Connections Transport & ICT 96247 Boosting Mass Transit through Entrepreneurship Going beyond Subsidies to Reduce the Public Transport Funding Gap Daniel Pulido and Irene Portabales Most of the world’s urban mass transit systems cannot cover operating costs, let alone capital 25% expenses, through farebox revenues. On The average share average, 25% of metro operating expenditures of all metro system are not funded by farebox income. With limited operating expenses public subsidies, as well as obstacles to raising unfunded by fares and political sensitivities to road user farebox revenue taxes, metro systems have been increasingly pursuing income from commercial activities connected with their operations. Metro systems that earn commercial income—such as from advertising, naming rights, and especially real estate activities—are making inroads in their operating deficits. Commercial revenue in some systems is nearing 20% of fare revenue. Although reforms of transit financing structures remain high on the policy agenda, a review of ancillary income streams of metro systems around the world shows that a more entrepreneurial approach to tapping their commercial potential can help them narrow their funding gap. Lots of Infrastructure, Great Potential most lucrative in Asia. But systems in the develop- ing world are increasingly looking at ways to in- The number of cities with a commuter rail system, crease their nontariff revenues. Most initiatives are or metro, continues to grow. Today, metro systems executed in collaboration with the private sector or comprise about 9,000 transit stations and 11,000 other transport systems. kilometers of rail line. These facilities represent an enormous opportunity for the owners and opera- Advertising tors to generate income from their associated Advertising on urban rail systems is widespread, commercial potential, including advertising, space but some initiatives show that it has a larger poten- leasing, and real estate development. tial. The Mexico City government has announced a renegotiation of its contract with a private adver- There are no approaches to raising commercial rev- tising management company to increase revenue enues that are valid for all cases. Each system must from more than 70,000 advertising spaces. develop the business models and commercial rev- enue streams and that best fit their infrastructures. A new generation of advertising technology—a series of synchronized in-tunnel video display panels —is now in several systems and will soon Recent experience be launched in Madrid for revenue estimated at Commercial activity by metro systems is concen- $500,000 per year. trated in advanced economies, with many of the FEBRUARY 2015 NOTE 06 Leasing of Commercial Space users of that land, but other methods of capturing the rise in value often provide far greater returns. These Underpricing may also be a feature of space rentals. methods include selling or leasing the land, charging Franchising consultants say that the Rio de Janeiro developers for the right to build taller buildings, and and São Paulo metros have been leasing commercial participating in urban redevelopment projects. space at 30% to 60% below shopping center rates. In response to such concerns, the state of São Paulo For rail operators in Tokyo (Tokyu) and Hong Kong pushed to increase the share of nonfare revenue in (MTR), the profit contribution of property and the business model for the city’s Line 6. commercial developments exceeds that of transit operations. Naming Rights Dubai’s transit authority has earned more than $540 The strategy has been hard to replicate in the million since 2010 from the sale of naming rights for developing world, although in Latin America, São 13 metro stations and from leasing retail space inside Paulo sold additional construction rights (known as its stations. The authority says the revenues cover CEPACs) to private developers, to mobilize about 60% of the network’s operating costs, and it aims to $100 million for Line 4 of the city metro. have the revenues fully cover costs by 2017. A similar deal in Mumbai for 12 stations will raise $250,000 to $1 million per year for five years. The Broader Agenda Experience shows that transit agencies in develop- In some cases, naming rights include amenities for ing countries can become more entrepreneurial. passengers, such as remodeling a station or the For example, nonfare revenues of Santiago’s metro supply of mobile phone coverage or free Wi-Fi. are 17% of fare revenues, higher than the average Merchandising of 5–6% for Brazil and Mexico. The merchandising potential of a metro is exempli- A metro system’s potential to mobilize commercial fied by the London Underground’s logo and “Mind revenue can be enlarged through the development the Gap” slogan. The London Transport Museum of business plans and strategic partnerships with earns about $4 million annually from the sale of the private sector. official merchandise. The Madrid metro has started selling branded merchandise, and a private compa- Going further, however, will depend on making com- ny has started selling goods in the São Paulo metro mercial activity a part of transit system planning with logos licensed by the transit system. from the beginning, embedding it in the mission and objectives of the transit agency. The revenues will Consulting Services and Technology Sales not be immediate, especially on new metro systems, but they can become a steady and significant long- Operators in the developing world are now entering term source of income if handled appropriately. the sonsultancy and technology licensing markets. Delhi ‘s metro system is advising other systems Even then, tapping into commercial revenue in India. Santiago’s system is helping the Panama sources will not be the last stop on the journey to City system evaluate business opportunities, and it financial stability for many of the developing world’s also licensed its fare card technology for use there. metro systems. Closing the gap between farebox Some systems are selling access to their tunnels for revenues and system expenses will certainly require the placement of fiber-optic cable. the implementation of more comprehensive reforms of urban transport institutions, tariffs, and financing. Land Value Capture Placement of transit stations greatly increases the For more information on this topic: value of the surrounding land, much of it owned by http://www-wds.worldbank.org/external/default/WDSContentServer/ the transit authority. The authority may tax the private WDSP/IB/2014/11/04/000333037_20141104220722/Rendered/PDF/ 922500WP0Box380REPORT0COMING0IN0DEC.pdf Connections is a weekly series of knowledge notes from the World Bank Group’s Transport & Information and Communication Technology (ICT) Global Practice. Covering projects, experiences, and front-line developments, the series is produced by Nancy Vandycke, Shokraneh Minovi, and Adam Diehl and edited by Gregg Forte. The notes are available at http://www.worldbank.org/transport/connections FEBRUARY 2015 NOTE 06