a capacity of 80 passengers. 3.5.2 Stakeholder and Institutional Arrangements 186 The DART Agency is responsible for delivering and operating BRT in Dar es Salaam. Its organizational structure is shown in Figure 3.21, with a chief executive reporting to the minister for the President’s Office for Regional Administration & Local Government (PORALG). The DART Agency’s chief executive also liaises with several DART Coordination Committees (including Steering, Technical, and Coordination Committees), and oversees a DART Agency team comprising several divisions which conduct and oversee planning, operations and infrastructure management, finance, and communications. The Ministerial Advisory Board has the responsibility of overseeing DART Agency’s operations and advising the minister for the PO-RALG. 187 The DART Agency works closely with other stakeholders, including the Ministry of Works, Transport and Communications (MWTC) in the area of transport policy and planning; the Tanzania National Roads Agency (TANROADS) as the agency responsible for infrastructure procurement and implementation; Dar es Salaam City Council (DCC) and its municipalities in infrastructure rollout and maintenance; the National Traffic Police for traffic control and enforcement of the traffic regulations; and the Land Transport Regulatory Authority (LATRA) for the regulation of public transport and fares. The Ministry of Finance and Planning (MoFP) is the entity tasked with oversight of PPPs in Tanzania, through a PPP Centre and a PPP Finance Unit. The DART Agency reports to and engages with the MoFP in the implementation of DART PPPs. 188 The DART Agency currently comprises 78 staff, with an annual operating budget of US$2.3 million. Given the scale and complexity of the envisaged BRT system, the capacity building of the DART Agency still needs to be strengthened, - 85- although this is supplemented by capacity in other stakeholders, including TANROADS and LATRA. The DART Agency expects its budget to double once operations fully commence, but it is arguable that it would then still be under- resourced (DART Agency 2019). 189 In 2015, the DART Agency concluded a contract with Usafiri Salama Dares Salaam Rapid Transit (UDA-RT) for the provision of interim services in DART Phase 1. UDA-RT is a special purpose company formed by UDA and two daladala associations, the Dar es Salaam Commuter Bus Owners Association (DARCOBOA ) and the Association of Transporters in Dar es Salaam (UWADAR) for the express purpose of operating interim services on Phase 1 of DART. Figure 3.20: Interim Daily 1 Ridership of BRT Phase 1 (passengers/day) - Source: World Bank 2018c. - 86- Figure 3.21: DART Organizational Structure - Source: World Bank 2018d. 190 The responsibilities of these key stakeholders, and several others, are summarized in Table 3.10. Table 3.10: Summary of Key Stakeholders and Their Responsibilities Entity Responsibility President’s Office for • Oversight of the project as a parent Ministry of Regional DART Agency Administration & Local • Monitoring of the activities of the municipal Government administrations Ministry of Finance and • Approval and oversight of public-private Planning partnerships Ministry of Works, • Establishment of the regulatory and legal Transport, and frameworks for land transport Communication - 87- • Supervision of LATRA and TANROADS. Steering Committee of • Oversight of project technical oversight DART Agency • Review of progress reports of the project and providing technical way-forward • Coordination of cross-sectoral/ministerial issues • Conduction of biannual meetings TANROADS • Directly responsible for implementation and maintenance of BRT infrastructure, including procurement of all BRT works infrastructure, management of implementation of works, overall responsibility for social and environmental safeguards implementation and disbursement DART Agency • Implementation and management of BRT, including procurement and monitoring of operators and other service providers • Responsibility for procurement of consultants and advisors for preparation of BRT operations • Maintenance of BRT stations LATRA • Responsible for licensing of public transport • Sets public transport fares (including for BRT) • Overall responsibility for the transformation of daladalas into the formation of companies, cooperatives, or franchises UDA-RT • Special purpose company formed by UDA and the two daladala Associations, the Dar es Salaam Commuter Bus Owners Association (DARCOBOA) and Association of Transporters in Dar es Salaam (UWADAR) Local Government27 • DCC and local municipalities participate in the infrastructure roll-out and maintenance, but 27 DCC and the Municipal Councils of Temeke, Ilala and Kinondoni. - 88- their roles are limited role given that control of the project has been centralised National Traffic Police • Protection of BRT lanes • Enforcement of illegal operators (with LATRA) Ministry of Lands and • Planning and authorisation of the use of land Human Settlements • Management of the settlement of residents Development 191 The responsibilities for planning, operating, and managing the DART system are spread among different agencies. The DART Agency is responsible for overall project implementation of BRTs but has no explicit control over the city’s transport system. In particular, several core responsibilities critical to the efficacy and sustainability of DART are split between the DART Agency and LATRA. Although the DART Agency is responsible for the implementation and management of the BRT system, only LATRA has the right to decide on critical managerial matters such as the issuance of license, fare-level adjustment, and the integration of daladalas into the BRT operation. The fragmented responsibilities and rights lead to complexities in procedures and coordination of BRT operations. 192 Implementation of Phase 1 BRT infrastructure was delayed mainly by two challenges delays in civil work and inadequate engineering design - and the lack of PPP experience. The prequalification procurement process for construction works met a roadblock in September 2008 due to the unavailability of a qualified bidder. The works were then repackaged into seven smaller lots, splitting major building- related works from roadworks, and then retendered. The six small packages of building and utilities-related infrastructure were awarded by mid-2010. The main roadworks contract was awarded in February 2011. However, the preferred bidder declined to sign the contract after a period of negotiations and a contract was eventually concluded with the fourth-ranked bidder in December 2011. 193 The second challenge to roll out several phases of the DART system is the lack of experience in implementing PPPs, which is the main delivery model for the future projects. MoFP’s PPP Unit and other government agencies have inadequate experience in implementing a PPP of this scale in the transport sector as the PPP Act was established in 2010 but the PPP institutions are yet to be fully established and successfully process PPP transactions. To ensure effective and efficient procurement and governance of PPPs for the DART system, the DART Agency, MoFP, and other agencies in Tanzania need further capacity development in PPP. 194 The issues above all negatively influence commercial viability, both directly with regard to financial performance (less revenue generated, additional operating - 89- and maintenance cost incurred) and indirectly with regard to private sector participant appetite to invest in the system. 3.5.3 Political Economy 195 Initially, the DART BRT was promoted as the solution to chronic and rapidly escalating traffic congestion and to the low quality of public transport provision. Significant progress has also been made in developing and implementing Dar es Salaam’s BRT system. However, the progress of full operationalization of DART Phase 1 has been constrained as a consequence of the complexity of Tanzania’s political economy. The complexity was led by the imbalance of the political goal and institutional capacity, as well as the misalignment of the political and economic interests of different stakeholders. Despite this, significant progress has since been made in developing and implementing the first phase of Dar es Salaam’s BRT system. 196 Although there are strong political commitments to support the operation of the DART BRT, the governance capacity and the authority of the DART Agency is limited to implementing these political commitments. The main reason is that the responsibilities for planning, operating, and managing the DART system are spread among different agencies. In particular, several core responsibilities critical to the efficacy and sustainability of DART are split between the DART Agency and LATRA. For instance, the DART Agency is responsible for the implementation and management of the BRT system, but only LATRA has the right to decide on critical managerial matters such as the issuance of licenses, fare-level adjustment, and the integration of daladalas into the BRT operation. The fragmented responsibilities and rights lead to complexities in the management of BRT operations. 197 A certain level of misalignment of objectives exists within government agencies, leading to conflicts and delay of implementation. As displayed in Section 3.4.2, the public sector stakeholders include different government agencies that manage the BRT and land transport, etc. The misalignment of the objectives of these public sector stakeholders is one of the major obstacles to the implementation of BRT. For example, the Dar es Salaam City Council and DART Agency had conflicting agendas on the use of Ubungo station. Ubungo station is Tanzania’s largest terminal to up-country destinations, so the revenue from Ubungo was an important asset to the Dar es Salaam City Council. However, Ubungo was planned by the DART Agency as one of the main terminals of the BRT. The change of land use plan raised conflict of interests between these two government agencies, which caused the delay of implementation. 198 Tensions between the government agencies and the operators, and the lack of market competition led to the obstacles to implementing competitive tendering. UDART was initially awarded an interim contract to operate the BRT Phase 1 as the interim service provider (ISP). The competitive bidding of BRT - 90- operator was planned to relaunch after the interim service period. However, the relaunching process was stalled after the high court issued an injunction to maintain the status quo following an application by the ISP to stop the launch of competitive bidding for operation of the remaining BRT Phase 1 buses. Although the government has committed to relaunching the procurement process, conducting adequate market sounding, and enabling BRT Phase 1 to become fully operational, the local market lacks qualified service providers to support the competitive bidding. Ultimately, in order to guarantee the operation of the BRT Phase 1, the UDA-RT was awarded a transitional contract without competition. 3.5.4 Legal and Regulatory Considerations 199 The main policies instructing DART are 1) Tanzania’s National Transport Policy (United Republic of Tanzania 2003); 2) the Dar es Salaam Transport Policy and System Development Master Plan (United Republic of Tanzania 2008); 3) Big Results Now (BRN) (2013), a national development strategy; and 4) the Public Private Partnership Act (2010). 200 The National Transport Policy prioritizes the development of a BRT system and an associated feeder bus network for Dar es Salaam and emphasizes the significance of providing infrastructure for public transport, e.g., bus lanes and facilities for pedestrians and passengers (Ministry of Communications and Transport 2003). 201 In the Dar es Salaam Transport Policy and System Development Master Plan, BRT is one of the main transport pillars. The master plan also promotes involvement of the private sector in business opportunities related to urban transport provision, including tasking the DART Agency with taking the initiative in the development of appropriate business models to attract private sector participation. Transit-oriented development, and, by extension, leveraging and building value out of BRT-associated development, is a principal policy of the master plan (Dar es Salaam City Council 2008). 202 The overarching national development strategy, Big Results Now (BRN) (2013), prioritized the Central Transport Corridor, linking the Port of Dar es Salaam to neighboring countries and included the development of BRT. BRN also identified BRT as one of the three projects to be delivered through PPPs by the end of 2015. 203 Currently, there is no legislation that explicitly governs implementation and operation of a road public transport (BRT) system in Tanzania, nor a law that clearly allocates roles and responsibilities for BRT development between stakeholders. The DART Agency was legally established in 2008 through GN. No. 120 of 2007, under the Executive Agency Act, No. 30 of 1997, to oversee DART through existing laws that would apply (such as road traffic and safety provisions, labor legislation, land use regulations, and environmental laws) and current institutional relationships. - 91- 204 The Public Private Partnership Act (United Republic of Tanzania 2010), in concert with the Public Private Partnership Regulations (United Republic of Tanzania 2011), governs the PPP regime in Tanzania, and so will guide the procurement of private partners for the DART system. Tanzania has implemented several PPPs, albeit none successfully since the enactment of various PPP reforms in 2010-11. Three PPPs for Phase 1 of the DART system have progressed the furthest, to cover operations, ticketing, and fund management. However, only the PPP for the fund management reached agreement, but is still to be implemented. Aside from capacity issues, a lack of clarity in PPP legal and implementation frameworks, and a lack of financing and risk-sharing mechanisms are mooted as reasons for the slow procurement of PPPs (World Bank 2016a). This is a significant risk to commercial viability. 205 Fare levels for the DART system are set by LATRA. LATRA has adopted a “cost plus” policy for establishing BRT fare structure, which considers the cost of providing the service and the required margins. This is adjusted according to public consultation and affordability (DART Agency 2019). To date, the policy has tended to favor affordability, and fare escalation on interim operations has been low, and, therefore, disconnected from rising operational cost. 3.5.5 Contractual Arrangements 206 The Phase 1 DART system was planned to be delivered through a PPP structure. Under this structure, the Government of Tanzania finances, implements, and maintains the infrastructure, while the private sector partners finance and operate the buses, as well as undertake ticketing, fare collection, and fund management. 207 The DART Agency originally proposed an access fee model as well as the revenue management approach for the bus operations PPP. In the 12-year concession arrangement, the operator collects fare revenue and takes on revenue risk, while paying the DART Agency an access fee for use of the BRT infrastructure. The fare collector contractual arrangement was designed to run over 12 years, with remuneration as a monthly fixed fee plus a percentage of fare proceeds. A tripartite agreement between the DART Agency, bus operator, and fund manager stipulates the fund manager manages various cash flows over an aligned 12-year contract. In return, the fund manager would be remunerated a percentage of funds under management. 208 Given that the main trunk line was nearing completion after the formal procurement processes began in 2014, the DART Agency subsequently chose to proceed with the single-source procurement of a local operator (UDA-RT) as the ISP for a period of two years. The aim was to continue to conduct a competitive procurement process for the full operationalization of Phase 1 while interim services were underway, per an amended process summarized in Figure 3.15. - 92- 209 The interim contract was designed for the operation of a specified reduced fleet of buses. It also required the ISP to supply a simple ticketing solution. In addition, the contract was drafted to ensure that a competitive process for the remainder of Phase 1 services could still proceed. The government signed the interim service contract in April 2015, but excluded clauses recommended by the advisers that would prohibit scope expansion and participation of the ISP in the procurement process for the remaining services. After a short period of preparation, interim bus operations commenced on May 10, 2016. Figure 3.22: DART Phase 1 Operational and PPP Status - Source: World Bank 2018a. 210 The ISP supplied BRT buses and systems beyond the scope of the contract after the contract was concluded. The mismatch between the terms of the contract and the ISP’s supply of vehicles and systems resulted in further delays. In February 2016, an addendum to the contract was concluded to allow for the increased number of vehicles. It was also agreed that the ownership of the automatic fare collection system (AFCS) and intelligent transportation systems (ITS) systems would be shifted to the government subject to an independent technical and financial due diligence. However, it was subsequently determined that these systems were not fit for purpose to support full operations, and there was no clear legal path that existed for the DART Agency to unilaterally acquire the equipment. 211 The request for qualifications for a second BRT operator was launched in June 2016 but confronted with difficulties in attracting qualified bidders, with only one noncompliant bid. It was determined that the access-fee model was not suitably attractive to the market. The relaunching of the bus operator bidding process was temporarily stalled in January 2017 after the high court issued an injunction for maintaining the status quo following an application by the ISP to stop the government from proceeding. The ISP agreement expired on May 10, 2018 and was extended until the DART Agency concluded a transitional service agreement in August 2019. To date, the competitive procurement process for a bus operator(s) has not been completed. Given the lack of interest in the proposed access fee model, the DART Agency is still in the early stages of exploring an alternative - 93- contractual mechanism and utilizing a gross-cost model. In this model, the DART Agency would take on the revenue risk and remunerate the bus operator per an agreed-upon rate, with various risk-sharing incentives bolted on. The procurement process for the fare collector was also confronted with difficulties. The tender was cancelled in the middle of negotiations upon a recommendation from the attorney general’s chambers. 3.5.6 Paratransit Participation 212 Daladala operators in Dar es Salaam are not well-organized and there is lack of a comprehensive engagement process initiated by the government. Achieving consolidation between independent operators is challenging in a context of limited organization and trust between operators (LATRA 2019a; LATRA 2019b). There is also an understandable resistance to participation in BRT due to the perceived risk to livelihoods (Mfinanga 2012). 213 LATRA’s broad approach to the paratransit industry in the context of the DART system has gradually evolved from the full replacement of existing daladala services with formalized trunk and feeder BRT services to a more inclusive operation solution. The full operationalization of Phase 1 will affect approximately 2,000 daladalas. The initial approach was for affected operators to be rerouted to other parts of the city or other regions (DART Agency 2019). With the subsequent decision to engage with the daladala operators, affected operators were provided with the option to participate in UDA-RT. Approximately 400 operators were affected by interim rollout. They were then included in the operating company, UDA-RT, and received limited financial compensation such as shares of UDA-RT and a disturbance allowance (LATRA 2019a; LATRA 2019b). However, UDA-RT’s financial performance and the role of participating daladala operators in the company are opaque. Participating daladala operators have had limited access to UDA-RT’s operational or financial information since they joined the company as minority shareholders. 214 The World Bank has initiated a study on integrating paratransit operators to provide an alternative and inclusive operation solution. The aim is to support the daladala operators form an official company or companies qualified for BRT operating contracts. The formalized daladala operators could then be awarded a noncompetitive contract for the operation of Phase 3 and/or Phase 4. However, challenges hindering daladala participation include a lack of capacity or experience operating formalized, scheduled bus services and access to capital to establish companies, commence operations, or purchase vehicles. Approximately 35 percent of the daladala owners have indicated that they lack enough capital to form companies and/or take part in the DART system (Mfinanga 2012). The long-distance buses and truck owners have more capital at their disposal than local daladala owners. But the daladala owners have rejected the idea of forming companies with up-country bus and truck owners out of concern that they will lose control of their - 94- businesses. In addition, there appears to be limited government planning, support, and engagement with the daladala industry to support formalization and integration into BRT. Government agencies (e.g., LATRA) are of the view that daladalas should formalize and consolidate independently. It was also indicated that formalization and capacitation of daladalas is not a political priority (LATRA 2019a; LATRA 2019b). 215 Unlike formal potential private partners procured under PPP, paratransit operators are facing challenges to “pay their own way” concerning the cost of qualified rolling stock for BRT operation. The cost and time requirements for the formalization of daladala operators into effective and sustainable operating companies also need to be considered. Their inability to formally participate in the BRT operation and the insufficient capacity of the current BRT operators may cause more demand-supply issues, which will affect the financial sustainability and commercial viability of the BRT system. 3.5.7 Commercial and Financial Aspects 216 TheimplementationofDARTPhase1hasbeenprimarilyfinancedbyconcession al loans to the Government of Tanzania from the World Bank, covering actions such as planning, infrastructure development, and capacity building. The government provided a letter of commitment as a quasi-informal guarantee. Fare revenue reportedly flows to the National Microfinance Bank (NMB) of Tanzania first, to recoup the loan repayments, before flowing to the operator (DART Agency 2019). 217 The operational and financial performance of the existing DART service remains opaque28. The DART BRT operation relies exclusively on fare revenue to cover its cost as it is not subsidized by the Government of Tanzania. The financial model for the full operationalization of Phase 1 projected to cover direct operating cost by fare revenue at maturity under the current design and operating scenario with current fare levels with subsidies as viability gap funding. However, UDA-RT claims there are commercial viability issues in continuing the interim operations due to the low fare levels (UDA-RT 2019). The extent to which the operator has received ongoing support from the government is unclear given that the state owns 49 percent of UDA, the majority shareholder in the BRT operating company (Mchomvu 2019a; Mchomvu 2019b). 218 A substantial commercial viability gap will inevitably affect the financial sustainability and commercial viability of full operation of the DART Phase 1. The DART Agency has considered several operational options to overcome this gap. These scenarios incorporate various operational modifications, including increased 28 The actual financial performance of existing Phase 1 operations was not made available to the project team and is considered confidential at this time. - 95- fares, lowered cost of finance, decreased number of buses, and a switch from diesel to natural gas buses in order to save on operating cost: • Option 1 – the base scenario, on which subsequent options are based; • Option 2 – a 30 percent decrease in the size of the bus fleet; • Option 3 – a decrease in the cost of capital for the operation from 17 percent to 10 percent; • Option 4 – adoption of compressed natural gas (CNG)29 for the bus propulsion system (increases up-front fleet cost, but reduces operational cost); • Option 5 – adoption of CNG bus fleet, and a 30 percent decrease in bus fleet size; • Option 6 – adoption of CNG bus fleet, a 30 percent decrease in bus fleet size, and a 15 percent reduction in ridership; and • Option 7 – adoption of CNG bus fleet, a 30 percent decrease in bus fleet size, a 15 percent reduction in ridership, and a fare increase of TZS200. 219 As shown in Figure 3.16, the only scenarios to yield commercially viable results are Option 5 (switch to natural gas and lower number of buses) and Option7 (switch to natural gas, lower number of buses and ridership, and increase fares). This indicates that for the next procurement process to be successful, the government will need to consider making changes from its default DART system design, such as reducing the bus fleet size, increasing fare, and adopting renewable energy vehicles. Alternatively, government support to cover 40 percent to 50 percent of the cost of purchasing the vehicle fleet would bridge the viability gap of Option 1. 220 Regardless of the operational option, any positive commercial viability demonstrated is highly dependent on the projected ridership figures and fare levels. In order to avoid the lack of attractiveness of the proposed Access Fee PPP model, the government would need to provide a minimum ridership and fare-level guarantee. Alternatively, a gross-cost PPP model could be pursued. Currently, the DART Agency and other stakeholders have not decided on a preferred way forward. This issue is described at length in Section 4.5.1. 29 All CNG scenarios have been excluded in the new model. - 96- Figure 3.23: DART Operational Models and Commercial Return Scenarios - Source: DART Agency 2019. 3.5.8 Technical, Social, and Environmental Aspects 221 The DART BRT was designed to be inclusive. During the initial design phase of the Dar es Salaam BRT, universal access was mainstreamed. BRT stations have level boarding with buses, and other facilities for wheelchair users. From the perspective of corporate governance and social benefits, it is expected that up to 770 staff will be permanently employed during Phase 1 operations, plus several more on a non-permanent basis for the construction of future phases. 222 However, DART BRT still faces issues with improving the service quality of AFCS and lack a traffic signal management system. The DART BRT lanes, depot, and station are highly exposed to flooding, causing a reduction in operational capacity and increase in maintenance cost. An investigation of DART BRT indicated that 52 percent of the respondents are not satisfied with the general services provided by the ticketing agency, MAXCOM (Chengula and Kombe 2017). Commuters are forced to queue at stations and terminals as there are few attendants during peak hours, causing delays in commuting. In addition, there is presently no traffic signal management system, and buses often experience bunching, especially at inner-city stations. The capacity of the DART BRT system is constrained by technical issues, causing lower-than-expected service levels and overcrowding. 223 Increasing the system’s resilience to environmental and climate change risks is also critical for financial sustainability and commercial viability. In April and May 2018 the Jangwani depot (Phase 1) experienced significant flooding, becoming - 97- entirely submerged and largely unusable. The water damaged several vehicles parked at the depot, as well as other equipment. Besides the longer-term financial implications of the flooding, the impact on DART BRT operation in the short term was also significant, as carrying capacity was reduced and certain routes could not fully operate. Since the event, the DART Agency has developed mitigation plans to avoid a similar occurrence during future monsoon seasons in Dar es Salaam. - 98- 4 | Factors Influencing Financial Sustainability and Commercial Viability 224 The high-level review and synthesis of findings in Chapter 4 began to inform the identification of a number of key factors influencing financial sustainability and commercial viability of Bus Rapid Transit (BRT) systems in Sub-Saharan Africa (SSA). To build on this initial factor identification, and provide real examples to further characterize these factors, three of the systems explored in Chapter 5 were selected as more detailed case studies—Cape Town (South Africa), George (South Africa), and Dar es Salaam (Tanzania). Through the review of SSA BRT initiatives and the three case studies, the key factors emerging as influential on financial sustainability and commercial viability were progressively identified and proposed as follows: • Fiscal capacity (Section 4.1) • Legal and regulatory framework (Section 4.2) • Market dynamics (Section 4.3) • System design and business model (Section 4.4) • Policy and political will (Section 4.5) • Institutional capacity (Section 4.6) • Incumbent operators (Section 4.7) • Participation model (Section 4.8) • Adjacent value (Section 4.9) 225 In this chapter, these factors are described and analyzed in detail, supplemented by insights from the case studies to demonstrate the impact of each factor on financial sustainability and commercial viability in different contexts. - 99- 4.1 Fiscal Capacity Fiscal Capacity Fiscal capacity is the capacity of the government (and supporting stakeholders) to effectively meet their financial commitments and obligations over the lifecycle of the BRT project program. This includes consideration of issues such as the source and security of funding, any mechanisms in place to mitigate risks to that funding, and the ability of the government to raise and effectively deploy funding. 226 The continental overview and detailed case studies indicate the importance of fiscal capacity as a key determinant of financial sustainability and commercial viability, given the almost universal requirement for government funding in BRT systems, to cover both capital and ongoing operational expenses. 227 From a capital and establishment perspective, fiscal capacity is required to fund the procurement and development of infrastructure and, in some cases, the bus fleet and technology systems. Capital and establishment support are also required to manage the role of incumbent operators, including the cost of formalization and integration into the new system. 228 From an operational perspective, fiscal capacity is required in cities where system running cost cannot be fully covered by fares and other system revenue. Ongoing operational subsidies are required where the pattern of demand results in poor cost recovery, where low thresholds of passenger affordability constrain fare levels, and where the design of the system does not optimally reflect these constraints and the local operational context. 4.1.1 Insights From Case Study Cities 4.1.1.1 Cape Town 229 In Cape Town, significant levels of capital and operational subsidies are required to ensure the financial sustainability and commercial viability of both MyCiTi BRT services and the Golden Arrow Bus Services (GABS) conventional bus operations. Therefore, the fiscal capacity of the national and city governments to provide this subsidy is core to the financial sustainability and commercial viability of the Cape Town BRT system. - 100- 230 All MyCiTi routes require subsidies of direct operating cost due to demand patterns (see Section 4.3.1 for an explanation of how MyCiTi’s demand patterns are impacting its ability to optimize revenue generation). Revenue is lower and cost higher than the initial projection, thus greater levels of subsidies are required than initially forecast (CoCT 2015). Historically, as discussed in Section 3.2.6, MyCiTi’s direct cost recovery has been around 45 percent. As additional phases come online, projections are that recovery will steadily increase to around 70 percent in 15 years. 231 The shortfall of revenue is largely covered by funding from the City of Cape Town (CoCT), predominantly derived from property fees and taxes. While originally 4 percent of the city’s property rates revenue (approximately US$20 million per annum in 2018) was set aside to subsidize the direct operating cost of full- system rollout, it has largely been absorbed by the first phases of the system (Phase 1 and the N2 Express service) (CoCT 2018). This leads to risks for the ongoing sustainability and viability of further MyCiTi phases. With indirect cost of operating MyCiTi accounted for, the shortfall increases, as highlighted in Section 3.2.6. Cost recovery of both direct and indirect cost is currently only around 25 percent, although projected under 50 percent by the 2033-34 financial year. This means that MyCiTi at full maturity would only be able to sustain 50 percent of its overall operational cost. Therefore, the system faces risks to financial sustainability and commercial viability. 232 Indirect operating cost of the system and capital cost are currently funded by South African National Government’s Public Transport Network Grant (PTNG) subsidy (approximately US$67 million per year). However, this grant is only guaranteed a year in advance. It is, therefore, not fully secure, and the lack of long- term visibility of funding impacts the planning. The grant’s existing allocation formula can be changed at the National Government’s discretion, and there is growing pressure on the capacity of the national fiscus from myriad other sources. The quantum of future available funding from the national government is uncertain beyond the three-year national budgeting periods, which results in risk for the city when entering long-term operating contracts. The stability of the subsidy is a crucial factor for financial sustainability and commercial viability in this context in order to scale up and expand the MyCiTi system beyond Phase 1. 233 In the South African context, cities that are eligible to receive funding from the national government need to comply with stipulated system specifications of the Public Transport Network Grant (PTNG) and the Public Transport Operations Grant (PTOG) (see Section 3.2.3). This includes the requirement to use smart systems (such as smartcards that are Europay-Mastercard-Visa compliant) and a very high level of service specifications, which add significantly to the cost of the system (see Section 4.4.1 for further detail). To continue system expansion without significant delay to rollout, the city requires additional capital funding sources. As - 101- such, the city is investigating measures to reduce the cost of the planned infrastructure for Phase 2A that does not materially impact operational scale CoCT 2018b). 234 There is a strong need to explore a wider spectrum of funding as well as consider the feasible approach to adjust fare level. Given that Phase 1 operating cost has absorbed the available subsidies from the city, system expansion is a key challenge with more efficient system designs proposed for the future phases, and additional funding sources being explored, for example, through an improved approach to parking management.30 A further consideration for fiscal capacity is that the available subsidies from the National Government generally do not increase in line with transport inflation31 and, for public affordability reasons and per the city’s fares policy, fares cannot easily be increased to match transport inflation. This growing escalation gap places further pressure on the BRT and city’s finances, affecting the BRT system’s long-term sustainability. 4.1.1.2 George 235 The GoGeorge BRT system is highly reliant on government subsidies for both capital and ongoing operational expenses. As discussed in the case study in Section 3.3.6, the George Integrated Public Transport Network’s (GIPTN’s) cost recovery has historically sat at around 30 percent, and factoring in indirect cost, this coverage decreases to 25 percent, which leaves a substantial gap requiring support from the government. 236 While the government has been able to meet its financial commitments to date, its ability to fund all aspects of the project is increasingly under pressure. Similar to Cape Town, the stability and predictability of funding sources is also crucial in George. In addition to funding from the national government, GoGeorge also receives funding from the provincial government, which is subject to similar security and visibility constraints but reduces reliance on the national fiscus. Both national and provincial budgets are under pressure due to the general worsening of economic conditions in South Africa and declining revenue collection. 237 The formulae used to determine national grant allocations is biased toward larger cities, putting the George BRT at a disadvantage. Further, the eligibility conditions for national funding are written with larger cities and full BRT systems in mind, making it difficult for the GIPTN to comply. Compliance increases complexity 30Revenue generated from managed parking is ring-fenced for public transport by the City of Cape Town. 31 Transport inflation refers to higher-than-normal inflationary increases due to annual increases in fuel and labor cost, which make up the majority of vehicle operating costs. - 102- and cost, which leads to issues for the financial sustainability of these systems in secondary cities. 238 As is the case in Cape Town, the cost of the GIPTN system is higher and the revenue lower than originally projected, requiring additional funding and raising questions about the accuracy of the assumptions in the original financial models. This shows the importance of realistic and robust demand and financial projections, including preparing for worse-than-expected performance. The limited fiscal resources have been prioritized to cover direct operational expenditure, resulting in insufficient funding for the project’s infrastructure requirements for the rollout of the next phases. 4.1.1.3 Dar es Salaam 239 The Government of Tanzania provides substantial fiscal support to the DART BRT system in the form of funding for infrastructure and other capital cost (as discussed in Section 3.4.7) of Phase 1, as well as for Phases 2, 3, and 4. Such funding will be required for future phases as well as any cost overruns in current phases. 240 Under modelled scenarios in the feasibility study, DART Phase 1 is able to cover its ongoing direct operating cost through generated system revenue. However, the issue of data disclosure results in difficulties in evaluating its operational and financial performance. Furthermore, the PPP model proposed for Phase 132 is not commercially viable without significant changes in the design of the system (such as increasing fare levels), or through additional subsidies (up to 50 percent of the cost of the vehicle fleet). 241 There is a financial gap between operational revenue and cost, which may require further subsidies from the government. However, considering an increasing debt to-GDP ratio and general slowing of economic and fiscal growth because of the COVID-19 pandemic, the Tanzanian fiscal condition may make it difficult to make room in the budget for a substantial new and ongoing cost. 32 According to the addendum to the Feasibility Study Report for Dar Rapid Transit Project Phase 1, the DART Agency will procure the required services by entering into contracts with service provider(s) for the procurement, financing, operation, and maintenance of buses; the DART Agency will finance, install, and maintain the electronic fare collection equipment (hardware) and ITS system (hardware and software); and a fund manager will provide fund account management services, payment services, and financial reporting services. This structure has been designed with a view to allocate each and every risk to the party best able to manage it and mitigate its impact, with the ultimate objective of providing the best value for money to the Government of Tanzania and the commuters of Dar es Salaam. - 103- 242 In addition, the proposed Phase 1 PPP model places revenue risk on the private partner. Previous attempts at procurement have revealed a lack of appetite from prospective market participants due to this risk. To make procurement successful, the government will need to provide minimum ridership and fare-level guarantee to ensure the commercial viability of the system. The government is considering this option but also facing difficulties to make such commitment given the challenges in its fiscus. 4.1.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities 243 The case studies indicate that BRT systems in SSA will face viability and sustainability issues without significant up-front and ongoing government subsidies. As such, it is important to ensure that BRT systems are designed within the bounds of long-term government fiscal capacity and reflect the realities of local market dynamics, noting that additional funding will likely be needed to accommodate cost overruns and system expansion beyond the initial phase. In addition, if the government cannot afford to subsidize BRT operations on an ongoing basis, the system must be designed to be financially self-sustaining, although this may not always be possible given different market dynamics. 244 Thereshouldalsobecomprehensiveanalysisontheeconomicandfinancialgoal s of BRT projects when assessing options to fund and finance BRT projects. When economic goals such as affordability and level of service override financial goals such as profit and return of investment, the tariff is likely to be set below the level required to cover the capital and operational cost. Without subsidies, it makes it impossible for BRTs to be financially sustainable, challenging the long-term service sustainability. Therefore, subsidizing BRT projects for the collective benefit of economic goals and filling the financial viability gap is critical to sustaining the efficacy of a BRT project. 245 Overly optimistic financial projections pose implementation challenges. In all the case studies, the financial projections are based on assumptions with reliability and feasibility risks. As such, financial projections should be of the highest quality, carefully scrutinized and benchmarked, and “stress-tested” scenarios developed for worse-than expected performance and accommodated in the design. It is also important for decision makers to assess the security and stability of funding sources before proceeding with BRT development, given their importance for financial sustainability and commercial viability. 246 The development of a mechanism that supports the joint arrangements to share subsidy cost and reduce the risk of reliance on a single source is worth considering. The management entity sharing in fiscal responsibilities also incentivizes the planning and operation of more efficient services to optimize - 104- system financials. In Cape Town, the indirect cost is largely funded by the national government and this has, arguably, resulted in inefficiencies because the local implementing agent is not incentivized to minimize cost. Hence, the conditions associated with funding sources, such as imposed design specifications, should be well understood, including the impact they may have on the financial sustainability and commercial viability of the system. 247 Similar to the SSA region, providing BRT service that is financially sustainable and commercially viable with an affordable level of fares is a challenge for most cities across the globe. The fiscal capacity not only needs to serve the social development goal by adjusting the fare level, it also needs to enable the BRT systems to meet the urban mobility demand efficiently by providing funding for BRT infrastructure construction. In addition, the funding used as subsidy can be regarded as a fiscal tool to be complementary to the government-regulated fare. Although subsidies are usually necessary, it should not be regarded as a funding default to compensate for financial loss. Instead, subsidies should be granted based on robust financial analysis, demand analysis, and the business model structure to avoid dependence. 248 There are also various financing instruments that the planners and decision makers of BRTs can use to widen the capital sources that fund and finance the construction and operation of BRTs. There are mainly three types of financing instruments used to finance transport projects—general benefit instruments, direct benefit instruments, and indirect benefit instruments. The definition of these financing instruments is based on the “who benefits pays” principle, meaning that those who benefit from the projects should pay for the cost. The benefits that transport projects generate include 1) general benefits, which are received by society in general, so the public authorities as representatives of the general public should pay; 2) direct benefits, that are received mainly by users of the transport system and can be directly charged to them; and 3) indirect benefits, that are received by people that are not the users of the system but still perceive benefits from the improvements in accessibility, mobility, and increases in business opportunities. At the planning phase, these benefits should be identified and measured so that they can be paired with specific financial instruments to fund, finance, and capture the added value of BRTs to ensure the financing can be more sustainable based on a broader range of funding sources (World Bank 2016b). Table 4.1 summarizes the specific financing instruments under each category. Table 4.1: Financing Instruments by Type of Beneficiary - Source: World Bank 2016b. General benefit instruments Direct benefit Indirect benefit instruments instruments Beneficiary: General public Beneficiary: Direct Beneficiary: Indirect Beneficiaries beneficiaries (firms, land - 105- (users, drivers, and property owners, passengers) developers) • Public transport • Parking • Advertising subsidies Property charges Employer taxes • Road contributions • National and pricing • Added value international grants • Congestion capture and loans charges mechanisms • Climate-related • Fuel taxes • Land-value financial instruments and taxes/betterment Global Environment surcharges levies Facility (GEF) • Vehicle • Tax increment • Clean Technology taxation financing Fund • Farebox • Special • Clean Development revenue assessment Mechanism (CDM) • Transportation • Public-Private utility fees Partnership (PPP) • Land asset management • Developer exactions • Development impact fees • Negotiated exactions • Joint developments • Air righ 249 Box 4.1 summarizes the actions that have been taken in Colombia, the United States, Mexico, Turkey, Brazil, and India to enhance the financial sustainability and commercial viability of BRT from the perspective of fiscal capacity. The best approaches in terms of funding and financing should combine different instruments based on the local context and the fiscal capacity of stakeholders involved in the BRTs. Box 4.1: International Experience on Improving Fiscal Support to BRT Systems General benefit financing instruments—Colombia’s BRT systems The National Urban Transportation Program (NUTP) provides dedicated funds for infrastructure construction, financing 40 percent to 70 percent of the total project cost. The funds of the program are mainly from loans by multilateral development banks such as the World Bank, Corporación Andina de Fomento (CAF), and the Inter-American Development Bank (IDB). This arrangement has - 106- lightened the burden on the local government, boosting implementation of BRT projects in several cities in Colombia, including Bogotá (Transmilenio), Barranquilla (Transmetro), Bucaramanga (Metrolínea), Cartagena (TransCaribe), Pereira (Megabus), and Medellín-Valle de Aburra (Metroplús). NUTP’s experiences show that the sources of national-level funding can be widened through collaboration with international and regional financial institutions. However, when Colombia expanded BRT projects to medium-sized cities under the NUTP program after the rollout of the TransMilenio BRT, operational subsidies were not considered. The BRTs in these medium-sized cities face financial sustainability challenges due to the lower-than-expected ridership and the inelasticity of fare levels. Direct benefit financing instrument — Bogotá, Colombia; the United States; and Istanbul Metrobüs, Turkey Bogotá, Colombia Colombian law establishes that the proceeds of surtax on fuel (25 percent) are earmarked for the CAPEX of the transportation system. In Bogotá, 50 percent of the fuel surtax was used for the construction of the TransMilenio BRT. The fuel surcharge enabled the city to attract additional funds from other sources, such as national government or global funding sources, establishing a virtuous mechanism to fund the BRT system. After 2015, the self-financing objective was overruled as the law defined financial sustainability as the new objective. This amendment of the law gave way to other sources of funding, not only the fuel tax but also parking fees and municipal budget allocations, to supplement the fare revenue, enhancing the financial sustainability of BRT. United States In the United States, a significant portion of the BRT projects have been funded by the Federal Transit Administration via New Starts/Small Starts, which has received a dedicated portion of the national gasoline tax since 1970. A fixed percentage of this is earmarked for transit, creating a reasonably stable funding stream. The federal funding is available for infrastructure, rolling stock, and fare-collection equipment. Istanbul Metrobüs, Turkey The Istanbul BRT system (Metrobüs) was fully financed by the local government. Private sector involvement was not explored both during construction and operation of the system. Bus operation is undertaken by the Istanbul Public Transport Authority, which was also responsible for the operation of the conventional buses. The Metrobüs fare revenue per kilometer - 107- (US$4.75) are higher than the operational cost. The average operational cost for the Metrobüs system buses is US$3.56/vehicle-kilometer. Unlike the conventional bus system, the Metrobüs’ cost recovery ensured that subsidies were not required. Indirect benefit financing instrument—BRT systems in Brazil; India; Mexico City, Mexico; and Cleveland and Richmond, the United States. Different from the national-level funding mechanism in Colombia, the BRT infrastructure in Brazil is largely funded by municipal governments whose budgets are heavily dependent on value-added taxes on businesses. Private investment generally funds the vehicles and fare-collection equipment. Similarly, BRT CAPEX in India are largely funded with a combination of national government Jawaharlal Nehru National Urban Renewal Mission (JNNURM) grants, and from the same state-level value-added-tax revenue. In Mexico, Mexico City is a federal district with powers similar to that of a state. As the country’s economic activity is concentrated there, the state value-added tax receipts are sufficient to pay for part of the city’s BRT infrastructure. In other cities of Mexico, BRT projects depend more on state and national funding. BRT vehicle procurement tends to be paid for by private operators with some subsidies from the government tax income. In Cleveland, United States, Greater Cleveland obtained US$6.75 million additional funding by selling the naming rights of the BRT line. The naming rights were jointly purchased by Cleveland Clinic and University Hospitals hence the name “HealthLine.” The additional finances are dedicated to maintenance of the system over a period of 25 years. Inspired by Cleveland’s HealthLine, the Greater Richmond Transit Company (GRTC) board sold joint naming rights to two local hospitals—Bon Secours Richmond Health System and Virginia Commonwealth University Health System (VCU Health). In total, the two institutions contribute US$425,000 per year for operations and maintenance. In addition, the institutions can advertise both at the stations and in the buses. Sources: World Bank 2020; ITDP 2017b; Alpkokin and Ergun 2012; Nikitas and Karlsson 2015; ITDP 2019. 250 Financial sustainability of these financing instruments can be assessed in terms of scale, stability, political acceptance, and administrative ease of implementation. The scales differ widely with instruments from vehicles or fuel and fares able to generate the bulk of resources, while others like congestion pricing playing a more complementary role. Instruments such as property tax or employer - 108- tax provide stability in resources over the long term, while development-based land value capture mechanism are more impacted by market fluctuations. The level of political and public acceptance is strongly influenced by the people it impacts. For example, the introduction of a congestion charge requires careful engagement and communication with the public prior to being introduced and needs to be combined with mechanisms that improve alternative options of public transport. 251 The case studies in SSA and international experience indicate the importance of government funding, the balance between the affordability and the cost and revenue of implementing BRT, the coordination between the central government and local government fiscal policy, and funding. Government funding from general, direct, and indirect sources is usually an important capital source to complement the CAPEX and OPEX of the BRT projects to ensure their financial sustainability. However, the governments in the SSA are also confronted with fiscal constraints to ensure the continuity of the funding, especially when there are competing needs from other sectors and unexpected risks in economic development such as the COVID-19 pandemic. Without sufficient government funding or lack of channels for the governments to raise funding, the BRT projects will be confronted with negative financial impacts such as capital gaps for infrastructure development and lack of capability to provide subsidies for the service operation when needed. The following aspects related to the fiscal capacity should be assessed to ensure sufficient funding sources can be allocated to support the implementation of BRTs and enhance their financial sustainability and commercial viability. Key Actions to Promote Financial Sustainability and Commercial Viability • Government should have the fiscal capacity (balance sheet health, good track record of collaboration with donors/DFIs) to mobilise additional and alternative funding for the BRT system on practical terms as required. • Government should plan and/or implement mechanisms to mitigate against financial risk in the BRT system (such as guarantees on return for private sector investors, ring-fenced cash-flows to provide more certainty of return, currency hedging to minimise foreign exchange risk, etc). • Government should possess a successful financial track record in implementing and operating (including servicing financial commitments) large infrastructure projects of similar nature to the BRT system. • The necessary fiscal and fiduciary relationships and mechanisms should be in place between government stakeholders (e.g. to allow for the flow and governance of funds between city, provincial, and/or national entities) to facilitate effective, efficient, and sustainable project funding. • The local governments and central government should expand the funding resources for urban transport development such as fuel tax, parking charges, and funding mechanism of land value capture. They should also consider dedicate financial resources to from central government through a development fund such - 109- as national urban transport fund/program in Mexico and Colombia to development of public transport, integrate land use and public transport development. • The central and local governments should consider establishing debt and contingent liability management system to enhance government liability planning and management. 4.2 Legal and Regulatory Framework Legal and Regulatory Framework Legal provisions and regulatory frameworks enable BRT development and allow for and govern private sector participation in the project. This includes consideration of issues related to the ability of the private sector to participate, any requirements for local participation (including incumbent operators), legal mechanisms to facilitate participation and the role of the government, and its contractual track record on implementing private sector participation in comparable initiatives. 252 The continental overview and detailed case studies reveal the governing legal and regulatory framework to be a primary enabler of BRT implementation and operations, and hence have an impact on the financial sustainability and commercial viability of BRT systems. Legal provisions and regulatory frameworks fundamentally influence the nature of BRT systems and the role of stakeholders, including the government, incumbent operators, and private sector partners. 4.2.1 Insights From Case Study Cities 4.2.1.1 Cape Town 253 The South African legal and regulatory framework is comprehensive. In the development and rollout of its MyCiTi system, Cape Town has benefited from clear stipulations and guidelines informing the design, financing, and management of the system as discussed in this section. 254 The National Land Transport Act (NLTA) decentralized South Africa’s road- based public transport functions to local government, including the core functions related to planning, development, and operation of BRT systems. In Cape Town’s case, legally defining and consolidating these functions in the local context has allowed for a more effective and efficient system, including financial efficiency. - 110- 255 The NLTA makes legal provision for local BRT systems to receive funding support from the national government in the form of the Public Transport Network Grant (PTNG) and the Public Transport Operations Grant (PTOG) (further informed by conditions in the Division of Revenue Act). Although the grant allocations are variable from year to year, and visibility does not extend beyond three years (with only the first guaranteed), legal provision for such support provides more security and confidence than any ad hoc commitment. 256 The NLTA also makes allowance for private sector participation and provides instruction and guidance for incumbent operators. The law clearly defines the different approaches to contracting for such services, including negotiated (sole source), subsidized service, and commercial contracts, as well as general procurement options. Cape Town utilized these stipulations to enter into operating contracts with incumbent participants for MyCiti bus operations for the initial 12- year contract. 257 The NLTA requires Cape Town to enter into a competitive procurement process for MyCiTi bus operations after the initial contract with the incumbent operators ends. This process will be informed by comprehensive PPP legislation, discussed in detail in Section 3.2.3. South Africa has successfully implemented numerous PPPs, including in the broader South African transport sector, revealing its PPP legislation to be effective and robust, and providing strong rights to participants. However, there have been no formal PPPs in BRT or bus operations in the country to date. This is partially due to the government’s desire to enter into sole-source contracts with incumbent operators and can be regarded as the result of the current BRT systems not being sufficiently commercially viable to attract private sector investment. 258 South Africa has legislation that influences the setting of BRT fare levels and structures. Cape Town’s MyCiTi fares are established according to its fares policy, which in turn is guided by stipulations in the NLTA, the Municipal Finance Management Act, and the Framework Conditions for the PTNG and PTOG. Like many SSA BRT systems, MyCiTi must strike a delicate balance between public affordability and system design when it comes to fares. 4.2.1.2 George 259 George shares national and provincial legal and regulatory jurisdiction with Cape Town, and, therefore, much of the legal and regulatory influence on the GoGeorge system is analogous to that on MyCiTi. This is discussed in more detail in Section 3.3.3. 260 The NLTA enables the joint performance or exercise of public transport functions by provincial and local government, and in an important distinction from - 111- the Cape Town context, GoGeorge is overseen by a joint Western Cape Government-George Municipality entity. Such an arrangement has effectively enabled the GIPTN, with provincial funding and support complementing that from the national government. Without such an arrangement, the GIPTN system would not be feasible, revealing the influence of the clear legislative articulation of roles and responsibilities on sustainability and viability. 4.2.1.3 Dar es Salaam 261 The DART Agency was legally established to oversee DART BRT implementation and operations. However, there is a lack of clarity in legal procedures to clearly allocate roles and responsibilities for BRT development between stakeholders, and this has left the DART Agency insufficiently legally empowered to perform certain key functions (described further in Section 4.6.1). In addition, the DART Agency does not have a mandate to plan intermodal integration that would add value to the BRT. That mandate is with the proposed Dar es Salaam Urban Transport Authority (DUTA) that has yet to be established. The DART Agency also does not have jurisdiction on the land use along the BRT corridor, which could have subsidized fares through transit-oriented development (TOD). 262 Tanzania possesses a suite of laws and regulations that govern PPPs (described in more detail in Section 3.4.4), and these have been further expanded upon and refined in recent years. This PPP framework will provide important guidance for, and facilitate, the procurement of DART’s Phase 1 PPPs, as well as the PPPs for future phases, making such participation viable. Efforts to secure a bus operator for the full rollout of Phase 1 have stalled, and the country has had limited recent experience in successfully implementing PPPs within this legislation in other areas. The legislation’s existence will, nevertheless, provide participants with sufficient confidence in the system. 263 Tanzania lacks binding legislation that stipulates or influences the setting of BRT fare levels. Further, one of the key functions the DART Agency is not legally empowered to fulfil is that of setting fares for DART BRT. The mandate for establishing fare levels lies with the Land Transport Regulatory Authority (LATRA). This is problematic on two fronts: 1) without legal stipulations, there is less structured control exerted on fare-level establishment, and 2) LATRA is removed from system financial management responsibilities that lie with the DART Agency, and, as a result, is less influenced by system cost-side pressures. LATRA faces pressures from political imperatives to keep fare levels unchanged, in line with informally operating daladala services, without due consideration for the financial sustainability and commercial viability of the BRT service. - 112- 4.2.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities 264 In order for SSA BRT systems to be commercially viable and perceived as bankable by private sector participants and investors, they must be enabled and supported by a fit-for-purpose legal and regulatory framework. 265 Legal provisions and regulatory frameworks that clearly define the nature of the business model and the contract design of BRT projects, as well as stipulate the roles of stakeholders, is fundamental to increase financial sustainability and commercial viability. Legislation ensuring that the implementing stakeholders are fully empowered to reach their objectives in line with mandates and enable the participation of incumbent operators or private sector entities is critical. Poorly enforced provisions will hinder BRT systems and reduce their viability. In addition, legal and regulatory frameworks are the foundation for effective contractual arrangement and enforceability. Enabling legal frameworks inform more options for risk allocation and participation models in the contract design of BRT PPP projects, which often inspires more confidence in the private sector. For example, in some countries where government guarantees and contingent liabilities are constrained by fiscal regulations, but the government is willing to attract private sector investment into the projects without sufficient commercial viability, permission for the availability payment for certain PPP contracts to mitigate the demand risks and attract private sector investment will be useful. However, such permission under PPP law will also need careful design, monitoring, and risk management. 266 A BRT system that seeks to implement a PPP with a private sector partner will need to be guided within structures established by a functional set of PPP laws or regulations. An efficient and streamlined PPP procurement process that is clear in its requirements and promotes PPP arrangements with robust protections for participants is attractive and a boon to viability. Countries with a track record of successful PPP procurement in BRT or public transport in general will be considered more favorably by the private sector. 267 Restrictive PPP or participation conditions, for example, those that favor local entities over international ones, will inherently reduce viability due to a reduction in the pool of potential participants and, therefore, a reduction in the likelihood of securing the optimal private sector partner. A suboptimal partner also has knock-on implications for long-term financial sustainability. The broader legislative and legal environment in the city and country in question, such as that governing employment, tax obligations, investment protection regulations, foreign exchange controls, fiduciary responsibilities, and similar, should be conducive to business. Private sector participants will not only consider their investment in the context of the BRT system, but also the wider environment. - 113- 268 Apart from the experience in SSA, international experience on how the law and regulation help expand financing sources to support urban transport development can provide some useful lessons (Box 4.2). Box 4.2: International Experience of Legal Support for BRT Implementation United States The Fixing America’s Surface Transportation (FAST) Act was signed into law in December 2015 and supports transit funding through fiscal year 2020. The FAST Act includes five years of formula grants as well as several competitive grant programs. In addition, federal law requires local matching funding for federally funded BRT projects, and, typically, the higher the local contribution, the more competitive the funding application. Indonesia Decentralization of government power in Indonesia allows local governments to decide independently on certain political, fiscal, and administrative aspects of governance and have the option to follow central policies. The central and local government can coordinate on balancing the funding for the TransJakarta BRT development in Greater Jakarta. There are also regulations that guide the green development and financing of transport projects in Indonesia, including the TransJakarta BRT. In July 2017, the Financial Service Authority of Indonesia (Otoritas Jasa Keuangan; OJK) issued a regulation that requires banks to develop action plans for sustainable financing and report their green financing. Bogotá, Colombia In 2015, the self-financing objective of the transportation system and defined financial sustainability as the new objective. This allows other sources of funding, such as fuel tax, parking fees, and municipal budget allocations, to supplement the fare revenue, which enhanced financial sustainability of the BRT. It apportioned the additional cost burden of transport formalization to the entire society rather than only public transport users, who are primarily the low-income population. The amended law provided the necessary legal and regulatory framework enabling financial sustainability of BRT implementation and operations. Japan Adjacent value-capture financing for BRT implementation requires a supporting legal and regulatory framework. SSA BRTs can learn from the supportive legal framework for successful land value capture financing in the rail space in Japan. The 1989 Housing and Railway Act allowed land readjustment in Japan paving the way for land value capture financing for railway development. Government entities, private railway corporations, and private developers have used the land adjustment approach to develop public transport infrastructure and TOD. Examples are the Tama Den-en Toshi railway project and Futako-Tamagawa - 114- Station redevelopment project by Tokyu Corporation. Land readjustment requires the planning authorities to give approvals before redevelopment. Redevelopment has created a transit-supportive environment, increasing railway ridership and Tokyu Corporation’s revenue and recurrent profits. United States In the United States, land value capture mechanisms such as property tax [tax increment financing (TIF) and land value tax], development impact fees, and joint development are governed by state laws, policies, and regulations. Each state has regulations in place for each of the land value capture mechanisms in effect in the state. For instance, tax increment financing in California is governed by the Community Redevelopment Law—Financial Provisions— Taxation, while joint development is governed by the Public Utilities Code, Article 9 — Joint Development Authority [99420]. Sources: ITDP 2019, UNDP 2015, World Bank 2020, PPIAF 2017, U.S. Department of Transportation n.d. 269 The case studies in SSA and international experience indicate the importance of clear and enforceable legal frameworks and regulations to motivate private operators, widening the funding sources of the BRT. The legal and regulatory framework is the cornerstone of the commercial viability and financial sustainability of the BRT and other infrastructure projects. Without a well- designed, clear, and effective legal and regulatory framework, the development and operation of the BRT projects will be confronted with negative financial and commercial impacts, such as low private sector participation, low enforceability of the concessions, and high transactional cost led by the legal and regulatory risks. The following aspects related to the legal and regulatory framework should be assessed to create a more enabling market environment for private participation and guide the development and governance of the BRTs and other urban transport projects in a more sustainable manner. Key Actions to Promote Financial Sustainability and Commercial Viability • A clear, organized, and efficient legal process must be in place for the arrangement of private sector participation in the BRT system. • The legal and regulatory provisions should be agnostic with respect to the nature, such as nationality, of the private sector participant (e.g. impartial and fair to an international participant). • The legal and regulatory framework should clearly stipulate requirements for the participation of incumbent operators and/or related affected stakeholders. - 115- • The city/country should have a successful regulatory track record in procuring, implementing, and sustaining private sector participation in large infrastructure projects of similar nature to a BRT system. • The legal and regulatory framework should enable the different options of contractual arrangements of PPP projects in public transport sector, allowing effective schemes for optimal risk allocation and investment return and considering sectoral context on demand risk and investment need. • The legal and regulatory framework should clearly stipulate the requirements and responsibilities for government in implementing and operating a BRT system. • The broader business regulatory environment (e.g. key employment laws, tax obligations, investment protection regulations, foreign exchange controls, and etc) in the city/country should be conducive to efficient private sector participation (refer to the World Bank’s ‘Ease of Doing Business’ analysis). • The legal and regulatory framework should provide enforceable rights for private sector participants to secure/protect their investments (e.g. step- in rights). 4.3 Market Dynamics Market Dynamics Passenger market demand dynamics and commuters’ capacity to afford the BRT service are core determinants of system revenue generation and profit margin. This includes consideration of issues related to the size and spending power of (serviced portions of) the market, fare levels, and demand projections. 270 Given the impact of urban spatial development configurations, the pattern of demand, and the ability of prospective passengers to pay on farebox recovery, market dynamics are a key determinant of the financial sustainability and commercial viability of SSA BRT systems. Market dynamics have an outsized impact on sustainability and viability, especially in the planning stage, if they are not adequately assessed when systems are being designed. Practical examples of the impact of market dynamics include: - 116- • Patterns of demand (not only the magnitude of demand) have a major impact on operating cost, and include factors such as directional peak flows, extent of demand through the day, trip distances, and seat turnover. Figure 4.1 illustrates the principle of directional flows and its impact. Low reverse flow, where buses have low occupancy rates on return trips, negatively impacts fare revenue. Planners should aim, as far as possible, to maximize seat renewal on return journeys to optimize vehicle utilization and increase revenue. Demand patterns are largely determined by land use (as well as the use of other transport modes) and have an impact on the revenue that the system can generate and the cost of providing the service. For example, increased population density in the wrong locations can increase operating cost as more buses are required to service peak demand patterns and often cannot be used for multiple trips. • Fares that are set based on social imperatives can have a detrimental influence on system revenue and require careful consideration against projected operating cost. • The purchase of vehicles and construction of stations based on projected demand that does not materialize once demand patterns have stabilized can be costly. Figure 4.1: Illustrative Concept of High and Low Reverse Flow 4.3.1 Insights From Case Study Cities 4.3.1.1 Cape Town 271 In Cape Town, the spatial legacy of apartheid settlement patterns, low average population density, and overall spatial distribution result in demand patterns that - 117- contribute to low-cost recovery. Low-density suburbs and high concentrations of informal development result in long travel distances, unidirectional peak flow, low peak-to-base ratios, and low seat renewal. Consequently, market dynamics are not conducive to financial sustainability and commercial viability without significant subsidies. 272 Cape Town has undertaken several initiatives to better optimize services and revenue generation according to market dynamics (discussed in Section 3.2.6). But these dynamics, as well as system design options (see Section 4.4.1), show that the direct cost recovery of the MyCiTi BRT system’s Phase 1 routes is approximately 45 percent, resulting in a requirement for significant ongoing subsidies from the government. 273 In the short to medium term, system expansion will require significant additional subsidies due to market dynamics, unless the system design for Phase 1 is adjusted to improve efficiencies (CoCT 2017). In the medium to longer term, proactive efforts to influence demand patterns, such as mixed-use densification and transit- orientated development, are expected to improve the financial sustainability of public transport services. However, these are long-term initiatives. To address the issue of low peak-to-base ratio, the city introduced a progressive peak pricing strategy33 (e.g., lower fares during the “shoulder” of the peak) on the MyCiTi service. This has been effective in shifting demand out of peak periods, relying both on peak spreading (e.g., spreading demand over a longer period of time) to the extent that this is possible, as well as a multimodal approach to cater for the full peak demand. 274 An important issue for MyCiTi Phase 1 is that modelled Phase 1 passenger demand and revenue were significantly overstated, and cost was understated, resulting in serious issues later in the implementation process. This highlights the importance of conservative projections based on reliable survey data (CoCT 2015) and being aware of optimism bias. 275 Passenger preferences have not always been reflected well in transport models. In Cape Town, some passengers have preferred to use paratransit services on MyCiTi routes due to a range of factors, including higher paratransit service frequencies in peak periods, the “barrier” effect of electronic ticketing due to limited availability 33 The differential between peak and off-peak demand is a major driver of operating costs since the fleet and related services need to be sized for the peak but then lie idle for much of the day. By increasing fares for peak travel periods, cities can reduce costs associated with having to provide additional peak buses to encourage peak spreading and optimum service usage. The MyCiTi service has a progressive peak pricing approach which includes a peak: off-peak fare differential of 35 percent. This is accompanied by marketing to ensure passengers are aware of the benefits of travelling outside of the peak in terms of reduced queues and cheaper travel. - 118- of card outlets and “top-up” facilities, and guaranteed seats provided by paratransit services as opposed to standing capacity provided on MyCiTi buses (CoCT 2015). 276 MyCiTi fares are determined by the City of Cape Town’s Fares Policy (as discussed in Section 3.2.3) and are set to be affordable to low-income users and to offset the inequitable spatial structure of Cape Town. The focus on lower fare levels detrimentally impacts system revenue, and, therefore, direct commercial sustainability and viability. 4.3.1.2 George 277 Like Cape Town, George is also detrimentally impacted by the spatial legacy of apartheid. The major source of public transport demand in George is located on the urban periphery and, therefore, demand is unidirectional toward the major employment nodes in the morning peak, with the opposite pattern in the evening. Related to this is a low level of seat renewal and low demand during off-peak periods. In addition, the city is characterized by low-density suburbs, relatively high car ownership, and a high proportion of people still choosing to walk. These market dynamics collectively have a negative impact on the revenue potential of the system. 278 Fares are set by government to be affordable to low-income users, constraining system revenue. The population of George is characterized by high levels of poverty, unemployment, and low income. This limits the ability of prospective public transport users to pay commercial fares for public transport services. 279 Together, these factors have a negative impact on financial sustainability and commercial viability, which, given the system design and business model, is only achievable with significant up-front and ongoing subsidies from the government. 4.3.1.3 Dar es Salaam 280 In Dar es Salaam, due to outward urban sprawl and a relative lack of densification (the long reach of the DART Phase 1 corridor can be seen in Figure 3.12, the pattern of demand is strongly unidirectional, in that buses are very full in the direction to the city center in the morning peak and relatively empty in the reverse direction, impacting the revenue generating potential of the service (UDA- RT 2019). 281 Demand patterns are strongly determined by existing land use dynamics, which would need to shift over the long term to improve the situation. The issue of urban sprawl, specifically the challenge of viably servicing the ever-expanding city - 119- with public transport, was also highlighted during on-site consultations (LATRA 2019). 282 DART fare levels are informed by public affordability imperatives and are kept low despite the relatively long distances travelled (requiring higher operating cost), impacting revenue and viability. At current fare levels, the full operationalization of Phase 1 is faced with challenges to be viable without additional government support. 4.3.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities 283 Market dynamics directly drive revenue and profit generation, and the volume and nature of passenger demand most directly determine the extent to which a BRT system can be commercially viable and sustainable. 284 A BRT system’s revenue-generation capacity needs to be fully assessed in the planning phase. It is important to ensure that reliable and detailed transport surveys are undertaken by competent and experienced survey teams during the early planning stages for BRT. Passenger demand projections must be informed by detailed survey information of existing travel patterns in order to design and size infrastructure, procure fleet, and design operations to closely match system specifications to passenger demand profiles. While infrastructure design should take a longer-term view to provide for future growth, demand modelling should be conservative in terms of fleet requirements and operational design to avoid providing for demand that may not materialize in the short to medium term. 285 The issue of fare-level setting and adjustment in BRT systems in SSA is complex. The reasons that lead to this complexity mainly include the tension between targeting high-value demand with fare levels at commercial levels versus a socioeconomic imperative of providing public transport services to less affluent markets, which typically travel longer distances due to spatial inequities, and setting fares at artificially low levels. It is inevitable that higher fare levels, regularly adjusted according to factors such as the cost of operations, will contribute more to a system’s financial sustainability and commercial viability. However, this will be at the expense of serving the population most in need. 286 An efficient and fit-for-purpose system design can help improve financial sustainability and commercial viability where market dynamics are suboptimal. For example, decision makers could choose to focus on implementing services that achieve higher cost recovery. However, improved service design cannot always fully address all viability gap issues. To address the issue of suboptimal market dynamics in the long term, there should be a focus on spatial restructuring to improve demand patterns and inclusive economic development and employment creation - 120- to improve the ability of passengers to pay. Increasing the reach and frequency of the trunk and feeder service can be an option to meet imbalanced and unidirectional market demand and to generate sufficient revenue for the BRTs. Experiences from Lima can provide a useful reference for the SSA countries (Box 4.3). Box 4.3 International Experience of Integrating the Trunk and Feeder Service Lima, Peru The poor population in Lima, Peru, tends to live in the northern and southern periphery of the city and lacks direct access to the mass transit system. Limited amount of BRT passenger comes from the poor neighbourhood due to the accessibility issues. The poor residents still need to rely on extensive penetration of feeder routes with multiple modes. By increasing the reach and frequency of the feeder service, as well as integrating BRT with existing informal or traditional modes, the Lima BRT system aims to better meet various and dispersed urban mobility demand by providing public transport service in lower-density communities and hard to reach area. In the first year of operation, ridership was under 200,000 passengers per day, significantly lower than the 713,000 per day ridership initially projected, and only the southern part of the trunk infrastructure was complete. In an effort to increase demand from the feeder areas, the tariff was restructured gradually from 2012 to 2014. Initially, Metropolitano BRT users paid a fixed rate of 1.5 soles (US$0.47) and 1.0 soles (US$0.31) for trunk and feeder routes, respectively. Because the feeder route traffic volume was less than expected, the 2014 tariff update incorporated a cross subsidy system vis-a-vis the trunk routes to enhance accessibility for the feeder route users. The profitable trunk route users (either trunk route only or both trunk route and feeder routes) paid 2.5 soles (US$0.78), and feeder route only users paid 0.5 soles (US$0.16). In other words, 0.5 soles for feeder routes are not commercially viable given the current number of passengers but collecting 2.5 soles from trunk route users can generate profits to cover the deficit in feeder routes. After this change, an increase in ridership among users coming from the feeder areas traveling to the central areas of the city was observed. By 2014, the BRT entered full operation and the routes connected the north and south peri- urban areas of Lima. The BRT system has 35 BRT stations with the full fleet of 300 articulated buses operating, 8 trunk-line services, and 222 feeder buses serving 20 feeder routes (13 in the north and 7 in the south). In the same year, demand reached 660,000 card validations per day. By 2015, the system’s - 121- demand was estimated to surpass 700,000 daily validations of which approximately 450,000 were trunk users and 230,000 feeder users Source: World Bank (2015), IZA Institute of Labor Economics (2018) 287 The case studies in SSA and international experience indicate the significant financial impact of the market dynamics on the financial sustainability and commercial viability of the BRTs. On the one hand, the transit demand and fare level determine the major composition of the system revenue. On the other hand, the trip pattern and the operational arrangement are closely related to the operational cost. Hence, the cost recovery of the service on each route in the system is closely related to the market dynamics. 288 There is a strong need to coordinate the fare level to ensure the public affordability from the perspective of residents and profitability from the perspective of the operators. The following aspects related to the market dynamics should be assessed to develop affordable, inclusive, commercially viable, and financially sustainable BRTs and urban transport projects in SSA. Key Actions to Promote Financial Sustainability and Commercial Viability • The volumes and patterns of demand in the affected corridors and catchment areas of the BRT system should be sufficient (both currently and projected) to support high operational efficiency. • The BRT system should have sufficient capacity to optimally meet the expected demand. • The target market for the BRT system should be sufficiently willing and able to pay for services planned. • Modelling and market sounding should confidently indicate that the BRT system’s revenues and margins (underpinned by the above- mentioned demand, capacity, and willingness/ability to pay) would support and be attractive to private sector participation. • The BRT system fare levels should be dynamically adjusted, on an ongoing basis, to ensure the system can optimize the balance of profitability and affordability. • Fare levels for the BRT system should not be controlled in a manner disconnected from market forces (e.g. increased operational costs). • Travel demand must be projected in a sound and credible manner, with full consideration for local context and experience of similar projects. - 122- 4.4 System Design and Business Model System Design and Business Model A BRT system’s technical ability to attract and support private sector participation and cater to the public transport service need, in a sustainable manner through an effective operational model and design. This includes consideration of issues related to means of generating revenue and profit, the robustness of the business model, mitigation of technical risks, alignment with land use and mobility planning, and the impact of competition. 289 Hand in hand with market dynamics, the overview and detailed case studies reveal the strong impact that the underlying system design and business model of a BRT system can have on financial sustainability and commercial viability. Both the design and model directly impact ongoing operational cost, the ability to generate and sustain revenue, and the capability to effectively integrate private sector participation. 4.4.1 Insights From Case Study Cities 4.4.1.1 Cape Town 290 The system design and business model are particularly important issues in the Cape Town context. The system design was informed by a national government- level act, policies, and strategy, and the approach adopted included: • Comprehensive replacement of existing road-based public transport modes, including paratransit and conventional bus operations; • Implementing BRT system components, such as station management services and electronic ticketing systems; and • Achieving high-quality standards (initially including minimum frequencies and extended operating hours). 291 This system has proved to be costly, particularly from a direct and indirect operational cost perspective, as it was not designed to optimize profitability. The comparative cost of operating Cape Town’s MyCiTi BRT buses at the current standard is more than three times higher than conventional bus services being operated in the city 34 . When indirect operating cost, for example, station 34The higher cost of the MyCiTi service is likely due to the following factors: MyCiTi services run all day at relatively high frequencies compared to peak only GABS services—resulting in the use of more - 123- management and electronic ticketing, is included, the cost is up to six times higher (GABS 2019). When fares are set to be competitive with conventional services, this results in the large cost recovery gaps depicted in Section 3.2.6, suggesting that the MyCiTi Phase 1 system design and business model is not geared toward financial sustainability and commercial viability. Therefore, significant ongoing operational subsidies are required. 292 Despite successful implementation of a high quality of service, the Phase 1 system design is unable to be replicated in its current form due to the inherent funding gap and government fiscal constraints. While optimization and moderation processes initiated by the City of Cape Town have significantly improved the efficiency of Phase 1 services, more fundamental changes are required to enable financial sustainability for future phases and the rollout of the full envisaged network. These changes include the introduction of a hybrid BRT and minibus taxi system design with minibus taxi feeder services, a reduction in the rates paid to bus operators, increasing alternative revenue sources, and spatial restructuring. 293 Cape Town’s BRT system is partially designed for private sector participation, but very specifically with formalized incumbent operators in mind. In this manner, it would eliminate competition by removing incumbent operators from BRT routes. The longer-term implications are that the MyCiti system design and business model may require changes to improve cost recovery if the city intends to adopt the PPP model and attract a wider range of private participants in the medium and long term. 4.4.1.2 George 294 George’s system design was informed by a national government-level act, policies, and strategy and aimed to fully replace the existing MBT industry with a comprehensive, high-quality bus service. The characteristics of this system design are fully described in Section 3.3.1. It includes a full route network of main and community routes, minimum frequencies and operating hours, and Europay, Mastercard, and Visa (EMV)-compliant electronic ticketing. As such, the system was primarily designed to achieve policy objectives and specifications without sufficient consideration of its financial sustainability and commercial viability. 295 The GIPTN was designed as an infrastructure-light, Quality Bus Service (BRT-Lite). A full BRT system, with dedicated rights-of-way, would not have been fuel, higher driver requirement, more wear and tear on buses and, therefore, more maintenance. The specification of MyCiTi buses is higher, and there are higher maintenance costs (this is tendered and outsourced, which is more expensive than GABS which do this themselves). The smaller 9-meter buses used to provide feeder or lower-demand services have lower capacities, and have higher costs per passenger than larger buses. GABS has a full metro network and can interline buses to increase efficiencies. - 124- appropriate or fit for-purpose in George. Despite this, and as a result of the cost of delivering this system and the associated level of ongoing subsidies required, the Western Cape Government is now exploring alternative, lower-cost approaches to public transport improvement in other secondary cities in the province with a focus on incrementally improving existing paratransit services at a significantly lower cost rather than establishing Quality Bus Services. 296 The George system is partially designed for private sector participation, but like Cape Town, very specifically with formalized incumbent operators in mind. As with Cape Town, this means the GoGeorge system design and business model may need to adjust if it intends to adopt a PPP arrangement. 4.4.1.3 Dar es Salaam 297 DART Phase 1 was designed to provide a high-standard network of BRT services and to fully replace existing informal daladala operations on the corridors. Although significant progress has been achieved, there are many challenges for the DART BRT to meet the high specifications of the system design, as well as enhance the financial sustainability and commercial viability of the business model. The DART Phase 1 system design and business model includes large terminals and transfer stations, maximized right-of-way, raised median stations, a bus fleet that is compatible with these stations, AFCS and ITS (Section 3.4.1 provides more detail on these elements). This system design can be complex to implement and is projected to result in high establishment and ongoing operational cost that cannot be adequately funded by system revenue without government guarantees. In addition, the single-source procurement of UDA-RT as the ISP for the integrated provision of operations, fare collection, and system management without competition lowers the operator’s motivation to improve service quality and operational capacity, which affects the overall performance of the BRT system and business model. 298 Lessons from other cities, such as Cape Town, indicate that formalized BRT feeder services struggle to offer a competitive advantage over paratransit services in mixed traffic and can be costly to operate. This thinking has now been incorporated into the planning for the full operationalization of Phase 1 and later phases, which include proposals for daladalas. 299 In Dar es Salaam, the BRT lanes, bus depot, and port access road are exposed to flooding by rainfall events, even with relatively low intensities. As a result of flooding of the main depot, interim services were suspended on several occasions and some buses were damaged, with financial consequences for the operator. Climate change will increase the frequency and intensity of rainfall events resulting in more frequent flooding. By 2050, all phases of Dar es Salaam’s BRT system are projected to be exposed to routine flooding. Such natural disaster and - 125- force majeure risks will challenge the viability, sustainability, and resilience of the DART BRT system in the long term. The appropriate allocation and mitigation of the environment and climate-related force majeure risks are, therefore, critical (World Bank 2019). 4.4.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities 300 When considering the influence of an SSA BRT’s system design and business model on its financial sustainability and commercial viability, a key issue is the “contradiction” inherent in its design as a public service and a business. The case studies indicate that many facets of existing systems are fundamentally designed to achieve public service objectives and service quality standards that are often too high relative to farebox recovery and available funding, which can undermine financial sustainability and commercial viability. Therefore, it is important to ensure the system design and business model fit the local context. The following content provides specific examples and in-depth analysis to support the fit-for-purpose system and business model design. 4.4.2.1 System Design 301 System design needs to reflect local context and constraints, and to ensure a fit for-purpose system. System design elements, such as network and operational planning, infrastructure design, choice of infrastructure allowing segregation from other modes or not, guaranteed speed along the corridor, integration in the urban environment and with other modes of transport (interfaces with cars, rails, nonmotorized transport, etc.), fare integration, and fare collection interoperability are essential to the commercial viability and financial sustainability of the whole BRT system embedded in the public transport system. 302 There are different configuration options for the segregation of BRT corridors according to the design capacity, right-of-way, road width, and bus service types. Full segregation, on the one hand, has the least interference with mixed traffic, provides the most exclusive BRT corridors, and allows high operational capacity and express service. On the other hand, full segregation might affect the commerciality and financial sustainability of the BRT systems due to the considerably high cost and the limitation of the utilization of road space. For example, in Bogotá, the trunk buses use the central lanes of existing streets, longitudinally segregated from the general traffic, which might increase the tension of road-space. Different from the full segregation, the bus priority lanes are less costly and easier to implement. However, the bus priority lanes are less exclusive, causing conflicts with mixed traffic and risks of accidents. As the main part of the infrastructure development in BRT systems, the design of the segregation should comprehensively assess its cost, benefits, and suitability to the local road conditions. - 126- 303 The integration of BRT systems with other transport modes can further increase the connectivity of the public transport as well as close the gaps of the last-mile mobility demand. The integration of BRT systems with other transport modes, such as the pedestrian sidewalks, bikeways, metros, train lines, ferries, and even airport express, generally occurs at BRT stations. For example, the airport station of Cape Town’s BRT allows passengers to go from downtown to the airport more quickly and avoid the risks of congestion. The parallel bikeways and sidewalks along the BRT corridors enable the commuters to arrive at their final destination by cycling or walking. At the system design level, circulation and transport networks should be organized to share resources and maximize coverage of BRTs and other transport modes to achieve the integration. 304 The technology components of the system design include fleet management, fare collection, and user information systems. They are able to enhance the operational capacity of the BRTs but are complex due to the changing and diverse transport demand as well as the challenges of data collection. In São Paulo, Brazil, fleet management is based on the centralized command center, the tracking of the fleet is Global Positioning System (GPS)-based. In addition, bus lane enforcement is ensured by the utilization of cameras and license plate recognition technology. The smart card system design in São Paulo considers compatibility with metro and real-time information provides passengers with estimates of bus arrival times. To increase the feasibility of these technology components, their compatibilities with BRT operational specifications, the local operators’ capacity, and the existing infrastructures and vehicles need to be assessed during the design phase. 305 The key of system design is being compatible with the local context although the design elements of a corridor, such as the busways, stations, fleet, and technology offer a variety of configurations and options. The BRT infrastructure can range from the “Lite” to the complex high-capacity system. As discussed in Section 2.1.4, the design of Lagos’ BRT Lite demonstrates the concept of “form following function,” which sets relatively lower targets that are compatible with the planning and investment capacity. Although the Lagos BRT still faces challenges, it is able to achieve high ridership and financial sustainability. Beyond the SSA region, there are experiences from Latin America and Asia on more contextualized system design which are summarized in Box 4.4. Box 4.4 International Experience of BRT System Design Configuration options for the segregation of BRT corridors: Guayaquil, Ecuador Cities frequently consider splitting each direction of public transport service between two different but usually parallel roads, which are also called couplet - 127- configuration. In this configuration, at least one land of mixed traffic can typically be retained, and private vehicles can retain some form of direct access to corridor. Guayaquil, Ecuador, faces challenges that limited spaces can be used to build the exclusive BRT lanes. Therefore, it has utilized such configuration in the central areas of the city with one-way pairs roads. Richmond, Virginia’s BRT Richmond’s BRT, the pulse, is a low-cost and high-quality BRT system. The route has varying lane configuration and alignment to suit the local context. Of the 7.6-mile BRT route, 2.6 miles is a segregated, median-aligned corridor; 0.6 miles is paint demarcated curbside bus-only lane and in the remaining sections the BRT buses operate in mixed traffic to accommodate existing on-street parking. This configuration contributed to the system being among the BRT’s with lowest construction costs in the United States while at the same time fitting into the local context. Integration of multiple transport modes: Guangzhou BRT, China Organizing the BRT network integrated with other networks allows maximum integration. Guangzhou BRT integrates bike-sharing stations alongside its BRT stations and also provides direct, built-in connections between BRT and subway stations. ITDP field surveys have shown that Guangzhou BRT has higher peak passenger flows than other BRT systems in Asia and most mainland China metro lines. In addition to the intermodal integration, the high capacity of Guangzhou BRT can be attributed to the system design elements (multiple stopping bays ‘sub-stops’, overtaking lanes with adequate space to allow overtaking at reasonable speeds, allocation of routes to sub-stops etc.). Hartford’s CTfastrak and Richmond’s Pulse BRT systems, United States Similar to Guangzhou, most United States’ BRT systems have integrated non- motorized transport in the system design. Hartford’s CTfastrak BRT system has bike racks at every station and two bike racks are provided inside the buses to enable connection of bicycle and bus trips. Richmond’s pulse buses have a fold- down rack at the front of the buses that accommodates three bikes, and bikeshare stands at two stations. The flexibility of switching transportation modes enables cyclists to use BRT services and promotes ridership. Technology component: In Barranquilla, Colombia, passengers were able to plan their journey by 2017 using MOOVIT app which provides real-time information such as bus location, expected bus arrival time and road and station closures. In November 2017 - 128- Transmetro BRT launched near field communication (NFC)-enabled payment bracelets which can be used to pay fares and for retail purchases. Sources: World Bank (2020); ITDP BRT Planning Guide, 4th Edition (accessed August 2020); Fjellstrom, K. (2010), ITDP (2019) 4.4.2.2 Business Model 306 One key element of the business model is fare-collection management. The fare collection management option has to align with the demand risk allocation and associated subsidy mechanism. For instance, in South African cities, fares are collected by the operators, but revenue is managed by the city government, as the government takes full responsibility for demand risk and operators are paid based on the negotiated gross-cost contracts. As discussed in Section 3.2.4, there is a four- part cost model, which determines the remuneration of the operator according to the scheduled service—it might disconnect the payment to the operators from actual demand. In the cases where private operators have to share the demand risks, private operators prefer to have control over fare collection in order to have full visibility on these revenue flows. 307 A common issue identified in the case studies is the over-optimistic estimation of the fare revenue during the feasibility study phase. In addition, the fixed-rate tariff structure is likely to either affect poor residents’ accessibility when the fares are not affordable or affect the profitability of the business model when fares are set too low by the government. These issues affect the implementation of the business model, especially the benefit and risk sharing between the government agency and the private operators. 308 It is common that once networks are designed, infrastructure is built, contracts are signed, and services are operational, cities are “locked in” to the associated operating cost and revenue-generation risks. A more dynamic fare- setting system, to some extent, will help manage the risks. The fare-level adjustment should be based on a thorough review on the public affordability, changes in labor and energy cost, and sufficient consideration of its countereffect on the demand. Box 4.5 provides an example of TransJakarta BRT in which the fine- tuning of the fare structure and exploring more ridership potential supported the growth of fare revenue. Box 4.5 Example of Fare Structure Adjustment in BRT Operation Phase TransJakarta BRT, Indonesia3 TransJakarta BRT adopted a flat fare system for the first corridor. It lost a lot of customers because there were minibuses that offered a competing service at a - 129- price below the fare for TransJakarta BRT. For short trips, customers tend to use the minibuses, but for long trips, where time savings are a major issue, customers tend to use TransJakarta BRT. Compared with the long trips, the short trips on the corridor are generally a highly profitable trip type, but their profit generation potential was not well captured in the flat-fare mechanism. On Corridors 2 and 3, most customers take a very long trip from the periphery to the city center. On these corridors, the flat-fare structure gives TransJakarta a competitive advantage over other commercial operators who charged a zonebased fare. This flat fare also attracted a lot of low-income residents who live in the city’s periphery and who are highly price-sensitive. Therefore, TransJakarta theoretically tested the impact of a distance-based fare on profit. Table 4.2 shows that shifting to a fare structure with a reasonably set minimum fare combined with a distance-based fare would be able to attract more passengers traveling different distances and yield substantially more profit than a flat-fare system. Figure 4.2 highlights the amount of ridership that each of the different fare strategies would generate. - 130- Source: ITDP 2017b. 309 In principle, the business model of a BRT system should be able to cover its basic operating cost from its own fare revenue. If a new BRT system faces ongoing operational losses, as has occurred in Cape Town, there should be an assessment of the scale of these losses in advance to plan accordingly. Stable government funding streams such as specified earmarked government tax revenue or transport surplus revenue are more preferable. In addition, the understanding of the local context is the premise of system design and key to the feasibility of the business model. 310 It is important to note that there is no predefined business model that can be directly transplanted. The investment in SSA countries usually faces higher risks and more uncertainties due to complex political-economy issues. Moreover, the technical and manufacturing capacity is limited. This drives up the rolling stock and maintenance cost, and 311 the fare affordability is relatively low. Therefore, the system design and business model should be contextualized and consider exploring more revenue- generating channels to attract private operators and investors. 312 The case studies in SSA and international experience indicate the significant financial impact of the system design and business model on the financial sustainability and commercial viability of the BRTs. The system design and business model directly determine the CAPEX and OPEX of the BRT system. If the system design does not fit the local context (e.g., urban planning, integration with major transport modes, etc.), it will result in cost overruns in the infrastructure construction phase (e.g., Cape Town BRT) and high repair and maintenance cost. In addition, whether the BRT is a functional element in public transport and urban planning determines its value for money. An integrated urban public transport system will not only be able to generate more economic benefit for the BRT investors and operators by connecting and bringing in more demand, but also achieve more environmental and social benefits for the government and for the general public. 313 The business model determines the fare-level design, payment mechanisms, and use of funding, etc., which enables the revenue generation and capital flow within the BRT system to support the operation and maintenance of the BRT. Given the diverse development contexts, demand level, and urban configurations of the SSA cities, the following aspects related to the market dynamics should be assessed to develop technically feasible and compatible, as well as commercially viable and financially sustainable, BRTs in SSA. - 131- Key Actions to Promote Financial Sustainability and Commercial Viability • The BRT system design must consider the generation of regular operational profit over its lifecycle. • All BRT revenue opportunities (such as variable fares, advertising, leasing of shop space in stations or terminals and similar) should be comprehensively explored, and where suitable, developed and incorporated into the new BRT system’s business model. • The business model for the BRT system must be robustly and comprehensively stress-tested, and the underlying assumptions should be reasonable and defensible. • All direct and indirect risks to the BRT system in design, financing, implementation, operations, and maintenance (including environmental, climate, and social) must be identified, fully quantified/qualified, and appropriate mitigative actions put in place. • Competition (where relevant, such as from existing informal public transport providers, or private sector services) to the BRT system, and its impact on operational efficacy and commercial return, must be fully considered and factored into the design. • The consideration on mobilizing private sector investment should also be reflected in the system design and business model. • The BRT system should align with master strategies and planning for land use, mobility, and related development. • The projected outcomes of the BRT system business and financial model, specifically with regards to indicators around projected revenue and costs over the lifecycle, should align with local and international BRT experience. • The design of the BRT system should be sufficiently flexible to allow for future expansion and changes as may be desired or required (e.g. to integrate with other modes of transport or upgrade with newer technology such as electric vehicles). • The BRT system must be clearly and comprehensively described in formal plans and related documents (such as a business plan, design plans, cost and financial models, environmental impact assessment, etc) to ensure all project information is captured and available to stakeholders. • Thesystemdesignandbusinessmodelneedtosystematicallyintegratethecon siderations on the fiscal capacity, institutional capacity, market dynamics and the local political economy contexts. • There is a need to develop an integrated public transit plan and contracts to ensure proper coordination and performance of feeders. The government need to implement and enforce bans on informal transport providers and illegal use of BRT lanes. - 132- 4.5 Policy and Political Will Policy and Political Will These are the overarching strategies and political desire to shape and drive development of a new BRT system, and appetite for private sector participation in such. This includes consideration of overarching policies promoting, and political support for, private sector participation in key projects, stakeholder consensus, and impact of outside influences. 314 Policy and political will play a significant role in influencing project funding, system design, and private sector participation in SSA BRT systems. Ultimately, these influences impact a system’s financial sustainability and commercial viability. 4.5.1 Insights From Case Study Cities 4.5.1.1 Cape Town 315 National government-level policy, chiefly the Public Transport Strategy and subsequent Action Plan (see Section 3.2.3), has shaped the approach taken in Cape Town with respect to the system design and business model, and the role of the private sector and incumbent operators. Consequently, national public transport grants of more than US$400 million per annum were established for capital and indirect operating cost in eligible South African cities, of which Cape Town receives a substantial share. This funding is conditional on meeting national requirements, which prescribed high-quality system design specifications, as well as the approach toward the participation model in South African cities. 316 There was a strong political drive for an improvement in public transport and the empowerment and inclusion of incumbent operators in run-up to the 2010 FIFA World Cup. NationalpolicypromotedBRTandrequiredcostlysystemdesignandbusinessmodel elements, such as full replacement of existing services, a comprehensive range of services, EMV-compliant electronic ticketing, universal access, and negotiated contracts with incumbent operators. The view underpinning this approach was that the systems would generate enough revenue to cover cost, which did not materialize. 317 The policy priority has significant influence on the formalization of the informal and incumbent minibus taxi industry. Cape Town adopted a negotiated - 133- process with the minibus industry. As a result, there was no scope for competitive procurement or participation of nonincumbent operators, such as experienced international bus operators or firms from other parts of the country with their own capital. Cape Town undertook a complicated process of incumbent operator participation and integration into MyCiTi (as discussed in Section 3.2.5). The minibus taxi industry arguably wields the most significant influence in the public transport sphere in South Africa. Often, consensus does not exist between it and he government on the best way forward with regard to developing BRT systems. This has typically resulted in the development of new systems taking substantially longer than expected due to extended engagement and negotiation processes. 4.5.1.2 George 318 George shares similar national and provincial jurisdiction with Cape Town. One additional characteristic of the GIPTN is the joint implementation role of both the Western Cape Government and the George Municipality. In a triumvirate with the national government, alignment of will among the three entities is a powerful influence on the direction of the GIPTN system, while misalignment is more challenging to manage. 4.5.1.3 Dar es Salaam 319 Significant progress has been made in developing and implementing Dar es Salaam’s BRT system as a result of support from Tanzania’s National Transport Policy and Dar es Salaam’s Transport Policy and System Development Master Plan, and substantial political will from the government. However, full operationalization of the DART Phase 1 has been challenging partially due to the disagreement, and misalignment of objectives and interests, that exists within and between the public sector and private participants on the governance of operation and competitive tendering of the operator. 320 The DART Agency and UDA-RT have not achieved consensus on the approaches to assess and close the viability gap. Several stakeholders, such as the current operator, are of the view that the system’s fare levels are a significant constraint and that they need to be increased to achieve viability, subject to community consultation and an associated affordability assessment (Sugden 2019). The public sector still needs to provide a government guarantee or legal covenant ensuring that fare increases are predictable (Mchomvu 2019a; Mchomvu 2019b) or projections of revenue are accurate (DART Agency 2019), in order to motivate the involvement of the private sector. 321 The payment mechanism and fare revenue management remain to be improved to align the interests of the operators and the government agencies. For example, there is currently an impasse on whether to apply a per-kilometer rate to pay the - 134- operator (gross cost PPP model) or for the operator to be charged an infrastructure access fee (Access Fee PPP model). There are also disagreements on the most appropriate fare revenue management for DART, and whether it would be best placed under the fund management of the private sector. It is vital that the fare collection system is robust and well-managed to provide transparency and comfort to prospective private bus operator participants. 322 Tensions between the government agencies and the operators resulted in the delay of competitive tendering. Due to resistance from the UDA-RT, the planned competitive bidding of BRT operator has not been implemented. This has led to questions about whether the current operational capacity of the UDA-RT could meet the specifications of the DART BRT Phase 1. In addition, there is a lack of qualified BRT operators in the local market, which disincentivizes the UDA-RT to improve its operational capacity. Therefore, while awarding the transitional service contract to the UDA-RT to maintain the operation of the DART BRT Phase 1, it is necessary for the government agencies to support the professionalization of other local bus operators, improve the market environment, and encourage effective market competition. 4.5.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities 323 A supportive, conducive policy framework and strong united political will from decision makers are required for successful implementation of SSA BRT projects and to attract appropriate private sector participation. In addition to the SSA case studies, the experience of establishing a national-level urban planning policy and consistent political support in Brazil, Iran, Mexico, and Singapore can also show the importance of a supportive policy framework and strong political will (Box 4.6). Box 4.6 International Examples of Policy Framework and Political Support for BRT Rollout Brazil Curitiba, Brazil, with strong and continuous political support and urban planning that links land use and public transport, became one of the first cities to operate BRT and effectively integrate it into the bus transport system. A key figure in Curitiba’s planning history is the architect and planner Jaime Lerner, who served as mayor for three terms, starting in 1971. Under his leadership, the city consolidated the links between land use and public transport and created a network of urban parks. In 2009, the federal government announced US$6.6 billion of funding for improved urban mobility, and Bus Rapid Transit (BRT) became a central plank of this agenda. The Center for Sustainable Transport in Brazil (CTS-Brasil) within the World Resources Institute (WRI) Ross Centre for Sustainable Cities - 135- leveraged its expertise, relationships, reputation, and political and technical leadership to promote high-quality BRTs in four major cities in Brazil: Recife, Belo Horizonte, Rio de Janeiro, and Porto Alegre. These achievements paved the way for a consistent, national, sustainable transport policy, which obtained support from the president and the Ministry of Cities. Tehran,Iran Tehran Municipality developed a comprehensive strategic plan (Tehran Transportation Master Plan) illustrating “Tehran in 2025.” The plan is based on a higher-level strategic plan, Tehran Comprehensive Strategic Development Plan — 2025 Outlook. This master plan laid the groundwork for the implementation in 2007 and customized to the local context. In the first year of operation, passenger ridership increased by 77 percent compared to the initial ridership of the regular bus service. This motivated the municipality to implement two more BRT lines in 2008. Mexico City, Mexico In order to avoid disputes among the members of the Ruta 2 Insurgentes association (the incumbent operators of Line 1 of the Metrobús BRT) during the formation of the vehicle operating company (VOC), the Mexico City administration first determined which buses were impacted. Not 100 percent of all the Ruta 2 drivers were impacted even on Insurgentes (the first line of Metrobús BRT). If the bus route only overlapped the corridor for less than 50 percent of the route, it was not pulled out of operation and the operator was unaffected. In this case, there is less resistance from the incumbent operators. In addition, this approach also increased the efficiency to structure the ownership of the VOC. As a condition for signing the operating contract with the newly constituted company, the incumbent operators were required to turn over all of the affected vehicles for scrapping by the city. The municipal government of Mexico City dictated to Ruta 2 Insurgentes that the stock composition of the new company was going to be one share of stock for one vehicle turned over to the city for scrap. In 2004, about 68 percent of the Ruta 2 members holding bus concessions joined the operating company Corredor Insurgentes (CISA). According to official records, 180 of 262 vehicles were scrapped under the substitution program. Singapore The government of Singapore encourages the use of public transport. To encourage the use of public transport, Singapore limits the ownership of private cars via the Vehicle Quota System (VQS) and increases ownership cost by charging additional registration fee and road tax. In addition, Singapore implemented Electronic Road Pricing (ERP) to reduce congestion to ensure - 136- optimal road space use. ERP rates vary by location and time and are based on local traffic conditions. Sources: Débora, Duarte, and Carrier 2020; World Bank 2020; ITDP 2017b; Land Transport Authority 2020. 324 Key decision makers need to be aligned on and buy into critical system parameters, including the system design, fare levels, existence and extent of subsidies, procurement processes, the role of incumbent operators, and the extent of private sector participation. In the absence of this alignment and support, implementation can be extremely challenging to attract private sector participants. Private sector participants will also perceive considerable risk where subnational governments are responsible for promotion and delivery of BRT systems, where the national government may otherwise be indifferent. In addition, decision makers should ensure that the implications of policy are well understood and informed by best practice and lessons learned in other contexts. In South Africa, for example, some of the system specifications set by the national government are now being relaxed based on the lessons learnt in operational cities such as Cape Town, Johannesburg, and George. 325 The case studies in SSA and international experience indicate the impact of the policy and political will on the financial sustainability and commercial viability of the BRTs. Strong and continuous political support and well-implemented transport policy that integrates the transport funding and coordinates urban and transport planning is fundamental to ensure the effective rollout and operation of BRTs. With policy and political support, more qualified investors (e.g., international and bilateral financial institutions and private investors) and operators will be willing to participate in the BRT projects, which can widen the capital mobilization channels and better technical solutions through competitive processes. In addition, consensus among the key stakeholders will facilitate the progress of the contract negotiations, which also will lower the overall cost of the BRT project from the project preparation phase. The following aspects related to policy and political will should be assessed to develop affordable, inclusive, commercially viable, and financially sustainable BRTs and urban transport projects in SSA. Key Actions to Promote Financial Sustainability and Commercial Viability • Consensus and will amongst key government and related stakeholders (including at sub-national and national level governments, industry unions, existing transport operators, etc.) should exist to push the BRT project towards successful implementation and sustainable long-term operations. - 137- • Key stakeholders and their mandates and objectives should be clearly identified, and these should be consistent with the direction of the BRT system. • Over-arching city and country developmental policies and strategies should support and promote private sector participation in key projects such as the BRT system. • Strong and sustainable political support is essential to create a level playing field for private sector participation in BRT system. • Role-players such as unions, construction companies, vehicle manufacturers, existing transport operators, and similar, should wield limited political influence over the project exigencies so as to have little long-term impact on the direction and success of the BRT system. • It is important to conduct early market soundings to gauge interest, identify key concerns and establish iterative dialogue processes with sponsors and lenders. • The government should explore support options from experienced transaction advisors and seek feedback early on from development finance institutions (DFIs) with respect to private sector financing. • The government needs to implement policies to discourage private vehicle use (e.g. taxes, congestion charges, circulation limits). 4.6 Institutional Capacity Institutional Capacity Institutional capacity is the ability of a government to effectively fulfil its role around planning, designing, implementing, operating, and managing a BRT system. This includes consideration of a government’s capacity and expertise to fulfil its own role as well as manage private sector participants, appropriate institutional structures, leadership, and track record. 326 To ensure sustainable success with BRT, SSA governments require the appropriate mix of experience and qualifications within their institutions to manage network development and services, as well as to facilitate procurement and oversee governance of private sector participation, over the life cycle of the system. The institutional structures and relationships that allow this capacity to effectively - 138- interact and complement mandates is critical to enabling commercial viability of BRTs in SSA. 4.6.1 Insights From Case Study Cities 4.6.1.1 Cape Town 327 The City of Cape Town (CoCT) has been relatively successful in fulfilling its role in the implementation of MyCiTi BRT Phase 1 services. This is attributed to the establishment of a dedicated MyCiTi Project Office with a focused mandate, a large staff cohort, and high levels of capacity and expertise to conduct and oversee the planning, design, and implementation stages. Importantly, the Project Office’s role and responsibilities were clearly defined, effectively linking with other key CoCT role players (including roads, urban planning, land use, enforcement, and treasury authorities) allowing for effective development and rollout of Phase 1. 328 However, the establishment and management of operational contracts has been challenging, resulting in long and complex negotiations with incumbent operators, difficulties enforcing bus operator penalties, and the cancellation of operational contracts. These challenges have been exacerbated by a series of institutional changes within the CoCT that have impacted its capacity to deliver BRT, as described in detail Section 3.2.2. Over the last six years, the MyCiTi Project Office has gone through several reorganization phases, including incorporation into the CoCT’s broader and urban transport authority, which was later dismantled and restructured under a separate directorate. The changes are multiple and rapid, accompanied by changes in leadership, management, and roles and responsibilities. These fluctuations, coupled with the loss and non-replacement of key personnel and lower overall numbers of dedicated staff, lower the CoCT’s capacity to effectively and efficiently manage current BRT operations and deliver future phases. 329 The gross-cost contracting model employed by Cape Town and all BRT systems in South Africa is complex to design and oversee. On one hand, gross-cost contracting is generally more attractive to private operators as it lessens their revenue risk and allows the government to have more control over the system. On the other hand, this control requires substantial institutional capacity to manage and enforce. Effective oversight of operational contracts is critical to the ongoing sustainability and viability of the MyCiTi system. The termination of the N2 Express contract is partially attributed to a lack of capacity for effective contract management. 330 The CoCT developed MyCiTi BRT as a high-quality alternative to paratransit services and relied on the quality standard as barrier to overcome competition from informal operators. However, this approach has had limited success, with illegal - 139- informal operations reducing MyCiTi’s passenger numbers. This has led to renewed emphasis on policing and enforcement of paratransit operations, and the capacity and institutional systems necessary to do this successfully. 4.6.1.2 George 331 In George, the government stakeholders have largely been able to fulfil their broad institutional responsibilities in relation to the project. However, numerous issues remain to be addressed. George Municipality’s capacity to develop and manage GoGeorge is limited as it only has a single official dedicated to the project. The GIPTN Management Unit, responsible for day-to-day management of the service and described in Section 3.3.2, is comprised of only five staff, all from the provincial government. Similar to Cape Town, George utilizes a gross-cost model for current operations (see details in Section 3.3.4), which requires intensive management from government authorities. In addition, George continues to work toward implementation and rollout of additional GIPTN phases, with the immediately upcoming Phase 4, which has the largest infrastructure and rolling stock investment among all phases. With inadequate internal capacity, the system is, therefore, highly dependent on a large network of consultants to perform its functions in a timely and effective manner. This reliance on external capacity is costly and has implications for the long-term sustainability of the GIPTN once consultants are no longer involved and institutional memory is lost. Additional internal capacity has been planned but has been slow to materialize due to restrictions on government recruitment and divergence between the two government stakeholders on the best approach for building this capacity. 332 The joint institutional oversight of GoGeorge by the Western Cape Government and George Municipality introduces additional complexities to the institutional system due to an increased number of role players and increased potential for institutional misalignment. Potential private participants will consider this complexity warily, given the possible impact on ongoing system progress and sustainability. 4.6.1.3 Dar es Salaam 333 Key stakeholder and institutional issues in Dar es Salaam include fragmented responsibilities for BRT-related administration and insufficient institutional capacity, which has affected the implementation and management of the DART system. 334 There is currently a diverse spread of responsibilities for planning, operating, and managing the DART system. The DART Agency, which is ultimately responsible for managing DART BRT implementation and operations, is not fully empowered to perform its role due to, for example, being unable to license - 140- operators and establish fare levels. Efforts to better centralize functions have to date not materialized (DART Agency 2019). In particular, the inability to better set fares that correspond to cost directly impinges on the financial sustainability and commercial viability of the system. 335 The high staff turnover within the DART Agency weakens its capacity. As discussed in Section 3.4.2, the DART Agency currently employs 78 staff of varying seniority and experience, with an annual operating budget of US$2.3 million. Given the scale of the BRT system, and institutional complexity that must be managed, these numbers are likely insufficient. The DART Agency projects a doubling of these figures once Phase 1 operations fully commence, but this remains to be further realized. 336 Implementation of Phase 1 BRT infrastructure was also delayed by various challenges partially attributable to the insufficient capacity within and institutional cooperation among the DART Agency and other key implementing authorities, including the Tanzania National Roads Agency (TANROADS). These challenges include procurement delays and inadequate engineering design and supervision. Delays were experienced in procurement of construction contractors for Phase 1 infrastructure, and once underway, numerous issues emerged with regard to the quality of the design and engineering. Delays in procurement and implementation manifest as increased cost, impacting the financials of the project. Inadequate design and engineering impacts on the quality of the system, its ability to fulfil its intended purpose, and its long-term sustainability. All of these consequences negatively influence commercial viability, both directly with regard to financials (less revenue generated, additional operating and maintenance cost incurred) and indirectly with regard to private sector participant appetite to invest in the system. 337 In addition, the capacity and experience of government, both within Tanzania’s Ministry of Finance and Planning (MoFP) PPP units and the DART Agency, to procure and manage participation of private sector entities is limited. Tanzania has a comprehensive set of PPP laws and frameworks. However, attempts to procure an additional BRT operator for the full operationalization of DART Phase 1 are challenging. Procurement of a ticketing and fare collection service provider were also confronted with many obstacles. One reason for these obstacles is the lack of procurement capacity, knowledge, and experience within the institutions. Several actions have now been undertaken to better prepare for the revised competitive procurement process, including the completion of a feasibility study for the full operationalization of Phase 1, with an associated financial model, and a market sounding process. However, questions remain about the government’s ability and capacity to effectively and sustainably manage its private partners once procurement is successfully concluded. - 141- 4.6.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities 338 A capacitated government body is a prerequisite for successful BRT development and facilitation of private sector participation. Institutional capacity to deliver BRT and manage private sector participation requires the clear and effective allocation of roles and responsibilities, empowered institutions with the authority to perform their functions, robust systems and linkages between stakeholders, and an organizational structure populated with the required number of suitably qualified and capacitated personnel. In particular, suitably centralized, empowered, and capacitated BRT management units are core to developing and sustaining a viable system. In some countries, BRT implementation and management has been the responsibility of existing capacitated transport authorities, contracted transit service providers, or capacitated government transport departments. In most cases, these institutions are also responsible for vehicle operations in the same manner as they operate the regular bus system (Box 4.7). Box 4.7 International Examples of Capacitating Existing Transport Authorities for BRT Management Coordination between the central and local governments-China The national government departments, such as the Ministry of Transport and the Ministry of Housing and Urban Rural Development can be instrumental in setting goals, formulating national strategies, developing nationwide standards and regulations, allocating inter-governmental transfer payments, and advancing capacity building programs. Moreover, in a political setting where local city leaders are held accountable to upper-level governments, the urban transport development progress ties to political leaders’ performance assessments, thereby creating essential political incentives and accountability mechanisms. The Ministry of Transport authorizes financial support for the implementation of projects and initiatives proposed by the Demonstration Cities throughout the program cycle. However, instead of a new funding pool, the Ministry of Transport draws funding from the existing programs and their funding pools. Therefore, the funding is primarily channelled to focal areas where the Ministry of Transport has traditionally been a leader, including the development of multi-modal transit hubs, operation monitoring systems for bus rapid transit, clean energy buses, and intelligent transportation systems. In addition, the national government supports the connection of the international agreement and national policy and local policy, provide some funding for prioritised projects, and aid in capacity building for regional and local governments. Transit authorities - United States and Australia - 142- In these countries, most BRT systems are managed by pre-existing transit authorities with the power to contract private operators for BRT services. Las Vegas BRT system in the US, under the Regional Transportation Commission of Southern Nevada (RTC), has contracted out BRT operations to private operators. Other examples of BRT systems managed by transit authorities in the US include: Eugene Emerald Express (EmX) BRT in Oregon managed by Lane Transit District (LTD); HealthLine, MetroHealth Line and Cleveland State Line in Cleveland managed by Greater Cleveland’s Rapid Transit Authority (RTA) and the Pittsburgh Martin Luther King Jr. East Busway operated by the Port Authority of Allegheny County. In Australia, TransitLink - a public authority – manages the Brisbane BRT. Municipal government transport departments – Ottawa, Canada OC Transpo, a department in the City of Ottawa, operates the Ottawa BRT system. The City of Ottawa was created through amalgamation of smaller municipalities in the Regional Municipality of Ottawa–Carleton. OC Transpo is responsible for all public transport options in the City of Ottawa covering system planning, operations, customer information systems, and maintenance within the municipality’s budgetary constraints. OC Transpo successfully developed the transitway (Ottawa-Carleton’s rapid transit system of roadways for buses’ exclusive use) which has resulted in operation cost savings and new developments value (over the life of the Transitway) each exceeding the investment costs. Source: World Resources Institute (2015), ITDP, BRT Planning Guide, 4th Edition; TRB’s TCRP Report 90, volume 1. 339 BRT projects are complex, involving numerous components that need to be implemented in a coordinated and cohesive manner. When considering whether to proceed with a BRT project, decision makers must consider whether and how the required institutional capacity can be developed, or whether a different approach to BRT development or public transport improvement with a lower capacity burden should be explored. This could include consideration of a system design or business and contractual models that reduce the capacity burden on government, such as a single private sector BRT partner being responsible for vehicle operations, vehicle provision, vehicle maintenance, station management, ticketing, etc. The experience of setting up a capable transport authority to manage BRTs in Peru and cities in India can also provide useful references for SSA cities (Box 4.8). Box 4.8 International Experience of Setting up Dedicated Transport Authorities for BRT Systems - 143- Lima,Peru In 2002, the Metropolitan Municipality of Lima (MML) created a transport authority, Protransporte, tasked with public transport project development in Lima and the development of the Metropolitano BRT project. Protransporte has its own administration and is funded by MML, the World Bank, and the Inter-American Development Bank (IDB), which significantly enhanced Protransporte’s capacity to hire and train qualified staff and maintain efficient operation of the institution to manage the BRT system. Protransporte is becoming a robust authority as a result of the hands-on experience gained while implementing the Metropolitano BRT project. India Urban transport falls under the state government’s purview in medium-sized cities in India. The local government is the relatively weak tier due to the lack of technical capacity and resources, leading to the lagging development of institutional capacity to manage public transport in these cities. In order to improve the institutional capacity, in the case of the Hubli-Dharwad BRT, the more substantial role of the state government (Government of Karnataka) ensured an effective implementation of the BRT by being directly involved in the setting up the Land Transport Department. At the city level, the capacity building focuses on the technical assistance to support the cities to develop more commercially viable urban transport initiatives, instead of merely focusing on the infrastructure-led approach. In addition, the state government established the Hubli-Dharwad BRTS Company Ltd. (HDBRTSCO) as a Special Purpose Vehicle (SPV) to coordinate the implementation of the BRT. The state government holds 70 percent of the SPV shares. The remaining 30 percent shares of this SPV are held by the HubliDharwad Municipal Corporation (HDMC), Hubli-Dharwad Urban Development Authority (HDUDA), and North Western Karnataka Road Transport Corporation (NWKRTC). Source: World Bank 2020; UITP n.d.; Gopiprasad and Shankar 2016. 340 The case studies in SSA and international experience indicate the impact of institutional capacity on the financial sustainability and commercial viability of the BRTs. A lack of institutional capacity is a risk for prospective private sector BRT operators, which will cause a high cost of the operation, given their reliance on functional institutions to deliver the service. In addition, a capable institution can ensure the reasonable arrangement and monitoring of the budget allocation for BRT development, construction, and operation, which can improve the efficiency - 144- of capital utilization, reduce the risk of cost overruns, and assist the subsidy arrangement based on the service performance. The following aspects related to the institutional capacity should be assessed to develop affordable, inclusive, commercially viable, and financially sustainable BRTs and urban transport projects in SSA. Key Actions to Promote Financial Sustainability and Commercial Viability • Appropriate institutional structures must be in place, defining and linking the roles of relevant government stakeholders (e.g. between national, provincial, local levels of government, and authorities overseeing public transport, roads, land, finance/treasury, BRT management agency, enforcement, etc.) to optimally implement and manage the new BRT system. • Government should have sufficient capacity and expertise to sustainably and successfully fulfil its role in the implementation and management of the new BRT system(e.g. in authorities overseeing urban and public transport, roads and infrastructure, land planning and development, policing and enforcement, finance, dedicated BRT management, and related). • Government should have sufficient capacity and expertise to sustainably and successfully facilitate and manage private sector participation in the new BRT system (e.g. a public-private partnership authority, BRT management agency). • An experienced and fully capacitated leadership/management cohort must be in place - a dedicated BRT management entity - with a clear mandate to manage the implementation and operation of the new BRT system. • Effective plans and systems should be in place to retain and build government management capacity over the lifecycle of the new BRT system. • Government should have a track record of successfully delivering and managing large, multi-faceted, and multi-stakeholder flagship projects of similar nature and scale as the new BRT system. 4.7 Incumbent Operators Incumbent Operators - 145- The influence and role of incumbent operators (often largely consisting of an informal industry of private transport service providers) needs to be managed in a new BRT system. This includes consideration of the existing and nature of existing operators, their influence, possible integration into the BRT system, and the financial implications of any such integration. 341 The influence of incumbent operators and paratransit operators is one of the most critical factors affecting the financial sustainability and commercial viability of SSA BRT systems. The approach toward incumbent operators is complex and informed by several other factors articulated in this chapter, including fiscal capacity, the legal and regulatory framework, policy and political will, institutional capacity, and the participation model. 4.7.1 Insights From Case Study Cities 4.7.1.1 Cape Town 342 Paratransit industry participation and empowerment is a core objective underlying South Africa’s BRT program. The policy that has been adopted is that no current minibus taxi operator will be worse off under new transport systems. This is an important principle intended to ease the transition of urban public transport processes, particularly given the political influence of the minibus taxi industry in South Africa. In support of this policy, the NLTA legislation provides for negotiated contracts to be concluded with incumbent operators for the first 12-year contracts. 343 The industry transition processes in Cape Town’s MyCiTi BRT Phase 1 were successful in creating new formal independent bus operating companies from affected groupings of independent minibus taxi associations, as discussed in Section 3.2.5. This was achieved by financially compensating affected operators to surrender their legacy operating licenses, and by offering affected operators a number of options for their future integration. This approach has significantly influenced financial sustainability and commercial viability in Cape Town. The provided compensation, estimated at an average of ZAR500,000 per operating license, adds substantial cost to the overall system. Furthermore, the precedent will be difficult to sustain for system expansion, particularly for Cape Town which has more than 10,000 licensed incumbent paratransit operators. The sole source procurement process pressured the city government to concede to favorable terms for vehicle operations, leading to higher cost than would have been the case through a competitively tendered process (CoCT 2018). In addition, the incumbent operators may expect a permanent role in BRT operations beyond their first contract, likely impacting the ability to procure other private sector entities. - 146- 344 The local informal minibus taxi industry lacks the capacity to operate a high- quality, scheduled bus service or to run a company with a formal corporate structure. The government has to provide extensive and ongoing support to the operators to build this capacity, including training and ongoing funding of dedicated business advisers. In addition, the local minibus taxi industry is short of the capital needed to invest in establishing companies, either to capitalize or to purchase bus fleets. As such, the government has to provide the funding needed to capitalize the company and take responsibility for procuring and maintaining bus fleets, as well as the other responsibilities and cost associated with vehicle asset management (e.g., insurance). This cost has added significantly to the capital and operating budgets of the MyCiTi system. 345 The newly established bus operators have experienced governance and management challenges, including compliance with corporate governance best practice and corporatization. The longer-term financial sustainability of newly formed VOCs requires a good governance model to ensure good business practice is followed. Because bus services are inherently more profitable at the outset when equipment and infrastructure requires little maintenance or replacement, finances need to be managed to ensure that initially high profits can be utilized at a later stage to ensure the continued provision of services at the specified quality of service through maintaining and replacing assets. The industry transition approach toward the N2 Express BRT service in Cape Town provides the following insights, building on the previous discussion and reflecting on the discussion in the case study (Section 3.2.5). The N2 Express was planned as a “top-up” and not a replacement service, and, therefore, a different approach toward incumbent operator compensation was followed based on observed impact. This has profound implications38 for Cape Town as the revised system and business model for the city is to implement a complementary hybrid BRT and paratransit system, which is relatively innovative compared to the full replacement approach. 4.7.1.2 George 346 The George context is very similar to that in Cape Town. A comparable industry transition process was undertaken with incumbent operators affected by the rollout of GoGeorge, per Section 3.3.5 of the case study. Existing licensed (e.g., legally operating, as opposed to several illegally operating paratransit providers) operators in George were extended an opportunity to become shareholders in the newly established company, with the option to buy in (participate), buy out (leave the industry) or compete with the system. Those who chose to buy in or buy out were financially compensated by the government for relinquishing their operating licenses and vehicles, at an average compensation value of ZAR260,000 per operating license for Phase 1. A new bus operating company was then established, owned by incumbent operators who chose to participate, and awarded the contract for bus operations for GoGeorge. As with Cape Town, the implications of - 147- this approach include compensation amount precedents, and incumbent operators’ expectations for permanent operational involvement. The government provides the new operator company with capacitation and establishment assistance, including a bus fleet, which adds significant cost to the George system, detrimentally impacting financial sustainability. 38Far-reaching implications include: • In MyCiTi Phase 1, compensation was predetermined based on a full replacement model. Notwithstanding, on some routes MBT operations have resumed in competition with MyCiTi despite compensation of previous MBT operators. • The concept of compensation based on “observed impact” allows the city to put in place a service without compensating all affected operators up front. This was accepted by the MBT industry in the rollout of the N2 Express. Post-implementation surveys were done to ascertain how many passengers using MyCiTi were from MBTs (as opposed to rail), and compensation paid out accordingly. • The adjusted approach toward the next phase of MyCiTi is to put in place trunk services that don’t provide for the full corridor demand, supported by limited feeders. Thus the impact on existing MBT operators is not known. In this context, compensation based on “observed impact” is preferred, and there is now established precedent for this approach via the N2 Express. 347 Currently, the launch of GoGeorge Phase 4 has been delayed for several years partially due to resistance from a disgruntled group of incumbent informal operators who are dissatisfied with the original agreement. Engagement between the The disputes on the integration agreement led to resistance from the incumbent informal operators. government and this grouping is ongoing, but the issues remain unresolved. This group has expressed its resistance through violence, including burning George system buses and the assassination of local MBT leaders. As outlined in the section on fiscal capacity, this delay has placed increasing financial pressure on the government as it is incurring systemwide cost without the significant fare revenue expected from Phase 4. In the intervening period, illegal operators have begun providing services in this area, further complicating rollout. 4.7.1.3 Dar es Salaam 348 Daladala operators in Dar es Salaam are not adequately consolidated. UWADAR, the current incumbent operator association, only represents several hundred operators out of several thousands. In Dar es Salaam, daladala participation in interim Phase 1 operations has not fully achieved the expected outcomes, both in terms of benefit to the informal operator, as well as to the system. A discussed in Section 3.4.6, the 400 operators affected by interim - 148- operations were included in the operating company UDA-RT, with up to 30 percent shareholding. However, there is lack of evidence to prove whether these daladala operators have been offered financial compensation. Some of the participating operators who were “removed” from operation on the corridor through nonrenewal of their annual license returned to illegal operations as they were not satisfied with the benefits from their involvement in the interim operating company (LATRA 2019a; LATRA 2019b). 349 The government’s plan for later phases is for daladala operators to form a company or companies suitable for BRT operating contracts. However, daladala operators currently lack the capacity, experience, and capital to formally establish and effectively operate high-quality bus services. They are also wary of partnering with more experienced firms out of concern that they will lose control of their business. To overcome these challenges will require substantial resources from the national and the municipal governments in terms of time, capacity, and funds, which will have an impact on the financial sustainability and commercial viability of DART BRT. 4.7.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities 350 The role of incumbent and paratransit operators is a priority factor that introduces a great deal of complexity and risk to the process of BRT development and operations. Therefore, the approach of governments to this issue needs to be given enough attention, carefully thought through, and managed. Table 4.3 summarizes the typology of approaches to integrate the incumbent operators into the BRT system based on the South Africa cases, the Dar es Salaam case, the Dakar case and, Lagos BRT case. Table 4.3: Typology of Approaches of Incumbent Operator Integration: Typical SSA BRT Cases-Source: ITDP 2017b. Typology of Cape Town and Dar es Dakar, Lagos, approaches George, South Salaam, Senegal Nigeria Africa Tanzania Incorporate Negotiated Negotiated Performance-based Operational contracts interim and contracts awarded contract awarded to transitional to AFTU and DDD awarded to incumbent contracts operators private operators awarded to operator private Primero operator Transport UDA-RT Services Limited - 149- Improve N.A. N.A. Corporatisation and Training to professionalisation formalise of the informal the minibus public transport drivers and sector improve service quality Mitigate Compensation N.A. N.A. N.A. for the licences of the operators choose to exit the operation Note: The definitions of the typology of approaches are based on the study on Managing Project Related Risks in BRT, World Bank, 2018. a Incorporate refers to considering local operators in bidding requirements and service contracting. Start by assessing their capacity to raise financing and compete when designing a tender process. b Improve refers to regularizing services with permits/concessions (e.g., quality and safety standards, as feeder or in growing/underserved areas, etc.), and improving level of services through technical assistance (e.g., open data and user information). c Mitigate refers to a situation when private operators cannot be incorporated or improved, a fleet replacement or compensation or retraining program may be needed. 351 There is also an evolution of the transition mechanism transforming the preexisting bus systems into efficient BRT systems with public investment based on the existing BRT cases. Figure 4.3 illustrates the transitioning stages from the public provision of service to the fully competitive tendering service mode. The transition at each stage requires extensive engagement with stakeholders, including the operators, financiers, government agencies, and users. For example, to achieve the fully competitive tendering of the bus operators, the Land Transport Authority of Singapore (LTA) conducted consultations with a wide range of stakeholders, including commuters, cyclists, youth, and the elderly, to better understand their mobility demand. In addition, the LTA has a two-stage tendering procedure to ensure the technical specifications and cost-control requirements can be met. - 150- Figure 4.3: Service Contracting As a Sector Transition Mechanism 352 The involvement of incumbent and paratransit operators in BRT projects in SSA cities is ongoing but remains challenging. Key challenges in involving incumbent paratransit operators in BRT systems are significant cost and complexity of formalization processes and compensation arrangements. Incumbent paratransit operators have the potential to disrupt BRT implementation and operations through, for example, strikes and violence. They are able to generate revenue by operating in competition to the BRT system by providing cheaper, more convenient, and point-to-point service. They also wield significant political and social influence. However, there is a developmental imperative to ensure the inclusive socioeconomic development of a key economic industry which provides services to millions and supports the livelihoods of a vast number of people in SSA cities. 353 In addition, participation of paratransit operators creates inherent risk for prospective formal private sector investors. There is a need to be structured and governed to manage the interests of all of the participating operators in accordance with common goals to deliver high-quality services at low cost, and to build mature bus operating companies owned by paratransit operators. On the other hand, the investment and participation of formal private entities without the support of local paratransit operators is extremely high-risk, given disruptive capabilities previously described. 354 A comprehensive understanding of incumbent and paratransit operations, financial performance, condition of assets, business models, and other issues to inform the approach to formalization and inclusion is the premise. Experience in South Africa and Dar es Salam suggests that successful paratransit formalization and inclusion processes are complex, requiring extensive and dedicated - 151- engagement, negotiation, and government support and funding at the outset of the BRT implementation. The experiences in Bogotá and Pereira BRTs in Colombia also demonstrate the importance of planning the integration of incumbent operators at the outset (Box 4.9). Box 4.9 International Examples of Incumbent Operator Integration TransMilenio BRT in Bogotá, Colombia Phase 1 of TransMilenio BRT in Bogotá included the busiest urban corridor. Most bus routes in the city were affected, resulting in resistance from the incumbent bus owners and companies to the TransMilenio plans. To appease the incumbent operators, government authorities set up a tendering process that gave priority to bidding companies that had demonstrated experience operating transit in the city. However, this was coupled with a minimum capital requirement. This led incumbent companies to compete against each other to seek partners that were able to supply experience and capital. The result was the formation of new companies that included existing companies as shareholders, although the former were mostly controlled by new partners with capital from other industries. The preference for existing companies did not address the concerns of the bus owners and many were finally displaced amidst protests. The city also faced more protests as it attempted to expand the system in Phase 2. Therefore, the authorities changed the bidding rules, giving preference to companies that included not only companies holding existing permits, but bus owners currently providing service. For Phase 1, which began in 2000, public authorities tendered four concessions for BRT trunk operations. These were long-term contracts to provide sufficient time to recoup the investment required for the purchase of new buses. In addition, authorities awarded five feeder area-based concessions. These had a significantly shorter duration (four years) and allowed bids from operators using fleets composed of used buses. In Phase 2, completed in 2006, authorities awarded three additional trunk concessions, bringing the total to seven trunk concessions and six feeder concessions. Nonetheless, only five clearly identifiable investor groups own the 13 concessions. In 2013, BRT contracts were renegotiated with the existing companies to obtain cost savings for TransMilenio. Despite the successful implementation of Phases 1 and 2, TransMilenio only accounted for 26 percent of public transit trips in Bogotá. In response, Bogotá in 2006 undertook a plan to implement an Integrated Public Transit System (Sistema Integrado de Transporte Público; SITP) by contracting the rest of the transit coverage. This plan divided the city into 13 zones, designed to feed into the - 152- BRT corridors. After receiving more than 30 bids to operate the 13 SITP zones, authorities awarded the concessions in 2010. These concessions will last 24 years and implementation was started in June 2012. Notably, companies with existing TransMilenio contracts won six of the 13 SIPT concessions. TransJakarta BRT, Indonesia Jakarta adopted direct-line services allowing incumbent and paratransit operators to be part of TransJakarta’s BRT service delivery. In 2005, TransJakarta officials implemented discounted transfer tickets in an attempt to link minibus and BRT services and in the process expand paratransit feeder connections. Program implementation failed due to a lack of trust and confidence from incumbent operators. Aided by ITDP, Jakarta succeeded in the second attempt at BRT-minibus integration with the introduction of direct-line services. These services allow the minibuses to use TransJakarta’s BRT infrastructure and also operate on local streets outside of TransJakarta corridors. TransJakarta also offered salary guarantees to minibus drivers as part of the minibus service reforms, which was key to acceptance of the reforms by the incumbent operators. Source: Paget-Seekins, Dewey, and Muñoz 2015; Chatman et al. 2019. 355 Authorities need to give full consideration to planning and carefully managing the role of incumbent operators in SSA BRT systems in the planning phase. This includes a requirement for strong institutional capacity with dedicated expert advisers to build trust and navigate the necessary processes. Moreover, it is necessary to adopt a contextualized approach to plan the integration of the incumbent and paratransit operators given the diversity of cities in SSA. A successful approach is one that best addresses local industry dynamics in order to facilitate effective outcomes. 356 The case studies in SSA and international experience indicate the importance and challenges of integrating incumbent operators. The integration of incumbent operators has a significant impact on the financial sustainability and commercial viability of the BRT projects as it is related to the CAPEX on the professionalization of the incumbent operators and the compensation for the affected operators on the BRT routes. In some cases, the integration also meets roadblocks, such as resistance and competition from the incumbent operators, which will significantly affect the BRT’s operation and revenue generation capacity. Hence, comprehensive consideration of planning and carefully managing incumbent operators’ role, providing feasible incentives, and the professionalization training for the incumbent operators are critical. In addition, integration of the incumbent operators needs to be conducted in a gradual manner to avoid resistance. The following aspects related to the integration of incumbent - 153- operators should be assessed to develop a more effective and inclusive market that enhances commercially viable and financially sustainable BRT implementation in SSA. Key Actions to Promote Financial Sustainability and Commercial Viability • Government should pay adequate attention to the impact of roll-out of the BRT system on current public transport providers, particularly in the informal sector, and be prepared to address the impact. • Existing public transport providers should not operate in competition with the BRT system. • An incumbent operator participation model, for partial or full integration into the BRT system, should be considered and be in place (where applicable). • Affected incumbent operators should generally be amenable to participation / integration into the BRT system. • It should be ensured that participation / integration of affected incumbent operators would have a minimal financial implication for the BRT system. • Government should have the plans, processes, structures, and funding (such as that to enable and oversee engagement and negotiations, business formalisation and capacitation, integration strategy, and operational performance) in place to sustainably support and manage incumbent operator participation / integration over the BRT system lifecycle. 4.8 Participation Model Participation Model The relationships, structures, and contractual arrangements for private sector participation in BRT systems. This includes consideration of the remuneration model for private sector participants, the investment required by the participant, and the level of return on offer. 357 The participation model is one of the first aspects considered by potential private sector participants in a BRT system and plays a foundational role in the financial sustainability and commercial viability of SSA BRT systems. This model encompasses the role of the private sector in the project and the associated - 154- contractual arrangements between the public sector and private sector that govern their role. There is a wide spectrum of potential options for private sector participation, ranging from fee-based service provision to full privatization. 358 The mechanism of risk allocation and benefit sharing is the basis of the participation model. In many cases, the role of the private sector is limited to the outsourced delivery of defined services, such as bus operations, fare collection, or station management, with the government taking responsibility for procuring and maintaining the vehicle fleet, delivering and maintaining the infrastructure, and, critically, the revenue risk. In other cases, the private sector may be an investor in the project with responsibilities for procuring vehicles and other items, often exposing itself to a greater degree of risk in expectation of a greater return on investment. 359 Contracting arrangements can include gross and net cost contracts, as well as incentive-based contracts, which combine elements of both gross and net cost contracts. In a gross-cost contract model, the public sector plans, manages, and monitors services, and is responsible for collecting fare revenue and paying providers based on the service provided. The public sector, therefore, takes on the operational management and the fare revenue risk, whereas the service provider takes on very low risk, but needs to make sure that services are delivered according to the specified standard at the risk of incurring penalties. In a net cost contract model, the fare revenue is collected and retained by the service provider. In a bus operator’s case, the amount generated in fares comprises an important part of an operator’s income. Therefore, an increase in fare income translates into more revenue for the operator, driving efficiencies and quality improvements, provided that the operator has control to adjust services, which is essential to manage their risk. From a fleet ownership perspective, in net contract examples the operators typically finance their own vehicles, whereas the public sector owns the fleet in the gross-cost contract examples. Incentive contracts are designed to provide financial incentives for private sector service providers that deliver high-quality services, while still operating under a gross-cost environment where fare revenue is retained by the public sector. 4.8.1 Insights From Case Study Cities 4.8.1.1 Cape Town 360 In Cape Town, the city government has taken on most of the project risk in the MyCiTi BRT system. It is done through concluding sole-sourced and negotiated gross-cost contracts with incumbent operators for the 12-year bus operating contracts, and through fee-based, service-level agreements with providers for other services. More specifics on these contractual arrangements can be found in Section3.2.4 of the Cape Town case study, as well as in Figure 3.1. This participation approach lowers the risk of participation and secures the buy-in of the incumbent - 155- informal industry. The approach, including entering into gross contractual arrangements, was also informed by two additional factors: 1) the city’s objective of building operating companies and developing competition between them in the long term for future contracts, and 2) a vision to provide integrated services between different operators and modes of public transport, with integrated ticketing, routing, scheduling, and branding. 361 The participation model was a key factor in successful industry transition approaches in Cape Town. However, the absence of competitive procurement processes means that experienced local or international public transport operators who could potentially have delivered services at a more competitive price could not participate. It is likely that negotiated processes have resulted in government conceding to favorable terms and agreeing to pay comparatively high rates to settle contracts and commence services, leading to comparatively higher cost than would have been the case through a competitive tendering process CoCT 2018). 362 Legislation and policy stipulate that a competitive procurement process should occur after the initial 12-year contract period, but there is a risk that the incumbent operators fail to bid for new contracts. As VOCs currently have about two-to-three-year terms remaining, securing greater levels of private sector investment in new contracts has not, to date, emerged as a priority. Notwithstanding, the CoCT indicated that steps are being taken in the design of new operating contracts to ensure that vehicle operators take on risk for commuter numbers, otherwise they are not incentivized to provide quality services to retain and attract new passengers. This is particularly relevant in a context where it is difficult to enforce penalties (CoCT 2019b). In addition, the CoCT is exploring alternative forms of participation through different contracting approaches, such as incentive based contracts, and other approaches where private sector operators are encouraged, through competitive processes, to invest in the system and take on a greater risk share. 4.8.1.2 George 363 In George, the government has entered into service contracts for a majority of operations functions. In addition to bus operations, service-level agreements are in place for vehicle provision and maintenance, facilities management, electronic ticketing, intelligent transport systems, and marketing and communications. Details are provided in the George case study in Section 3.3.4. 364 Like Cape Town, George has concluded a sole-sourced and negotiated gross-cost 12-year contract with a VOC formed by affected incumbent operators. In contrast to Cape Town, there is currently only one bus operator contracted. But similar to Cape Town, the nature of the contracting approach (government taking on all revenue risk and providing the bus fleet) expedited the contractual process. - 156- Despite the fact that such characteristics may be favored by some private sector participants, fiscal sustainability is still questionable. 4.8.1.3 Dar es Salaam 365 The operational model and contractual approach in Dar es Salaam differ from that in Cape Town and George. Unlike the latter, market dynamics and revenue potential are more favorable in Dar es Salaam, and DART has been planned from the outset to be operationalized within the context of formal PPP (discussed in detail in the Dar es Salaam case study in Section 3.4.5 and the factor analysis for policy and political will, institutional capacity, and incumbent operators). DART BRT aims to fully operationalize Phase 1 through the procurement of a bus operator on a net cost basis. In DART Agency’s approach, the operator would enter a 12-year concession, where it keeps fare revenue, provides the vehicle fleet, and pays an access fee for utilization of the BRT infrastructure. 363 The DART Agency has already entered into an interim arrangement with an operator for the provision of interim BRT services. In this case, the operator is ostensibly self-sustaining off the fare revenue, although it has also expressed concerns about ongoing commercial viability, and the provided services have not consistently met the quality standards sought by the government. 366 The procurement process for the bus operator to enable full operationalization of Phase 1 has been challenging to date. There has been a lack of interest in the net cost model from the market, indicating the market demand for government guarantee to ensure commercial viability. This is reflected in the DART Agency’s financial modelling, which considered several possible scenarios (see Section 3.4.7), all of which would require either increasing fare levels or a government subsidy to incentivize the participation of the private sector. 367 The DART Agency is still in the early stages of exploring an alternative gross- cost model. The government sought to procure a private sector entity to provide ticketing and fare collection services on a PPP basis although the process met many barriers. The government has been successful in securing a fund manager on a PPP basis. However, that contract may be at risk due to the delay in rollout caused by the issues in procuring the bus operator, ticketing, and fare collection entity. 4.8.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities 368 A wide range of potential participation models exist for BRT systems, targeting a broad pool of private sector participants with differing risk-return appetites. This would, therefore, offer BRT planners a number of options with regard to the approach they could pursue with implementation and operation of - 157- their system, and the amount of investment and risk share they seek from the private sector. 369 The SSA BRT market condition needs to be further improved to facilitate the private sector participation. Risk appetite is low, and in the short term, governments are likely to have limited models available to them to procure private sector participation. As evidenced by the case studies, limited net and gross contracts are the most likely participation models for the private sector in the immediate future. Minimum guarantee of revenue is likely to be sought by most potential participants. Beyond that, as planners implement measures to improve the financial sustainability and commercial viability of their BRT systems, further participation models may open up. For example, with the gradual development along the BRT corridors, the possibilities of obtaining additional revenue (e.g., property value increase) will increase. 370 Unbundling ownerships of bus infrastructure and the fleet can be an alternative option of participation model design and enhance the project’s bankability. In the ownership unbundling model, the public sector is responsible for infrastructure development, network and service planning, and regulating and monitoring of operations, while the private sector provides operation service according to set standards. 371 There are two broad types of ownership-unbundling models. For the model of bundled procurement, operations and maintenance of buses, the bus company procures, operates, and maintains fleets (e.g., in the case of Tanzania). For the model of unbundled fleet provision, bus operation and maintenance, the public sector procures and provides private operators with the fleet under lease and operating contract. Bogotá BRT and Singapore’s experience can provide some lessons on the feasible options of participation model design considering the risk preferences and capacities of both the public and private stakeholders (Box 4.10). Box 4.10 International Examples of Participation Model Design Bogotá BRT, Colombia Bogotá transformed private bus enterprises and individual bus owners into modern bus corporations as the city introduced the TransMilenio BRT system. Up to six different fleet providers with a total investment capacity of US$161 million were selected. Then around 1,400 buses were leased in concessionary contracts to operate the buses up to 15 years. The demand risk (risk of lower-than-anticipated ridership) was divided between the city and the operating companies. The trunk line operators are paid on a per- kilometer basis. Fare collection is managed by a separate entity and the revenue is - 158- apportioned by a financial service provider. The government can reduce the fares below the technical fare but needs to compensate the operating companies in such cases, providing the operators a certain level of guaranteed income. Bussystem,Singapore In Singapore, the government bought back the bus fleets and leased them to qualified private operators in order to lower market entry barrier, increase effective competition, and improve bus asset management performance. Source: Global Green Growth Institute 2018. 372 Stakeholder engagement and communication play a vital role in determining the participation model. For example, in South Africa, during the formalization process of incumbent operators, public consultation was mandatory and a legal requirement. Stakeholder engagement in the South Africa MBT initiated comprehensive negotiation between the government and the industry to determine the optimal participation model and compensation methods for minibus operators. The stakeholder consultation also assists the transition of the MBT operators to join the Integrated Public Transport Network (IPTN) (RSA National Treasury and RSA Department of Transport 2018). The transition of the MBT industry to IPTN can be delineated into five elements: 1) engagements with the industry and the negotiations processes, which took place in industry transformation; 2) the creation of VOCs and relevant contracting arrangements; 3) the approach taken to the vehicles which were surrendered by the industry on entry into the VOCs; 4) value-chain opportunities relating to industry transformation; and 5) the compensation of operators for their potential loss of legitimate profit due to the transition (Pegasys Limited 2018). 373 The case studies in SSA and international experience indicate the importance of the design of a participation model for the financial sustainability and commercial viability of the BRT projects. The participation model directly determines the risk allocation and benefit sharing among the stakeholders involved in the BRT development and operation. Imbalanced risk allocation and benefit sharing among the public and the private stakeholders will lead to a lack of private participation willingness, which will weaken the price discovery effect of the PPP model. Moreover, it will also cause the rent-seeking risk and contract breach risk when the private participants choose to accept the unequal and unreasonable arrangement. These issues will inevitably increase the transactional cost of the BRT project. Therefore, the participation model should be compatible with the governance capacity of the transport authority, financing capacity of the public and private investors, and the operators’ operational capacity. The following aspects related to the participation model should be assessed to design and adjust the - 159- participation model and ownership in order to enhance the commercial viability and financial sustainability of the BRT. Key Actions to Promote Financial Sustainability and Commercial Viability • Private sector participants in the new BRT system should be remunerated through some form (government payments and/or revenue) of guaranteed minimum income. • Up-front investment from private sector participants in the new BRT system should be a relatively low proportion of the overall total up- front cost of the project. • The level of return, or profit margin, on offer to private sector participants should be in line with typical market returns in comparable opportunities in more established markets. • The level of return on offer to private sector participants should provide government, third-party stakeholders (such as donors), and ultimately the public with value for money which is comparable to alternatives. • The governments and operators should explore feasible ways to reorganize the ownership of the BRT’s assets so as to encourage more effective market competition and improve the BRT’s operational performance. • The participation model should incorporate demand risk sharing in concessions (e.g., minimum revenue guarantee, availability payments). • For the first BRT corridor, it is preferable to bundle as many elements as possible to minimize interface risk and complexity in system and contract management. • The government should assess whether the incumbent operators have the financial strength to raise financing for the operations and infrastructure development, and be aware that this might be a market constraint when deciding whether to impose a certain level of local operators’ participation among bidding consortia. • The government should consider strong technical and financial requirements in bidding documents that can be met with the participation of strong, experienced sponsors in consortiums with existing operators. 4.9 Adjacent Value Adjacent Value - 160- Emergent value generators with potential to boost BRT system commercial returns. This includes consideration of the existence of tangential revenue opportunities, the ability to bundle such into the BRT system, and how these can be used to leverage additional private sector participation. 374 Adjacent value opportunities (tangential opportunities emerging from and enabled by BRT development to generate additional value), particularly land value capture, have the potential to improve the financial sustainability and commercial viability of SSA BRT systems. However, this is a relatively new area of consideration. To date, leveraging of adjacent value opportunities, particularly in an SSA context, has been limited due to complexity of origination and implementation, as well as limited institutional capacity and other constraints. 4.9.1 Insights From Case Study Cities 4.9.1.1 Cape Town 375 Cape Town has to date been predominantly focused on the implementation and management of the MyCiTi BRT service. As such, adjacent value capture has not been a prioritized focus area. Nevertheless, there are examples of adjacent value capture in Cape Town, including: • Small-scale, commercially subsidized services where private sector companies fund direct operating cost of services, such as the Table Mountain Cable Car shuttle. • The construction of the Century City MyCiTi BRT Station, which was funded by the property developer in lieu of development charges, with the station management operating cost covered by the city. • Revenue from the advertising contract and the requirement for the advertising contract to maintain bus shelters. • Interest has also been expressed in private sector utilization of the Phase 1 dedicated bus lane, which is made possible by the provision of “passing lanes” at most stations that allow parallel services to utilize the bus lane without significantly impacting the capacity of Phase 1 trunk services. 376 From a property development perspective, the value-generation prospects of the MyCiTi BRT system appear to be limited. However, there is well-located, publicly owned land with high value, including in the center of Cape Town. This land could be used to offset operating cost of services if the sites are correctly developed - 161- and released to the market. This would require bus operating companies to partner with experienced and qualified property developers. 4.9.1.2 George 377 Adjacent value has not been a major focus in the George context. While government stakeholders are aware of opportunities such as land value capture, and there has been some preliminary planning, it has not been a major focus. The priority remains fully establishing the GIPTN network and ensuring its operational and financial sustainability. Given the relatively low ridership, the scale of this opportunity is unlikely to be significant. Other value opportunities, such as advertising and rental income from transport interchanges, are being pursued but are relatively limited. Green and climate funding opportunities have also been explored, but the cost of participation in these schemes, including extensive compliance requirements, are seen as outweighing the potential benefits. 4.9.1.3 Dar es Salaam 378 Land value capture opportunities have not been leveraged to date to enhance the financial sustainability and commercial viability of the DART BRT system. However, a corridor development study has now been completed and the World Bank is supporting the implementation of two priority hubs as PPPs to materialize the adjacent value (Figure 4.4). While there appears to be potential for land value capture, obstacles to progress include complex land ownership arrangements (Mchomvu 2019a; Mchomvu 2019b) and the high level of institutional capacity required to successfully leverage these complex opportunities (Sugden 2019). 4.9.2 Implications for Financial Sustainability and Commercial Viability in SSA Cities 379 Although adjacent value is not currently a key driving factor to enhance the financial sustainability and commercial viability of BRT systems in SSA cities, it still shows its importance in the mid to long term. Given the high capital and operational cost of BRT systems, and the difficulty in achieving financial sustainability and commercial viability through fare revenue alone, it is becoming increasingly important for governments and planners to seek funding sources in addition to fare revenue. Adjacent value provides opportunities in areas like land value capture (residential, commercial area development, and parking), data value capture, and green value capture among others, to generate revenue that may turn marginal BRT systems into commercially viable ones. As part of BRT planning and feasibility assessment, authorities can explore adjacent value opportunities, in particular, on well-located and valuable land that is owned by the state, and the prospects of bundling these with the core BRT system. While exploring adjacent value capture opportunities, the authorities should also consider the local context of urban - 162- planning, land ownership, development procedures, and real estate market, and identify a realistic path without overestimating the potential. Figure 4.4: Proposed Ubungo Pilot Transit-Oriented Development Hub Project - Source: World Bank 2018b. 380 It is instructive to consider adjacent value initiatives that are being explored in the rail space. In South Africa, both the Gautrain Rapid Rail system and government run commuter rail systems have pursued land value capture initiatives. Locations around key Gautrain stations have experienced significant development since operations commenced. Within the Gautrain context, a property developer paid to have the station moved to allow for commercial development around the station, and in Heartlands, another property developer paid in advance for a station to be built on the site of its future development. The “before and after” aerial photographs (Figure 4.5) highlight this effect around the Sandton and Rosebank stations. 381 In another rail example, a large commercial and retail mall was built on top of a busy station in South Africa’s KwaZulu-Natal province, a partnership between a commercial developer and PRASA (the Passenger Rail Agency of South Africa, a public sector entity). The 22,000-square-meter KwaMnyandu Shopping Centre was built alongside its namesake station and launched in 2015, ensuring the mall access to the foot traffic passing through the station. - 163- Figure 4.5: Commercial Urban Development Around Major Gautrain Stations 382 In addition to the adjacent value capture from the rail system in South Africa, the experiences of East Asian rail systems can also provide lessons for SSA cities. For example, the Hong Kong Mass Transit Railway (MTR) system is constructed, operated, and maintained through value capture without heavily relying on government subsidies (Box 4.11). However, there are also some challenges that the decision makers in SSA should be aware of when learning from the relatively mature mechanism to capture adjacent value from the other cases. These challenges mainly include 1) whether the government owns the land and 2) whether there are government policies and actions that support coordinated property development. Box 4.9 International Examples of Adjacent Value Capture MTR system, Hong Kong, China The MTR system is developed by the Hong Kong Mass Transit Railway Corporation (MTRC), a publicly traded corporation, through its Rail plus Property (R+P) model. The value capture mechanisms applied by MTRC include selling land, joint development, long-term leasing of development rights, and leasing of commercial space in and around stations. The MTRC acquires land from the government and sells or leases it at higher rates (post-MTR rates). Property development activities constitute almost half of the MTRC’s operating revenue. This strategy has been successfully implemented by the MTRC and is regarded as a template to capture - 164- the value along the public transport lines and enhance the financial sustainability and commercial viability of the MTR system. Tama Den-en Toshi, Tokyo, Japan The Tama Den-en Toshi project implemented joint development among the private sector (Tokyu Corporation) and landowners without government intervention. Tokyu Corporation is both a railway operator and a property developer. The project applied land readjustment and real estate development mechanisms. Land readjustment provided the land required for railway development. Tokyu Corporation spearheaded the process by forming cooperatives comprising the individual landowners to amalgamate the properties while retaining ownership. After redevelopment, the landowners received smaller, fully serviced parcels at no charge. On the other hand, Tokyu Corporation acquired reserved housing sites. Tokyu Corporation further sold land and constructed residential houses, attracting shopping centers and schools and, in turn, increased the area’s population and rail ridership. Between fiscal year 2004 and fiscal year 2016, 36 percent of Tokyu Corporation’s operating profits were from real estate, 40 percent from railway and feeder bus services, and 24 percent from retail, leisure, and hotel services. Chicago,UnitedStates Property taxation is prevalent in U.S. cities and the funds are mostly earmarked for urban development with many competing urban demands. Chicago has leveraged additional property taxes in zones where a new BRT is being constructed to finance part of the capital cost. This tax increment financing (TIF) has been used to fund the Central Loop BRT stations and the subway construction. Tax increment revenue financed the Randolph/Washington subway station (US$13.5 million) and Dearborn Subway-Lake/Wells subway line (US$1.2 million). Source: Salon and Shewmake 2011; Medda and Modelewska 2011; ITDP 2017b; PPIAF 2017. 383 The case studies in SSA and international experience demonstrate the potential to materialize the added value to fund the BRT operation. Considering the public goods feature of the BRT service, the capture of adjacent value along the BRT corridors has a critical role in enhancing its financial sustainability and commercial viability. Adjacent value has the potential to complement government funding to support the development and subsidize the BRT operation thereby ensuring the affordability of the BRT service. In addition, if the adjacent value is counted as - 165- revenue of the BRT projects or urban transport systems, the cost recovery rate of the whole project or system will also be improved. The premise of added value capture depends on the integration of urban planning, transit development, and economic activities. The following aspects related to the adjacent value should be assessed in order to explore more feasible revenue-generation channels and enhance the commercial viability and financial sustainability of BRTs. Key Actions to Promote Financial Sustainability and Commercial Viability • Opportunities to monetize the wider ecosystem created by BRT projects should be explored (e.g., land value capture through property development, data value capture through technology deployment, or green value capture through the rollout of renewable energy solutions). • If plans exist to bundle adjacent value opportunities into the implementation and operation of a BRT, then private sector participation model(s) to be employed should designed to facilitate and optimize such bundling. - 166- 5 | Viability Assessment Tool 5.1 Overview 384 This high-level tool has been developed for planners, decision makers, donors, and other stakeholders to guide the analysis of the key factors impacting the commercial viability (“bankability”) of an SSA BRT system, particularly with respect to 1) attracting private sector participation / investment and 2) sustaining private sector participation/investment. 385 The report provides the explanations and details of the terms, analytical context, methodology, overview of SSA BRT systems, in-depth case studies, and factor identification and analysis as essential references for the use of the tool. 386 The assessment tool, together with this report, provides guidance for users to assess the key factors affecting the financial sustainability and commercial viability of BRTs in SSA in a systematic framework. In addition, this tool is also able to guide users to diagnose the core issues impacting the operational performance of existing BRTs and the rollout of new BRTs, as well as begin to design solutions to address these issues in the SSA context. 387 Given the diverse contexts of countries in the SSA, this tool is designed to be applicable to a wide variety of possible BRT and BRT-Lite scenarios and is able to be adjusted and expanded. In addition, there is an “Answer Justification” column designed to require users of the tool to provide rationale and evidence of their input. This not only allows the users and the evaluators to validate the inputs and outputs, more importantly, it assists them with identifying key challenges in their local context that can inform the selection of an appropriate configuration of features in the BRT system they are planning. 5.2 Assessment Factors 388 The factors affecting the financial sustainability and commercial viability of BRTs in SSA are categorized into nine groups: 1) fiscal capacity, 2) legal and regulatory framework, 3) market dynamics, 4) system design and business model, 5) policy and political will, 6) institutional capacity, 7) participation model, 8) incumbent operators, and 9) adjacent value. 389 This tool consists of nine assessment dimensions. In each assessment dimension, there is a series of questions framed to interrogate key factors that will influence the commercial viability and financial sustainability of the BRT system - 167- under assessment. Each factor consists of a group of questions framed to interrogate key elements that will influence the financial sustainability and commercial viability of the BRT system under assessment. The user is provided with three options to select from, to answer each question. These three multiple-choice-style answers seek to capture, in a simplified and easy to-use manner, the broad spectrum of possible responses that may be applicable within numerous contexts. Fiscal Capacity Is government (and supporting stakeholders, such as donors and a developmental banks) funding for the development, implementation, and operation of the new BRT system legally secure? b Does the government have the fiscal capacity (balance sheet health, good track record of collaboration with donors/DFIs) to mobilize additional and alternative finance for the BRT system on practical terms, either internally or externally? Has the government planned and/or implemented mechanisms to c mitigate financial risk in the new BRT system (e.g., guarantees, ring- fenced cash flows, currency hedging, etc.)? Does the government have a financial track record in implementing and d operating (including servicing financial commitments) large infrastructure projects of similar nature to the new BRT system? e Are the necessary fiscal and fiduciary relationships and mechanisms in place between government stakeholders (e.g., to allow for the flow and governance of funds between city, provincial, and/or national entities) to facilitate effective, efficient, and sustainable project funding? f Is the broader fiscal environment (financial and economic outlook) in the city and country likely to be attractive to private sector participants in the new BRT system (is the city/country seeing strong and sustainable economic growth which supports prospects for return on investments)? - 168- Legal and Regulatory Framework Is a clear, organized, and efficient legal process in place for the a arrangement, procurement, and operation of private sector participation in the BRT system? Are the legal and regulatory provisions agnostic with respect to the b nature, such as nationality, of the private sector participant (e.g., impartial and fair to an international participant)? Is the authorization in place to implement the compensation for c incumbent operators and/or related affected stakeholders? Does the city/country have a regulatory track record in procuring, d implementing, and sustaining private sector participation in large infrastructure projects of similar nature to the new BRT system? Does the legal and regulatory framework stipulate the requirements and e responsibilities for the government in implementing and operating a new BRT system? f Based on the World Bank’s Doing Business 2020 analysis (www.doingbusiness.org), is the broader business regulatory environment (e.g., key employment laws, tax obligations, investment protection regulations, foreign exchange controls, etc.) in the city/country conducive to efficient private sector participation? Does the legal and regulatory framework provide enforceable rights g for private sector participants to secure/protect their investments (e.g., step-in rights)? Market Dynamics Are the volumes and patterns of demand in the new BRT system’s a targeted corridors and catchment areas sufficient (current and projected) to support the system’s rollout? - 169- What is the new BRT system’s capacity to meet demand? b What is the willingness or ability of the new BRT system’s targeted c market to pay for services rendered? d Does modelling and market sounding indicate that the new BRT system’s revenue and margins (underpinned by demand, capacity, and willingness/ability to pay) would support and be attractive to private sector participation? Will the new BRT system fare levels be dynamically adjusted on an e ongoing basis to ensure the system can optimize profitability? Will fare levels for the new BRT system be controlled in a manner f disconnected from market forces (e.g., increased operational cost)? Has the demand for the new BRT system been projected in a sound g and credible manner, with full consideration for local context and the experience of similar projects? System Design and Business Model Is the new BRT system aligned with master strategies and planning for a land use, mobility, and related development? Is the design of the new BRT system sufficiently flexible to allow for future b expansion and changes as may be desired (e.g., to integrate with other modes of transport or upgrade with newer technology such as electric vehicles)? Have all direct and indirect risks to the new BRT system in design, c financing, implementation, operations, and maintenance (including environmental, climate, and social) been identified, fully quantified/qualified, and appropriate mitigative actions been put in place? Is the new BRT system clearly and comprehensively described in formal d plans and related documents (such as a business plan, design plans, cost and financial models, environmental impact assessment, etc.) to - 170- allow prospective private sector participants a comprehensive understanding? Has the business model for the new BRT system been robustly and e comprehensively stress tested, and are the underlying assumptions reasonable and defensible? Has the business model of the new BRT system been designed with private f sector participation/investment in mind, and is it ready to receive such participation and investment? Has competition (where relevant, such as from existing informal public g transport providers or private sector services) to the new BRT system, and its impact on operational efficacy and return, been fully considered and factored into the design? Have all revenue opportunities been explored (variable fares, advertising, h leasing of shop space in stations/terminals, etc.) and, where suitable, been developed and incorporated into the new BRT system’s business model? i Do the projected outcomes of the new BRT system’s business and financial model, specifically with regard to indicators around projected revenue and cost over the life cycle, align with local and international BRT experience in a similar context (spatial form, travel demand, demographic, socioeconomic, etc.)? Is the new BRT system projected to generate regular profit over its life j cycle? Policy and Political Will Among key government and related stakeholders, does consensus and a the will exist to push the new BRT project toward successful implementation and sustainable long-term operations? Are key stakeholders (financiers, government agencies, operators, b developers, and suppliers, etc.) and their mandates and objectives clearly identified, and are these consistent with the new BRT system? Do overarching city and country developmental policies and strategies c support and promote private sector participation in key projects such as the new BRT system? Is there strong and sustainable political support for private sector d participation in key projects such as the new BRT system? - 171- Institutional Capacity a Are appropriate institutional structures in place, defining and linking the roles of relevant government stakeholders (such as between national, provincial, local levels of government, and authorities overseeing public transport, roads, land, finance/treasury, BRT management agency, enforcement, etc.) to implement and manage the new BRT system? b Does government have sufficient capacity and expertise to sustainably and successfully fulfil its role in implementation and management of the new BRT system (e.g., qualified individuals and authorities overseeing urban and public transport, roads and infrastructure, land planning and development, policing and enforcement, finance, dedicated BRT management, etc.)? Does government have sufficient capacity and expertise to sustainably facilitate and manage private sector participation in the new BRT c system (such as a public-private partnership authority, BRT management agency)? Is an experienced and fully capacitated leadership/management cohort d in place (a dedicated BRT management entity with a clear mandate) to manage implementation and operation of the new BRT system? Are there effective plans and systems in place to retain and build e government management capacity over the life cycle of the new BRT system? Does government have a track record of delivering and managing f large, multifaceted, and multistakeholder flagship projects of similar nature to the new BRT system? Participation Model How will the private sector participant(s) be remunerated in the new a BRT system? - 172- Relative to the overall requirements of the new BRT system, what level of up-front investment will be required from private sector b participant(s), equating to their overall financial exposure in the project? What level of return on investment or profit margin is nominally on c offer to private sector participant(s)? Does the level of return on investment on offer to the private sector participant provide government, third-party stakeholders (such as d donors), and, ultimately, the public with value for money compared to alternatives? Incumbent Operators Are there existing public transport providers, particularly in the informal sector, who will be impacted by the rollout of the new BRT a system? b Without any intervention (such as license and operational regulation, law enforcement, and physical segregation infrastructure) would existing public transport providers likely operate in competition with, and have a negative influence on, the new BRT system? Has an incumbent operator participation model, for partial or full c integration into the new BRT system, been considered? Are affected incumbent operators generally amenable to d participation/integration into the new BRT system? Will participation/integration of affected incumbent operators have a e financial implication for the new BRT system? f Does the government have the plans, processes, structures, and funding (such as that to enable and oversee engagement and negotiations, business formalization and capacitation, integration strategy, and operational performance) in place to sustainably support and manage incumbent operator participation/integration over the new BRT system’s life cycle? - 173- Adjacent Value a In developing and operating the new BRT system, are there tangential opportunities that emerge to generate additional value in the wider ecosystem (e.g., land value capture through property development, data value capture through technology deployment, or green value capture through rollout of renewable energy solutions)? Will it be feasible to bundle any viable adjacent value opportunities with b implementation and operation of the new BRT system to boost overall commercial viability? If plans exist to bundle adjacent value opportunities into the c implementation and operation of the new BRT system, is the private sector participation model(s) to be employed designed to facilitate and optimize such bundling? 5.3 Tool Mechanics 390 The tool consists of input and calculation frameworks. Each of these sheets in the Excel tool allow changes to certain inputs, including write-ups of the questions, answers, scoring values applied to each answer, and weightings. 391 Scores applied to each answer range from three (for the answer representing the best possible scenario) to one (for the answer representing the worst scenario). A score of one means the answer representing the worst possible scenario and corresponding factor has a significant negative impact on the commercial viability and financial sustainability of the BRTs. A score of two means the answer representing the possible scenario and corresponding factor has a slightly negative impact on the financial sustainability and commercial viability of the BRTs. Nonetheless, the negative impact can be mitigated by existing fiscal, political, financial, and project technical and management tools of the stakeholders. A score of three means the answer representing the best possible scenario and corresponding factor has a positive impact on the commercial viability and financial sustainability of the BRTs. 392 These scorings are used to rate each question according to a traffic light rating, and then added up and averaged to provide an overall factor score – green is a score above 75 percent, yellow a score between 50 percent and 75 percent, and red a score of 50 percent or below. Finally, the tool estimates an overall “commercial viability and financial sustainability” score for the assessed BRT system utilizing the individual factor scores. 393 The tool does provide the functionality to weight certain factors, and specific questions under those factors, higher than others. In its default state, no weighting - 174- has been applied (all questions and factors are weighted the same). However, the weightings can easily be adjusted within the input framework. Moreover, changing certain weightings to a zero value has the effect of removing particular questions or criteria from the analysis and final scoring, if this is desired. 5.3.1 Expansion 394 It should be kept in mind that this tool is, in order to be applicable to a wide variety of possible BRT and BRT-Lite scenarios, high-level and relatively generic in its assessment. As additional case studies are completed, it is possible to expand this tool with additional questions/responses and/or refine the existing questions with additional nuance and specificity. 395 For this reason, the tool has been designed to be adaptable and modular. The factor questions, and the multiple-choice answers to each question, can be refined and changed. Changes within the current tabular bounds will automatically be reflected in the questionnaire worksheets. 396 Extra questions can be added by expanding the bottom of each factor table in the framework and updating the total scoring formula (additional added questions will impact the overall unweighted and weighted scores for the factor in question, and the formula need to be modified to account for the newly added questions). Any new questions and multiple-choice answers will need to be manually linked into their respective questionnaire sheets. The number of available answers can also be expanded beyond the current three per question by expanding the table under the question. The added answers will need to be manually linked to their respective questionnaire sheets. 5.3.2 Limitations 397 The tool is intended to be used by practitioners as a guide to evaluate the financial sustainability and commercial viability of the BRT project being assessed, specifically, to highlight any specific issues among the myriad of factors that need to be considered in planning such a project that may impact on its attractiveness to investors. The outcomes of such an analysis are not intended to replace the detailed investigations required to complete a due diligence exercise or proper robust planning. Instead, the report, in combination with the tool, should be used to stimulate internal discussion on the project concept and provoke reflection on the assumptions that tend to be made around how a project is planned and conceived. 398 There are some limitations associated with the use of the assessment tool that users should be aware of. For instance, in order to provide more visual assessment results, the tool utilizes a traffic light indicator rating system (red– yellow–green). Users should note that this indicator rating intends to show the - 175- impact of the factors on the financial sustainability and commercial viability of BRTs instead of providing a final verdict on whether the BRT project is financially sustainable and commercially viable or not. In addition, this tool is developed mainly based on the case studies of current BRTs in SSA presented in this report, which might not cover all possible conditions. To manage this constraint, this tool is also designed to be adjustable and expandable to fit the specific local context and account for variations in the configuration of features in the BRT system under consideration. 5.4 User Guide 399 This tool can be used at the planning and design phase for the new BRTs as well as during the operational phase of the existing BRTs. The user of the tool is provided with three possible answers for each question under each factor from which they should select the scenario that most closely describes the BRT system’s current situation. The users must answer all questions using the drop-down lists to select the answer which most closely describes the current situation and provide the corresponding rationale and evidence in the “Answer Justification” column. The content in the “Answer Justification” column will be the reference for answer validation, which can also serve the peer review of the assessment results, and the tool customization and expansion according to the features of each BRT. 5.4.1 Financial Sustainability and Commercial Viability Scorecard 400 Once the user has answered each question across all the factors, the results of the assessment are provided in the scorecard. 401 The results are communicated utilizing a traffic light indicator (red–yellow– green), representing the impact of a specific question or factor on the financial sustainability and commercial viability of the system. Utilizing the question and factor ratings, an overall system financial sustainability and commercial viability score is also provided, using the same red–yellow–green modality. Within the bounds of the factors assessed in this model, a green rating indicates a system which is likely to be commercially viable and sustainable (although it may still have “blockers” in a specific factor with a red ranking), while a red rating indicates a system that will require significant work in several areas for it to have a chance of becoming financially sustainable and commercially viable. A yellow rating indicates a system that, with further focus on areas of deficiency, has a certain level of likelihood of becoming commercially viable and financially sustainable. 402 It should be noted that this rating provides the user with some insight into the critical areas of the BRT project where work is required to improve the system’s ability to attract private sector participation and investment. However, guidance derived from the tool is high-level and broad. It is up to the users to determine the - 176- validity of each rating and its detailed applicability to their particular BRT systems and contexts. 5.4.2 Tool Utilization Examples 5.4.2.1 Assessment and Scorecard 403 The user will answer a number of detailed questions about the BRT system and its enabling environment. 404 The results are portrayed in a comprehensive scorecard, which provides the user with guidance on the overall conceptual financial sustainability and commercial viability of the BRT system in question, as well as specific areas of strength and weakness in this regard. An example of the outputted scorecard is provided below, based on a hypothetical user case. 405 In this hypothetical example, market dynamics strongly support a viable and sustainable BRT system, and planners have comprehensively designed the system and the proposed private sector participation model is also compatible. Policy and political will is strongly in favor of a BRT system with private sector participation, and the legal and regulatory framework to enable this is robust. 406 However, the government’s fiscal capacity to financially support the hypothetical BRT project is limited, and its institutional capacity to oversee the system’s implementation and operation is constrained. Critically, planners have been focused on the technical design and development of the new BRT system and have given little consideration to the role of incumbent paratransit operators—these informal operators are numerous and have a large captive market. Finally, planners have not given sufficient consideration to opportunities for leveraging adjacent value in the BRT system. - 177- - 178- - 179- - 180- - 181- - 182- References Alpkokin, P., & Ergun, M. (2012). Istanbul Metrobüs: first intercontinental bus rapid transit. Journal of Transport Geography, Volume 24, 58-66. AutoJosh, 2017. 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World Resources Institute, Challenges and Opportunities of China’s “National Transit Metropolis 1 Demonstration Program”, 2015 - 189- Appendix A - South Africa’s Public Transport Network and Operations Grants Frameworks The regulatory frameworks defining and governing the South African National Government’s Public Transport Network Grant and Public Transport Operations Grant are reproduced in full below (extracted from the Government Gazette No. 41704 (RSA 2018), issued under the Diversion of Revenue Act 2019). - 190- - 191- - 192- - 193- - 194- - 195-