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Casebound ISBN: 978-0-8213-8182-3 eISBN: 978-0-8213-8130-4 DOI: 10.1596/978-0-8213-8182-3 Softcover ISBN: 978-0-8213-8085-7 eISBN: 978-0-8213-8130-4 DOI: 10.1596/978-0-8213-8085-7 Library of Congress Cataloging-in-Publication Data has been applied for. Cover photo: http://www.sxc.hu (stock.xchng website) Cover design: Graphic Designer Carlos Eduardo González Garza Contents Foreword XII Chapter 4 Acknowledgments XV Understanding and Managing Risk Glossary XVI 4.1: Analyzing Responsibilities and Risks 63 Abbreviations XVIII 4.2: Common Risks and Responsibilities 65 Case Studies XXII 4.3: Political and Macroeconomic Risks 65 Overview 1 4.4: Risks Specific to the LRMT Sector 70 4.5: Project-Related Risks 74 Chapter 1 4.6: Risks Associated with Managing the PPP Agreement 78 Urban Transport and Light Rail­Light Metro Transit 4.7: Managing the Demand or Farebox Risk 81 1.1: Introduction 9 Checklist: Risk Allocation 85 1.2: Urban Transport Policy 10 1.3: Defining Light Rail­Metro Transit Systems 11 Chapter 5 1.4: Planning and Selecting Transportation Solutions 12 Public-Private Partnership Design, Specifications, 1.5: Characteristics of LRMT Systems 17 and Performance Management 1.6: Influences on LRMT Policy Decisions 19 5.1: Setting Service Standards 88 1.7: Achieving Value for Money 22 5.2: Costing 90 1.8: The Customer Approach 27 5.3: Determining Fares and Subsidy Requirements 92 5.4: PPP Agreement Duration: Factors to Consider 95 Chapter 2 5.5: PPP Project Financial Structure and Design 96 Technical Issues 5.6: Performance Management and Control 98 2.1: Complexity and Size of Projects 29 Checklist: PPP Design Specifications and Performance 2.2: Route Selection 34 Management 107 2.3: Integration 35 2.4: Segregated versus Nonsegregated Systems 37 Chapter 6 2.5: Capacity and Service Reliability 38 Funding and Finance 2.6: Selecting Rolling Stock and Planning for Asset 6.1: Sources of Funds for LRMT Initiatives 109 Management 40 6.2: Funding through Captured Externalities 110 2.7: Ticketing and Barriers 41 6.3: Considering Bankability 111 6.4: Structuring Finance for LRMT Projects 114 6.5: Private Financing for LRMT Projects 118 Chapter 3 6.6: The Need for Public Support 119 Incorporating Private Sector Participation 6.7: Multilateral and Bilateral Financial Organizations 122 in LRMT Initiatives 6.8: Sources of Public Support and Incentives 123 3.1: Key Requirements for a Successful PPP 45 6.9: Funding Ongoing Investment Needs 123 3.2: Partnerships between Public and Private Institutions 48 6.10: Developing a Project Finance Model 124 3.3: Models of Private Participation 51 6.11: Considering and Valuing Contingent Liabilities 126 3.4: The PPP Arrangement: Four Stages of Development 6.12: Hedging 126 and Implementation 53 6.13: Refinancing 127 Checklist: Incorporating Private Sector Participation in Checklist: Funding and Finance 129 LRMT Initiatives 61 Chapter 7 Chapter 9 Contractual Arrangements Conclusions 7.1 Legal Framework 131 9.1 Value for Money in LRMT Concessions 7.2 Contract Form 134 and Other Public-Private Partnerships 193 7.3 General Design of the PPP Agreement: 9.2 The Value of Private Finance 194 One Contract or More? 140 9.3 Developing a Strategy for Success 194 7.4 PPP Contractual Issues 145 9.4 Managing Fares Intelligently 196 7.5 Provisions during Development Stages 147 9.5 The Structure of Public Support Determines Outcomes 197 7.6 Provisions Related to Construction and Assets 148 9.6 Managing Demand is Crucial to Success 198 7.7 Provisions Related to Service Obligations 152 9.7 Partners' Other Interests Matter 199 7.8 Availability Payments and Other Sources of Revenue 9.8 International Sporting Events and LRMT 199 for the Developer 154 9.9 Recommendations for Procurement 201 7.9 Provisions Applying to Financing 155 9.10 Final Thoughts 203 7.10 Provisions Applying to Implementation 156 Checklist: Contractual Arrangements 164 Annexes Chapter 8 Annex 1: Selected Case Studies 205 Procurement - Manchester Metrolink - United Kingdom 209 8.1 Choosing a Selection Method 169 - Docklands Light Railway - London, United Kingdom 215 8.2 Managing the Bidding Process 170 - Kuala Lumpur STAR and PUTRA - Malaysia 222 8.3 Selection Criteria and Bid Evaluation 172 - Gautrain Rapid Rail Link - Gauteng Province, South Africa 227 8.4 Prequalification 174 - MRT 3 'Metrostar Express' - Manila, Philippines 233 8.5 Choosing the Bidding Process 176 - Bangkok Skytrain - Thailand 238 8.6 Final Request for Proposals 179 - Canada Line - Vancouver, Canada 243 8.7 Submission, Opening, and Comparison of Bids 182 Annex 2: Targeting the Urban Poor and Access for All 251 8.8 Final Selection 186 Annex 3: Analytic and Advisory Work Required 255 8.9 Unsolicited Proposals and Direct Negotiations 188 Annex 4: Sample LRMT Risk Matrix 261 8.10 Contractual Issues 188 Annex 5: Examples of International Standards 8.11 Negotiating with Preferred Bidders 189 for Rolling Stock 269 8.12 Other Procurement Issues 189 Annex 6: Other Specifications Commonly Included Checklist: Procurement 191 in LRMT Contracts 273 Annex 7: Technical and Financial Proposals: Checklists 279 Annex 8: Unsolicited Proposals 283 Bibliography 291 4.4 Possible Limits on Use of Capital 73 4.5 Risk Allocation and Compensation Paid to Canada BOXES Line's Developer 78 1.1 Linking Public Policy and the Characteristics that 5.1 Standards and South Africa's Gautrain 89 Contribute to Viable Transport Systems 10 5.2 The Capital Maintenance Approach to Costing 91 1.2 Integration and Bangkok's Skytrain 15 5.3 Fares, Populism, Public Affordability, and Manila's MRT3 94 1.3 Encouraging Switching with the Gautrain Rapid Rail Link 21 5.4 Operation and Service Obligations and their 1.4 Competitiveness and France's Orlyval System 25 Relationship to Demand Risk 100 1.5 Opportunity Cost of Public Funds and St. Louis's 5.5 Key Performance Indicators, Performance Metrolink 26 Management, and the Docklands Light Railway, 1.6 Accessibility and Singapore's Mass Rapid Transit United Kingdom 104 27 Network 6.1 Funding Contributions from Property Developers 110 2.1 Route Alignment and Kuala Lumpur's STAR and 6.2 Leverage and France's Orlyval 119 34 PUTRA Lines 6.3 Public Support and the Docklands Light Railway 121 2.2 Feeder Systems: Bangkok, Thailand 36 6.4 Taxes and Gautrain's Capital Grant 121 2.3 Segregation: New Jersey, United States 37 6.5 Hedging and Gautrain's Capital Grant 127 2.4 Increasing Rolling Stock: Western Europe 39 6.6 Refinancing Gain: HM Treasury 128 2.5 Automation: Copenhagen, Denmark 39 7.1 Legal Issues and Manila's MRT3 132 2.6 Rolling-Stock Compatibility and the Manchester 7.2 Implications of a Unified Contract Approach Metrolink's Legacy Stations: United Kingdom 40 for Network Extensions and Expansions 143 2.7 Calypso: An Electronic Ticketing Standard 42 7.3 Setting Fares: Phase 2 of the Manchester Metrolink 154 2.8 "Proof of Purchase": Hudson-Bergen LRMT, 7.4 The Cost of Getting the PPP Agreement Wrong 163 43 United States 8.1 Bidder Compensation and Canada Line's Procurement 180 3.1 South Africa: Assessing PPP Transactions 46 8.2 The Downside of BAFO Processes 189 3.2 Generic Factors Driving Value for Money 47 3.3 Airport Link: Canada Line and Vancouver International Airport 48 3.4 Manchester Metrolink Ticketing Arrangements 55 3.5 Project Team Members 58 4.1 An Example of Risk Allocation Between a Grantor and a Developer 64 4.2 Difficulty of Forecasting Demand: United States Experience 72 4.3 Rationalizing Risk Allocation and the Docklands Light Railway 73 IX LIGHT RAIL - LIGHT METRO FIGURES 8.1 Single-Stage Bidding Process 177 0.1 LRMT Project Life Cycle 2 8.2 Stage 1 of a Two-Stage Bidding Process 177 0.2 Balancing Service Standards, Fares, and Subsidies 5 8.3 Stage 2 of a Two-Stage Bidding Process 178 1.1 Scope of LRMT Schemes Considered 18 1.2 Carbon Dioxide Emissions in the United Kingdom, TABLES by Passenger Mode 22 1.1 Characteristics of Various Types of LRMT Systems 17 1.3 Distribution of Farebox Recovery Ratios for U.S. Light Rail 1.2 Comparison between LRMT and BRT 20 Systems Reporting to the U.S. National Transit Database 2.1 Cost of New LRMT Systems, Based on Vertical in 2006 24 Alignment 30 3.1 The Four Fundamental Factors of a PPP Framework 45 2.2 Effect of Physical, Financial, and Other Factors on 3.2 Stages of Development and Implementation 53 Cost 31 4.1 Base Case Scenario with Full Inflation Indexation 68 2.3 Costs of LRMT Systems in the United Kingdom 32 4.2 Base Case Scenario: Cash Flow from Grantor 68 2.4 Costs of LRMT Systems in Various Cities Worldwide 33 4.3 Base Case Scenario but with Capital Cost Inflation 3.1 Risk Bearing by Contract Type 51 Doubled and No Increase in Tariff or Fares 69 4.1 Availability Payments and Minimum Revenue 4.4 Doubled Capital Cost Inflation Scenario: Cash Flow Guarantee Structures 84 from Grantor 69 5.1 Commonly Specified Systems for Managing Compliance 99 4.5 Implications of Risk under an Integrated Contract 71 5.2 Examples of Common KPIs for LRMT Systems 101 4.6 Typical Cost Composition of an LRMT Project 75 6.1 Factors Influencing Project Bankability 112 4.7 Cash Flow of Simulated LRMT Project with an Availability 6.2 Project Finance versus Corporate Finance Structures 116 Payment and Capital Grant Payable by the Grantor 82 7.1 Unified Contract System versus Layered Contract 4.8 Diagrammatic Representation of a Minimum Revenue Approach 141 Guarantee 83 8.1 Weighting Bids: Price versus Quality Features 184 4.9 Revenue Guarantee versus Availability Payment: 9.1 Case Study Systems Influenced by International Similar Mechanisms Creating Similar Exposure Sporting Events 200 to the Grantor 84 5.1 Balancing Service Standards, Fares, and Subsidies 87 5.2 Balancing Income with Cost of Service 92 6.1 Building Blocks of a Typical Project Finance Model: Financial Equilibrium of an LMRT Project 124 6.2 Articulation of the Financial Model 125 7.1 Contractual Links 136 7.2 Financial Links 137 XI LIGHT RAIL - LIGHT METRO Foreword Cities across the globe are looking to improve transportation The approach is presented in nine sections, and in preparing in response to ever-expanding urban populations. Planners it the author drew on current international LRMT PPP must find affordable, environmentally friendly, and socially experience, through a series of interviews and case studies. responsible transportation solutions that can support The sections covered are further development in urban areas. When appropriately planned and properly implemented, light rail­light metro 1. Urban Transport and light rail­light metro transit transit (LRMT) systems can provide rapid urban mobility (LRMT): An overview of urban transport policy, the and vital access to city centers from surrounding districts. characteristics of LRMT schemes and the influences on Attractive LRMT services can help reduce both traffic LRMT policies. 2. Technical Issues: A brief review of some key technical congestion and vehicular emissions. Such systems also issues inherent in LRMT schemes and their potential have the potential to drive urban renewal and increase impact on PPP design and implementation. local investment when supported by enabling policies. 3. Incorporating Private Sector Participation in LRMT Improving transportation enhances quality of life by giving Initiatives: What PPP has to offer, and an overview of the citizens greater access to employment opportunities, urban issues and stages public authorities follow to establish amenities, and neighboring communities. successful LRMT PPP arrangements. 4. Understanding and Managing Risk: Analyzing and This book aims to help governments and public authorities allocating risks and responsibilities among stakeholders to establish effective LRMT systems, and focuses on use of in the LRMT scheme and practical ways of designing risk Public-Private Participation (PPP) arrangements. Rather allocation rules. than identify a single approach, we present options 5. Public-Private Partnership, Design, Specifications and and discuss practical issues related to preparing and Performance Management: Setting service standards and specifications and establishing associated costs; implementing new LRMT PPP schemes. The approach is developing of performance and payment indicators focused on providing information that can be used to make and managing compliance. informed decisions, adapted to local policy and objectives. 6. Funding and Finance: Large LRMT capital and system The material presented is intended as a practical guide to maintenance requirements require strong financing developing LRMT PPPs in both developed and developing arrangements. The practical use of public and private countries. This work endeavors to provide answers to readers' financing mechanisms under PPP arrangement is revie- ques-tions regarding how to successfully incorporate private wed. sector participation in LRMT with a lesser emphasis on why 7. Developing a PPP Agreement: Looking at the main LRMT and the private sector may be beneficial. The primary types of PPP agreements, an outline framework for focus of this text is guiding the reader from design through developing the contractual arrangement is developed to project implementation. It starts from the premise that through re-view of key issues. underlying transport policy decisions will have already 8. Procurement: Reviewing the approaches that the public authority can use to select the private partner. been made and that LRMT has already been identified as 9. Conclusions the appropriate transport solution. We have included some limited discussion of policy and technical issues where these directly impact the LRMT PPP approach. Source: http://www.sxc.hu/ This book has been developed with the support of the Public- been done on general urban transport issues to which this Private Infrastructure Advisory Facility (PPIAF), a multi-donor book is intended to be a complement. The book should be of technical assistance facility aimed at helping developing considerable value to government officials and managers of countries improve the quality of their infrastructure through urban rail enterprises, whose strategy for improving urban rail private sector involvement - http://www.ppiaf.org, the Finance services includes using the private sector and aims to help them and Guarantees team and the Transport Anchor of the World design arrangements that lead to better services. It should also Bank. be a useful source for private sector specialists working on We believe that this book is a useful contribution to the urban rail transport solutions. development of urban rail services. Much work has already Zoubida Allaoua Jamal Saghir Director, Finance, Economics and Urban Director, Energy, Transport and Water World Bank Chair, Transport Sector Board Chair, PPIAF Program Council World Bank September 2009 XIII LIGHT RAIL - LIGHT METRO Tram in Dresden, Germany. Photo by and reproduced by kind permission of Rainer Hesse. Acknowledgments This book deals with a subject that involves a number of Hesse, Hubert Nove-Josser, Marc Juhel, Scott McIntosh, important, diverse, and sometimes complex issues as Paul Noumba, Gerhard Menckhoff, Slobodan Mitric, Nigel well as several areas of professional expertise. It draws Prichard, Richard Podolske, Paul Reddel, Jorge Rebelo, on the experience and advice of a wide ranging group of Abdul Rashid Abdul Aziz, and Sam Zimmerman. professionals from around the world, all with particular experience of LRMT and PPP related issues. Each of these This whole book would not have been possible without advisers brought different strengths, expertise, and ideas the enthusiastic support and patience of other World that contributed to the development of this book. In recog- Bank and industry colleagues who gave encouragement, nition of this fact, there are many people who deserve guidance and support throughout. These include, among sincere thanks for their contribution on what you are about others, Raymond Bourdeaux, Christophe Bosch, Jeffrey to read. Of course, the ultimate responsibility for this text Delmon, Sylvia Diez, Ahmed Eiweida, Grégoire Gauthier, lies with the author, but I am are indebted to all those who Henry Kerali, Motoo Konishi, Andreas Kopp, Denis Koslov, contributed their time and effort. Ksenia Kolesnikova, Irina Koshelkova, Andrey Kozrev, Ajay Kumar, Gerhard Menckhoff, Yuri Molchanov, Henry This study was led by Cledan Mandri-Perrott and Iain Russell, Janique Racine, Clemencia Torres de Mästle, Dieter Menzies. Cledan Mandri-Perrott is the main author. Iain Schelling, Maxim Sokolov. Thanks also to other colleagues Menzies developed the chapter on financing and provided who helped support this work in other ways, and not all of comments throughout. The book is developed from their whom are listed below: Chalida Charansuk, Vivian Cherian, joint work on a major infrastructure transaction upon which Vannee Dalla, Hope Gerochi, and Upali Pereira. some of the materials in this book are based. A special recognition goes to the research team of David Stiggers (who also acted as main editor), Amit Burman, and Dominic Patella, who tirelessly worked on some of the material used in this book. Thank you all. Thanks are due to those who shared their expertise and experience of some major LRMT PPP schemes through Case Study interviews, and patiently gave explanations in the necessary follow-up sessions, including Tom Beamon, John Cartmell, William Dachs, David Hand, Jeffrey Hewitt, David Keep, Raymond Louie, Martin Spicer, and Rein Westra. There was also considerable dialogue with other industry specialists, and I am grateful to: Michel Audigé, Cesar Light Train in Barcelona, Spain. Arias, François Boulanger, Vickram Cuttaree, Jim Dwyer, Photo by and reproduced by kind permission Troy Edwards, Ben Eijbergen, Arturo Ardila Gomez, Reiner of Rainer Hesse. XV LIGHT RAIL - LIGHT METRO Glossary Authority: A public body charged with tasks that may include Counterparty risk: One party's risk that another party will fail to meet · Formulating policy its obligations as agreed in a contractual arrangement. · Procuring assets or private partners Creditworthy: Likely to repay a debt as agreed. · Regulating contracts Debt service: The total amount of interest and principal payments · Monitoring and evaluating project performance required to satisfy the conditions for repaying debt. · Operations Demand risk: Risks associated with uncertain levels of passenger or The role and responsibilities assigned to authorities may differ depen- customer numbers using the light rail­light metro transit services. ding on individually specific mandates or charters. Depot: A maintenance and storage facility for light rail­light metro Availability payment: Financial compensation payable to the develo- transit vehicles. Depots can be relatively large and may be above per by the grantor to an agreed satisfactory availability of a service ground or underground, as spatial constraints require. or asset. Developer: The private company or consortium of private companies Balance sheet: A statement showing an organization's financial assets, contracted through a public-private partnership agreement to liabilities, and equity. perform some combination of the following: financing, design, Bankability: A measure of a project's suitability for commercial financing construction, commissioning, maintenance, and operations. that typically includes factors related to transport policy, integration, Discounted cash flow (DCF): A form of analysis whereby future cash ticketing, and macroeconomic conditions, among many others. flows are valued at their present-day equivalent. Basis point: One hundred basis points are equivalent to 1 percent. Drawdown: The process of incrementally receiving funding or Basis-point differentials (spreads) are often used to describe interest financing committed to a project. rates on private debt relative to public debt. Due diligence: A process of examining and analyzing every aspect Best and final offer (BAFO): A final round of bidding where selected of a project (financial, technical, legal, market, and so on) to fully firms (typically two) improve on their original bid submissions in an understand its risks, cash flows, and overall sustainability. effort to achieve the best combined technical and financial proposals Eurodollars: U.S. dollar­denominated deposits held in banks outside for final consideration. the United States. Cash flow: A stream of liquid assets (that is, cash). The term free cash Expansion: Typically refers to increasing the customer capacity of flow is often used in the context of a project company to describe its existing light rail­light metro transit service routes, including ability to service debt, pay dividends, and invest in assets. · Increasing the number of trips between stations Commercial close: The point in time when project parties formalize and · Adding rolling-stock carriages to train configurations sign contractual agreements. Commercial close does not necessarily · Increasing the capacity of stations and platform coincide with financial close, at which time all financial arrangements infrastructure are in place and the project company of the developer is ready to draw · Extending operating hours on the funding available for the project. Extension: Implies the creation of new routes to areas previously not Commuter rail: Systems that typically have greater distances between served, typically including constructing new track infrastructure in stations, allowing them to achieve high revenue speeds. These addition to stations. systems are particularly effective at creating rapid links between Farebox ratio: A measure of operating costs that are covered by fare urban centers and periphery communities. Electric commuter rail revenues (that is, what customers pay for light rail­light metro transit links in dense urban areas may involve complex civil works to achieve service). grade separation. Financial close: The day when the project's financial structure is Concession payment: A payment made by a concessionaire to finalized, all investors commit funds, and those funds are ready to be a contracting authority. used by the developer. Consortium: A group of companies assembled to bid and eventually Force majeure: An event beyond the control of any project party that realize a light rail­light metro transit project through a public-private significantly (and often adversely) affects a project. Examples of force partnership agreement. majeure events include natural disasters, terrorism, armed conflict, Consumer price index (CPI): A measure of inflation commonly used in and riots. a number of countries. Forward contract: An agreement between two parties to exchange Contingent liability: An uncertain obligation to pay or perform some some form of consideration at a future date. Unlike futures contracts, service at a future date. forward contracts may involve counterparty risk because they are not Contracting authority or grantor: The public counterparty to typically traded on regulated exchanges. a public-private partnership agreement (most often a signatory to the Futures contract: An agreement between two parties to exchange contract). Contracting authorities may have some or all of the roles some form of consideration at a future date. Futures contracts and responsibilities discussed under the definition of authority. are traded on regulated exchanges and involve mark-to-market Cost of capital: The opportunity cost of scarce resources invested in reconciliation of daily gains or losses. The exchange-traded feature a project. of futures contracts eliminates the counterparty risk associated with forward contracts. Gearing: The relative proportion of debt to equity in the capital direction along its route. structure of a project company. Highly geared companies have greater Pax/sqm: A measure of passenger density equivalent to the fractional proportions of debt relative to equity financing. number of passengers occupying a square meter of free, open floor Grade-separated heavy metros: Systems that are typically found in space in a light rail­light metro transit vehicle. areas with high population densities and limited physical space and Performance management system: An agreed set of assessment that require highly complex civil works--often including substantial criteria tied to a regime of penalties and possibly rewards designed to investments in underground construction. Grade-separated heavy align private operator incentives with public interest. metros use relatively large rolling-stock configurations (that is, Pro rata: Division according to some proportional allocation between many linked cars) and have high revenue speeds when stations are participants. sufficiently spaced apart. These systems offer the greatest passenger Public sector comparator (PSC): A financial model that describes capacities but also require the largest upfront investments of any light the risk-adjusted cost to the public sector of realizing a project using rail­light metro transit solution. only traditional procurement methods (without a public-private Grade-separated medium-capacity "light" metros: Systems that partnership approach). use rolling-stock technology similar to light rail trains but typically Reference design: A nondetailed, conceptual design provided to incorporate greater complexity in their civil works to achieve full prospective developers on which their detailed designs will be based. segregation from general traffic. Increased segregation allows for Reference designs typically offer generalized guidance for major civil higher revenue speeds, improved service reliability, and greater works, such as track alignment, conceptual station architecture, and passenger capacity. Many grade-separated medium-capacity metros location of major civil works. are inappropriately labeled as "light rail" on account of their similar Reserve account: A separate pool of funds set aside to pay a future ex- rolling stock. pense (for example, debt service or maintenance). Guarantee: One party's agreement to endure the consequences of Risk adjusted: Term that implies that the overall value assigned to risks otherwise born by some other party. some consideration includes a valuation for uncertain outcomes that Hedge: A position taken to offset some exposure to uncertainty. For may occur. example, project companies may enter into forward contracts to Rolling stock: A collective term for light rail­light metro transit vehi- "hedge" against unfavorable changes in foreign exchange rates that cles. This broad definition can be subdivided into could otherwise adversely affect project costs and revenues. · Revenue rolling stock (vehicles that carry customers) Leverage: An alternate term for debt and the degree of debt a project · Nonrevenue rolling stock (vehicles that are used for involves. Highly-leveraged projects involve greater amounts of debt maintaining system assets, including revenue rolling stock) relative to equity. Route: The path that a light rail­light metro transit system's track fo- Liability: An uncertain obligation to pay or perform some service at a llows. future date. Shadow fare: An additional amount of compensation paid to a private Light rail trains: Most light rail systems include a mix of segregated and operator by a public authority for each customer fare collected. nonsegregated rights of way. Light rail systems often serve downtown Shadow fares can bridge differentials between service costs and ac- areas in addition to neighboring suburbs. Common light rail train tual customer payments, thereby allowing for lower fares in support systems use two-car rolling-stock configurations with articulating of policy goals. joins between cars. This arrangement provides for greater passenger Sinking fund: A pool of funds (accumulated through regular payments) capacity while still allowing for tight radius-cornering capabilities. that is designated to pay for a future expense. Linkage: A route between two or more stations. Streetcars and trams: Services that are typically not segregated from Net present value (NPV): The value (at current time) of future cash general traffic and carry proportionally fewer customers at slower flows net of expenses. speeds over shorter distances. Streetcars and trams are commonly Operational control center: The "nerve center" that supervises, found in and around downtown areas and often use a single-car manages, and controls light rail­light metro transit system operations. configuration for rolling stock. Such facilities are typically connected to all applicable signaling and Subordinated (junior) debt: Debt with a priority for repayment. Subor- monitoring systems of the system and have direct communications dinated or junior lenders receive repayment only after senior lenders with light rail­light metro transit vehicle drivers, station managers, have been repaid in full. security forces, and emergency services. Tenor: The life of a loan (typically in years). Opportunity cost: The forgone benefit of not pursuing a next-best Tranche: A distinct portion of an overall financing package. alternative. Value for money: A measure of the additional value created for public PPP reference model: A financial model that describes the risk-ad- institutions through successful partnerships with private firms. The justed cost to the public sector in pursuing a public-private partnership term value for money (with some good or bad qualifier) is often used (PPP) approach for a project. as a measure of other investments as well. Passengers per hour per direction (pphpd): The number of customers a light rail­light metro transit system can transport per hour in a single XVII LIGHT RAIL - LIGHT METRO Abbreviations AP availability payment DoT Department of Transportation (various countries) ATC automatic train control DoTC Department of Transportation and Communications AVL automatic vehicle location (Philippines) BAFO best and final offer DSCR debt-service coverage ratio BBBEE Broad-Based Black Economic Empowerment ECA export credit agency BC British Columbia (Canada) EDSA LRT The consortium that built Manila's MRT3 BEE Black Economic Empowerment (South Africa) EIB European Investment Bank BLT build-lease-transfer ESDA Epifanio de los Santos Avenue (Philippines) BMA Bangkok Metropolitan Authority Euribor euro interbank offered rate BOOT build-operate-own-transfer Ex-Im Export-Import BOT build-operate-transfer FDBOM finance-design-build-operate-maintain BRT bus rapid transit GMPTA Greater Manchester Passenger Transport Authority BTO build-transfer-operate GMPTE Greater Manchester Passenger Transport Executive BTS Bangkok Transit System GVAA Greater Vancouver Airport Authority BTSC Bangkok Mass Transit System Corporation Limited GVRD Greater Vancouver Regional District (Canada) CCTV closed-circuit television HBLR Hudson-Bergen Light Rail CEN European Committee for Standardization HM Her Majesty's CLCO Canada Line's contracting authority IABC International Association of Business Communication (under TransLink) ICC Investment Coordination Committee (Philippines) CMC control and maintenance center IFC International Finance Corporation CP condition precedent IFI international financial institution CPI consumer price index IP intellectual property CPIX consumer price index, excluding mortgage IRR internal rate of return interest payments ISO International Organization for Standardization CSFB Credit Suisse First Boston JEXIM Japan's Export-Import Bank DBFM design-build-finance-maintain KfW Kreditanstalt für Wiederaufbau DBFO design-build-finance-operate (the German government's development bank) DBOM design-build-operate-maintain KL Kuala Lumpur, Malaysia DCF discounted cash flow KPI key performance indicator DFID Department for International Development LDDC London Docklands Development Corporation (United Kingdom) LIBOR London interbank offered rate DfT Department for Transport LRMT light rail­light metro transit DLR Docklands Light Railway (London) LRSP Livable Region Strategic Plan (Canada) DLR Ltd. Docklands Light Railway Limited LRT Light Rail Tain (DLR's contracting authority) LRTA Light Rail Transit Authority LTFRB Land Transportation Franching and Regulation Board (Philippines) MRG minimum revenue guarantee RFID radio frequency identification device (Phillipines) MRT Mass Rapid Transit (network, Singapore) RPI retail price index (United Kingdom) MRT3 Manila Metro Rail Transit System line 3 RPIX retail price index, excluding mortgage (Metrostar Express) interest payments (United Kingdom) MRTC MRT3's project company SMME small, medium, and micro enterprise MTR Mass Transit Railway (Hong Kong, China) SMS safety management system NAO National Audit Office SMTP strategic metropolitan transport planning NCCI net-cost contract with investment SNPB Syarikat Prasarana Negara Berhad NEDA National Economic Development Agency (Kuala Lumpur's publicly owned national (Philippines) infrastructure holding company) NPV net present value SPV special-purpose vehicle OECD Organisation for Economic Co-operation SRT Thailand State Railway and Development STAR Sistem Transit Aliran Ringan (Kuala Lumpur) OSA Official Secrets Act (Malaysia) STU special technical requirements O&M Operations and Maintenance TfL Transport for London PFI private finance initiative TVM ticket vending machine PMS performance management system VAL véhicule automatique léger pphpd passengers per hour, per direction VfM value for money PPIAF Public-Private Infrastructure Advisory Facility VIAA Vancouver International Airport Authority PPP Public-Private Partnership YVR Vancouver area's international airport PQQ prequalification questionnaire PSC public sector comparator Currency symbol Expanded name PSP private sector participation Can$ Canadian dollars PUTRA Projek Usahasama Transit Ringan Automatik Euro (Kuala Lumpur) FF French franc QMS quality management system RM Malaysian ringgit RA Republic Act (Philippines) P Philippine peso RATP Régie Autonome des Transports Parisiens (France) ZAR South African rand RBS Royal Bank of Scotland B Thai baht RER Réseau Express Régional (France) £ U.K. pound sterling RFP request for proposals US$ U.S. dollars XIX LIGHT RAIL - LIGHT METRO SECTION SECTION A B STRUCTURING PRIVATE UNDERSTANDING LRMT SECTOR PARTICIPATION Chapter 1: Chapter 3: Urban Transport and Light Incorporating Private Sector Rail­Light Metro Transit Participation in LRMT Initiatives Roadmap of Information Contained in Chapters · Broad overviews of urban transportation, · Discussion about what the private sector relevant policy considerations, and alterna- can offer and some ideas about the effect tives analysis of PPP on LRMT schemes, investment, and · Characteristics of LRMT schemes (scope, operations and policy enforcement choice as urban transport solution, value for · Discussion of the various PPP structures money, and budgetary policy issues) used in developing LRMT schemes · The four stages of PPP development and implementation (policy development, Chapter 2: arrangement design, developer selection, and arrangement management) Technical Issues Chapter 4: · Various key characteristics of LRMT that influence policy, design, and contractual arrangements of PPP schemes (complexity and size, route, segregation, integration, Understanding and Managing Risk rolling stock, service, and ticketing and · Risk as an important factor in determining barriers) the type, design and effective implementa- tion of LRMT PPP projects · Analysis and allocation of responsibilities and risks in LRMT PPP projects, including macroeconomic risks, sector-specific risks, and project risks Chapter 5: Public-Private Partnership Design, Specifications, and Performance Management · The relationship between setting service requirements and consequent capital and operating cost needs · The balance between fares and subsidies, and the effect on financing · Discussion of how key performance indica- tors define specified service qualities and provide the contractual mechanism for ob- taining them SECTION SECTION C IMPLEMENTING D CONCLUSIONS AGREEMENTS Chapter 6: Chapter 9: Funding and Finance Conclusions · Descriptions of various funding sources, their advantages, and unique considerations · Summary of material discussed · Detailed discussion on both project and cor- · Conclusions on key points covered porate finance structures and their implica- tions · Brief overviews of refinancing gains, valu- Annexes ing of contingent liabilities, and "sinking · Detailed information on project case stu- funds" dies, together with supporting material on LRMT PPP issues Chapter 7 Contractual Arrangements · The legal framework for LRMT PPP sche- mes · Methods for analyzing contractual needs, including contractual and financial links, term sheets, and use of a layered contract approach · A checklist approach (following a concession example) to key contract clauses Chapter 8: Procurement · Choice of a suitable method for LRMT PPP procurement and selection of a developer · Management of the bidding process, including use of transaction advisers, specia- list advisers, and award committees · Choice and implementation of effective de- veloper selection criteria and evaluation of bids · A practical view of bidding, evaluation, selection, and negotiation to contract close with the chosen developer XXI LIGHT RAIL - LIGHT METRO Case Studies Manchester Metrolink-United Kingdom · System Type: Light Rail Train · Contract Structure: O&M franchise (current) full DBOM concession with capital grant (previous) Kuala Lumpur STAR / PUTRA-Malaysia · System Type: Light Metro · Contract Structure: Full FDBOM concession Gautrain-Gauteng Province-South Africa · System Type: Eletric Commuter Rail · Contract Structure: Full DBOM concession (with substantial capital grant) Canada Line-Vancouver, British Columbia · System Type: Light Metro · Contract Structure: Full DBOM concession (with substantial capital grant) MRT III-Manila, Philippines · System Type: Light Metro · Contract Structure: Full DBOM concession with leaseback to public operator Docklands Light Railway-United Kingdom · System Type: Light Metro · Contract Structure: De-layered concessions and O&M franchise Bangkok Skytrain-Thailand · System Type: Light Metro · Contract Structure: Full DBOM concession All photographs publicly available XXIII LIGHT RAIL - LIGHT METRO Tram in Berlin, Germany. Photo by and reproduced by kind permission of Rainer Hesse. Overview This book has been developed to address the growing best practice. The book has been structured to follow worldwide interest in the use of light rail­light metro the expected course of development of major LRMT transit (LRMT) schemes to provide urban transport schemes, from policy issues through procurement of solutions and, in particular, to review the potential use a viable and sustainable arrangement. The approach is of public-private partnership (PPP), or private-public to show how to make use of PPP effectively and how to participation, models to support LRMT schemes. This incorporate the necessary checks and balances in the work, funded by the World Bank and the Public-Private evaluation, development, and long-term operation of Infrastructure Advisory Facility, is based on extensive the project. industry consultation and the development of case studies from recent major LRMT schemes, all involving The book is arranged in nine key subject chapters, and the some form of PPP arrangement. sequence has been chosen to follow, in general terms, the way that these issues are developed during the project The approach begins with the basic premise that the life cycle, from policy setting through procurement and need for an LRMT scheme has already been justified long-term management of the LRMT scheme (see figure and that there is a need for a systematic approach for 0.1). Each chapter gives a broad overview of the key assessing and developing the scheme while making use issues involved, but there is sufficient sufficient depth of some form of public-private participation. The work to be of practical use in effective selection, design, and draws heavily on current case studies, both in major implementation of a PPP arrangement for an LRMT international LRMT schemes as well as in current PPP scheme. Chapter 1: Urban Transport and Light Rail­Light Metro Transit We start by looking at LRMT schemes in the context of modes. The most successful planning efforts seem the general urban transport sector. Then issues related to be those that incorporate an unbiased evaluation to the complexity and capital needs of such schemes process for selecting transport solutions. On that basis, lead into consideration of the ways to fund the large compelling arguments for use of LRMT--or indeed any capital investments needed and the potential role of other transport mode--need to be presented before private participation in achieving this funding. The making or implementing any investment decision. Such nature of urban transport--and of LRMT schemes in preparatory thinking is of particular importance for LRMT particular--raises particular and key questions of policy schemes, because they generally have major capital and operation; some of these overarching issues are investment requirements. discussed. We look at several important transportation policy topics The decision to implement new LRMT services and the that will have a direct influence on key decisions related subsequent decision to incorporate the private sector to project choice and implementation. The primary focus are most effective when part of a larger coordinated is to note the steps toward scheme implementation, but transport planning effort aimed at improving urban on the assumption that policy decisions have been made transportation through a variety of suitable transport and unbiased transport mode assessments have already identified LRMT as the appropriate transport solution. 1 LIGHT RAIL - LIGHT METRO FIGURE 0.1 LRMT PROJECT LIFE CYCLE 1. Urban LRMT schemes vary in size and complexity, making the transport & LRMT projects extremely capital intensive, which is one of the main drivers to using some form of PPP. This aspect, 2. LRMT 3. PPP technical policy and together with other key issues, has a particular effect Issues issues on the financing, construction, and operation and 4. Understanding & 5. Design, maintenance of the PPP scheme, all of which must be specification & allocating Risk performance reflected in the policy approach, design, and contractual form of the scheme. Some of the key issues include the 6. Funding & finance following: · Complexity and size of projects 7. Contractual · Route selection arrangements · Segregated versus nonsegregated systems · Integration 8. Procurement · Selection of rolling stock and asset management planning Source: Author's representation. · Capacity and service reliability A brief summary of the key issues · Ticketing and barriers that are covered in each chapter follows. For each of these key issues, we describe their importance in LRMT design and implementation and their particular Chapter 2: relevance in relation to the choice and design of the most effective long-term PPP arrangement. Technical Issues LRMT PPP projects have a unique "footprint" that is Chapter 3: particularly influenced by the physical and technical Incorporating Private Sector characteristics of LRMT. In this chapter, we review some key technical issues that influence all aspects of developing Participation in LRMT Initiatives any LRMT PPP scheme. Following the philosophy of our This book focuses on the successful introduction and overall approach, we give the background to some of design of arrangements for private participation in these issues and draw conclusions on some of the key LRMT schemes through a PPP arrangement between the consequences of a PPP scheme. We do not explain all public sector (we use the terms government, grantor, technical design points in this work or provide a technical and contracting authority interchangeably) and a private design primer, but we show the importance of technical sector partner (the terms developer and private operator design issues in the PPP context. In other chapters, we are also used interchangeably). link technical design into detailed PPP policy, design, and contractual issues. In this chapter, we first consider what private participa- introduce the approach and describe how it will need to tion can be expected to achieve. The successful use of be tailored to the actual needs and market conditions of private sector partners in establishing LRMT schemes, the specific LRMT scheme. as well as other public sector infrastructure and service provision, is well documented. Through a PPP, the It is important to understand that the PPP arrangement government, as the contracting authority or grantor is an integral part of the LRMT scheme, not just a con- on behalf of the public sector, can draw on resources, tractual arrangement that can be bolted on at the end. expertise, and capital from the private sector. It has important implications for the development of policy, as well as for procurement and viable operation Starting from the premise that the decision to involve over an extremely long contract period--perhaps 20 the private sector in LRMT has already been made, we or 30 years. We, therefore, look at four stages of LRMT review some of the key issues that relate to the provision project development and note that PPP issues will need of LRMT services in urban situations and the ways that to be addressed at each stage: private participation might address those problems. A major issue is the need to ensure value for money, 1. Developing policy. We describe how to set objectives, particularly where use of scarce public resources is identify a reform leader, and determine the ground involved. Considerable international experience has been rules for the development and operation of LRMT used to assess PPP schemes, and some effective models within the structure of the sector. are given as examples. 2. Designing the arrangement. We discuss how tech- Partnering with the private sector can deliver substantial nical and service standards are set, how the tariff is value by augmenting limited government capacity (both designed, and how risk sharing is defined and allocated operational and financial) to the benefit of transport between the parties. We look at how to set roles and customers. However, formulating complementary responsibilities for the parties in the PPP agreement relationships between public and private entities is and how to manage them. Contractual arrangements important, because failing to "get it right" can have have to be developed, as do the institutions to manage severe consequences for taxpayers, investors, and them. customers. The approach given in this book addresses 3. Selecting the developer. The process to attract this problem through the development of a viable and and select the best private partner or developer is well-structured PPP arrangement. described, and useful advice is given for success. This topic is covered in more detail in chapter 8. Then, we discuss some of the main forms that private participation takes and how they might be used. These 4. Managing the arrangement. Project design and forms, which are assessed as a measure of the risk management are covered, as well as the importance taken by the private and public parties, vary in range of transaction management and overall long-term from management contracts to full net-cost contracts contract management. Effective and comprehensive with investment (NCCIs)--more commonly known as management of the PPP agreement is necessary concessions or build-operate-transfer arrangements. We from the earliest policy-making stages and continues, have taken these models from international experience although with varying emphasis, through all stages of and also make comparisons with recent European Union the project cycle, through to monitoring and regulation practice. Again, no one model fits all schemes, and we of the long-term service provision under the PPP agreement. 3 LIGHT RAIL - LIGHT METRO Chapter 4: Chapter 5: Public-Private Partnership Design, Understanding and Specifications, and Performance Managing Risk Management Proactive risk identification and allocation are essential In designing the LRMT PPP arrangement, the grantor planning tools in the successful delivery of major infra- needs to arrive at a final design that balances the pro- structure projects. This chapter explores methods of vision of public services against a bankable technical and allocating the risks and responsibilities between the economic solution. Additionally, once the contract has grantor and the developer and discusses managing been established, the grantor needs a mechanism by demand risk and the implications that risk has on the which it can ensure that the public service objectives are structure of the proposed PPP agreement. met during the life of the contract. At each stage, from design and construction to operation, In this chapter, we look at some of the key steps in LRMT systems face risks. The grantor and the developer the process of establishing and maintaining the PPP must identify all project risks and the ways that they are arrangement (figure 0.2). The process starts with the managed. For example, LRMT projects face standard grantor's defining the scope of works for the service to be project risks such as country, sector, and project risks. provided and the standards to be met. This definition will Forecasting operational scenarios and the interplay directly affect the overall cost of the project. Generally, of the risk variables that compose an infrastructure the cost of providing the LRMT service exceeds the cost project is not an exact science. Accordingly, effective risk that can reasonably be recovered from fares collected allocation will be an integral part of a project's success. from the riders (the farebox income). Therefore, capital Risks should be categorized into those that the grantor grants and project subsidies (through availability pay- or developer will retain, transfer, or share. In this chapter, ments, performance payments, minimum revenue gua- risks are described as macroeconomic risks, sector risks, rantees, or similar mechanisms) generally have to be and project risks, as well as risks involving the public and provided. Once the final balance among services, costs, private parties' ability to perform. Risks associated with and subsidies has been established, the grantor can managing the PPP agreement are discussed in some proceed to establish the final design, financial approach, detail, including issues such as payment mechanisms, and the contractual basis of the PPP arrangement. In the fare risks, and inflation, as well as the question of how long term, the services to be provided by the developer to deal with the assets, particularly at the end of the need to be monitored and controlled, and they need contract period. to be linked to some form of performance payment mechanism. This task can be done through a limited Managing the demand or farebox risk is crucial to the number of key performance indicators (KPIs). KPIs must viability of a long-term arrangement. Demand, ridership- be practical, easily measurable, and achievable. They must flow measurements, and travel times and vehicle speeds be relevant to the contractual obligations and should be are fundamental inputs to the appraisal of any LRMT linked to the performance management and reporting PPP project and may be seen as a having high associated systems. KPIs can also serve as a means of assessing the risk levels. Given the problems of reliability of demand developer's level of performance and may be used as a forecasts, the grantor may choose to provide either tool for implementing incentive schemes in areas where availability payments or minimum revenue guarantees the developer could be expected to perform above the to help mitigate farebox risk. These useful mechanisms basic contractual terms. are described in some depth. Chapter 6: Different contractual arrangements for private sector participation can effectively prescribe the funding and financing mechanisms for LRMT projects. The majority of project financiers will look at the proposed transaction structure and try to find the funding structure that best fits. This effort, in turn, can have significant effects on other important considerations, such as affordability, value for money, risk transfer, and overall project feasibility. Because financial close usually occurs later in a project's Funding and Finance development cycle, planners will inevitably be challenged to anticipate the implications of their decisions before receiving final investor feedback. Indeed, it should be borne in mind that sometimes the project may need to be restructured to suit funding requirements. Understanding the basic financial considerations of LRMT projects is therefore essential when seeking to align financing implications with public interests during early planning stages. It is also important for public authorities to appreciate that private capital comes with an expectation of reasonable return. Rational, profit-maximizing developers and investors are prepared to take risks only if they expect to earn commensurate rewards. Planners must consider how private investors will recover normal returns throughout project development and implementation. Public-private partnerships are never free, and failing to understand the need for reasonable rates of return can render projects financially nonviable or result in underinvestment during subsequent stages of operation and maintenance. This chapter discusses the more important funding and finance issues that are likely to arise in LRMT PPP projects. They are described in sufficient detail to allow the reader to obtain an understanding of their importance to the success and viability of the overall scheme. FIGURE 0.2 Balancing Service Standards, Fares, and Subsidies Specify Estimate Set fares and Design Performance and monitoring service costs subsidies and control finance Source: Author's representation. Light Rail in Barcelona, Spain. Photo by and reproduced by kind permission of Rainer Hesse. 5 LIGHT RAIL - LIGHT METRO Chapter 7: Chapter 8: Contractual Arrangements Procurement This chapter looks at some of the major issues to be considered This chapter presents an overview of the key issues to when formulating the contractual arrangements for an LRMT be addressed in selecting and awarding a contract to PPP scheme. By their nature, PPP arrangements are complex, a suitable developer. Given the size and complexity of and each arrangement has its own set of interlinking contracts LRMT projects, the chosen procurement method not and agreements that are needed to establish allocation only needs to meet local procurement standards but also of risks and responsibilities, as well as to deal with financial generally will need to be adapted to satisfy international obligations and cash flows. We use a PPP agreement structure norms and standards, to ensure effective involvement of based on the NCCI to illustrate some of the main contractual financing institutions and developers. The overall goal is issues to be considered. We also detail some of the associa- to establish an effective method for selecting a developer ted contracts that would typically be used by the grantor as that is financially, technically, and operationally capable of a means of sharing the risk among the project participants. the development and long-term operation of an effective We also look at the importance of the overall legal regime of LRMT system under the PPP agreement. the host country in which the potential PPP will take place and explore the importance of ensuring that the grantor has the We focus on competitive bidding but note some key issues legal rights to enter into the PPP agreement. of other procurement approaches. The selection criteria and assessment methods are issues to be established early Finally, given that it is impossible to give one "standard" in the process. contract form, this chapter is designed to outline the key issues to be considered when designing and applying a new Given the nature of the de- LRMT PPP contract. The majority of the new LRMT PPP velopment of LRMT PPP projects reviewed in preparation for this book have involved schemes, it is beneficial to major project investment, with investment commitment by have continuing stakehol- the private sector as well as the public sector. It should be der consultation--particu- noted that many of the points covered here (that is, those not larly with potential private specifically related to investment) will also apply to the other partners and financiers-- noninvestment contract forms, such as operations contracts. throughout the procure- ment process, with the We will look at the basic needs for contracts and their sub- aim of development of the sidiary agreements, specifically to gain an appreciation for the optimal scheme. We show potential complexity of a complete contract structure and the how the procurement pro- interlinking of the various contracts (for example, land leases, cess can be managed from lenders' direct agreements, and technical annexes). an initial survey of interest Although the detailed contracts will vary from scheme to through to final bidding, scheme, the level of detail given here in a generic format negotiation, and award of provides a very useful checklist when one is assessing the the contract. Source: http://www.sxc.hu/ adequacy and suitability of proposed LRMT PPP contractual arrangements. Chapter 9: Conclusions publicly sponsored bailout for failed projects is quite strong. In this last chapter, we revisit some of the key issues for Abandoning a functioning LRMT system would simply be success encountered through our research, and we politically unacceptable in most cases, making the strong develop some thoughts related to their importance. We case for trying to get it right from the earliest stages. start with some ideas about the need to establish value for money in PPP scheme design and implementation, as The complete process requires careful systematic well as the value that private finance can bring. management, with resources and focus adapted to suit the specific project stage. The process of procurement has to Another common thread in successful schemes seems be comprehensive, with the PPP procurement issues being to be the use or development of an effective transport considered at the earliest stages of feasibility and design. strategy, with the role of LRMT clearly defined. In parallel Early and continued consultation with the stakeholders-- with this aspect is the ability to manage fares intelligently, particularly the private developers and the organizations including a clearly defined mechanism for any subsidy providing private funding and financing--during the (taking into account incentives for the private sector) feasibility and design stages offers a very productive way and a clear and fair method for dealing with demand or of achieving an optimal scheme outcome. farebox risk. Finally, an overarching conclusion of this research is that The structure of public support, including grants and sub- incorporating private sector participation in LRMT initia- sidies, has an important effect on the scheme design. tives can offer good value for money, but achieving this Many PPP schemes have mechanisms to provide for objective requires carefully managed planning and im- capital subsidies, because capital development costs are plementation. The complex and massive nature of LRMT often far in excess of the capacity of the fare revenue to investments has a direct effect on the type and form of fund them. Even when the outcome of LRMT investments private sector involvement, and ensuring adequate public is less than ideal, substantial interest in maintaining and private sector funding requires a major investment services will almost always exist because of the numerous by the grantor in commitment, time, and resources. stakeholders involved. Consequently, the likelihood of a Developing LRMT schemes through PPP arrangements requires the rigor of a structured approach that will satisfy both public and private sector objectives. We hope this book will give some practical assistance in meeting this goal. 7 LIGHT RAIL - LIGHT METRO CHAPTER URBAN TRANSPORT AND LIGHT RAIL­ LIGHT METRO TRANSIT 1 Tramvia Blau Tram in Barcelona, Spain. Photo by and reproduced by kind permission of Rainer Hesse. Urban Transport and Light Rail­Light Metro Transit Around the world, interest is growing in the use of light rail­ The decision to implement new LRMT services and the sub- light metro transit (LRMT) schemes to solve increasing urban sequent decision to incorporate private sector involvement transport problems. As the number of LRMT projects increases are most effective when they are part of a larger coordinated and a track record for these projects begins to grow, a similar transport planning effort aimed at improving urban UNDERSTANDING LRMT growth has occurred in the use of public-private partnerships transportation through a variety of suitable transport modes. (PPPs) to support provision of public infrastructure projects. The most successful planning efforts seem to be those that This book was developed from research that was funded by incorporate an unbiased evaluation process for selecting the World Bank and the Public-Private Infrastructure Advisory transport solutions. On that basis, compelling and rational Facility (PPIAF) and is based on extensive industry consultation arguments for using LRMT--or indeed any other transport and development of case studies from recent major LRMT mode--need to be presented before making or implementing schemes, all involving some form of PPP. any investment decisions. Such preparatory thinking is of particular importance for LRMT schemes, which generally have The aim of the research was to develop a practical assessment major capital investment requirements as well as an effect on of the way that PPPs could successfully be used to support urban transport policy. modern LRMT schemes and to present effective methods for design and implementation. The book starts from the This book is intended to be a useful guide to LRMT PPPs in both premise that the need for an LRMT scheme has been justified, developed and developing countries. It is intended to show typically through the undertaking of a comprehensive and how to successfully incorporate private sector participation rigorous feasibility study of options, impacts, and value-for- in LRMT rather than discuss why such an approach may be SECTION A 1 money assessments. It covers the key issues to be considered beneficial. As a step toward this objective, we look briefly at in designing, developing, and implementing an LRMT PPP several important transportation policy topics that will have a and offers a practical approach to be followed. Case studies direct influence on key decisions related to project choice and of recent LRMT schemes involving PPPs have been developed implementation. The primary focus of this book is to guide from interviews with leading industry specialists and managers the reader on the steps toward scheme implementation, but directly involved in a number of major benchmark schemes it assumes that policy decisions have been made and unbiased worldwide. Lessons and conclusions have been drawn from transport mode assessments have already identified LRMT as this study of current practice and were used directly to develop the appropriate transport solution. our work. 1.1 INTRODUCTION 1.1.1 Case Study Approach In this chapter, we start by looking at LRMT schemes in the This book is based extensively on case studies (see annex 1), context of the general urban transport sector. Issues related to which were selected from recent major international LRMT the complexity and the capital needs of such schemes lead into PPPs and represent a diverse range of scheme options, from consideration of the ways to fund the large capital investments which the most relevant and practical lessons learned can be needed and the potential role of private participation in drawn. The book draws heavily on the case studies, as well as achieving this funding. The nature of urban transport--and of on other industry examples, to illustrate the issues covered. LRMT schemes in particular--raises important specific ques- Some of these LRMT initiatives yielded outcomes that diffe- tions of policy and operation, and some of these overarching issues are discussed here. 1 Such benefits could include cost and time savings. See, for example, Duffield (2008). 9 LIGHT RAIL - LIGHT METRO Light Rail in Dublin, Ireland. Photo by and reproduced by kind permission of James Dwyer. red substantially from what was originally envisaged. For term planning systems and government support to promote example, several of the LRMT PPPs studied terminated the benefits of public transportation. before their planned completion dates. One main reason Delivering an efficient transportation system through PPPs was that the challenges encountered were typically more can be effective if incorporated into an overall strategic plan. complex than originally envisaged (often including political In India, for example, the National Urban Transport Policy and macroeconomic factors outside the project's scope). defined the parameters that guide federal financing and Nevertheless, there appear to be specific lessons that can be private participation in urban transport investments (see box 1.1). learned and that, when applied, have the potential to improve In an urban context, the environmental, social, and economic the chance that future LRMT schemes will succeed. Box 1.1 1.1.2 Terminology Linking Public Policy and the A number of terms are used throughout the chapters of Characteristics That Contribute this book. The public sector or government entity that buys to Viable Transport Systems the service to be developed under any given form of PPP is referred to indistinctly as the grantor, contracting authority, India's National Urban Transport Policy (launched in 2006) was or government. With respect to general policy issues, the the result of a tacit admission of the link between public policy reference may be made to the government because the grantor and the characteristics that contribute to viable transport or contracting authority is not the same government entity systems. The policy was focused on reducing the reliance on that is able to enter into the PPP contract. The counterparty to cars in urban transport and included a number of reorienting the public sector is referred to as the developer. The developer objectives, including · Incorporating urban transportation as an important is considered to be the private sector party and may be one parameter at the urban planning stage of or a combination of the following: the operator; the train · Encouraging greater use of public transport and manufacturer and rolling-stock provider; the construction nonmotorized modes by offering central financial company; or any other stakeholder that has a financial, assistance for this purpose technical, or commercial stake in the execution of the PPP · Establishing quality-focused and multimodal public transport systems that are well integrated project. The contractual arrangement detailing the roles and · Raising finances through innovative mechanisms responsibilities between the grantor and the developer is that tap land as a resource for investments in urban referred to as the PPP agreement. transport infrastructure 1.2 URBAN TRANSPORT POLICY A complementary funding initiative, the Jawaharlal Nehru National Urban Renewal Mission, was launched to improve To facilitate the introduction of PPPs in urban transportation, urban infrastructure, enhance governance, and provide policy makers need to consider formalizing the links between facilities for the poor. Under this initiative, the national 2 government provides support of up to 20 percent of the PPPs and urban transport planning. A PPP is a cooperative capital costs of public transport projects (up to 50 percent partnership between the private sector and the government under a public-private partnership arrangement). In some that can contribute to the economic growth of urban centers cases, in exchange for the funding, the cities must undergo and the quality of life of people living there. Efficient, cost- reforms, create a city development plan, and obtain financing effective, and sustainable transportation systems require long- for the remainder of the required investment through a combination of state, city, or private sector resources. 2 Numerous resources are available to help planners pursue nonrail urban transport solutions. For example, PPIAF has recently published a bus toolkit designed to help planners implement bus- based transportation networks. This resource is available free of CHAPTER charge at http://www.ppiaf.org. 1 pressures for introducing new public transport schemes can be investment when supported by enabling policies. Improving high. Governments and policy makers are faced with choices transportation enhances quality of life by giving citizens on how best to meet their transport needs. Customers' ability greater access to employment opportunities, urban amenities, and willingness to pay, as well as competition with alternative and neighboring communities. UNDERSTANDING LRMT transport modes, low fares, and consequent revenues, mean that the government's financial resources are constrained. 1.3 DEFINING LIGHT RAIL­METRO TRANSIT Additionally LRMT services have characteristics that create SYSTEMS special issues for public policy. Among them is the fact that Broadly defined, LRMT systems are urban rail transportation LRMT services can create benefits for people not receiving solutions that use electrically powered coaches (known as the services (that is, externalities), such as reduction in traffic rolling stock) to transport customers between fixed stations. congestion, improvement in environmental conditions, There are many subclassifications within this broad definition, and general improvement in local workplace and economic although differentiating between them is often difficult. In conditions, including stimulus to development. These externa- this text, the abbreviation LRMT has been used to cover the lities can bring major benefits to a community that individual broad categories of light rail trains, electric commuter rail, and customers may not be willing to pay for. grade-separated medium-capacity "light" metros. For reasons of relevance to our approach, we chose not to include two Other issues facing policy makers may arise from the fact that associated transport forms: streetcars or trams and grade- LRMT schemes generally have to be considered within the separated heavy metros. Later in this chapter, we describe in context of the overall urban transport sector, and the relative SECTION A some detail the characteristics of all the various LRMT modes. influence of each element of the sector (such as buses, cars, Another critical division between modes is whether they share taxis, and rail) on the LRMT scheme may not be easily evaluated. the public realm or are segregated from it. For example, trolley This circumstance makes it harder for private companies to buses, streetcars or trams, light rail, and interurbans, even if make informed bids for providing LRMT services and harder they operate on separate rights of way on parts of their routes, for the government to set appropriate prices. Still more tend to share space with other transport modes. Segregated problems are created by the fact that various levels of central systems include, for example, electric railways and metros. and urban governments may have overlapping responsibilities and policies, and this situation will be worsened if there is no Segregated systems in urban centers are difficult because new comprehensive public transport policy. surface-level alignments in cities are hard to find. Even if they can be found, community severance and access problems may Cities across the globe are looking at ways to improve trans- occur. In addition, a large number of grade-separated crossings portation services in response to ever-expanding urban will be needed, which means that all modes that cannot share populations and growing motorization. Planners must find the public realm will need to be elevated or underground. affordable, environmentally friendly, and socially responsible transportation solutions that can support further develop- Understanding private sector participation in LRMT invest- ment in urban areas. When appropriately planned and ments first requires an appreciation of the basic concepts and properly implemented, LRMT systems can provide rapid urban policy considerations underlying such projects. The following mobility and vital access to city centers from surrounding sections provide a brief summary of some of these concepts districts. Attractive LRMT services can help reduce both and basic policy considerations and describe some of the traffic congestion and vehicular emissions. Such systems also unique challenges of LRMT PPPs. have the potential to drive urban renewal and increase local 11 LIGHT RAIL - LIGHT METRO Light Rail in Barcelona, Spain. Photo by and reproduced by kind permission of Rainer Hesse. 1.4 PLANNING AND SELECTING 1.4.1 Selecting Appropriate Transport TRANSPORTATION SOLUTIONS Solutions Decisions to pursue LRMT or any other large infrastructure Choosing between options without bias is no easy task in a investment cannot be made without considerable initial universe of transportation solutions. Urban rail initiatives preparation and study on behalf of the government, which seem particularly prone to selection for reasons not solely acts as the grantor of the proposed PPP agreement. Many resulting from sound analysis (Pickrell 1992). In this respect, texts and other useful aids can guide readers through the it is important to recognize that any cost-benefit analysis will various processes of analyzing and selecting appropriate depend on which items are monetized and the weighting 3 transportation solutions. However, three factors may create that is applied to each item. Such judgments are inevitably serious obstacles--under both public and private operation-- influenced by socioeconomic considerations. Unfortunately, to achieving a government's goals in establishing successful when one is selecting the most appropriate solutions, there LRMT schemes: is no simple, objective yardstick by which to measure all · In many unplanned and unregulated transport schemes. Given the high price tag that LRMT projects often markets, individual LRMT routes will be in competition carry, this consideration is important. Nevertheless, there are with other public (or private) transport services instances where LRMT will be an optimal solution for urban serving similar areas. transport. Even then, successful implementation, as with all · In planned transport markets, technologically in- major transportation projects, will require proper planning, ferior modes of transport are likely to be replaced by including a thorough consideration of the following: improved systems, and the replaced system may be · Available public budgets (current and future) converted into feeder services. · Technical feasibility of different modes · The investments required to provide the services · Important customer criteria (such as comfort, speed, are high and almost by definition long lived and safety, any confirmed biases) irreversible. Once made, they cannot be reversed · Estimated customer volumes (along with their uncer- should the returns to the investment prove less than tainty) expected. · Fare/demand price elasticity · Upfront costs and operating expenses This first factor means that customers having alternative · System life and continuing investment needs modes of transport typically resist price increases even when · Environmental impacts of various solutions prices are lower than costs. The impact of this factor is often · Ability to integrate with other modes compounded by large concealed subsidies in, for example, · Ability to integrate with the built form of the city road use. As a result, governments face strong pressure · Lead time for implementation to keep prices below costs and to make up the difference between prices and costs with subsidies or grants. The biggest challenge for governments, with systems that are either publicly or privately operated, is to address these problems in 3 The World Bank specifically offers resources for this purpose at a way that will encourage investment to improve services. http://www.worldbank.org/urbantransport. CHAPTER 1 1.4.2 Conducting Meaningful Alternative Analysis Meaningful analysis of alternative transport solutions is · Establish evaluation criteria. Develop criteria that measure essential to ensure the best use of scarce public resources. cost-effectiveness and affordability as well as criteria that Different transportation modes offer different advantages consider nontransport concerns, such as environmental, social, land, and economic development effects and health UNDERSTANDING LRMT and disadvantages, and it is important that rigorous alterna- tive analysis be conducted before making any firm decisions and safety considerations. Efforts should be made to make on which transport solution to pursue. Rigid performance the criteria as simple as possible for decision makers and specifications can require inappropriate application of the general public to understand. certain solutions while ignoring the beneficial effect of · Identify and collect information. Analytical forecasting others. In evaluating the various LRMT alternatives available tools can be used to assist decision makers. Data should to governments, the government, as grantor, should ensure be gathered about the current situation in the geographic that it does not rigidly use standard technical specifications, area in which a transport solution is being discussed. Data but rather advocates a thorough examination of alternative on issues such as population size, land use, demand, and transport options and allows all modes to compete in their financing will be critical. Analytical models should be used best possible form for a given amount of public subsidy to produce forecasts for each of the key evaluation criteria, (Kain 1992). such as o Travel demand Different transport modes will have dissimilarities regarding o Network performance analysis (travel times, number their cost, complexity, and construction times. It will be ne- of transfers) o Environmental impact assessment (emissions and SECTION A cessary to develop comparison factors to allow for a uniform analysis of all considered alternatives. These comparison noise levels) factors could include the agreed opportunity cost of public o Costs (implementation, operating, maintenance, funds and the value of customer commuter time. Furthermore, recapitalization) the grantor should ensure that alternative analysis also · Evaluate alternative transport solutions. Concerted effort considers robust estimates for mode-specific parameters such should be made to consider the "right" alternatives and as upfront construction expenses, customer use, and planned to recognize that there is more than just one rapid transit operating costs. 4 transport solution. Guidelines can be developed that can ensure that each alternative proposal is developed to a 1.4.3 Alternative Analysis Guidelines competitive level where the proposal can be considered operationally feasible and reasonable both physically and Alternative analysis can be conducted according to the following financially. Various policy options can be tested within process (Zimmerman 2008): these proposals to see how they handle the stress (for · Establish the goals and objectives. A key element will example, tolls, traffic management, fares). be ensuring that each stakeholder understands the · Develop complete, objective, and reliable information. alternative analysis process and remembers that the The evaluation team should endeavor to maintain full analysis is not a feasibility study. · Evaluate current problems and future challenges. Analyze current and expected future conditions 4 Poor-quality inputs will yield similarly poor-quality results. It should be noted that LRMT projects (along with most other types under a scenario in which no project is developed of transport PPP projects, such as toll roads and toll bridges) have historically been prone to significant overoptimism regarding both at all. Identify the underlying causes of the current ridership and costs. transport issues and not just the symptoms. 13 LIGHT RAIL - LIGHT METRO Light Rail in Dublin, Ireland. Photo by and reproduced by kind permission of James Dwyer. transparency and to fully disclose an honest and · Congestion pricing and other tolls on private transport objective assessment of the benefits, costs, impacts, · Access for transport customers with disabilities and risks of each alternative proposal. Identified risks should be subjected to sensitivity analyses, and the For LRMT systems to realize the most positive outcomes, their credibility of these evaluations could be enhanced if size, scope, and cost require special consideration, and high conducted by an independent assessor. levels of integration must occur between various transportation · Make the case for the selected alternative. The ca- modes. LRMT links often form the "trunks" of urban trans- se should tell a clear, coherent, and concise story portation infrastructure. These trunks require support from about how the current transport problems will be feeder networks to realize efficiencies through greater passen- addressed by the selected alternative. It should ger volumes. Similarly, distribution networks must carry pa- explain the relative effectiveness and costs of the ssengers from trunk services to their final destinations. In- other alternatives being evaluated in addressing the tegrating with feeder and distribution networks (and other same transport problems. Finally, the case should be trunk links) can be a daunting task, especially when various made as to why the selected alternative is the best. services fall under different government entities. Many LRMT · Make the decision. On the basis of research and in- systems have opened to lower-than-expected ridership as a formation, policy makers should now be in a sound result of poor integration with feeder and distribution services position from which to make an informed decision. or poor coordination with the public entities that oversee them. Centralized transportation planning for entire metropolitan 1.4.4 Centralizing Planning for Metropolitan regions can help to prevent this outcome by eliminating the artificial obstacles to service coordination imposed by admi- Regions nistrative boundaries. Designing properly integrated, intelligently planned, and well- operated public transportation networks typically requires a centralized transportation or transit authority. Ideally, this 1.4.5 Strategic Metropolitan Transport group should have a mandate reaching across all modes of Planning urban transport and should also have the budgetary resources In addition to focusing on near-term system improvement, and legal authorization to implement new transport initiatives. centralized transport authorities also need to carry out effective In the near term, a centralized planning body should work to strategic metropolitan transport planning (SMTP), which focu- rationalize the following: ses on long-term policy goals and the investments needed to · Route layout (for both trunk and feeder networks) realize them. Good SMTP requires the following: · Service schedules · Consideration of--and coordination with--all modes · Fare levels for different services of transport in the urban environment. Seamless in- · Regulation of complementary and competing transport tegration between modes enhances the service quality 5 developers (such as private bus companies) of public transportation. It creates additional value for · Ticketing and ticket integration between modes customers, which results in greater ridership, increa- · Incorporation of nonmotorized transport sed satisfaction, and improved system sustainability. (such as bicycles) · Parking costs and related policies 5Such consideration should also include the manner in which the proposed LRMT system will CHAPTER integrate with road and vehicle usage. 1 · Planning for entire metropolitan areas across ad- Box 1.2 illustrates the importance of SMTP. ministrative and political boundaries. At the very least, such planning implies dialogue between stakeholder Box 1.2 institutions. Legislative acts may even be necessary to Integration and Bangkok's Skytrain empower selected institutions to champion projects Bangkok's Skytrain project illustrates the need for integrated UNDERSTANDING LRMT through to implementation. planning among various levels of government. During · Meaningful stakeholder consultation and involve- Skytrain's development and construction period, several ment. Incorporating feedback from citizens, busi- public institutions (including the Ministry of Transport, the nesses, agencies, labor organizations, and other Bangkok Metropolitan Authority, and the State Railway of groups is absolutely critical to SMTP. Thailand) were each implementing transportation solutions in Bangkok. Coordinated planning between these entities · A structured yet continuously evolving methodology was deficient or lacking entirely, and little consideration was for analyzing the role of private sector participation. given to integrating the systems. Unfortunately, this oversight Many countries have established dedicated PPP contributed to disappointing Skytrain ridership levels at units that perform both supervisory and technical opening. Preliminary estimates suggested that somewhere assistance functions. Concentrating expertise in between 600,000 and 700,000 people per day would ride the system. Actual ridership levels at opening were in the range of one national unit can help to ensure consistency and 150,000 passengers per day. System revenues were so low that provide valuable guidance for subsovereign insti- the concession company eventually became unable to meet tutions. its financial obligations. · Formal processes for planning, project evaluation, approval, and implementation. Legal requirements Skytrain's services offered clear value to customers by enabling them to avoid Bangkok's extreme traffic at a reasonable cost. SECTION A should ensure that all planning and decision making However, without supporting modes of transportation, many take place within these processes. Transparent re- of Bangkok's citizens could not access the system effectively. porting and public disclosure should also occur at More recent improvements in service integration (including the each stage of a project's evolution. incorporation of dedicated feeder buses) have helped increase · A long-term vision for transportation and quality Skytrain's ridership to approximately 460,000 passengers per weekday. For more information about Skytrain, see annex 1. of life in the urban environment. All decisions and processes should support the goals articulated within this vision. Planning, implementation, and assessment must be part of a continuous cycle of action aimed at achieving policy goals. · A decision to implement a new LRMT service and a subsequent decision to incorporate private sector involvement. These decisions should be part of a larger coordinated SMTP planning effort aimed at improving urban transportation through a variety of modes. · A bias-free evaluation process. The process leading up to the selection of LRMT must remain free from bias toward any one mode of transport. Choosing transport solutions should not involve predetermined outcomes or unreasonably inflated projections Train of Bangkok, Thailand. designed to bias decisions in one direction or another (Kumar and Zimmerman 2008). 15 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 1.4.6 Urban Development Public Transport of transit dependency than the general population and that low-income households in urban, walkable, and the "Peripheralization" of the Poor transit-oriented neighborhoods spent just 9 percent Rapid urban development can exacerbate disparities between of their incomes on transportation, while those in car- affluent and poor households, where increased real estate oriented neighborhoods spent 25 percent. values and correspondingly high rents result in geographic · Urban displacement can be beneficial when it allows separation of different socioeconomic classes. Gentrification the poor to move from congested districts close to can displace the urban poor to the peripheries of developing polluting employment to cleaner neighborhoods. It cities or into densely packed slums where basic infrastructure has been argued that urban displacement was one of services may be deficient or entirely lacking. Greater urban the main contributors to the improvement in public incomes can increase personal vehicle ownership, which health in developed industrial nations from 1890 decreases demand for public transportation services and also to 1940. Such displacement depends on attractive, produces additional negative externalities (such as pollution affordable transport. and congestion). Paradoxically, urban development can actually · A good public transport system should serve both the harm poor populations if they become isolated from desirable poor and the rich. The rich will be disproportionately jobs in developed urban areas because of poor transportation large transferees from private car use and will give access (Barone and Rebelo 2003). the political credibility for a subsidized service. Their aspirations will drive the quality of provision above Planners and policy makers need to pay special attention to the minimal provision for a social service for the poor, public transportation for the poor, because mobility is essential thus spreading operating costs over a wider customer to providing opportunities for development. However, serving base. The higher quality will prevent the aspirant poor populations can be challenging given lower affordability poor from transferring to private car use at the first limits and greater displacement from urban centers. Provi- economic opportunity. ding financially viable rail-based access can be especially di- fficult given higher upfront capital costs and the potential Annex 2 gives more thoughts on targeting the poor and access requirement for large operating subsidies. Nevertheless, there for all. are cases where rail-based solutions have been successfully implemented to serve poor populations (for example, the São Finally, planners should realize that access to public trans- Paulo Metro Line 4 extension project). portation is not de facto access to high-quality transportation. Lackluster services characterized by long transit times, Some further issues relating to peripheralization of the poor unreliability, numerous transfers, or excessive costs represent also merit consideration: a virtual tax on both the income of poor transport customers · Cities that are transit poor can impose additional cost and their quality of life. Whichever mode planners use to penalties on low-income households. A recent report reach poor customers, it should deliver high-quality service at by the U.S. Federal Transit Administration (2006) shows reasonable cost. that low-income households have a much higher rate CHAPTER 1 1.5 CHARACTERISTICS OF LRMT SYSTEMS LRMT systems come in a variety of forms (see table 1.1). Differentiating between types of services can be difficult, even for experienced experts. The one-off nature of projects often introduces a high level of subjectivity that complicates precise classification efforts. Inconsistent naming across systems further complicates this issue. For example, many LRMT systems labeled "Light Rail" are in fact medium-capacity metros. Unfortunately, there is no simple fix that can rectify a history of confused nomenclature, and readers may notice occasional discrepancies between classification and operational characteristics. Table 1.1 Characteristics of Various Types of LRMT Systems UNDERSTANDING LRMT Peak capacity (passengers per Common Revenue hour in peak Typical degree technical System type speed direction) of segregation traits Streetcar Low Low · No significant · Frequent street or tram (5,000 or less) degree of crossings segregation · Primarily at grade · Single-car rolling-stock configurations Light rail train Low­ Low­medium · Partially · Mostly at grade SECTION A medium (10,000-12,000) segregated · Single-and double car rolling-stock configurations Electric Very high Medium · Completely · Greater distances commuter rail (about 30,000) segregated between stations · Mostly at grade Grade-separated High Medium­high ·Completely ·Either elevated medium-capacity (15,000­30,000) segregated or underground "light" metro Grade-separated High High ·Completely ·Either elevated heavy metro (60,000 or more) segregated or underground, involving complex civil works Source: Author's compilation. 17 LIGHT RAIL - LIGHT METRO 7 For our purposes, definitions for different classes of LRMT systems traffic. Increased segregation allows for higher reve- and their typical applications include the following: nue speeds, improved service reliability, and greater · Streetcars and trams. These services are typically not passenger capacity. Many grade-separated medium- segregated from general traffic and carry proportionally capacity metros are inappropriately labeled as "light rail" fewer customers at slower speeds over shorter distances. on account of their similar rolling stock. Streetcars and trams are commonly found in and around · Grade-separated heavy metros. High population densi- downtown areas and often use a single-car configuration ties and limited physical space require these systems to for rolling stock. incorporate highly complex civil works--often including · Light rail trains. Most light rail systems include a mix substantial investments in underground construction. of segregated and nonsegregated rights of way. Light Grade-separated heavy metros use relatively large rail systems often serve downtown areas in addition to rolling-stock configurations (that is, many linked cars) and neighboring suburbs. Common light rail train systems have high revenue speeds when stations are sufficiently use two-car rolling-stock configurations with articulating spaced apart. These systems offer the greatest passenger joints between cars. This arrangement provides for capacities but also require the largest upfront investment greater passenger capacity while still allowing for tight of any LRMT solution (Halcrow Fox 2000). radius-cornering capabilities. · Electric commuter rail. Greater distances between sta- This broad spectrum of LRMT systems has been looked at be- tions allow electric commuter rail systems to achieve cause, despite significant operational or technological differences high revenue speeds or higher interstop speeds. These between modes, the issues of scheme development and invest- systems are particularly effective at creating rapid links ment requirements show considerable similarities, thereby allo- between urban centers and periphery communities. wing important lessons to be drawn. Electric commuter rail links in dense urban areas may involve complex civil works to achieve grade se- The focus on LRMT within the range of urban rail systems is shown 6 paration. in figure 1.1. At one extreme, we consider urban rail systems that · Grade-separated medium-capacity light metros. These are only partially segregated from general traffic (such as the systems may use rolling-stock technology similar to light Manchester Metrolink). At the other extreme, the focus could rail trains but typically incorporate greater complexity in apply to some rail initiatives best described as fully grade-separated their civil works to achieve full segregation from general medium-capacity metros (such as the Bangkok Skytrain). Figure 1.1 Scope of LRMT Schemes Considered Range of LRMT systems discussed within this text Grade- Electric separated Grade Streetcar or Light rail commuter medium- separated tram train rail capacity heavy ¨light¨ metro metro Increasing complexity of civil works, passenger capacity and vehicle speed Source: Dominic Patella 6 Electric commuter rail will have fewer stops and thus higher interstop speeds, but few passengers live or work at rail stations. Therefore, passengers will need a secondary mode of transport (walk, cycle, take a bus or taxi, use 7 It must be noted that the tendency in LRMT is to move transit to a second level to allow unfettered use of road space for the private car. This decision is the "kiss and ride" or "park and ride," and so forth) to access the station. political rather than economic. Given the greater space and energy efficiency Thus, the overall trip time and, hence, the generalized cost of a journey may be of public transport, it may be more efficient to hold traffic up to allow lower for a system that makes more stops and has a lower commercial speed rail vehicles to cross an intersection than to construct a grade-separated than for a system offering higher commercial speed but with more widely CHAPTER spaced stops. The challenge is for the grantor or government to find the optimum balance within the given circumstances. intersection. 1 Although tram and streetcar systems certainly qualify as LRMT and Mackett 1996). Influences from a multitude of factors systems, we do not focus on them because they do not show up may affect the decision to select or pursue certain investments as major PPPs in the territories we looked at. At the other end rather than others. For example, funding arrangements of the spectrum, we do not focus on grade-separated heavy between local and national governments can create incentives metros because the technical complexity of these systems for local planners to pursue riskier, higher-cost investments and their extremely high capital costs make them significantly when national governments pay the majority of upfront different from the other systems. costs and project overruns (Pickrell 1992). Prestige associated with different transportation modes can also be a major UNDERSTANDING LRMT factor influencing the decision-making process. There are 1.6 INFLUENCES ON LRMT POLICY DECISIONS many examples of project promoters championing LRMT solutions because they are seen to support the image of a 1.6.1 Recommendations to Policy Makers modern "European-like" city. Some would argue that such Policy makers should ensure that a concerted effort is made to advocacy efforts may not necessarily be a bad thing, because conduct a rigorous alternative options analysis prior to making many mainland European cities are physically attractive, a definitive decision on whether to proceed with an LRMT environmentally responsible, and attractive to inward invest- 8 transport solution. It is advisable to perform project planning ment. Politics and other influences will inevitably affect any in two distinct phases (Mitric 1998): public transportation investment decision and any decision to 1. Economic and financial evaluation of multiple transport pursue a PPP. Planners need to take care to minimize the impact options. The evaluation should be performed using a low to of these influences on PPP policy or investment decisions. intermediate level of accuracy of cost and traffic forecasts and should be cross-referenced to the financial capacity of Some LRMT proponents have also argued that customers the city. The main point of the exercise is not to settle on naturally prefer rail over bus transportation, thus limiting the one option but to decide which option should be studied in selection process between transportation alternatives to SECTION A greater detail in phase 2 of the project planning cycle. either rail or nothing. However, this preference often assumes 2. Financial feasibility study of preferred option. The feasi- disparities between bus and rail services that depend largely on bility study should be configured to reflect the needs of system design (degree of segregation, quality of rolling stock, the public and private sectors. The traffic and revenue dependability, and so forth) rather than any mode-specific model should focus on the local context (such as the differences. Presumptions about service quality can create current alternative modes of transport or potential threats formidable challenges, especially for bus-based transportation to ridership forecasts from other new services). If, after solutions, which may be seen to involve major issues, including conducting the second phase, the government finds that traffic congestion, poor scheduling, environmental pollution, it cannot afford the proposed system or that forecasts and possibly limitation of service provision to only the poor. suggest the tentatively preferred option is unsuitable, the government can either repeat the stage and focus These issues are at the core of frequent debates on the on another option or scale down the proposals for the choice between bus rapid transit (BRT) and LRMT options. preferred option. For example, the Maryland Transit Authority recently decided to proceed with a 16-mile LRMT project for the northern su- 1.6.2 Choice of LRMT versus Other Transport burbs of Washington, D.C. (the Purple Line), after evaluating a number of BRT and LRMT options. Table 1.2 summarizes the Solutions reported advantages and disadvantages of these options for Public transportation investment decisions are in many ins- this particular transit corridor project. tances political in nature and are made within the context of existing policy, legislative, and economic realities (Edwards 8 In many cities of the United Kingdom and United States, there has been a tendency toward urban decay and middle-class flight, resulting in suburban sprawl and an automobile culture. 19 LIGHT RAIL - LIGHT METRO Developing an effective information strategy is often ne- cessary to show the various options for quality and depend- Table 1.2 able urban transport services for both rail and alternative Comparison between LRMT and BRT modes. In the case of the proposed Purple Line, a Web site (http://www.purplelinemd.com) was established for the LRMT BRT project. The Web site disclosed, among other things, the Alternatives Analysis/Draft Environmental Impact Statement, Pros: Pros: which eva-luated a number of alternative transit options, · Is seen as more · Is less expensive to introduce including the following: permanent · Is easier to implement in pieces · Is viewed as superior · Has greater route flexibility · A no-build alternative at promoting economic · Allows bus use of designated · A transportation systems management alternative development around lanes on local streets has stations greater route flexibility · Three BRT technology­build alternatives · Attracts more riders · Three LRMT technology­build alternatives because considered faster and more reliable A recent study conducted by researchers from the Massa- Cons: Cons: chusetts Institute of Technology and Japan's Nagoya University · Is more expensive · Has less proven track record sought to test for a customer bias toward rail services (Ben- than BRT on attracting development · Faces strong competition around stations Akiva and Morikawa 2002). Results from the study suggest from government · Faces greater developer that public transportation customers do not have an inherent construction grants reluctance to invest because · Deals with tight government bus routes are viewed preference for either rail or bus when quantifiable service- transportation funds as less permanent than rail quality metrics were equal between the systems (that is, · Attracts fewer riders because viewed as second-class system similar travel times, dependability, number of transfers, and so forth). The study also found that a bias for rail emerged only Source: Washington Post, January 8, 2009. when such systems delivered superior service at appropriate fares levels. The lesson for policy makers is therefore quite clear: LRMT must deliver superior price-adjusted performance to offer value and attract customers. Relying on some inhe- rent affinity for LRMT is unlikely to be a strategy for successful implementation. Integration of LRMT with other transport services needs to be considered under local or national transport plans. In chapter 2, we discuss some of the technical and related policy issues that need to be considered. See also box 1.3 for a case study. Source: http://www.sxc.hu/ Box 1.3 Encouraging Switching with the Gautrain 1.6.3 Environmental Issues Rapid Rail Link Increasing environmental awareness is leading many institu- tions to pursue transport solutions aimed at reducing emission UNDERSTANDING LRMT South Africa's Gautrain has been designed with the view to and traffic congestion in densely populated city centers. Clean attract customers who would otherwise drive between Tshwane transport policies fall within the wider environmental aims (Pretoria) or O. R. Tambo International Airport and Johannesburg. Traffic congestion along South Africa's N1/M1 highway corridor of the Millennium Development Goals (World Bank 2008). increased 7 percent each year between 1995 and 2005. Estimates It is now generally accepted that global climate change is accounting for direct costs, lost work time, and expenses related occurring and that the transport sector is responsible for to increased accident rates value the ill effects of this increased about 15 percent of emissions of the gases contributing to congestion at R 300 million annually (26 million). Commutes along global warming in industrial countries (Gwilliam 2002). The the 50-kilometer route between Tshwane and Johannesburg can average as long as two hours. By comparison, Gautrain's service high growth in transport demand means that emissions should reduce travel times to a more manageable 42 minutes. attributable to transport will increase: forecasts suggest that The grantor has taken into account the cost of driving the N1/M1 expected energy use in developing countries will increase corridor and priced Gautrain's fares accordingly. Similarly, tariffs from 32 percent of the global transport total in 2000 to 46 for riding Gautrain from O. R. Tambo airport to Sandton reflect percent in 2030 (World Bank 2008). This increase in motorized the costs of competing taxis that travelers would otherwise take. transport is concentrated in urban areas and should be a vital consideration in the design of urban transport policies. The grantor foresaw problems with integrating Gautrain with SECTION A other transportation services early in the project's development The energy efficiency of specific transport modes is crucial stages: coordination between municipal governments, national not just for economic reasons, but also for reducing overall agencies, and independent bus transportation authorities had historically been poor. Spatial planning in South Africa has also environmental impact. In many instances, the case for LRMT resulted in low population densities, which would eventually services relies heavily on potential improvements in urban limit Gautrain's walk-on ridership. Furthermore, market analysis vehicular emissions, with the knowledge that rail is a more showed that Gautrain's target customer group viewed existing efficient mode of transport than road in terms of carbon public transportation as "a transport mode of last resort" on emissions per tonne or passenger-kilometer. Research by account of long travel times, poor timeliness, security concerns, and generally poor perceptions. Together these considerations the U.K. Office of Rail Regulation has demonstrated that suggested that simply integrating Gautrain with existing public electrically powered trains emit one-fifth of the carbon dioxide transportation services would not compel significant conversion emitted by petrol-using cars (figure 1.2). from private transportation. To avoid initial integration issues and to improve ridership de- mand, Gautrain's PPP agreement includes its own cobranded feeder­distribution bus service. The Bombela consortium (Gautrain's private concessionaire) will operate this network alongside rail services. A bus-specific performance management system will help to ensure high-quality bus links and will include key performance indicators emphasizing both safety and security. Selected Gautrain stations will also feature "park-and- ride" and "kiss-and-ride" facilities aimed at complementing private vehicle transportation and allowing customers to reduce Gautrain, Gauteng Province, South Africa. personal vehicle use. For more information about the Gautrain Rapid Rail Link, see annex 1. 21 LIGHT RAIL - LIGHT METRO Tram in Strasbourg, France. Photo by and reproduced by kind permission of Rainer Hesse. Figure 1.2 consideration if the transport policy is based on a desire to Carbon Dioxide Emissions in the United convince drivers to leave their cars at home and use public transportation. Although the actual magnitude of any emissions Kingdom, by Passenger Mode savings ultimately depends on methods used for power generation and the comparable efficiency of automobiles, many public authorities have pursued LRMT expressly seeking to realize environmental benefits. Clearly transport policies should not be predicated on the basis of the environmental benefits alone, because such a basis does not reflect the reality of the economic, social, and political considerations that preface major policy decisions and programs. 120 r Good policies will take into account local circumstances and ete 100 om Pet rol capabilities. In the richest countries, which are responsible Car il Bus for two-thirds of transport-related emissions, and in the large, 80 er-k sel Die n 104 fast-growing middle-income countries, adopting policies aimed 60 g tric Trai 76 ssen Elec in Source: U.K. Office primarily at reducing greenhouse gas emissions is essential to 40 Tra 55 of Rail Regulation 2005. tackling the global problem. Many small, poor countries need /pa 20 22 to explore the synergies between local and global benefits with ms 0 Gra a view to avoiding carbon-intensive growth by shifting policy direction early and taking advantage of carbon financing or Electrically powered rolling stock can help lower emissions in financing related to climate change (World Bank 2008). the urban environment by reducing the reliance on motorized personal transportation. Rail technology itself contributes 1.7 ACHIEVING VALUE FOR MONEY to reduced greenhouse gas emissions through regenerative It is important for procuring authorities to ensure that any LRMT braking, which uses the motors as brakes. Rather than being PPP project is a suitable procurement route that represents good wasted as heat, the motors act as generators and convert the value for money (VfM). We use the term VfM in this book in the surplus energy into electricity, which is then returned to the same way that it is used by Her Majesty's (HM) Treasury in the overhead wire or supply rail. Studies have shown that trains United Kingdom: "VfM is defined as the optimum combination making frequent stops can save around 20 percent in energy of whole-of-life costs and quality (or fitness for purpose) of the consumption. good or service to meet the user's requirement" (HM Treasury 2006: 7). In other words, procurement should not be based At the same time, the environmental advantages implied solely on the lowest-cost bid. According to HM Treasury the key by LRMT schemes rely on attracting a sufficient number of drivers of VfM are as follows: customers who would otherwise have relied on motorized · Optimum allocation of risks between the various personal transportation. As noted earlier in this chapter, parties (see chapter 4). some proponents have argued that customers have a natural · Focus on whole-life-cycle costs of the asset rather than preference for rail over bus transportation--an important on only the upfront costs involved. · Integrated planning and design of facilities-related CHAPTER 1 services through an early assessment of whether the possible integration of asset and nonasset services should deliver VfM 1.7.1 Affordability Determining the affordability of LRMT PPPs requires consi- benefits. derations beyond upfront capital subsidies and project · Use of an outputs specification approach to describe the grantor's requirements, which, among other things, allows potential bidders development costs. Providing appropriate rates of return to develop innovative approaches to satisfying the service needs of for private partners while keeping fares affordable will often the grantor (see chapter 5). require ongoing operating and maintenance subsidies, which · Rigorously executed transfer of risks to the parties that are res- are paid for by public sources. Even if public authorities have UNDERSTANDING LRMT ponsible for them, thus ensuring that the allocation of risks can be access to initial funds, later funding requirements can exceed enforced and that the costs associated with the risks are actually public budgetary capacity. The quality of LRMT services will borne by the parties in the manner allocated and agreed (see inevitably suffer substantially when public institutions must chapter 4). forgo continuing investment requirements on account of · Sufficient flexibility to make certain that any changes to the original insufficient funds. Planners must accordingly consider the specification or requirements of the grantor and the effects of long-term affordability of new services. Later chapters will changing technology or delivery methods can be accommodated discuss mechanisms for public support and their relative me- during the life of the project at a reasonable cost to ensure overall rits in more detail. VfM (see chapter 7). · Sufficient incentives within the procurement structure and the project contracts to ensure that assets and services are developed Very few public transportation services collect sufficient and delivered in a timely, efficient, and effective manner, including fare revenues to cover system operating costs. Although both rewards and deductions (see chapters 5 and 7). other sources of income (from property development and · Contract term determined with reference to the period over which advertising) can offset operating losses, most initiatives the grantor can reasonably predict the requirement of the services require some form of operating subsidy to keep fares low SECTION A being procured. This element will require careful consideration of, and attract ridership. Differences between customer fares among other factors, potential changes in end-use requirements, and actual operating costs are one way to gauge the level of public policy changes, design life of the asset, number of major public support received. Comparisons across systems require asset upgrades or refurbishments during the period of the contract, some normalizing factor to account for differences in size and potential changes in the way services could be delivered (such as locality. Accordingly, the farebox ratio is a common industry technical advances), and arrangements for the asset at expiry of metric used to consistently assess the proportion of operating the contract (see chapters 5 and 7). · Sufficient skills and expertise on the part of both the public and the costs covered by customer fares as follows: private sectors and the effective use of this expertise during the procurement process and subsequent delivery of the project. Farebox Revenues · Management of the scale and complexity of the procurement Farebox Ratio = x 100% Operating Costs to ensure that costs are not disproportionate to the underlying project (see chapter 8). As an indication of how much operating subsidy new services The procurement process must be well planned, managed, and executed might require, figure 1.3 shows the distribution of farebox and must be transparent for these VfM drivers to be effective and for overall ratios for U.S. light rail systems that reported to the National VfM achieved (see chapter 8). Transit Database in 2006. The average farebox recovery ratio for the data shown here is approximately 22 percent. It is worth noting that even the most "profitable" U.S. light rail systems reported farebox ratios of around 40 to 50 percent. 23 LIGHT RAIL - LIGHT METRO Figure 1.3 1.7.2 Contingent Liabilities Distribution of Farebox Recovery Ratios for Contingent liabilities represent commitments to future ex- U.S. Light Rail Systems Reporting to the U.S. penditure if certain events occur (HM Treasury 2003). Many National Transit Database in 2006 of the risks associated with private sector participation in infrastructure create sizable contingent liabilities for public institutions. Because such liabilities are uncertain and do not correspond to definite cash-flow events, simply relying on 8 Farebox ratios for cash-based budgetary analysis will fail to take into account american light rail 5 systems reporting in 2006 their potential impact on affordability. For example, a public 2 guarantee on an LRMT project's debt will not result in a direct 7 cash outflow, but nevertheless, the value of such a guarantee 1 has potentially enormous future budgetary implications that 9 5 should be considered. The challenge for planners is valuing and # of isted fa of l 8 55% accounting for such contingent liabilities appropriately. Typical syst 7 45% methods used for this purpose include actuarial or statistical 6 35% o techniques, econometric models, and contingent claims rati ems ebox ra 5 25% 15% ery analysis (Lewis and Mody 1997). 4 cov r 5% x re with tios 3 2 eb o Contingent liabilities and the opportunity cost of cash reserves Far +/- 5 1 0 established to cover their potential impacts should form an Source: U.S. National Transit Database important component of affordability analysis. Later sections % (http://www.ntdprogram.gov/ntdprogram/). of this book will discuss valuing risks and contingent liabilities in greater detail. The United States is somewhat unique given its higher rates of automobile ownership and lower urban population densities relative to other developed nations. By contrast, U.K. tram 1.7.3 Budgetary Implications systems operate at ratios greater than 100 percent. However, The budgetary implications of LRMT initiatives have a major U.S. light rail farebox ratios do offer an important lesson effect on public sector finances. The massive nature of LRMT regarding the subsidies that rail-based public transportation expenditures has to be justified against the opportunity cost often requires. Planning efforts for new LRMT services should of scarce public funds. Planners should also closely consider include thorough examination of tariff shortfalls--and hence contingent liabilities associated with private sector participation operating subsidies--necessary to achieve policy goals such as to ensure that LRMT services do not require future bailouts at affordability or greater system ridership. Institutional budgets great cost to public institutions and taxpayers. must be robust enough to accommodate additional recurring expenses from new LRMT initiatives. Beyond the obvious need 1.7.4 Competitiveness of LRMT Systems for balancing budgets, private investors will seek assurances Transportation is a competitive business (see box 1.4). Unlike that public partners can meet their obligations throughout an the case with other infrastructure sectors, such as water and LRMT project's life. electricity, exclusive rights to operating public transportation systems such as LRMT are not pure monopolies. Customers CHAPTER 1 make daily choices between various services on the basis of the benefits and value that customers derive from service myriad factors, including accessibility, price, speed, reliability, (Kumar and Zimmerman 2008). LRMT planners must realize comfort, safety, and overall convenience. Many LRMT initiatives that ridership is never a given, despite the amount of money intentionally compete with other modes of transport (most spent on new routes. To attract ridership, LRMT must offer notably private automobiles) in an effort to realize some of the some compelling value proposition to potential customers. UNDERSTANDING LRMT policy goals discussed in this chapter. Policy instruments such Systems that rely heavily on tariff revenues for support should as subsidies, taxes, and capital grants can alter the competitive also consider customers' willingness and ability to pay for given landscape and influence LRMT's relative attractiveness. levels of investment. Considering the effects of these interventions is especially important when developing integrated transportation policy Planning for competitive LRMT services goes beyond shrewd and contracts for private sector participation. In some of the one-time tariff setting. Although fare levels can clearly affect cases discussed here, planners have chosen not to allocate ridership, factors such as comfort, safety, and convenience, as demand risks to private partners given that public policies previously discussed, will also influence system customer use. exert such large influences on the relative attractiveness of In addition, planners should consider contractual mechanisms LRMT. Later sections will discuss this aspect in more detail. that will allow LRMT developers to shape demand through Ridership levels for any public transportation system signal price adjustments in accordance with appropriately designed Box 1.4 SECTION A Competitiveness and France's Orlyval System The Orly VAL system (also known as Orlyval) linking Paris's Orly Airport to the Réseau Express Régional (RER) train network demonstrates the importance of accounting for competition when planning public transport initiatives. Orlyval was an early attempt at full private financing for LRMT-like infrastructure. The project eventually achieved infamy when actual ridership was so low that the concession company required financial restructuring and public bailout shortly after opening for revenue operations. Most references to Orlyval mention the project's high leverage ratio (roughly eight to one at financial close) as one reason for the concession's failure. Greater leverage certainly contributed to Orlyval's insolvency by requiring substantial cash flow to support debt service. However, Orlyval's financial troubles also resulted from insufficient project income on account of unexpectedly low ridership. Initial ridership estimates may have been entirely unreasonable. However, several sources also mention that Orlyval's planners simply failed to sufficiently account for competition from other public transport services. Choices for accessing Orly Airport at the time included · The Orlyval, which departed from Antony station on the B Line of the RER, cost approximately FF 55 (at opening), and took approximately eight minutes to reach Orly Airport. · The Orlybus, which departed from Denfert-Rochereau station (six stops before Antony station on the RER B line), cost FF 21, and took approximately 25 minutes to reach Orly Airport. · The Jetbus, which departed from Villejuif Métro station, cost roughly FF 18, and took approximately 15 minutes to reach Orly Airport. · Orlyrail, which combined RER C Line services with a shuttle bus link to Orly Airport from Rungis­La Fraternelle railway station. In 1992, the Orlyrail services were ferrying more than 1 million passengers per year to Orly Airport. In addition to lost revenues resulting from competing transportation services, Orlyval also suffered from improvements in airport access for private vehicles. The new A86 road--along with a 30 percent increase in parking spaces, provided by Aéroports de Paris--further reduced demand for Orlyval's services. Orlyval eventually carried approximately 1.5 million passengers per year shortly after entering service instead of the 4 million or more originally expected. Following the concession's termination, operations were transferred to France's publicly owned Régie Autonome des Transports Parisiens. 25 LIGHT RAIL - LIGHT METRO incentive structures. In many cases, fare regimes are less than optimal on account of politicization or poorly considered tariff controls. Fares for some LRMT systems around the world may actually be regulated too low, preventing developers from exploiting pricing power to increase farebox ratios (and reduce public support) without overly adverse effects on ridership levels. 1.7.5 LRMT Service for Poor Populations Many LRMT initiatives receive criticism for catering largely to middle-class customers while failing to gain ridership among lower-income groups. Targeting LRMT services and subsidies toward poor populations can be an intelligent strategy for reducing poverty and increasing development. However, plan- ners must realize that these subsidies may be better spent elsewhere--especially if the poor lack other basic infrastructure services (see box 1.5). Box 1.5 Opportunity Cost of Public Funds and St. Louis's MetroLink When considering the appropriateness of using LRMT to serve poor populations, planners should be cognizant of the opportunity costs associated with subsidies required to make services affordable. As an example of this situation, one economist examined the annual operating and capital sub- sidy provided to the MetroLink system in St. Louis, Missouri in the United States (US$133 million in 2001). On the basis of this estimate, MetroLink's annual subsidies would be enough to purchase new Toyota Prius hybrid vehicles every five years for each poor customer riding the system! Leftover subsidies following initial vehicle purchases could also provide each new Prius owner with an annual operating and maintenance allowance of US$6,000 while still leaving enough money to give every other nonpoor MetroLink customer US$1,045 per year to use on other transportation services in lieu of LRMT. This analysis has, however, drawn criticism for not taking into account the cost of highway space and environmental costs, and it should also be borne in mind that the operating and capital costs of the LRMT system in St. Louis are lower than those of the bus operation for the city. Although the alternative of purchasing hybrid vehicles for poor transportation customers is an extreme (and somewhat insincere) example, this analysis does demonstrate the challenge of serving poor populations with LRMT access. LRMT's great expense requires thoughtful consideration and a sound business model for actually delivering benefits at reasonable costs. CHAPTER 1 Tram in Bucarest, Romania. Photo by and reproduced by kind permission of Rainer Hesse. 1.7.6 Ensuring Access for All ramps or raised boarding platforms at bus stops. Providing good access to customers with disabilities requires important Planners, developers and policy makers have a moral obligation consideration when evaluating proposals and crafting PPP to ensure that persons with disabilities enjoy good access to specifications for new LRMT services. Failing to properly incor- LRMT services. Indeed, in many jurisdictions, it is now a legal porate such considerations can result in substandard facilities or obligation (see box 1.6). large retrofitting expenditures later on (Takamine 2004). Public-private partnership agreements in LRMT should re- Accessibility is a wide-ranging subject, and annex 2 contains fur- cognize this fact and include provisions addressing basic UNDERSTANDING LRMT ther thoughts on the issue. accessibility features such as the following · Lift access to underground or elevated structures · Designated dropoff points with ample room for spe- 1.8 THE CUSTOMER APPROACH cialized vehicles Our approach takes the philosophy that LRMT provision is driven · Ramps where appropriate by the need to provide good and effective transport services. · Accessible lavatory facilities Therefore, our focus is on customers, and we use this term · Directional signage throughout, instead of users. Simply put, customers (unlike · Tactile guidance systems users) have rights, including · Wider fare gates for accommodating wheelchairs · The right to safety (also helpful to passengers carrying baggage or par- · The right to be informed cels) · The right to choose · Generally barrier-free facilities · The right to be heard · Appropriately designed gaps between platforms and · The right to satisfaction of basic needs rolling stock · The right to redress · The right to education SECTION A · The right to a healthy environment Box 1.6 (United Nations 2003) Accessibility and Singapore's Mass Rapid Transit Network In the planning and implementation of LRMT systems, planners and developers alike need to ensure that customers' rights (as The government of Singapore has recently enhanced accessi- well as those of other stakeholders) are protected. bility throughout its Mass Rapid Transit (MRT) network in res- ponse to the needs of an aging population. Beginning in 1995, 48 existing MRT stations have undergone upgrades to comply with the Code of Barrier-Free Accessibility in Buildings. Total costs for these upgrades exceeded US$80 million. Along with improvements to its MRT stations, Singapore has also made substantial efforts to incorporate low-floor buses throughout its road-based public transportation network. The full content of this report is available at http://www.worldbank.org/urbantransport. Ensuring good access also includes working to improve trans- port services that integrate with LRMT. For example, feeder networks should include low-floor buses with extendable Source: http://www.sxc.hu/ 27 LIGHT RAIL - LIGHT METRO CHAPTER TECHNICAL ISSUES 2 Tram in Strasbourg, France. Photo by and reproduced by kind permission of Rainer Hesse. Technical Issues Light rail­light metro transit (LRMT) public-private part- scheme must be designed and constructed to meet physical nership (PPP) projects have a unique "footprint" that is local conditions, and the construction and operation must particularly influenced by the physical and technical charac- be arranged to allow existing urban activities to continue teristics of LRMT. In this chapter, we review some key with a minimum of disturbance. technical issues that influence all aspects of developing any LRMT PPP scheme. Following the philosophy of our overall The resulting complex construction works have particular UNDERSTANDING LRMT approach, we give the background to some of these issues characteristics and needs, including the following and draw conclusions on some of the key consequences · A number of specialist contractors for a PPP scheme. We do not explain all technical design · Coordination of complex design and construction points in this work or provide a technical design primer, but · Subsequent effect of complexity on cost and we show the importance of technical design issues in the program PPP context. In other chapters, we link technical design to · A variety of contractual issues, including detailed PPP policy, design, and contractual issues. o Different contract terms for various contract elements LRMT schemes vary in size and complexity, making the o Long-term guarantees, which must be enforced projects extremely capital intensive, which is one of o Elements with varying construction life the main drivers to using some form of PPP. This aspect, and subsequent renewal needs together with other key issues, has a particular effect on the o Varying maintenance requirements financing, construction, and operation and maintenance of o Integration issues with other systems the PPP scheme, all of which must be reflected in the policy o Closures and delays because of problems approach, design, and contractual form of the scheme. in existing systems, such as the effect of SECTION A Some key issues include the following segregated versus nonsegregated LRMT · Complexity and size of projects systems (discussed later) · Route selection o Land purchase and wayleaves · Selection rolling stock · Segregated versus nonsegregated systems The very scope and complexity of these projects result Integration in schemes requiring a major investment in capital infra- · Capacity and service reliability structure, although associated long-term operating and · Planning for asset management maintenance costs (operating costs per passenger kilome- · Ticketing and barriers ter) are often lower than for other modes. Annex 1 includes a summary table that gives some financial details of recent 2.1 COMPLEXITY AND SIZE OF PROJECTS schemes. 1 New LRMT schemes are typically complex in terms of construction and operation. They often involve a variety of infrastructure elements (such as roadways, bridges, tunnels, and stations); rolling stock; and mechanical and 1 The figures are from published budget data and are offered to show order of magnitude, but care should be used in electrical equipment (including traction power distribu- extrapolating these results because it has not been possible to tion systems, signaling, barriers, and ticketing), together make a rigorous comparison of the base data used nor to validate against a common content, price, or time basis. with the need to ensure effective long-term operation and maintenance of these elements. Additionally, the LRMT 29 LIGHT RAIL - LIGHT METRO 2.1.1 Effect on LRMT Table 2.1 Complexity of construction brings complexity of design, contract management, and long-term operation. The size of Cost of New LRMT Systems, Based projects directly affects the need for high levels of long-term on Vertical Alignment investment and associated public subsidy. All in cost (US$ million Construction and construction risk are generally a major part per route-kilometer of scheme costs. The complexity and size affect the program, Vertical alignment at year 2000 prices)a Ratio and the intensive due diligence that is normally carried out by investors and lenders reflects this complexity. Contract At-grade 15­30 1.0 monitoring and control, both at the construction and the long-term operation stages, must be well designed and imple- mented to accommodate a project of this size and complexity. Elevated 30­75 2.0­2.5 2.1.2 Budget Estimation of System Costs and Underground 60­180 4.0­6.0 Influential Factors A study commissioned by the United Kingdom's Department for Source: Halcrow Fox 2000. a. These costs are order of magnitude costs for comparison International Development and the World Bank (Halcrow Fox purposes only. 2000) offered the approximations shown in table 2.1 for the cost of new metro-like systems depending on their vertical alignment. This same study also assessed and qualitatively ranked the effects of a variety of factors on the total costs of these systems, as shown in table 2.2. Also of note is evidence placed before the U.K. Parliamentary 2 Information was provided by Scott McIntosh, technical director, Light Rail and Trams, Mott MacDonald. Select Committee in 1999 to 2000 that showed costs as illustrated 2 in table 2.3. CHAPTER Source: http://www.sxc.hu/ 2 Table 2.2 Effect of Physical, Financial, and Other Factors on Cost Factor Effect on cost Physical · Whether the project was a new system UNDERSTANDING LRMT or a progressive extension Dominant to an existing system · Ground conditions (related to underground construction Very large and foundations for elevated viaducts) · Urban constraints, topography, and natural factors (related to need for utilities diversion, proximity of route alignment to existing buildings Large and thoroughfares, seismic considerations, and environmental constraints) · System features (length or weight of trains, desire to use stations as civil Small­moderate defense shelters, air-conditioning SECTION A requirements, special access, and so forth) · Design and safety requirements Large · Financial and other factors Very large Financing · Land costs Moderate · Competition in the equipment supply and construction market Moderate · Labor costs Small­moderate · Taxes and duties Small · Freight costs Small · Quality of management or organization Dominant of implementing body Source: Halcrow Fox 2000. 31 LIGHT RAIL - LIGHT METRO Table 2.3 Costs of LRMT Systems in the United Kingdom Cost per System length a kilometer Location (kilometers) Type Cost (£ million) (£ million) Source: Evidence placed before the U.K. Parliamentary Select Committee in 1999 to 2000, as provided from Scott McIntosh, technical director, Light Rail and Trams, Mott MacDonald. a. Final costs at end of construction, costs not inflated, between 1992 and 1999. Source: http://www.sxc.hu/ A wider range of data (see table 2.4) inflated to fiscal year 2007 gives the following results: · Average over all tramways: £15.6 million per kilometer · Average over all tramways after discarding highest and lowest figures: £15.1 million per kilometer · Average over all underground systems: £170.6 million per kilometer · Average over all underground systems after discarding highest and lowest figures: £133 million per kilometer Table 2.4 Costs of LRMT Systems in Various Cities Worldwide UNDERSTANDING LRMT Cost per Length Cost kilometer Inflated cost System Type (kilometers) (£ million) (£ million) to end-2007 SECTION A Source: Evidence placed before the U.K. Parliamentary Select Committee in 1999 to 2000, as provided from Scott McIntosh, technical director, 33 Light Rail and Trams, Mott MacDonald. LIGHT RAIL - LIGHT METRO In Hannover, Germany, an elevated platform fitting into the urban environment. Most important, this analysis concludes that one kilometer of Box 2.1 an LRMT system costs from 9 to 11 percent of the cost of one Route Alignment and Kuala Lumpur's kilometer of an underground system. STAR and PUTRA Lines Data used for the preparation of an elevated railway in Europe Kuala Lumpur's STAR line began as an unsolicited proposal by show that although the cost of preparing the formation for a private developer (Taylor Woodrow/AEG Schienenfahrzeuge laying a twin track line on the surface was approximately £400 GmbH). The STAR system's original route took advantage of per linear meter, the cost of a viaduct to support the twin track existing heavy rail rights-of-way that had become unused. A was from £9,300 to £13,100 per linear meter--a ratio of 1:23 to build-operate-transfer concession with a 60-year lease provided 3 the contractual mechanism for private sector participation in the 1:33 on this single element. Similar figures would probably system's initial design, construction, operation, and maintenance. apply to stations and other infrastructure. STAR's sister system, PUTRA, was awarded as a concession to Renong Bhd, a Malaysian conglomerate with significant experience building toll road concessions. 2.2 ROUTE SELECTION Since opening in 1996, the STAR system has approximately Route selection is at the core of any LRMT project. For example, doubled its ridership. Even with this increase in ridership, STAR in Kuala Lumpur, the STAR (Sistem Transit Aliran Ringan) LRMT still operates only at approximately 60 percent of its original designed capacity. PUTRA has achieved greater ridership and scheme ran along an existing rail track that connected areas currently operates near 140 percent capacity. Whereas STAR's already served by other forms of public transport. In contrast, original route layout followed an existing unused industrial rail the PUTRA (Projek Usahasama Transit Ringan Automatik) line, PUTRA's route was intentionally designed to serve densely scheme, also in Kuala Lumpur, was designed to attract car populated middle-class neighborhoods where LRMT offered an users to LRMT by serving commercial and other areas more attractive transportation alternative over private car use. This difference in route alignment is often cited as a reason for the attractive to these higher-income riders, with a secondary dissimilarities in ridership performance of the two lines. objective of bringing an associated reduction in overall traffic congestion and environmental benefits. Many politicians push LRMT structures are unique because they do not represent a for the use of existing or disused railway formations for LRMT, full monopoly and happen to compete with other modes of believing that this approach will arouse less controversy. transport. Optimal route selection is crucial to ensure that the Although this perception may be true, the corridors are useful grantor's overall objectives are met. As a result, the grantor only if they serve significant traffic objectives. Kuala Lumpur's usually takes the main responsibility for selecting the route. STAR system shows the disadvantage of this approach (box 2.1). However, under some PPP arrangements, the exact alignment may be subject to a detailed agreement with the developer based on technical and other considerations. The public entity in charge of transport policy should have route location in mind when deciding to grant an LRMT PPP arrangement. Route location directly affects the demand for LRMT services. 3 Information was provided by Scott McIntosh, technical director, Market testing and integration with other modes of transport Light Rail and Trams, Mott MacDonald. as well as evaluation of possible feeder systems and network connections all affect the potential outcome of the PPP arrangement. CHAPTER 2 Light Rail Strasbourg, France. Photo by and reproduced by kind permission of Rainer Hesse. 2.2.1 Effect on LRMT 2.3.1 Competition with Other Forms Route selection is at the heart of any LRMT scheme design of Transport and implementation. Not only does routing affect demand Although in other sectors, competition (and thus competitive and ridership objectives, but also it has a direct effect on the tension) within the sector is sought as a means of promoting overall cost of the capital scheme and thus the level of funding increased efficiency, it would be impractical to establish two LRMT UNDERSTANDING LRMT required. systems to compete for the same route and traffic. It could be possible to establish separate developers for different sections of 2.3 INTEGRATION the route (for example, for system extensions) on large systems. The level of integration is the extent to which the planning and Competitive benchmarking would then allow comparison of long- operation of the individual urban transport services are linked. term operation, and some measure of the relative effectiveness This concept is an important consideration in the development of each developer could be made. Separate operation might and implementation of an LRMT scheme, because in many also be considered where local or national procurement rules ways, the individual alternative urban transport systems can prohibit awarding system extensions. However, the consensus be seen as potential and direct competition for ridership on the on this issue is that it would create additional investment, LRMT system. In more defined urban transport systems, the construction, and management and operational costs, and the LRMT system is developed within a full master plan for urban added complication would be difficult to justify. transport. The individual subsystems, such as buses, taxis, and LRMT, can be integrated to ensure that the overall system In the urban transport sector, the direct competition for LRMT works in the most effectively planned manner. This integrated ridership includes the existing bus, taxi, and train services, as well SECTION A approach can be achieved either by direct ownership and as private car use. The level of integration of the urban transport control of the individual elements by the public sector or by services influences the ridership and economics of the LRMT regulation. system. A well-designed transport plan balances the needs of these services and service developers, with the aim of creating Without a level playing field among private vehicles, buses, a level playing field for all. Such aims can be accomplished and rail, the LRMT system's financial performance will be more through licensing and tariff setting or through traffic priority and 4 difficult to ensure. However, it should be noted that the level operation rules (for example, LRMT priority lanes). playing field arises either from removing the hidden subsidies for private cars and making private road transport meet all Some surveys on willingness to use alternate transport modes its external costs or from adding to the revenue of the public have shown that the customers' choice is theoretically equal for transport so that fares can be set at the marginal cost of driving. equal levels of service on each mode (Ben-Akiva and Morikawa In Singapore, the government also used other transport policy 2002). However, when fares are comparable, the customer is elements: establishing road-use pricing, implementing high more likely to choose to use a new LRMT service rather than import duties on automobiles, and requiring that potential an existing bus or taxi service, given that the LRMT service is owners of private vehicles demonstrate that they possess generally less influenced by road conditions and more likely to an off-road parking space for each vehicle before purchase. arrive on time. For new LRMT systems, the level of integration has a direct implication on the effective ridership and use of the new system. Integration has a direct effect on a number of LRMT issues. 4 Halcrow Group Limited (2004) writes that the Singapore government's focus on a long-term land-use and transportation strategy has proved remarkably effective, with a single tier of government and a single organization with sector authority. The strategy creates a level playing field between cars, buses, and mass rapid transit­LRMT systems within an integrated strategy. It has required constant monitoring and adaptation in light of experience. 35 Integration has been the cornerstone of the LRMT strategy, and improvements have been made in this strategy, as well as land use, over time. LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 2.3.2 Connections and Feeder Systems 2.3.3 Integrating Fares with Other Modes The route of the LRMT system and the ease of connection of Transport to the centers that it serves directly influence the level of One of the major issues with LRMT projects (in common ridership on the system. The initial routing will be a balance of with other transport projects) is the difficulty of accurately the need to link the chosen demand centers, some of which predicting ridership. These forecasts are inherently unreliable, may be poorly served by existing transport systems, against being influenced by demographic changes, shift in demand, the constraints of acquiring an acceptable route. In addition, effect of competition, cost increases, customer willingness to customers must have convenient access to the LRMT service use the system, and customer willingness to pay. Nevertheless, and onward to their final destination. some sophisticated demand prediction models have achieved good results. The problem for developers is that certain things Systems designed to integrate the different transport services that are entirely out of the control of the transport operator must take into account the effectiveness of the connections can have a significant effect on demand. These factors include between the different services. In some cities, the workforce business booms and recessions, changing government policy, may travel for some considerable time on different forms of and changing taxation policy. Experience has shown that transport each way every day. The route and station locations private investors seek to avoid these unmanageable risks. of the new LRMT system may be constrained by construction, economic, or environmental needs. If these locations do not The willingness of investors and developers to be involved link conveniently for potential customers, then they may in an LRMT project is directly related to the level of certainty choose not to change their travel routes to use the LRMT for that they see in the ridership and fare forecasts. One key part of the way. It is important to ensure that the LRMT design element affecting ridership is the customer fare. If the level includes effective interchange with other transport modes, of pricing and the services provided by the various competing car parks at outlying stations for suburban commuters, taxi forms of public transport are controlled in some way, then parking areas, and shuttle bus feeder links to LRMT stations to more certainty can be applied to the LRMT forecasts and fare and from existing transport stops. Examples of systems with setting. In the next section, we discuss demand forecasts and such facilities include Washington, D.C.'s Metrobus system and fare setting in more detail. However, the level of integration Bangkok's Skytrain shuttles (see box 2.2). can directly affect the viability of the LRMT project through the ability to control price setting. Box 2.2 Feeder Systems: Bangkok, Thailand On Bangkok's Skytrain, passengers make considerable use of the car parks available at some of the stations. For bus users, not all the stations are near the main bus routes, and a series of shuttle bus services was developed by the Skytrain operator to transport customers between Skytrain stations and local bus lines. Strasbourg, France. Good interchange from feeder bus is vital to success of public transport. Photo by and reproduced by kind permission of Scott McIntosh. CHAPTER 2 2.3.4 Physical Integration 2.4 SEGREGATED VERSUS NONSEGREGATED The integration of a new or extended LRMT system with SYSTEMS existing systems will bring technical benefits in common A segregated LRMT system is one that runs on tracks dedicated operation methods, maintenance, and spare parts, in addition solely to the system. Segregated systems are possible in new UNDERSTANDING LRMT to improved journey experiences for customers. However, schemes where a clear right-of-way is available. Advantages these benefits have to be balanced against the cost of carrying include no delays caused by other traffic and the ability to out all the necessary work to meet the required common schedule closely. A disadvantage is the possible involvement of standard. The choice of technical approach must take into additional land purchase and roadway construction costs. For account the possible need for future growth--and the an example of a segregated system, see box 2.3. cheapest technical solution at an early stage may bind future stages of development to a limiting technology. In the United Box 2.3 Kingdom, for example, integration of new schemes with Segregation: New Jersey, United States original station platform design of the Manchester Metrolink later restricted the choice of rolling stock. The Hudson-Bergen Light Rail system uses a combination of old rail and new (private) rights-of-way for most of its length, with some grade separation in certain areas. It shares a lane with 2.3.5 Master Plans for Achieving Technical automobiles on a portion of Essex Street in downtown Jersey City, but for the most part, it does not operate with other traffic. Integration Special signals at the at-grade crossings automatically change The need for integration of LRMT within the different transport traffic lights in favor of the light rail to minimize stopping. solutions may appear obvious, but definite benefits result from SECTION A preparing master plans that work toward technical integration. LRMT design and development must have sufficient support In contrast, a nonsegregated system shares a road system at a high enough level to ensure a rational and integrated with other transport forms (common with traditional LRMT planning approach. Frequently, the government or public systems in dense urban areas). Although it may be possible to sponsor is faced with other priorities and resource constraints have sections of track on lanes isolated and dedicated to LRMT, that must be balanced within this plan. Elements to take into the LRMT is subject to traffic flow influences on the shared account include system and on dedicated lanes where they enter the general · Technical standards traffic flow. · Passenger service · Fares and ticketing Advantages of such systems may include more economical · Through operations between different LRMT lines construction, because maximal use is made of existing roadbed (extension or joining) and structures. It is possible to reduce the effect of other road · Design of multitransport service nodes, stations, and traffic (such as congestion) on LRMT performance through plazas · Shuttle bus routing to stations 5 For the Manchester Metrolink, the traditional platform design was maintained for system-wide continuity, but this design had a If it is not possible to plan for full technical integration, then a major impact on rolling-stock acquisition on new LRMT lines because possibly effective method is to concentrate on those aspects the modern international rolling-stock design standards favor low-floor vehicles. This constraint reduced additional rolling-stock of integration that are important and cannot be retrofitted at purchases to a smaller selection of vehicles and manufacturers. 5 However, a large number of high-floor LRMT Stadtbahn systems, a later stage. The benefits and effects of these key aspects chiefly in Germany, will continue to renew their fleets. Although must then be demonstrated to decision makers and planners high-floor light rail vehicles will form a declining proportion of overall to ensure that any necessary collateral work or services are deliveries in the future, they will still be available from most of the principal car builders. 37 provided to support the LRMT development. LIGHT RAIL - LIGHT METRO the creation of priority rules and signaling to improve LRMT The more restrictions on free access that are faced by the operational performance. Access along existing routes allows construction contractor, the more time will be required to direct connection with other transport systems and thus complete the work. Construction work must be designed to makes transferring easier for customers. take into account the specific requirements of signaling and control systems and their integration with existing traffic A disadvantage is that such systems may increase the pre- signaling, as well as the specific requirements of rolling stock ssure on existing traffic flows. They may require additional and management and operation of the LRMT system. construction to accommodate rail access and to widen or strengthen existing roadway or structures. The disadvanta- In addition, although a new segregated line will have these ges of not running in or adjacent to the highway for parts of access constraints only where it crosses other transport the route include routes, the issues of land acquisition and new roadway and · The inability to reach traffic objectives support structure construction (bridges, tunnels, and so forth) · The high cost of tunnels and viaducts will continue to add cost and time. · The visual intrusion of viaducts · The possible negation of higher service speeds 2.4.2 Effect on LRMT because of additional station access times The construction issue is largely about economics and land use. · A less attractive journey experience Whereas the segregated system would be able to run most · Less exposure of passengers to commercial offers by effectively in terms of operation in the long term and have little frontager businesses direct effect on existing traffic flows, these advantages must be weighed against the potential savings of a nonsegregated 2.4.1 Segregation: Construction Issues system through adapting existing roadway and infrastructure. LRMT projects raise particular issues related to construction. Nonsegregated systems face potentially fewer land acquisition If a nonsegregated system is used, access for construction issues but may experience an increase in existing traffic flows will be somewhat limited by the need to keep other traffic or congestion. operational on the same roadway. In this case, construction closures are generally limited, and night construction or 2.5 CAPACITY AND SERVICE RELIABILITY construction with limited traffic restriction may be necessary The design (economic as well as technical) of the LRMT system to complete work on, for example, signaling and infrastructure. revolves around the likely ridership levels. The forecasting and Nevertheless, many of the construction problems associated fare-setting issues dealt with in later chapters have a direct with nonsegregated systems in developed urban areas will also effect on the design capacity of the system. Ridership forecasts affect segregated systems. Constructing viaducts is difficult are notoriously difficult to establish with accuracy. Many are and disruptive, and constructing bored tunnels means dealing revised in the first few years of the project's operation. with excavated material and land settlement. Underground stations necessitate significant utility diversions and the The ridership forecasts define the system capacity required provision of station sites--all requiring road closures and and thus the numbers of rolling stock. The modeling of the disturbance. Constructing cut-and-cover tunnels can be even physical capacity required for ridership and service levels is more destructive (for example, as occurred with Amsterdam complex, being related not only to ridership levels, but also the Metro Line 1). number of trains on the track and the timing of train service. Source: http://www.sxc.hu/ As a simple concept, the initial service can be established with Adherence to the timetable is one possible measure of the a minimum number of cars in each train to provide the desi- quality of service provision. In this context, "bunching" red service levels. As the ridership levels increase with time, happens when the difference in headway between trams can then additional cars can be introduced. The system can finally lead to two or more trams following one another more close- reach its maximum capacity by using the maximum numbers ly than expected. This situation can result from a combination of cars per train and increasing the frequency of service, until UNDERSTANDING LRMT of different effects, such as other traffic conditions (a shared the negative effects of the higher-volume traffic (increased roadway or roadwork or track maintenance delays), dwell effect of "bunching," increased maintenance, downtime, and time at stations (different passenger loading times), schedules so forth) have a limiting effect. and operational plans with very little recovery margin to accommodate lateness, and varying speed tendencies of Ridership forecasting raises the question of how much individual drivers. The general effect is a level of service reduc- rolling stock and how many cars are needed. When ridership tion with more irregular service. A number of techniques may is low, the limiting factor is the minimum levels of service be used to mitigate bunching, including rerouting, adjusting and the timetable, with some allowance made for potential departures at terminals, or directly managing individual units future growth. Some care is needed at a contractual level to against the timetable. Increasingly, in more sophisticated ensure that any increases in rolling stock are provided by the systems, automatic vehicle location (AVL) systems linked to contractor in a timely manner (for instance, on the basis of system management and signaling are used (see box 2.5). either a planning timetable or some trigger linked to increasing ridership levels) to ensure that the future service levels are met Box 2.5 (see box 2.4). Automation: Copenhagen, Denmark SECTION A In Copenhagen, the entire Metro system is run by a fully auto- Box 2.4 mated computer system called ATC (automatic train control). By Increasing Rolling Stock: Western Europe letting a computer run the system, the developer has reduced the number of human errors, and a low time interval between the trains can be maintained because of precise acceleration and In a western European LRMT concession, the grantor made braking. The system is monitored at all times by five operators a transport plan that assumed that when ridership reached a at the control and maintenance center (CMC). In the event of an certain level, the number of rolling stock would be increased ATC system failure, the trains can be controlled either remotely by a planned amount to ensure continuing good service levels. by the operators at the CMC or by Metro stewards on the trains. This stipulation was made as a contractual obligation for the concessionaire developer. However, the concessionaire developer also controlled fare setting. If the developer increased fares, ridership levels would drop, but with the right choice of increased unit fare, the profit level could remain the same. By increasing fares and decreasing ridership, the developer could avoid making the major capital investment in additional rolling stock. Of course, this situation did not meet the grantor's objective of increasing ridership on the LRMT system, and for this reason, an amendment to the contractual terms was necessary. Copenhagen Train, Denmark 39 LIGHT RAIL - LIGHT METRO Manchester Metro Link, UK. This issue is relevant in the PPP context in that if, for instance, Given that the rolling stock is to be procured under a PPP headway between trams or adherence to the timetable is set scheme, a rolling-stock performance specification is a nece- as a developer's contractual obligation, then the management ssity. The PPP approach concentrates on performance and plan must provide for some way of mitigating these issues and output, rather than on the traditional public procurement for suitable technology, if necessary. approach of prescriptive design. Generally, a rolling-stock per- formance specification should include, but not be limited to, 2.6 SELECTING ROLLING STOCK the following high-level criteria · Design life AND PLANNING FOR ASSET MANAGEMENT · Capacity · Interface requirements 2.6.1 Selecting Rolling Stock · Operational requirements (including maintenance The rolling stock is a key element of the LRMT system, and regimes) selection of a rolling-stock contractor has a major influence · Performance requirements on long-term system operation and maintenance and de- · Tram and tram system requirements sign and construction of infrastructure components (see box · Spares and special tools 2.6). Typically the rolling-stock contract will be let not only for · Fire and safety issues supply, but also for installation and initial commissioning and maintenance. The rolling-stock contract is a key element of the 2.6.2 Planning for Asset Management overall contractual arrangements (chapter 7). The complex physical nature of LRMT projects requires continuing attention to maintaining assets, both physical infrastructure and rolling stock and equipment, in good Box 2.6 condition over the life of the project. In LRMT schemes, the Rolling-Stock Compatibility and the individual project components have varying replacement lives Manchester Metrolink's Legacy and varying maintenance requirements. It is important to take this point into account in the design and maintenance of the Stations: United Kingdom projects. Scheme and contractor selection will be made on The Manchester Metrolink system incorporates three diffe- output issues such as rent models of rolling stock. Although intelligent design has · Whole-life project costs (capital, operating, and enabled Metrolink to avoid purchasing from any one supplier, maintenance) selecting compatible rolling stock still remains challenging. · Maintenance programs The system's original route incorporated stations from a legacy electric train that had elevated platforms. All Metrolink · Replacement times and costs such as rolling stock, stations and rolling stock now include this feature to allow signaling, and mechanical and electrical equipment rolling-stock compatibility throughout the network. Requiring elevated platforms presents additional cost when constructing At the bid stage, it is helpful to ask the developer to provide an new stops. Similarly, the need for rolling stock with elevated asset management plan for the life of the project. Such a plan doors limits the number of available models because many manufacturers have concentrated on more popular low-floor will show the developing company's intentions in this regard; trams. indeed, it can be part of the contract requirements. Given that CHAPTER 2 the life of rolling stock and of some mechanical and electrical equipment is often shorter than the life of the contract, this 2.7 TICKETING AND BARRIERS It is important to note that, for LRMT systems, ticketing and plan should also include for potential replacement of those fare setting constitute an important marketing tool; note the elements. UNDERSTANDING LRMT extremely successful marketing of public transport in Zurich, Switzerland, and Freiburg, Germany. We talk later about procurement issues, but an important point The selection and design of ticketing and barrier systems to note here is that the whole-life costs and project implications are important and complex issues with major operational, of the rolling-stock purchase must be taken into account when contractual, and financial links. In chapter 1, we discussed the comparing various rolling-stock supply options. Maintenance "farebox" concept (the ratio of fare revenue to operating and renewal on operational characteristics, such as reliability, costs). In PPP arrangements, the farebox concept may be used level of comfort, and so forth, affect ridership. A contract let as a performance indicator affected by a variety of elements, solely on least cost supply price for rolling stock (even if to including the level of fares set and the ways of ensuring the common high technical standards) should not ignore the long- most effective collection of fares. In general, we assume that term costs incurred in operations, maintenance, and possibly under PPP arrangements, services are subject to a minimum infrastructure. Also, the contract should take into account the paid fare (unlikely to be a free service). Ticketing of some sort replacement life costs of the rolling stock. In the final years of is necessary for all arrangements. Various ways of ticketing for any long-term PPP arrangement, the contracting company different fare structures include has a tendency to limit expenditures--such as maintenance · Single fare or fare according to distance or zones and replacement--that do not increase its income in the short SECTION A · Fares for different times of the day or year term, with the risk that the physical assets will deteriorate. At · Ticketing for varying classes of riders the end of the contract, the public sponsor should take over · Ticketing for interconnection or transfer to other lines the physical assets in good running order so that it can continue or services providing the service itself or with another PPP arrangement. 6 · Use of electronic ticketing systems This matter of ensuring maintenance and renewal in the last years of the long-term PPP project can be covered by special contract provisions. 2.6.3 Effect on LRMT Asset management has major policy implications, particularly in the level of freedom given to the private operating partner or developer. Constraints on the type of rolling stock or other technical equipment that the developer can use on the project may limit the level of effective operation the developer can achieve and the level of risk the developer is prepared to take. The choice of rolling stock has major implications at all levels of design, and the implications for risk, procurement, and 6 Such systems include the Calypso network. contract form are considered in later chapters. See http://www.calypsonet-asso.org/index.php?rubrique=main_10. 41 LIGHT RAIL - LIGHT METRO In Ireland, for example, the integrated ticketing system approach is built into law. Under the legislation, which is known as the Transport (Railway Infrastructure) Act 2001 (Additional Functions) (Integrated Ticketing) Order 2002, integrated ticketing is "a system of ticketing which enables a passenger to use a single ticket on one or more public transport services by road or rail or both for a single trip or multiple trips on such transport, irrespective of the number of public transport 7 modes or operators involved in making that trip or those trips." The regional Tarifverbund concept in Germany and the national Strippenkart system in the Netherlands are also good references for successful integrated ticketing systems. A higher level of automation may be required for such a system. A Europe-wide protocol (see box 2.7) specifically covers this need. Box 2.7 Calypso: An Electronic Ticketing Standard An electronic ticketing standard is the secured dialogue between cards and terminal. It was developed by a group of European partners from the cities of Brussels, Belgium; Lisbon, Portugal; Konstanz, Germany; Paris, France; and Venice, Italy. The 10- year development program adapted the smartcard contactless technology to public transportation uses. Some functional choi- ces have been taken into account to answer the transit operators' needs: · Contactless technology. · Fast, safe transaction (decentralized security). · Communication within the transaction time. · Flexible transport application to build the system step- by-step. · Targeted products to address all users and new ser- vices. · Upgradable technology that takes into account current standards. · Microprocessor, contact, and contactless interface or contactless interface only. · Compliance with International Organization for Standardization (ISO) and European Committee for Standardization (CEN) standards (ISO 14443; ISO 7816-1, 2, 3, 4; and CEN 1545). The technology was made accessible to all manufacturers on a fair and nondiscriminatory basis to ensure · The birth of this technology, suited to the urban public transport needs. · Full product compatibility. · Fair market competition. 7 According to the legislation, the Railway Procurement Agency has the following functions in relation to integrated ticketing systems: "(a) to secure the provision of, or to provide, such integrated ticketing systems as may be determined, from time to time, by the Minister, and (b) to enter into agreements or arrangements with other persons in order to CHAPTER secure the provision of such systems, whether by means of a concession, joint venture, public private partnership, or any other means". 2 Photo showing a typical electronic ticket vending machine. Source: http://www.sxc.hu/ Linked with the need both to control passenger entry and exit must be policed to ensure that ridership obligations are met, and to ensure safety, the system for barriers typically goes including fare payment. The barrier and ticketing designs hand in hand with ticketing arrangements. Some systems must ensure that policing can be done effectively--that is, not allow for "free access," whereas others require "proof of pur- only limiting access to only those people who have paid, but chase" (see box 2.8). also ensuring that there is some proof of purchase to enable enforcement. Where barriers are used, physical arrangements may vary from the most complex, automatic, full-barrier systems to In determining the allocation of farebox risk, the following UNDERSTANDING LRMT simple turnstile arrangements. Use of ticketing and barriers issues must be considered: may assist in defining the legal implications of access to the · Bidders have limited ability to assess traffic and to LRMT system and payment for use of the service. The system produce reliable predictions of ridership. · Overly aggressive and overly conservative traffic forecasts are likely to be to the grantor's detriment. Box 2.8 · Issues that affect customer ridership levels and "Proof of Purchase": Hudson-Bergen that are outside of the developer's control include LRMT, United States competing transport issues (such as regulation of competing transport systems), traffic priority The Hudson-Bergen LRMT service operates on a "proof of at junctions, connecting transport links, and purchase" system in which riders must present their tickets upon request during random checks. Passengers purchase establishment of interchange arrangements with tickets at local transit ticket vending machines (TVMs). One- other public transport system operators (manage- way and 10-trip tickets must be validated at automated ment of the interface through ticketing and validators near the TVMs. The validator will date- and time- scheduling issues). stamp the ticket for 90 minutes of use. Fare inspectors perform random ticket inspections on vehicles and at 2.7.1 Effect on LRMT SECTION A stations. This method is similar to the system used in Europe for many light rail lines. The fine for fare evasion on the light Ticketing policy is directly linked to potential revenue. The rail is US$100. policy on interline ticketing must be implemented through the LRMT system. The level of actual revenue will be affected A one-way adult fare is US$1.90; 10-trip tickets are US$16.25. A monthly unlimited pass is US$58 (US$98 with parking included, by the effectiveness of the physical methods of ticketing except at Liberty State Park, where a pass costs US$108). that ensure that fares are paid. Efficient barrier systems Holders of monthly passes can transfer to adjacent New (complex and automated systems may be involved) and Jersey Transit buses without an additional fare. Senior citizens enforcement methods support higher levels of revenue. (age 62 and older) and passengers with disabilities travel on The legal aspects of enforcement must be addressed in the the light rail at a reduced fare of US$0.95 (valid identification may be requested). Customers who purchase one-way tickets bylaws and implemented under the LRMT PPP arrangement. can purchase Hudson-Bergen Light Rail (HBLR) "tickets with The issue of who is responsible for ticketing, fare collection, transfer" from HBLR TVMs for US$2.55. When validated, and enforcement must be clearly set out in the contractual these tickets may be used for travel on the light rail system, LRMT arrangement, with suitable operational arrangements plus a one-zone transfer to any connecting New Jersey Transit in place. intrastate bus. Customers also may purchase a transfer on board any intrastate bus that connects with HBLR. Valid current New Jersey Transit weekly and monthly train tickets are also good for travel and do not need validation. 43 LIGHT RAIL - LIGHT METRO CHAPTER INCORPORATING PRIVATE SECTOR PARTICIPATION IN LRMT INITIATIVES 3 Barcelona Light Rail, Spain. Photo by and reproduced by kind permission of Rainer Hesse. Incorporating Private Sector Participation in LRMT Initiatives This book focuses on the details for introducing and designing significantly affect the cost of infrastructure initiatives. A well- arrangements for private participation in light rail­light metro designed PPP arrangement should, in principle, enhance value transit (LRMT) schemes. First, we will consider what private for money (VfM) through a combination of factors, including participation can be expected to achieve. The successful use of financing, operational efficiencies, superior risk management, private sector partners in establishing LRMT schemes, as well greater implementing capacity, and enhanced service quality. as other public sector infrastructure and service provision, is STRUCTURING PRIVATE SECTOR PARTICIPATION well documented. Through a public-private partnership (PPP), The design, construction, operation, and maintenance of the government, as the contracting authority or grantor on LRMT systems are complex and require substantial resources. behalf of the public sector, can draw on resources, expertise, Public institutions may lack the capacity required to implement and capital from the private sector. We start with the premise traditional public procurement of LRMT system components. that the decision to involve the private sector in LRMT has The value added to the design and contractual integration of already been made. In this chapter, we review some of the LRMT systems may justify the additional costs of private sector key issues that relate to the provision of LRMT services in participation. urban situations and the ways that private participation might address those problems. Then, we look at some of the main 3.1.1 A Conducive Framework toward PPP forms of private participation and how they might be used. Successful PPPs require a combination of factors that will lead to a process that is conducive to attracting the private sector 3.1 KEY REQUIREMENTS FOR A SUCCESSFUL PPP while ensuring that the grantor can meet its development When deciding whether to involve private sector participation, objectives. Figure 3.1 represents the four fundamental factors governments have to assure themselves that it is cost-effective. that should be considered in developing the framework for the Compared with public entities, private firms usually have PPP process and the PPP agreement. higher costs of capital as well as profitability requirements that Figure 3.1 The Four Fundamental Factors of a PPP Framework Government commitment to PPP agenda Government commitment to the PPP project and procurement scheme, as well as financial support, SECTION B is vital for success of the LRMT project. Well-prepared PPP model Fair risk allocation and clear tender process Risk should be allocated to the party Careful selection of the PPP model best able (and willing) to manage is recommended, as is private sector and control it. Inappropriate allocation involvement at a very early stage by the grantor and acceptance of the process through by the developer may lead to consultation with potential higher project costs or even private sector parties. failure of projects. Regulatory and legal framework An adequate regulatory framework is necessary to transfer public sector responsibilities to the private sector, as is a legal framework to grant required security to international Source: Author's representation. developers and lenders. 45 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ The starting point is to ensure that the grantor and ultimately Box 3.1 the government are committed to the PPP agenda. LRMT South Africa: Assessing PPP schemes are an integral part of the government's transport Transactions policy and will require specific support for the procurement South Africa's Treasury Unit contains a dedicated group that of a developer to undertake all or some parts of the LRMT oversees all public-private partnership transactions in the entire scheme. Underpinning any PPP program is the concept of country and has jurisdiction over the Gautrain project (see a fair risk allocation (this concept is discussed in detail in annex 1). Before approving new projects, the PPP unit will verify chapter 4), which ensures that risk is allocated to the party the following: · Affordability. Any public institutions involved must be that is best able to take, manage, and accept such risk. The able to meet their financial obligations under the PPP overall legal framework--and to a lesser extent the regulatory agreement throughout the life of the project. Current 1 and anticipated budgets must be able to support any environment --will be important because any PPP agreement PPP-related expenses, including the costs of public that is developed will be enshrined within it. The less those oversight. are developed, the more the PPP agreement will rely on the · Value for money. Incorporating private sector parti- conditions of the agreement itself. However, it is likely to cipation must offer additional value to the public sector through risk transfer, increased quality, or increase the perceived risk of any such transaction and will some combination thereof. In the absence of value require providing protection to the developer and the lenders for money, traditional public procurement would be within the PPP agreement itself. This issue is discussed later the preferred method for realizing new infrastructure in the section titled "The PPP Arrangement: Four Stages of services. · Substantial risk transfer. Private parties must assume Development and Implementation." All these issues should meaningful risks as part of their participation in a lead the grantor to select the most suitable form of PPP (see proposed PPP arrangement. Value for money often discussion under "Models of Private Participation"). results when private partners can manage project risks better than their public counterparts. 3.1.2 Achieving Value for Money South Africa's Treasury Unit uses a series of reviews and As discussed in chapter 1, when considering PPP options, approvals throughout the project development process. In some cases, funds from a special project development the grantor needs to ensure that the scarce public resources facility can help local and regional planners engage additional available to it are used in the most effective way. Governments resources to aid in planning projects that meet Treasury Unit with experience with PPPs (for instance, Australia, Canada, standards for PPPs. To learn more about South Africa's PPP unit, visit http://www.ppp.gov.za. the Netherlands, South Africa, and the United Kingdom) have developed analytical tools to inform policy makers in this 2 However, when using the quantitative models, the grantor process (see box 3.1 for a South African example). should consider a number of issues, including the following: · Completeness and accuracy. Both PSC and PPP refe- Quantitative analysis is needed to assess the VfM proposition rence models may omit or incorrectly value critical of an LRMT PPP agreement. This analysis usually involves a risks. In the case of LRMT PPPs, these mistakes may comparison of net costs associated with public service pro- involve vision with those under the PPP scenario. It is often captured o Contingent liabilities within a public sector comparator (PSC) model vis-à-vis a PPP o Contract negotiation risks reference model. Together with qualitative assessments, this o Explicit but variable liabilities, such as opera- quantitative analysis can help public institutions make rational ting subsidies and minimum revenue guaran- choices regarding infrastructure procurement. tees 1 The regulatory environment is important because it sets out the rules of the 2 For links to many government Web sites, visit the World Bank game. However, some countries may not have a fully developed regulatory Institute's Global Public-Private Partnerships in Infrastructure Web environment specifically for LRMT schemes. Having a fully developed regulatory portal at http://info.worldbank.org/etools/PPPI-Portal/links.htm. CHAPTER framework is not a precondition for PPPs, but it is clearly beneficial. 3 Box 3.2 · Model inputs. Selecting appropriate inputs for project Generic Factors Driving Value for Money models is always a difficult task. The subjectivity of inputs can provide an avenue for manipulation and · The optimum allocation of risks between the various parties. VfM requires that risks be allocated on the undesirable biases. Many developed nations now party--or parties--that are best placed to manage and use sophisticated databases to check on modeler minimize risks over the relevant period. discretion. However, this approach is often not · A focus on whole-life-costs. VfM is achieved by focusing of the whole-life-costs of an asset rather than only the possible in developing countries where data from STRUCTURING PRIVATE SECTOR PARTICIPATION upfront costs involved. previous projects may be unavailable or lacking in · Integrated planning and design of the facilities-related quality. Discount rates for the opportunity costs of services. An early assessment should be made of whether integrating asset and nonasset services (for example, funds are particularly influential model inputs and may "soft" services) could deliver VfM benefits. be especially contentious. Small alterations in discount · An outputs specification approach. Use of such an rates can inordinately affect analyses because values approach to describe the authority's requirements, are typically compared on a net present value basis. 3 among other things, allows potential bidders to develop innovative approaches to satisfying the service needs of · Development costs. Conducting thorough quantita- the procuring authorities. tive analysis of a project's value can require time and · A rigorously executed transfer of risks. Transferring risks considerable costs--especially where institutional to the parties that are responsible for them ensures that the allocation of risks can be enforced and that the costs capacity is lacking and public authorities rely on exter- associated with the risks are actually borne by the parties nal advisers. in the manner originally allocated and agreed. · Timing. Determining the initial VfM of a PPP-based · Sufficient flexibility. Flexibility is necessary to ensure that any changes to the original specification or requi- procurement approach requires some indication rements of the procuring authority, as well as the effects of final project costs. However, those costs are not of changing technology or delivery methods, can be entirely "knowable" until the later procurement accommodated during the life of the project at reasonable stages and financial close. Even when PPP reference cost to ensure overall VfM. · Sufficient incentives within the procurement structure. models are well crafted, their results may still differ Incentives within the procurement structure and project substantially from actual procurement costs. contracts ensure that assets and services are developed · Reasonableness. Constructing PSC models may not and delivered in a timely, efficient, and effective manner, including both rewards and deductions, as may be make sense when public authorities cannot con- appropriate. ceivably implement a project because they lack · A reasonable term of the contract. The contract's term funds or institutional capacity. Traditional financial should be determined with consideration to the period over which the procuring authority can reasonably and economic analysis assuming private sector predict the requirements of the services being procured. participation may be the only quantitative analysis Determining the term of the contract will require careful SECTION B available to assess projects when that is the case considerations of factors such as potential changes in (Leigland and Shugart 2006). end-use requirements, policy changes, design life of the asset, number of major asset upgrades or refurbishments during the period of the contract, potential changes in In the United Kingdom, the concept of value for money is de- the way services could be delivered (such as technical fined as the optimum combination of whole-life-costs and advances), and arrangements for the asset at expiry of the contract. quality (or fitness for purpose) of the goods or service to meet · Sufficient skills and expertise. These skills can be found the grantor's requirements. VfM is not the choice of goods or in both the public sector and the private sector and must service based on the lowest cost (see box 3.2). be used effectively during the procurement process and subsequent delivery of the project. · Management of the scale and complexity of the procu- 3 Net present value is the sum of future cash flows discounted to the rement. The scale and complexity of the project must be present by some opportunity costs of capital. managed carefully to ensure that procurement costs are not disproportionate to the underlying project. 47 LIGHT RAIL - LIGHT METRO 3.2 PARTNERSHIPS BETWEEN PUBLIC Box 3.3 AND PRIVATE INSTITUTIONS Airport Link: Canada Line and Vancouver Refining and improving how LRMT systems can incor- International Airport porate private sector capital and expertise make good sense given the size and scope of such projects. Vancouver's Canada Line includes a spur connecting the system's main trunk route with Vancouver International Airport. Three Canada Line There is a clear need for increasing the long-term sus- stations will provide services on airport land. Travel between these tainability of private sector participation in LRMT PPPs, three stations is free as part of an agreement with the Vancouver considering the large amount of money at risk (both International Airport Authority (VIAA). VIAA contributed a substantial capital grant (Can$245 million) to the Canada Line project and public and private), as well as the lengthy duration of accordingly will use the free services to shuttle airport customers contractual relationships. Partnering with the private and employees between the main airport terminal, long-term parking sector can deliver substantial value by augmenting lots, future rental car facilities, and other airport support businesses located near the airport's Canada Line stations. limited government capacity (both operational and financial) to the benefit of transport customers. For its part, TransLink (Canada Line's contracting authority) will However, the mechanics of actually formulating also derive benefits from increased pricing power provided by this complementary relationships between public and link. Customers will pay a premium fare for traveling to Vancouver International Airport from stations not on airport land. Canada Line's private entities are never simple. Failing to "get it links with the Vancouver SkyTrain and Westcoast Express rail services right" can have severe consequences for taxpayers, will also help the system attract airport commuters from a relatively investors, and customers alike. large geographic area. Preserving private incentives for performance, while linked to contributions of substantial public funds toward new services, requires delicate mana- gement. In some instances, public authorities have rejected traditional concession models in favor of Canada Line, Vancouver. Photo by and reproduced by kind management-style contracts for publicly procured permission of Samuel Zimmerman. assets (for example, Manchester Metrolink Phase 3). Other initiatives have chosen instead to incorporate Achieving the possible benefits of a PPP arrangement for LRMT sche- substantial capital grants for new construction while mes requires getting two important aspects right: still requiring meaningful upfront contributions · Giving the developer the ability and the incentives to make of private investment (for example, the Gautrain good operating and investment decisions. This means giving Rapid Rail Link and Canada Line systems, which are the developer enough freedom to make decisions while discussed later as case studies; see also box 3.3). exposing it to the related business risks--so that it gains when Both models have had successful results, illustrating making good decisions and loses when making bad ones. that there is no single best way to incorporate public · Protecting the developer from the risk of losing from the support. Understanding the justifications for and the government's changing the rules of the game rather than implications arising from public support mechanisms from bad operating and investment decisions. This means used in previous LRMT PPPs will help future project protecting the developer from the risk that the government promoters make sensible choices for their own will opportunistically cut prices after the developer has projects. invested (or will take similar actions that undermine the investor's profitability). CHAPTER 3 Neither goal is easy, but protecting the developer from policy determining and financing investment, the developer can be risk is especially hard. The challenge is to embody the proposed expected to invest in system maintenance and operational policy objectives in a functional PPP contractual arrangement. improvements, provided that suitable incentives are included A good PPP arrangement will be reflected in a PPP agreement in the arrangement. (contractual terms) that matches risks and rewards and STRUCTURING PRIVATE SECTOR PARTICIPATION establishes adequate controls for both the grantor and the 3.2.2 Operating Performance developer. This subject is covered in more detail in chapter 7. The profit incentive of a private developer may cause it to operate more efficiently than its public counterpart. For 3.2.1 Investment and Financing Decisions example, it may provide the same level and reliability of services LRMT schemes are very capital intensive for both develop- with fewer staff and may be more diligent in fare collection. ment and construction. On balance, the government as the Ensuring that a private developer operates more efficiently contracting authority or grantor can generally obtain capital than a publicly managed LRMT system depends on the details with better terms than private investors can. As well as being of the PPP arrangement. For example, if the private developer able to mobilize the private sector to share part of the project can keep at least part of the increase in profits resulting from risk, the PPP approach may also help to define a stronger better ridership and fare collection, it will have a direct incentive overall project and allow the government to obtain the best to increase revenues. However, if the rules governing fare external financial support. At the heart of the challenge facing setting are out of the developer's control, then the incentive to LRMT PPPs is the issue of balancing the need for project improve revenues may be limited. revenue derived through customer fares against the large capital investments required to build, operate, and maintain Perhaps a key element in private operation is the technology systems over their lifetimes. Private partners can recover the and equipment used. It is important to take advantage of the cost of obtaining the financing (including a reasonable profit) benefit of the private developer's experience in provision, only by charging some fee for services. At the same time, management, and operation of modern LRMT systems. This however, customer fares must be affordable to meet public information can be gained at the initial design and develo- transport objectives, including access for poor customers. pment stages, through market consultation, or at the bid stage through contractual arrangements that include appropriate LRMT systems typically require greater upfront capital costs degrees of responsibility for the equipment and rolling-stock than private partners (including the developer and its lenders) design and operation. can reasonably recover through fare revenue­supported SECTION B financing alone. Accordingly, much of what determines success Finally, although private developers typically can bring skills for LRMT PPPs depends on how policy makers structure public to improve services through more effective management and support that would be payable through the grantor to the operation of services, it is important to realize that there is a developer. Public support can be channeled through a number limit to what can be achieved in operational improvements of possible mechanisms, depending on the type of LRMT PPP without the necessary capital investment for refurbishment scheme chosen. If, for example, the developer cannot control or new infrastructure. A key part of any PPP arrangement is fares and takes no farebox risk, the grantor will have to provide establishing how this capital investment will be funded, who direct financial support. At the heart of any financing decision will be responsible for carrying it, and how it will be linked to is the fact that if the developer has some responsibility for sustaining or improving levels of service. 49 LIGHT RAIL - LIGHT METRO Photo by and reproduced by kind permission of James Dwyer. Charlotte, North Carolina, USA. Example of where the line crosses major roads or highways: Tracks are elevated to increase safety and eliminate traffic delays. Stations are provided with parking as well as artwork and other visually attractive features. CHAPTER 3 3.2.3 Policy and Enforcement 3.3 MODELS OF PRIVATE PARTICIPATION The presence of independent profit-motivated private de- We do not set out to describe the exact form for a private velopers influences the sector policy and the way it is enforced. participation arrangement for an LRMT scheme; the precise Like other stakeholders, a private developer will tend to seek arrangement details will depend on the specific requirements to shape the arrangements in its favor, irrespective of the of the scheme. However, it is useful to understand the nature be-nefits for society as a whole. Overall, private participation of some of the important models and the implications of these may improve policy and its enforcement. For example, the models for the challenges of private participation. Subsequent STRUCTURING PRIVATE SECTOR PARTICIPATION government may enforce compliance with safety standards by chapters give more details of these models where they affect private firms more rigorously than it enforces compliance by other aspects of the private sector participation arrangement. public agencies. Terms used in discussing the main PPP contract models are those developed from a transport study for the European For successful private participation, the government needs to Commission (Colin Buchanan and Partners 2002) set clear objectives and conditions. If a private firm finances · Management contract the investment, it cares deeply about the rules for setting · Gross-cost contract prices and subsidies because those rules determine whether · Net-cost contract, more commonly known as a lease it gets its money back. The private developer will therefore · Net-cost contract with investment (NCCI), more insist, before investing, that the government establish clear commonly known as the concession, build-operate- and prospectively stable rules for setting prices and subsidies. transfer (BOT) form or finance-design-build-operate- And thereafter, it will try its best to hold the government, maintain (FDBOM) through the grantor, to its promises. Stable rules for pricing and subsidies will encourage investment and thus help the These contract types are differentiated largely by the extent government achieve its objective. In all these cases, the to which they transfer risk from the public authority to the advantage of private participation is indirect: The benefits developer, as outlined in table 3.1. come from good rules and enforcement, which, in turn, are a necessary prerequisite of a good PPP arrangement. Table 3.1 Risk Bearing by Contract Type Who bears the risk? Contract type Cost Revenue Investment SECTION B 51 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ We provide these PPP contract models to show the key cha- operate--and perhaps also to provide--the required fleet racteristics of each. However, readers should bear in mind of vehicles and rolling stock to specified quality-of-service that in practice, variations on each model may be necessary to standards for an agreed subsidy or premium. The developer accommodate specific project requirements. is normally entitled to all revenue (from fares and other sources) and could bear a number of additional risks. Those 3.3.1 Management Contract risks typically concern disturbances to traffic, fluctuations in The public authority retains ownership and control of all revenue, and changes to the regulatory regimes. Negotiated depots and vehicles, retains all revenues, and pays for all capital risk-sharing clauses in the contract may, however, limit and recurrent expenditures. The public authority may also be the developer's exposure to those risks. If required, these the employer of most or all of the staff members engaged in contracts allow for lease payments to the grantor for use providing the services. Developer involvement is confined to of facilities or services. These contracts are typically longer the professional management of operations on behalf of the term--usually 10 to 14 years. public authority. Normally, these services are provided for a fixed, negotiated period and for an agreed price. The contract 3.3.4 Net-Cost Contract with Investment term is established to allow sufficient time to achieve the (Concession or BOT variants) desired operational effectiveness, and it is typically of short The Net-Cost Contract with Investment (NCCI) may also duration. commonly be know as a Concession type contract or a form of build-operate-transfer contract with many of its variants 3.3.2 Gross-Cost Contract such as design-build-operate (DBO) amongst others. In these The public authority relinquishes control of the vehicles and contracts the public authority contracts with an outside rolling stock and possibly also control of the depots and other organization (developer) to provide services to specified quality- infrastructure (although it may retain ownership or transfer of-service standards. The developer must, consequently, ownership to a separate body). It requires the developer to provide the required inventory of fixed and movable assets operate--and perhaps also to provide--the required rolling from its internal resources or through external financing. The stock to specified quality-of-service standards for an agreed developer will also retain all revenues and will absorb either all price. Under gross-cost contracts, all revenues (from fares or a contractually agreed portion of traffic and revenue risks, and other sources) are transferred to the public authority, as well as the risks associated with construction. Risk sharing and the risks absorbed by the developer are confined to those may also extend into the areas of regulatory risk. associated with the cost of operations. A concession, in the form of some type of BOT or design-build- 3.3.3 Net-Cost Contract (Lease) operate arrangement, is often the most appropriate type of The public authority relinquishes control of the vehicles contract for situations with no previous services and with a and rolling stock and possibly also the depots and other requirement to provide depots or other infrastructure. New infrastructure (although it may retain ownership or transfer light rail schemes are often covered by long-term contracts of ownership to a separate body). It requires the developer to this nature. To ensure enough time for recouping investment costs, NCCI arrangements are generally long term, with con- tract periods of 20 to 30 years. CHAPTER 3 3.4 THE PPP ARRANGEMENT: FOUR STAGES OF DEVELOPMENT AND IMPLEMENTATION The preparation and implementation of an arrangement usually involve four stages, which may overlap each other in time (figure 3.2). STRUCTURING PRIVATE SECTOR PARTICIPATION The time required to complete the preparatory stages varies by country and by the arrangement being pursued. Countries with laws that support private participation in transport services and that have good-quality information on the system may proceed relatively rapidly. In addition, a management contract usually takes less time to prepare and implement than does a concession. With strong political commitment, a management contract could typically be designed and implemented in fewer than 12 months, whereas a concession and its associated financing could easily require two or more years. Figure 3.2 Stages of Development and Implementation 1. Developing the policy Set the objectives, identify the reform leader, and determine the ground rules for the structure of the sector. 2. Designing Set technical and service standards, tariffs, and risk sharing; set roles and responsibilities and determine how to manage them; and develop contracts and the the arrangement institutions to manage those contracts. 3. Attract and select the best private partner. Selecting the developer SECTION B 4. Design and manage the project, manage the transaction management, Managing the arrangement and manage the overall long-term contract. Source: Author's representation. 53 LIGHT RAIL - LIGHT METRO To ensure the successful development of the LRMT scheme, LRMT scheme operates. For example, the European governments may, with benefit, choose to allow more time legal environment ranges from full deregulation to initially to consider the issues and to establish the upstream cases where public authorities have full control over sector strategy and policies, as well as to manage social and transport issues. The implications of the legal regimes political concerns. Generally, this additional time will produce are discussed further in chapter 7 . a more effective design and management of a PPP arrange- · The business environment. The business environ- ment. As an example, an established transport sector policy ment, including the structure of the existing could remove much uncertainty about issues such as potential transport industry, will affect the LRMT PPP scheme. cross-sector competition or the degree of integration affecting For example, competing transport sectors will have the potential LRMT scheme. effects on the LRMT system. Relationships with third parties and the effect of responsibilities of others Financing LRMT PPP projects is always an important, complex, (such as ownership of existing track) on provision of and time-consuming process. Chapter 7 provides more details services under the PPP contract will need to be clearly on the issues and possible approaches involved. established. The business environment will also affect the monitoring regime that is developed. 3.4.1 Stage 1: Developing Policy The first step in developing policy is to decide whether pri- Budgetary constraints vate participation will be used as a tool for achieving the LRMT schemes are capital intensive for both the public and the government's objectives. The government will need to private sectors. Through its grantor (and depending on the determine what the scheme is intended to achieve and its link chosen form of PPP), the public sector may have significant to the overall plan for the sector. This determination begins financial exposures to the proposed scheme. Working within with setting objectives and recognizing the trade-off between its budgetary limits, the grantor must assess the level of subsidy different objectives. that it is able and prepared to pay. Accordingly, the grantor must, from the outset, establish good overall cost estimates Clearly articulating and agreeing on objectives at the start of to ensure that the resulting likely ultimate project values that the process will allow everyone to work toward a similar end will be bid do not exceed the available budget for subsidy. and provide a solid framework for choosing among options Furthermore, in some cases, and depending on the legal and resolving disputes during the design process. Several environment, certain government authorities (grantors) may key issues will need to be considered at this stage, including not be allowed to make financial commitments that exceed external constraints, budgetary constraints, local policy, their respective budgetary cycles. If that is the case, adequate service planning, pricing, integrated ticketing, and quality of alternative arrangements (including suitable protections for service. the developer) will need to be made and specified in the PPP agreement. External constraints When considering the type of PPP arrangement, the grantor needs to take into account any overriding legal and physical restrictions on the operating environment. The following are two examples: · Legal and regulatory environment. The choice of contract type will be determined (and in some cases limited) by the legal environment under which the Freiburg, Germany, has achieved excellent commercial results by means of well thought-out ticketing and marketing, rather than expensive infrastructure. Photo by and reproduced by kind permission of Scott McIntosh. CHAPTER 3 Local policy Integrated ticketing As noted earlier, the goals and objectives of the private developer When major cities have more than one public transport mode, may differ from those of the public transport authority and the the acceptance of integrated ticketing across transport modes grantor of the PPP agreement. Such differences may determine maximizes the efficiency of the transport network as a whole the type of contract chosen and its details. An example might be a (box 3.4). When the proposed LRMT scheme is not the only requirement to carry out integrated ticketing between different transport scheme and passengers are allowed to use a single transport sectors and the implications that requirement will have ticket to ride on various forms of transport, the PPP agreement for the PPP agreement, as well as the associated responsibilities (and any other appropriate related agreements) will have to STRUCTURING PRIVATE SECTOR PARTICIPATION allocated to the developer and the grantor. establish the arrangement for reimbursement of revenue sales between the different operators. The methodology and auditing Service planning of these arrangements must be clear, fair, and established 5 Although the public authority may be expected to define the type before the bidding process for the LRMT PPP agreement. of public transport services required, detailed service planning can Box 3.4 be carried out by the grantor, the developer, or some combination Manchester Metrolink Ticketing of both (such as details of routes, frequency, timetables, and Arrangements hours of operation). The PPP contract must clearly set out each party's role. In some cases, the public authority carries out the The Manchester Metrolink is an open system, but passengers must entire service planning function, even down to timetabling and purchase tickets before boarding trains. A schedule of escalating fines serves to dissuade potential fare evaders and is based on the use of rolling stock. At the other extreme, the developer may number of offenses they commit within a 12-month period: operate a fully deregulated service. The more common approach · First offense: £10 on the spot or £15 within 21 days is somewhere in between, where the grantor specifies minimum · Second offense: £20 on the spot or £30 within 21 days 4 · Third offense: £40 on the spot or £60 within 21 days service levels and offers incentives for further improvement. · Fourth offense: £80 on the spot or proceed to prosecution Pricing Stagecoach Group (Metrolink's current developer) employs and manages ticket inspectors on the system's trains. Although Pricing is politically sensitive. Public transport is often the only Stagecoach does not accept any revenue risks, revenue security means of transport available to the poorer sections of the does form one basis for its performance assessment and ultimate community, and other political objectives, such as environmental compensation. More information about Manchester Metrolink can be found in annex 1. issues, add to this sensitivity. It is possible to present a fully controlled price system that the private developer has to bid against, and the PPP agreement can then be awarded on the Quality of service minimum subsidy that the developer is prepared to accept. At the A key issue in PPP contracts is how to maintain quality of service. other extreme, pricing can be fully deregulated--but with the As an example, in the net-cost contracts (lease), the developer risk that the public authority's own policy issues may not be met. may have no direct incentive to increase demand and ridership SECTION B As an approach between these two extremes, the developer but would benefit from reduced operating costs from a lower can be given a maximum price level together with free rein to level of service. Most quality issues can be specified and mea- introduce lower fares or special offers. It must be noted, however, sured (such as technical specification, service reliability targets, that giving the developer an increased degree of freedom to set and customer satisfaction). Later, we discuss the potential use prices may influence the developer's decision to accept revenue of contractual performance indicators to ensure that quality-of- risk under PPP arrangements (see chapter 4). service targets are met, but some detailed thought on this issue is needed at all stages of project development, because it is at the heart of the long-term LRMT PPP operation. 4 The control of the planning function has a major effect on the 5 This issue will affect the LRMT PPP scheme design directly in that design of the PPP agreement. If developers are expected to bear some of the revenue risk (for example, under a net-cost contract or an NCCI the returns and costs to the LRMT scheme must be estimated, and its 55 contract), then they can normally expect to have suitable input to this effect on the LRMT pricing policy must be determined. planning function. LIGHT RAIL - LIGHT METRO 3.4.2 Stage 2: Designing the Details of the Analytic and advisory work required Arrangement Designing and implementing an arrangement require Once the objectives, vision, and structure for the sector are set, economic, financial, technical, and legal expertise and the the details necessary to make it work need to be developed. In coordination of that expertise. Detailed work is needed to particular, the following should be considered as integral acti- refine the option to be implemented, to identify the legal vities in designing the PPP arrangement and how it is reflected in measures to support it, and to prepare complex documents, the PPP contractual agreement: such as laws, bidding documents, and draft contracts. · Stakeholder consultation and communication. Knowing what stakeholders want is important because Governments or municipalities usually lack the full range of 6 their contribution to the reform is necessary to make it expertise within the civil service to carry out these tasks sustainable. and so will need advisers to provide some of these skills and · Level of service. The heart of the arrangement is the specialized expertise. Managing transactions of major LRMT level of service to be provided and the tariffs and any schemes with private sector involvement requires specialized subsidy that will have to be paid. This activity involves expertise, and it is likely that transaction advisory support technical and financial work and a large degree of con- from specialist advisers will be needed to help lead the whole sultation (see chapters 4 and 6). process. · LRMT infrastructure. The technical and physical deter- mination of the LRMT infrastructure requirements There will be times when more or less work is needed, and the must be made, and the costs and the resulting invest- appropriate combination of advisers will always depend on the ment plan must be established (see chapter 3). particular circumstances. The cost of advice always needs to · Risks and costs. The entities (both private and public) be weighed against its benefits. Annex 3 contains a checklist of that will bear the risks and costs of the chosen arrange- typical issues to be considered when employing advisers. ment must be determined, and these decisions may influence the type of contract chosen (see chapters 4 and 6). 6 A useful work addressing the appointment and use of advisers in PPP and infrastructure development is "A Guide · Institutions. Entities must be established to oversee the for Hiring and Managing Advisers for Private Participation in Infrastructure" by the PPIAF (http://www.ppiaf.org/content/ development and management of the PPP agreement, view/236/485/). This toolkit provides a comprehensive and thorough guide to the issues surrounding the hiring of as well as to supervise and adjust service standards and advisers to support government officials involved in increasing tariffs. private participation in infrastructure. The toolkit focuses on hiring advisers to increase private sector participation in the · Legal frameworks and contracts. Documents must be following sectors: electricity generation, transmission, and drafted to ensure an effective legal arrangement (PPP distribution; natural gas transmission and distribution; water and sewerage; solid waste; telecommunications; railways, agreement). The documents must reflect all the design ports, and airports; and roads. points and ensure stability of the long-term arrangement (see chapter 5). CHAPTER 3 Source: http://www.sxc.hu/ 3.4.3 Stage 3: Selecting the Private Service 3.4.4 Stage 4: Managing the Arrangements Developer Selecting the developer involves both ensuring that the Importance of a reform leader opportunity is attractive to potential private service develo- Early on, the government may wish to choose a reform STRUCTURING PRIVATE SECTOR PARTICIPATION pers and using good processes to determine which developer leader--that is, a government entity that has appropriate will be the best partner. skills, capacity, and responsibilities and that can champion and coordinate the overall process. Choosing the right entity Involving private service developers early in the process is sometimes difficult. For example, if local transport services is usually a good idea because it increases the likelihood are a municipal responsibility, should the reform leader be that developers will be interested in the arrangement. The the municipal administration (which has the appropriate government will also need to consider the kind of developers responsibility) or a central government agency (which has more it wants and can expect to attract. The possibilities range power and capacity)? It is advantageous to establish the reform from large international investment groups with experience leader at the earliest stage, while policy is still being developed. in private participation in transport schemes to small local Other tasks under policy development are addressed in later firms, alternative providers, and individual entrepreneurs. sections, including the following Chapter 8 describes ways to involve private service developers · Allocating responsibilities to different tiers of go- and investors during the development process in a structured vernment. For example, which level of government fashion that limits the risk of any developer's receiving an should have responsibility for transport services? unfair advantage or otherwise affecting competition for the · Deciding on the market structure. What level of com- arrangement. petition or control of tariffs and fares will be provided, and how will the LRMT scheme operate within the After having decided on an arrangement, the government local transport sector? needs a suitable private partner. Processes to select and reach agreement with a private sector developer can be divided into Setting up institutions to manage the process three broad types To manage the process, the government needs to do the fo- · Competitive tendering llowing: · Competitive negotiation · Clarify which level of government is responsible for · Direct negotiation managing the process in the long term. · Set up a streamlined management structure with SECTION B Often, the best result can be achieved by competitive tendering, strong analytic capacities and a reporting structure with prospective developers competing in a formal, structured that brings powerful decision makers into the process process. However, sometimes other approaches are suitable, in an effective way. for example, when bidder interest is limited or when innovative solutions are needed that are hard to define in advance. We address these processes in some detail in chapter 8. 57 LIGHT RAIL - LIGHT METRO Setting up a transaction management The project management and decision-making structure can be arranged in many ways. Characteristics of a successful structure structure will likely include the following: A number of factors are involved in setting up a transaction ma- · A competent, dynamic, and focused project team, nagement structure: with a mandate to develop options and proposals and · Project team with suitable skills. For reform to proceed to describe them clearly. smoothly, the public authority leading the transaction · A decision-making group that includes enough in- (for example, the grantor) may need to establish a fluential people to ensure that the group's decisions project team (box 3.5). The team could consult with in- are not undermined, while being sufficiently focused terested stakeholders or representative forums, while to provide clear and rapid responses to proposals viewing the process from a broad social perspective from the project team. that focuses on achieving the government's objectives. · A reform champion a senior individual who is The project team's skills are crucial. The team typically committed to moving the process along and over- includes senior individuals drawn from the grantor coming inertia. agency and other agencies with a particular interest or area of responsibility related to the project. The composition of the project team and steering group may · Effective delegated powers. The project team will change during the process. For example, different structures typically have an advisory role, with the grantor's may be suitable for the policy development and transaction approving all key decisions. The project team's implementation phases. Following selection of a preferred delegated powers should allow the reform process to bidder, the grantor may form a separate negotiation team, and proceed in a timely, efficient, and transparent manner following contract implementation, the grantor may form a with appropriate checks and balances. long-term contract management team. · Responsibility to an effective political decision- making group. The project team needs to report to a suitable political decision-making group, generally a Implementing the PPP transaction, including steering group. The steering group may be a cabinet negotiating the PPP agreement subcommittee, a committee of municipal leaders, or After the arrangements have been designed, the emphasis a combined local and national-level committee. The shifts to marketing the transaction. Marketing requires a tran- steering group should make decisions, with reco- saction manager who knows the potential developers well. mmendations from the project team. Technical, financial, and economic specialists will all be involved Box 3.5 in putting together a request for proposals and information Project Team Members memorandum. Lawyers will help ensure that the legal aspects of the procedure are in order and that the transaction is not Project team members might include the following · A high-ranking official from the contracting authority challenged on procedural grounds. Communication with · A legal official with applicable policy and procurement different stakeholders during this process is vital, and commu- experience nications and human relations specialists may be brought in to · A technical officer with appropriate engineering 7 knowledge and experience assist. · A representative with expertise in communication skills · A representative of the local transport authority · A finance officer with experience in the financial management and funding of public utilities and, if 7 Adequate stakeholder consultation is essential, especially given that the alignment (route) of the LRMT scheme will likely go through appropriate, in the negotiation of financing heavily congested urban areas. arrangements with private investors and public-private lenders CHAPTER · Political representatives such as municipal councilors 3 Prequalification of potential developers typically involves and rules for maintaining and governing the relationship will assessing their financial and technical strength and experien- be needed. Chapter 7 provides advice on how to develop con- ce, and specialists with good judgment in those areas will be tractual arrangements with suitable rules and mechanisms needed. Similarly, once bids have been received, it may be for maintaining and managing the relationship and adjusting necessary to assess the bids from a technical and financial aspects of it over time. The institutions set up to manage the perspective, depending on the bidding procedures used. arrangement may already have the capacity necessary to carry The grantor and its team will lead the negotiations with the out these tasks. They may need assistance, especially early STRUCTURING PRIVATE SECTOR PARTICIPATION developer. Lawyers and financial specialists will be involved in on, to augment the skills required to manage and monitor negotiations to ensure that all the necessary documentation the developer. Technical specialists can help monitor service is executed to make the arrangement legally effective and performance and assess operating efficiency. Financial analysts binding. and economists will be needed for tariff resets, and lawyers for enforcement and dispute resolution. While the PPP agreement Managing the arrangement in the long term and the associated arrangements are being planned, it is worth No matter how well designed the rules and institutions gover- thinking about what assistance will be needed during the ning the arrangements are thought to be, it will take time and operational phase. experience for the parties to truly understand each other and to work together--something that should be taken into To manage the process, the government needs to do the account when the arrangements are designed. following: · Clarify which level of government is res-ponsible for ma- After the developer is selected, the hard work of managing the naging the process in the long term. relationship starts. If the design stage was done well, the rules · Set up a streamlined management structure with strong and institutions created should keep the relationship on track analytic capacities and a reporting structure that brings and serving the public interest. During most arrangements, powerful decision makers into the process in an effective there will likely be fare and tariff reviews and other adjust- way. ments. At the end of the initial contract period, the govern- ment needs to decide on the next steps. Once the developer starts work, performance under the contract needs to be monitored to ensure that agreed stan- dards are met and also to ensure that all parties meet their contractual and financial obligations. Tariffs and service SECTION B standards may eventually need to be adjusted, and disputes may arise that need to be resolved. Setting up institutions to manage the long-term arrangement Financial close (that is, when the lender is able to start drawing Hanover Light Rail, Germany. down on its loans) marks the beginning of the relationship Photo by and reproduced by kind permission between the grantor and the developer. Good institutions of Rainer Hesse. 59 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ Checklist Incorporating Private Sector Participation in LRMT Initiatives Define and establish an adequate regulatory and Ensure government commitment to PPP agenda. legal framework: o Ensure that the existing framework provides Use the four stages of development adequate legal protections for all parties and implementation to guide preparation: (investors, developers, and so forth). o Developing the policy o Ensure that the LRMT operation legislation and o Designing the arrangement regulations are in place, and, if not, identify the o Selecting the developer "rules of the game" that are to be included in o Managing the arrangement the PPP agreement. Define procurement schemes and ensure that Define and establish a fair risk allocation to allocate res- sufficient financial support is available to support the ponsibilities and risks to the party best able to manage it. project. Ensure that the developer has incentive to make Ensure that the grantor has a thorough understan- smart operating and investment decisions. ding of the nature of models of private participation and the implications of those models (for example, Protect developers from the risk of government ensuring that a management contract has the least expropriation or rule changes. transfer of risk to developer) Perform quantitative analysis to determine the VfM Grantor staffing: of the project. o Determine what expertise the government has in house and what it needs to hire. Develop the grantor's strategy to manage the PPP o Establish a project team with suitable skills. agreement (including bidding and negotiations). o Select a reform leader to champion and coordinate the process. Create a well-prepared PPP model and tendering process: o Involve the private sector at an early stage. o Establish the type of developer the govern- ment wants and can expect to attract. 61 LIGHT RAIL - LIGHT METRO CHAPTER UNDERSTANDING AND MANAGING RISK 4 Source: http://www.sxc.hu/ Understanding and Managing Risk Proactive risk identification and allocation are essential expenses, taxes, and liabilities of projects. Predicting these planning tools in the successful delivery of major infrastruc- numbers over long time frames (generally 20 years or more) STRUCTURING PRIVATE SECTOR PARTICIPATION ture projects. This chapter explores methods of allocating requires the use of a base case to establish values of reve- the risks and responsibilities between the grantor and the nues, costs, and expenses. This base case is then used to de- developer and discusses managing demand risk and the termine the amounts of debt and equity that the project can implications that risk has on the structure of the proposed sustain. Critical to this base case are the identification and 1 public-private partnership (PPP) agreement. According to quantification of risks. Partnerships Victoria (2001), Effective risk allocation is premised on the notion of alloca- "Risk is the chance of an event occurring which ting responsibility for dealing with the consequences of each would cause actual project circumstances to differ from identified risk either to one of the developer or contracting those assumed when forecasting project authorities or through a system of shared responsibilities benefits and costs." (see box 4.1). Risks and responsibilities are usually allocated with the following in mind: 4.1 ANALYZING RESPONSIBILITIES AND RISKS · Project risks and threats to project costs are mini- Commercially viable and cost-effective risk sharing is at the mized by allocating particular risks to the party in heart of all successful PPP projects. Responsibilities and risks the best position to reduce the probability of the risk should be viewed as two sides of the same coin. Effective being realized and in the best position to manage the risk allocation is an integral part of a project's success and consequences of the risk after it has materialized. is one of the most complex elements of a project arrange- · One party may be better placed to diversify or ab- ment. Although decisions on risk allocation have important sorb the risks than the other parties involved in the efficiency and distributional implications, the real challenge arrangement. is to reduce risks so that they no longer constitute a signifi- · Allocating a risk to a party should provide incentives cant impediment to private financing of infrastructure projects. for the party to spend time and resources in delivering The precise allocation of risks among various parties is typi- the expected outcomes. cally defined after considering a number of factors, including · Not all risks can be foreseen within a PPP agree- the public's interest in the project's development, as well as ment, and therefore the agreement must allow for SECTION B that of other investors and lenders, and the extent of their mechanisms that deal with unpredictable, unforese- ability and readiness to absorb those risks at an acceptable en, or unmanageable events. These mechanisms are cost (UNCITRAL 2001). All parties involved in the PPP arran- best handled in the contract using force majeure and gement have an interest in identifying all the risks that a pro- other clauses for unforeseen events. ject may face and an equal stake in ensuring that these risks do not threaten the project. 1 These projections are not an exact science. Developers and lenders make assessments of the various capital costs, revenues and expected costs, expenses, taxes, and liabilities for the project Financing of large infrastructure projects requires a good on the basis of their experience and their appreciation of country, projection of capital costs, revenues and expected costs, sector, and other risks associated with undertaking the project. 63 LIGHT RAIL - LIGHT METRO Box 4.1 An Example of Risk Allocation between a Grantor and a Developer It must be noted, however, that risks are sometimes allocated During the design stage for a regional project in the Russian on the basis of commercial and negotiating strength, with Federation, which was not to be funded by the Russian fede- the stronger party seeking to allocate unwanted risk to the ral government, the grantor began by allocating the design, weaker party. In such circumstances, the grantor must ensure construction, and commissioning risks to the party granted construction responsibility--the developer. The entire risk that, when developing the PPP agreement, it foresees such of completing the construction within the agreed timetable, a situation and plans accordingly. The grantor must not find budget, and specifications--and of being capable of opera- itself with a counterparty that is unable to mitigate a particular ting to minimum threshold levels--was envisaged to be risk, which could lead to an unsuccessful PPP project. transferred from the grantor to the developer. Good industry practice suggests that it is in the interest of the grantor to transfer this risk to the developer, because the developer is The grantor of a light rail­light metro transit (LRMT) project best placed to assess the feasibility of the project design, to can use a number of strategies to allocate risk. For example, construct the project, and to manage any subcontractors the grantor may seek to have a single developer that has to ensure timely and complete delivery. However, in this various partners within it. Although each partner is responsible particular case, because the authorities did not grant the for a given portion of the PPP agreement--for example, cons- required approvals for the design, the grantor had to develop truction of infrastructure, mechanical and electrical work, a different strategy whereby certain protections were inclu- ded in the PPP agreement that would insulate the developer procurement of rolling stock, operation, and maintenance-- against nonapproval from some government entities not the project is implemented as a single PPP agreement with a under the responsibility of the grantor but nevertheless still single counterparty: the developer. The developer is ultima- part of the government. Not allowing for this mechanism tely responsible for the full and timely delivery of the PPP would have meant either that the bidding developers would agreement regardless of the internal risk allocation among have had to price such approval risk into the project, thus resulting in a greater cost to the grantor, or that the grantor the different parties. This arrangement is known as a unified would run the risk that the bidding developers would simply approach to the PPP agreement. An alternative to this appro- not bid. ach may be the layering approach, in which the project may be split among two or more separate PPP agreements address- Accepting risks involves costs, and in this case, the developer ing the construction of infrastructure, the procurement of required incentives to take on any substantial risk. At the same rolling stock, and the operation of the system. The choice and time, a grantor should be prepared to pay a premium based on the premise that the party best placed to control and mitigate form of PPP agreements is further discussed in chapter 7. An the risk should be allocated the responsibility. example of the format for a risk analysis matrix developed for a recent major LRMT scheme is given in annex 4. This matrix was developed early in the design and development of the project to bring out the key risk allocation issues and was used as an important and practical tool for effective decision making in a complex situation. Krasnodar, Russia. Photo by and reproduced by kind permission of Rainer Hesse. CHAPTER 4 At each stage, from design and construction to operation, · Counterparty risks are specific risks arising from the LRMT systems face risks. The grantor and the developer must counterparties to the PPP agreement not being able STRUCTURING PRIVATE SECTOR PARTICIPATION identify all project risks and the ways that they are managed. to meet their agreed responsibilities. For example, LRMT projects face standard project risks such Risk magnitudes vary depending on the project phase: Some as country, sector, and project risks. Forecasting operational risks can be allocated early in the bidding process, and some will scenarios and the interplay of the risk variables that compose an exist until the end of the project life. The magnitude obviously infrastructure project is not an exact science, and effective risk affects the optimum risk allocation. The four distinct periods in allocation is an integral part of a project's success. Risks should projects during which risks are allocated are be categorized into those that the grantor or developer will · Before bid submission retain, transfer, or share. · Between bid submission and financial close · During construction In practice, risk allocation is often a product of policy consi- · During operation derations and the negotiating strength of the parties. In alloca- ting project risks, the parties must analyze the strengths of each Each category contains specific risks connected to respon- party to which a specific risk is allocated and that party's ability sibilities within the project environment. Variations in specific to manage the consequences of the risk if it should occur. risks can have positive or negative effects on the cash flow of the project and on the total value of the business. 4.2 COMMON RISKS AND RESPONSIBILITIES Risks can be divided into four broad categories (Mandri-Perrott 4.3 POLITICAL AND MACROECONOMIC RISKS 2009): We turn now to the major responsibilities and risks involved in · Political and macroeconomic risks refer to the possibi- delivering LRMT services. lity that changes in the political and macroeconomic environment will occur that reduce the profitability 4.3.1 Political Risks of doing business in a country. These changes can The developer and the financier face the risk that the project adversely affect operating profits and asset value. may be negatively affected by acts of the grantor, other · Sector risks are risks that the sector will be affected by government agencies, or the legislature. Traditional political economic or other factors that pertain specifically to SECTION B risks include nationalization, new tax regimes, and other that sector more than other sectors. events that affect debt service and profits. Regulatory risks · Project risks refer to those circumstances that may include the imposition of new standards or the introduction have an effect on the responsibilities of each party to of competition, whereas quasi-commercial risks include brea- the PPP agreement and the benefits they may achieve ches by the grantor or interruptions because of changes in the from the project. Project risks may be related to grantor's plans (UNCITRAL 2001). Other political risks include financing, design and construction, or operation and acts of war, rebellion, default, and failure of public sector maintenance. entities. The grantor is normally the project participant with the greatest ability to manage the risk of change in the political climate and therefore often takes this responsibility. 65 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ In some instances, the risks of disruption of construction or operation by individuals or groups against the project will be 4.3.3 Contingent Liabilities Contingent liabilities represent commitments to future expen- borne by the grantor unless the disruption was caused by the 2 ditures if certain events occur (HM Treasury 2003). Many developer itself through a specific act or omission. The same of the risks associated with private sector participation in risk allocation normally applies in the case of legal challenges infrastructure create sizable contingent liabilities for public against the developer that inhibit the developer's ability to 3 institutions. Because such liabilities are uncertain and do not meet project objectives. correspond to definite cash-flow events, simply relying on cash-based budgetary analysis does not take into account their 4.3.2 Change of Law Risk potential impacts on affordability. This issue is important for Changes in law, including adoption, modification, or repeal, the grantor, and a more detailed review of contingent liabili- may happen at any time after a PPP agreement has been ties and their impacts is given chapter 6. signed and become effective. Developers are particularly wa- ry of future changes in any law that might have an effect on the development and operation of an LRMT system (inclu- 4.3.4 Risk of Change in Interest Rate Private investors and local and provincial governments have ding construction and renovation). It is essential to have an almost no control over prevailing interest rates, which are effective mechanism to deal with the consequences of any affected by central government actions. Typically loans are change of law after the bid date (not only after the effective 4 quoted in relation to a floating interest rate (based on some date), particularly if this change requires the developer to 5 reference value such as LIBOR or Euribor), and such interest incur costs or if it results in a decrease in profits. rates change with time and are not controllable by bidders or developers. Usually, governments are not willing to Accordingly, change of law provisions that are included in compensate developers for changes in interest rates during the PPP agreement should determine which party should be construction or operation. responsible for the costs arising from changes in law and how such costs should be funded. This situation is further discussed Because revenues cannot usually be adjusted in conjunction in chapter 7. with interest rate variations, equity holders, lenders, and governments usually prefer that the winning bidder-developer Significant changes in law include source a significant portion of debt at fixed rates through an · Currency or capital repatriation limitations 6 interest rate swap. · Nationalization of developed assets · Import and export prohibitions · Deprivation of the developer rights 5 The London interbank offered rate (or LIBOR) is a daily reference rate based on the interest rates at which banks borrow unsecured funds from banks in the London wholesale money market 2 In the case of disruption to construction, given the urban nature (or interbank market). The euro interbank offered rank (or Euribor) is of LRMT projects, the grantor may wish to give this protection to the the rate at which euro interbank term deposits within the euro zone developer on the assumption that all stakeholder consultations and so are offered by one prime bank to another. forth have been undertaken by the grantor prior to the construction. 6 A swap is an agreement between two parties to exchange future 3 Conventional insurance coverage by the developer may not cover this cash flows according to a prearranged formula. Swaps can be regarded risk or may be so costly that it is not a practical alternative. as portfolios of forward contracts. The streams of cash flows are called legs of the swap. Usually, when the contract is initiated, at least one CHAPTER 4 The effective date is the date on which the contract's obligations of these series of cash flows is determined by a random or uncertain variable such as an interest rate, foreign exchange rate, equity price, or become effective. commodity price. 4 This financial derivative product is used by the developer to Because bidders have no way of managing inflation risk, if manage its exposure to the interest rates it is being charged asked to bear such risk, they will either refuse to bid (the risk for the loans in the project. The swap exchanges a floating rate is too high) or make very conservative inflation assumptions STRUCTURING PRIVATE SECTOR PARTICIPATION loan to a fixed rate loan. (risk pricing), which will push project costs up significantly. In the latter case, it would probably have been far cheaper for However, given that the bidder-developer does not know the grantor to have compensated the developer for actual precisely when financial close of the PPP agreement will occur, cost inflation. For this reason, inflation risk is typically passed it cannot enter into a swap agreement. Bidders must then use through to the end user or the grantor through the indexation assumptions about applicable swap rates as part of their bids of capital grants and other contract payments (for example, even though they cannot control the swap rate until they availability payments and fares). Typically, a transparent in- enter into a swap contract. More than likely, the swap rate dexation formula is applied: It may refer simply to general at financial close will differ from that at the time of bidding, inflation (for example, a consumer price index or retail price and this variation can be positive or negative for the bidder- index) or preferably to a basket of inflation indexes that better developer. Who, then, should take the risk related to the reflect specific project costs, such as construction materials, underlying movement in interest rate swaps? This question power, and labor. It is important that the indexes used are from arises in any country and is a typical risk associated with project public sources to ensure transparency and minimize bias. financing. Countries experienced in PPP transactions have generally opted for the grantor to take the risk of changes in Figures 4.1 through 4.4 illustrate the effects of trying to swap rates between bid submission and financial close. transfer inflation risk to the bidder. The cash-flow projec- tions are for a hypothetical LRMT project with an availability 4.3.5 Risk of Change in Inflation Rate payment arrangement. Figures 4.1 and 4.2 (showing the base Under PPP arrangements, the construction and operational case scenario) assume full cost indexation. In figures 4.3 and risks are mainly borne by the developer. However, inflation 4.4, capital cost inflation is doubled, but everything else is can have a serious impact on the costs (both construction kept constant. This scenario would be equivalent to telling and operational) of a project. To lenders, covering this risk bidders that they will receive an availability payment but also is extremely important to limit their financial exposure and be responsible for any increase in inflation. Under this second to maintain the project cover ratios and the net benefit case, bidder-developers would need to run their analyses with anticipated from the revenue stream. For a typical PPP project, higher inflation rates and derive higher availability payments. SECTION B the time period between bidding and operating is long, and the cumulative impact of inflation over time will be significant. 67 LIGHT RAIL - LIGHT METRO Figure 4.1 Base Case Scenario with Full Inflation Indexation Availability Payments to Cover Debt Servicing Amount Availability payments Debt servicing (principal and interest) 0 3 30 Year Source: Simulation and graph done by Vickram Cuttaree Figure 4.2 Base Case Scenario: Cash Flow from Grantor Cash Flow from Municipality/Government Amount Revenues Revenue from fares and taxes 0 Availability payments 30 Year Capital Expenses grant net payments Source: Simulation and graph done by Vickram Cuttaree CHAPTER 4 Figure 4.3 Base Case Scenario but with Capital Cost Inflation Doubled and No Increase in Tariff or Fares Change in Availability Payments from Higher Inflation Assumptions Amount Availability payments Increase in availability payments STRUCTURING PRIVATE SECTOR PARTICIPATION Debt servicing (principal and interest) 0 3 30 Year Source: Simulation and graph done by Vickram Cuttaree Figure 4.4 Doubled Capital Cost Inflation Scenario: Cash Flow from Grantor Change in Payment from City/Government Amount from Higher Inflation Assumptions Revenues Revenue from fares and taxes 0 Availability payments 30 Year Increase in net SECTION B Capital payments Expenses grant Increase in availability payments net payments Source: Simulation and graph done by Vickram Cuttaree 69 LIGHT RAIL - LIGHT METRO 4.3.6 Risk of Change in Foreign Exchange 4.4 RISKS SPECIFIC TO THE LRMT SECTOR Rates LRMT schemes are of such size and complexity that they 4.4.1 Interface Risk typically involve funding and procurement structures that Depending on the type of LRMT PPP agreement and its risk depend on a variety of currencies: allocation, the design, construction, integration, installation, · LRMT PPP projects are often financed with significant testing, commissioning, operation, maintenance, and ultimate amounts of foreign capital in the form of, for example, performance of the assets procured or developed (including syndicated bank loans, bond issues, bridging, and rolling stock) are the responsibility of the developer. A "joint standby facilities, with multilateral and export credit and several liabilities" approach is generally required to ensure agency loans and guarantees that interfaces between parties are tackled and that the gran- · The project participants may have revenues in one or tor bears no residual risk. However, if two parties are jointly and more currencies, but costs in several others severally liable, each party will charge a premium for bearing · Some of the capital and operating costs might be the risk that the other defaults. If consortium parties have very denominated in a currency other than that of the different roles within a project (for example, the infrastructure country in which the project is being constructed contractor is responsible for building assets, and the operator · Project financing involving more than one currency is responsible for providing the services), these risk premiums exposes the project to changes in exchange rates will reflect the maximum risk borne because no party will feel · Changes in exchange rate of local currencies will capable of remedying the other's default. affect the level of planned revenues and profit taken offshore by the developer In developing the risk allocation of a proposed PPP agree- ment, the grantor should be mindful that these high-risk As a result, foreign exchange is a significant issue. Grantors and premiums will increase the total project price. It is usually more developers may mitigate this risk by aiming to reduce reliance cost-effective to properly allocate the interfaces between the on imported inputs or foreign currency borrowing. However, consortium parties. Figure 4.5 is a stylized example of the types in practice, foreign exchange risk is a significant part of most of risk a developer would have under an integrated contract LRMT PPP schemes. and the implications of the risks among the parties within the developer. In some instances, it is generally impractical for the grantor to take all the foreign exchange risk. Additionally, the fiscal effects of taking this risk must be carefully considered. It is possible for the developer to purchase protection against movement in project costs caused by foreign exchange fluctuations. This protection can be bought through a currency swap, which involves exchanging principal and interest payments on a loan in one currency for principal and interest payments on an equal loan in another currency. CHAPTER 4 Source: http://www.sxc.hu/ Figure 4.5 Implications of Risk under an Integrated Contract What the grantor believes it has because it has only one contract: STRUCTURING PRIVATE SECTOR PARTICIPATION developer What the grantor really has (that is, various parties that do not necessarily talk to each other): J&S risk premium J&S risk premium J&S risk premium electrical operations construction and mechanical and maintenance What the grantor should have is a fully integrated contract/agreement that has as part of its obligations the integration of the construction, electrical and mechanical, as well as the operation and maintenance aspects of on an LRMT scheme interface management electrical operations construction and maintenance and mechanical Note: J& S = joint and several. If parties within a PPP agreement have joint and several responsibility, a risk premium will be added. Source: Adapted from a diagram developed SECTION B by François Boulanger. 71 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 4.4.2 Demand Risk Demand is vulnerable to factors such as the following (Mackie, Nellthrop, and Laird 2005 b): Demand forecasts form a key input to the economic appraisal · Economic shocks, including fuel price shocks and of any LRMT project. In a demand assessment, ridership economic booms or recessions measurements, travel times, and vehicle speeds are required · Changing demographics for calculating operating costs and benefits. Future demand · Shifting preferences and growth of competing faci- forecasts are a fundamental input to any economic appraisal lities (for example, roads in competition with rail) (Mackie, Nellthrop, and Laird 2005 a).However, demand fore- · Political intervention casting is typically a complicated process. As an example, · Random error in forecasts when ridership is lower than forecast, the revenue is reduced. · Overselling by the developer or grantor to increase However, when demand is higher than expected, more servi- project scope ces are required, potentially affecting the quality of service. The critical inputs in forecasting ridership include three basic Historically, demand forecasts have proven unreliable, often categories: demographic factors, such as employment and failing to be sensitive to demographic changes, demand shift, population in the corridors where lines are to be located; competition, cost increase, and willingness to pay (box 4.2). number of transit service lines expected, including integration Public transport passenger volumes are difficult to obtain, and with existing services and fare amounts to be charged; and, such flows vary daily and seasonally. Often partial datasets are finally, speed, cost, and convenience of operating and parking used as a basis for estimation. a car (Pickrell 1992). Box 4.2 Specifically, traffic volume responsibilities and risks include · Ridership risk. Projected demand is less than forecast. Difficulty of Forecasting Demand: The risk allocation should be discussed because the United States Experience developer does not have the same level of control over Examples from rail transit projects in the United States de- demand drivers as the grantor or the government. monstrate how local governments used overestimated · Revenue risk. Risk levels may be shared depending ridership and underestimated construction and operating on the agreed payment mechanism (box 4.3). The expense forecasts to support their bids at the expense of less capital-intensive options. Alleviating traffic congestion, developer may opt to receive guaranteed revenue in making people swap their automobiles for public transport, which all fares received are paid directly to the grantor. and reducing pollution levels are some of the main arguments Or the developer may take the farebox revenue and used to support LRMT projects. Ridership forecasts were used to support these arguments, but in many cases, actual ridership pay the grantor a revenue stream. can differ significantly from forecast levels, thereby nullifying · Demand for service. Integration with other forms of the proposed traffic and environmental impacts that may have transport (buses, park-and-ride systems) along with convinced decision makers of the efficacy of the project. A regulatory changes (taxation policies, road provi- major problem has been the difficulty of predicting the number of people who would be drawn from their cars. sions) will all have large effects on the demand for LRMT services. The grantor will bear the majority of Source: Pickrell 1992. this risk because it has greater control over demand drivers. CHAPTER 4 · Fare levels. Depending on the type of PPP agreement and the structure chosen, the grantor and the 4.4.3 Risk of Increased Project Costs Given the high capital cost of LRMT schemes, errors in forecasting developer face the responsibility and risks of setting can have a major effect on the real economic cost of construction fare structures and levels. The main risk lies in the fare of infrastructure, financial planning, and project management. structure being set at levels insufficient to achieve the Unanticipated escalations in construction costs and higher-than- revenues anticipated. expected inflation rates are factors that may lead to potential STRUCTURING PRIVATE SECTOR PARTICIPATION · Fare collection strategy. The ticketing technology, 7 overruns. Clearly, determining which party bears this risk provision of locations, power supply, and monitoring depends on the type of PPP agreement. For example, under a systems are usually the main responsibilities of the net-cost contract with investment (see chapter 3), the developer developer. The primary risk is that the ticketing would be exposed to such escalations, which may affect the collection technology and strategy are not the most grantor. The two main causes of bias in capital cost estimates are efficient. In that case, the risk allocation will differ if as follows (HM Treasury 2007): the developer uses a ticketing collection technology · Inadequate definition of scope and objectives of projects and strategy stipulated by the grantor. If the in the business case: grantor risk developer is allowed to choose the technology, then · Inadequate management of the project during the the responsibility and risk will lie with the developer. implementation phase so that costs are not controlled and contractual risk mitigation instruments are not adhered to: developer risk Box 4.3 Rationalizing Risk Allocation and the Bias in capital costs can be managed by improving the estimation Docklands Light Railway of the capital costs of each option, adjusting these estimates on the basis of empirical evidence, and reducing these adjustments The Docklands Light Railway (DLR) has implemented two on the basis of confidence in the capital cost estimates and the "infrastructure-only" concessions (Lewisham and London City Airport), with a third set to open in 2009 (Woolwich Arsenal) risk management and mitigation systems (box 4.4). and a fourth in development (Dagenham Dock). DLR's first concession (Lewisham) was the first transportation private Box 4.4 finance initiative in the United Kingdom. It was structured such Possible Limits on Use of Capital that the concessionaire (City Greenwich Lewisham Rail) would be paid an availability fee for the first 10 years and then would In projects where the central government is providing grant take farebox risk for the final 11 years of the concession period. funding, it may decide to limit funding to an agreed ceiling. Any cost Planners later realized that this approach to risk allocation did overruns are borne by the developer. This arrangement provides not offer good value for money because the concessionaire had a direct incentive for the developer to place more effort into SECTION B little or no influence over ridership-related factors. Under the ensuring the accuracy and the reliability of the forecasts used. A infrastructure-only contract structure, the concessionaire was degree of uncertainty is to be expected when forecasting ridership not involved in system operation and could not influence the and capital costs, and such uncertainty cannot be eliminated. quality of services beyond ensuring that infrastructure assets Nevertheless, when assessing the bids, the grantor needs to ensure were in good order. Consequently, subsequent infrastructure- that the developer has made suitable contingency allowances. only concessions have been based entirely on an availability payment system, which aligns assessment and payment criteria Source: Author more closely with the factors under private control. 7 For example, in the U.S. study (Pickrell 1992), it was found that most cost Source: Author from various sources. overruns were the result of critical errors in forecasting either the volume of materials and services required to build and equip projects or the future costs of purchasing inputs. 73 LIGHT RAIL - LIGHT METRO Demand forecasting has a direct effect on establishing capi- tal and operating costs. When evaluating bids, the grantor must carefully evaluate the forecasting techniques used by the developer to establish project costs. For example, reducing the forecasting horizons used to predict ridership would reduce the time frame within which unanticipated demographic changes, demand shifts, and changes in the legal environment could affect the forecasts (Pickrell 1992). Additionally, the grantor may wish to perform its own engineering studies to develop a comparator estimation of the project's capital costs and future operating expenses. 4.5 PROJECT-RELATED RISKS Grantors and developers face a large number of project- related risks. To an extent, certain sector risks (such as de- mand risk) can overlap as project risks. However, at its core, an LRMT project is a partnership. The grantor has the difficult task of managing price certainty versus price minimization. Accordingly, the following key risk allocation rules should be kept in mind to balance transferring full risk against creating the right incentives for the parties to the PPP agreement: · If a developer perceives a risk to be outside its control, it will tend to price this risk on a worst-case basis-- especially now that corporate boards are aware of difficult LRMT projects. · Economically, it does not make sense for the grantor to pay the same price when a problem might happen as would be payable were the problem certain to happen. · For such risks, if the grantor is not itself capable of managing those risks, the emphasis should be shifted toward incentivization (for example, "cost + fee + pain/gain" approaches). · The optimal incentive is such that the "pain/gain" is commensurate with the cost of doing one's best. CHAPTER 4 Source: http://www.sxc.hu/ 4.5.1 Development Risk The development phase involves the preparation and procurement of the project up to financial close of the PPP agreement. This phase includes the invitation to tender and bidding, the negotiation of the PPP agreement and various project documents, and the effort to obtain debt and equity funding. Given the nature of LRMT PPP projects, both the developer and the grantor will expend significant time and 8 resources negotiating the PPP agreement. The costs during STRUCTURING PRIVATE SECTOR PARTICIPATION this phase are understood to be normal development costs, and generally each party bears its own risk. Occasionally, depending on the way the bidding process is designed and what is allowed in the tender documentation, the grantor may cover some of the developer's bidding costs. In figure 4.6, we show the typical composition of an LRMT project cost. It is important that the grantor be mindful of the possible changes in costs that occur once the PPP agreement is implemented. Figure 4.6 Typical Cost Composition of an LRMT Project 155% Initial budget construction estimate 100% Planning/scope definition contingency 8% Fare box 18% Construction contingency 15% SECTION B Systems integration 12% Funding costs 2% Source: Adapted from a diagram developed by François Boulanger. 8 Financial close means that the loan agreements are in place, and the first drawdown can be made on the loans. 75 LIGHT RAIL - LIGHT METRO 4.5.2 Design and Construction Risk 4.5.3 Performance Standards Risk Design and construction risks relate to responsibilities The norms and standards that are to be applied during both associated with the design, procurement, engineering, construction and operation in the LRMT PPP agreement construction, completion, testing, and commissioning of need to be established early. Generally the developer will the tracks and stations and with any integration that must take risks on the basis of established norms and standards take place with existing systems. Depending on the type (for example, European Union standards). In many countries, of PPP agreement chosen, the grantor will usually provide rules and standards for such systems do not exist, and in such specifications--or sometimes reference designs--for the situations, the absence of applicable laws will require special proposed LRMT scheme, and the bidding developers will base technical requirements to be developed and approved by the their bids on these specifications. The risk allocation during the appropriate governmental department. design and construction phase is complex, as follows: · Design. Whichever party takes responsibility for 4.5.4 Existing Services the design generally takes the risk of errors in If the developer is taking over existing services and infras- design that may lead to the failure of the project to tructure in addition to delivering new services, the payment satisfy contractual requirements or laws. The risk mechanism should be structured to incentivize the developer of faults or changes in design, latent defects, and to deliver the new services on time and not limit its outputs to asset life expectancy would have to be specified existing service levels. A critical question must be asked: When and responsibilities allocated. If the grantor requires does the developer take over the responsibility for existing variations, it typically bears that risk. service delivery? There are three general options (HM Treasury · Permits and access. The grantor is responsible for 2007): providing support to the developer in obtaining the · Following financial close, responsibility for all sites is permits and licenses necessary for the construction taken over by the developer. This approach provides and operation of the LRMT project. However, the for a clean, uncomplicated arrangement and is re- developer has ultimate responsibility for obtaining commended in most cases. Where there are con- such permits and licenses. The grantor is also cerns over the condition of assets, the grantor may responsible for guaranteeing the timely delivery of have to take on additional risks, which may prove land required for the development of the project, free unacceptable. of legal or physical encumbrances, and will bear the · A phased handover is used, in which the developer costs of dealing with these encumbrances. takes over responsibility for sites at the same time that · Construction. The developer is responsible for cons- it begins work on them. Under this scheme, the gran- tructing the project to the agreed specifications, tor will retain responsibility over some sites between including construction, integration, installation, test- financial close and the start of construction. 9 ing, commissioning, operation, and maintenance · The grantor takes responsibility for bringing existing tasks. The developer carries the risk of increases in sites up to a basic specification standard before hand- construction costs (price of labor or materials) and ing them over to the developer. 10 is also responsible for the performance of all sub- contractors. The developer also generally bears the 9 It must be noted that this scenario may add greater complexity to the PPP arrangement. risk of delays. 10 This arrangement is especially complicated because additional contractors will be party to it, thereby increasing the scope for disputes between developers and contractors. CHAPTER 4 The grantor must define an expected service level for existing services during the period in which sites are handed over to 4.5.6 Government Guarantees Guarantees are provided by the government to support the developer but before the full service commencement 11 infrastructure investments and to transfer risks from the stage has been reached. Limiting such risk requires a common developer to the government to make an arrangement understanding of services, including financial management more attractive to the private sector developer. During the services and maintenance services. Furthermore, the grantor construction phase of a project, developers may be using should specify the level of repair services needed to maintain STRUCTURING PRIVATE SECTOR PARTICIPATION inputs whose costs depend on the exchange rate, and the existing standards. Two options are available to the grantor to value of these inputs rises and falls with the local currency. manage this risk: In such cases, the government may provide an exchange · Run the existing services according to the specifi- rate guarantee to mitigate the effects of depreciation in the cations defined for the new service commencement currency (for example, fare dollarization). during the transitional period but with a more relaxed payment and performance regime. The concern with Developers face reduced incentives to improve performance this method is the risk of performance failures if the levels when government guarantees cover a risk that the existing facilities are in bad condition. developer is capable of managing and controlling better than · Create a tailored expected service-delivery specifica- the government (Irwin 2007). tion that sets out required services, taking into account the conditions of existing assets and what When government guarantees are provided, the contingent can reasonably be expected. If the developer cannot nature of the guarantees makes valuing them difficult, and meet expected delivery requirements for the transi- this situation raises issues about how they are to be accounted tion period, a tailored delivery agreement will be for within the government's financial and budget reports (Ter- required. Minassian 2005). 4.5.5 Financing Risk 4.5.7 Operational and Maintenance Risks Depending on the level of capital grant and subsidy, the Operational risks refer to the responsibilities associated developer will be responsible for raising the private financing with operating the existing and new assets and maintaining necessary to complete the project. For the portion of funding them to required standards. Depending on the type of PPP that is to be privately financed, the risk of increases in the agreement, the grantor may take less or more of the ridership interest rate or inflation rate should be borne by the developer and revenue risk. The grantor and developer must determine after financial close. This concept is discussed in further detail who will take the risk of integrating the system with existing in chapter 6. modes of transportation. The developer will be responsible SECTION B for the standard of performance in accordance with whether 11 In specific LRMT PPP agreements, the service the service provided to users meets the standards set out in commencement date is the date on which the PPP agreement is signed and comes into force. After that date, the construction the PPP arrangement. Typically, the developer is responsible or development obligations are undertaken by the developer, for costs of operations and maintenance, including any costs and the operation of service is due to commence, provided that the grantor has accepted the infrastructure that has been related to latent construction defects for which the developer developed for the purpose of providing the LRMT services. is responsible. 77 LIGHT RAIL - LIGHT METRO 4.5.8 Environmental Risk 4.6 RISKS ASSOCIATED WITH MANAGING The developer will be considered responsible for meeting THE PPP AGREEMENT environmental norms and standards, such as those related The mechanism for implementing and monitoring risk allo- to noise pollution and emissions. However, the grantor will cation rules must balance the required certainty of the PPP retain certain responsibilities related to specific issues such as agreement in the future with a need for possible adjustment 12 preexisting conditions or special compliance waivers. if there are unanticipated changes in laws, indexation, and value testing--critical factors in operating cost risk (box 4.5). 12 In some instances, the developer may be granted special Developers will be more willing to take on risks related to waivers that have been allowed to the grantor with respect to, for example, European environmental directives. Such waivers do not unforeseen changes in the operating environment if they are mean that the developer does not have the ultimate responsibility to, against an agreed timetable, meet the standards. In such given assurances that they can quantify through value testing situations, the PPP agreement must specify a schedule for the phase-out of the waivers. in order not to be disadvantaged (HM Treasury 2007). Box 4.5 Risk Allocation and Compensation Paid to Canada Line's Developer The Canada Line rail rapid transit system is part of an integrated transport network for the entire Vancouver metropolitan region. This system includes commuter rail, light rail, bus, and marine transportation services all under the supervision of a regional transportation authority (TransLink). TransLink has full responsibility for fare setting and structuring, service modal integration, and other policy-related decisions across the entire network (including Canada Line). In structuring risk allocations for Canada Line's concession agreement, planners accordingly decided that TransLink would be best suited to endure the majority of demand and revenue risks, given the effect that nonoperating decisions had on system ridership. Nevertheless, planners also wanted to align some portion of the concessionaire's interests with TransLink's ridership-related goals. Accordingly, Canada Line's contract ties 10 percent of the concessionaire's payment to the system's customer volume. Calculating this volume payment involves: a. A base forecast credit ridership estimate (excluding airport-only ridership). b. An agreed base volume payment. c. An agreed shadow fare per paying customer. During the system's operating phase, this information determines three possible payment scenarios: a. If ridership equals forecasts, the concessionaire receives the base volume payment. b. If ridership exceeds forecasts, the concessionaire receives the base volume payment plus the difference between actual and forecast ridership, multiplied by the agreed shadow fare. c. If ridership falls below forecasts, the concessionaire receives the base volume payment minus the difference between forecast and actual ridership, multiplied by the agreed shadow fare. Independent consultants prepared Canada Line's initial ridership study, which formed a basis for the system's base credit ridership estimate. However, Canada Line's contract specifies automatic revisions to this forecast at the commencement of services, two years after service commencement, and every five years thereafter. In addition, both TransLink and the concessionaire can trigger a forecast reassessment if any of the following events occur: · The system's service plan changes. · Planners expand services by adding stations along the existing route. · Bus services change. · Changes occur in the region's traffic demand management initiatives (for example, changes in road pricing or tolls). · TransLink increases fares more than 5 percent (in real terms) over the average fare during the previous five years. · Changes occur in the system's fare structure. · Average morning peak hour ridership during a three-month period exceeds a certain level near the system's maximum designed capacity. Source: Author interview with Canada Line CHAPTER 4 4.6.1 Payment Mechanisms The financial implications of a PPP agreement will depend on LRMT systems tend to use availability payments and perfor- its type. Put simply, the payment mechanism contained within mance payments as the basis for the arrangement's structure; the PPP agreement details the payments that the grantor that is, the developer will receive payments for providing an will make to the developer and also sets out the framework available service and will incur penalties or no payment when of incentives used to encourage the developer to provide an the service is unavailable or if certain performance indicators STRUCTURING PRIVATE SECTOR PARTICIPATION efficient service at a cost that provides value for money. are not met. The specifics of these arrangements are discussed How a grantor contributes financial support to a PPP arrange- later in this chapter. ment and how much it contributes are often dictated by what is necessary to attract private sector financing and to promote 4.6.2 Use of Bonuses and Penalties the success of the project (Torres de Mästle and Izaguirre The grantor can use bonuses and penalties as part of a 2008). Some of the mechanisms used by the government to mechanism for enforcing the risk allocation rules. Additionally, reduce the risk of private financing for LRMT schemes follow: bonuses and penalties can be used to enhance the developer's · Shadow fares are paid to the developer by the incentive to carry out its general responsibilities under the government on the basis of ridership or passenger terms of the contract and to meet agreed performance throughput. Fares are not charged to users. Financing targets. Penalties and bonuses should reflect the economic is based on a long-term agreement in which the costs and benefits of the behaviors that they are trying to grantor makes regular payments that are based on prevent or promote. Without such incentives, the grantor ridership throughput and other performance mea- reduces its ability to influence the developer and to demand sures over the long term of the PPP agreement. any improvements that may be required. · Availability payments are paid to the developer by the grantor on the basis of the availability of service and 4.6.3 Price Variations required capacity of infrastructure, including rolling The regulations for adjusting the payment structure are stock, regardless of actual ridership volumes. a critical component in the risk allocation architecture. · Capital grants cover part of the infrastructure cons- Throughout the life of the contract, a number of variables, truction costs. Where ridership revenues would not such as inflation, input costs, and legal regulations, are likely to be enough to recover the full construction cost of a change in unpredictable ways. To reflect these uncertainties, project, reducing the privately financed construction the PPP arrangement should allow adjustments to the pay- costs can make the project more financially attractive ments over time. Such adjustments will ensure that the de- to the private sector. veloper continues to earn a reasonable rate of return and · Minimum revenue guarantees are payments made that incentives are maintained (Kerf and others 1998). The SECTION B by the grantor to the developer if the ridership or developer should always be encouraged to control costs, but revenue falls below a specified minimum. Conversely, mechanisms to control unanticipated increases can go a long if revenues are higher than forecast, the developer way toward reducing excessive contingency risk pricing in the will share these revenues (at an agreed level) with the developer's bid. grantor. 79 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 4.6.4 Risk of Inflation: Indexation A chief concern for the developer is the risk of costs inflating six months. The indexation process aims to compensate the over the life of the PPP agreement, thereby rendering the developer for the effect of exogenous cost increases on the payments made insufficient to cover the operating and developer's inputs. More important, indeces reduce the risks financing costs. The availability payment should be indexed, faced by the developer without blunting the performance and the proportion of the payment to be indexed should incentives (Kerf and others 1998). The indexation formulas be determined at an early stage. The choice of indexes or automatically adjust fares according to agreed rules. Specific proportion should be determined by the grantor, not the indexation formulas can adjust fares according to changes in bidding developer, to facilitate comparison of rival bids. The the rate of inflation, consumer price indexes, or a consumer developer is protected by the use of benchmarking or market price index related to changes in the system's likely costs, such testing. Value for money is achieved by indexing the propor- as a basket of prices, exchange rates, or specified inputs. tion of the availability payment that matches the proportion of total costs represented by any of the components of the 4.6.7 Residual Value Risk developer's underlying costs that are not fixed. Indexations If an asset still has value (not fully depreciated) after the PPP that reflect the underlying cost exposures faced by the agreement has expired, the grantor should agree on how this developer can reduce the cost risks and provide large savings residual value should be treated. Under PPP financing, assets over the duration of the contract (HM Treasury 2007). will typically be depreciated against a given depreciation schedule. In most long-term PPP agreements, there will be 4.6.5 Cost Pass-Through a residual value at termination, especially if significant in- Cost pass-through is usually used to cover the cost of risks vestments have been made toward the end of the contract over which the developer does not have any control. As may period. If the grantor wishes the assets to be transferred be applicable depending on the type of LRMT agreement, on expiry at zero value, accelerated depreciation would be when input costs rise, the fare adjustment rules agreed upon required. Alternatively, if the assets are transferred at expiry between the developer and the grantor will allow for the at net book value (that is, the residual value), the grantor changes in the costs to be passed through to passengers. would pay this residual value to the developer at expiry, but Changes in inputs for LRMT projects can include changes in tax would not have to suffer large availability payments in the final structures or regulations governing the operation of the LRMT years of the PPP agreement. This residual value would easily be system. audited from the financial project accounts of the developer; it is a transparent and fully auditable transfer value. Other issues 4.6.6 Fare Risk: Indexation Formulas that the grantor should consider are as follows: · Is the grantor likely to require use of the assets after Fare indexation formulas alter fares to reflect changes in an expiry? index of prices and do not necessarily reflect changes to a · How will the residual value transfer affect any termi- developer's costs. Instead of changing in response to specific nation payments when the PPP agreement ends? events, fares are adjusted at regular intervals, such as every CHAPTER 4 4.7 MANAGING THE DEMAND OR FAREBOX RISK Given the problems of reliability of demand forecasts, the grantor may choose to provide either availability payments STRUCTURING PRIVATE SECTOR PARTICIPATION or minimum revenue guarantees as a means of mitigating the demand or farebox risk. 4.7.1 Availability Payment Structure An availability payment is a payment made by the grantor to the developer. The grantor must define the conditions that must be met by the developer for the service to be classified as available. Given the link between this classification and the payment mechanism, the developer (and, as appropriate, its constituent members) must ensure that these conditions are reasonable, measurable, and achievable under the PPP agreement. The provision of core functions lies at the heart of the defini- tion of availability, and the arrangement should determine a simple mechanism for measuring whether these core functions are being satisfactorily provided. In the case of LRMT services, the core function is for the developer to operate and maintain the LRMT system to the specifications determined in the PPP 13 arrangement. This requirement means providing an LRMT system that delivers commercially attractive service patterns capable of carrying riders at a minimum level of comfort. Unavailability should be measured in a simple way to avoid excessive monitoring costs. Unavailability means that the SECTION B developer is not able to meet the core service provisions set out in the PPP agreement. 13 In countries with significant perceived risks, an availability payment is likely to be more attractive to the private sector developer and will allow cheaper financing because the weighted average cost of capital will be reduced. Additionally, an availability payment grants the city greater control over tariffs, and it generally leads to a shorter tendering period. 81 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ How is an availability payment usually set? Depending on the type of PPP scheme chosen for the LRMT project--and assuming that the developer has no other cash flows or means of paying its costs or debt service (that is, the developer is not taking any farebox risk)--the availability payment should be calculated, adjusted, and paid in a manner that enables the developer to meet its financial commitments. Typically, the availability payment begins in the first year of operation and will be set at a level that will achieve the desired internal rate of return (IRR) or debt-service coverage ratio (DSCR). The availability payment can be optimized to reduce the total contribution from a grantor through indexation to inflation and other payment factors. The user defines the project's target IRR or DSCR, and the revenue is collected by the grantor. The availability payment is then made during the operating years and indexed to inflation and payment factors. The availability payment can be reduced in duration or level after a negotiated number of years. Figure 4.7 represents a sample LRMT project where a capital grant together with an availability payment is paid by the grantor. It shows the revenues expected from passenger ridership and indicates when payments from the grantor should reduce as capital costs are repaid and the system starts generating greater revenues. Figure 4.7 Cash Flow of Simulated LRMT Project with an Availability Payment and Capital Grant Payable by the Grantor 4,000 3,000 2,000 Currency X 1,000 0 -1,000 -2,000 Time y availability payment other (user defined) fare revenues (after value added tax) perceived other sources of revenue (taxes) government or city grant contribution to capital expenditure from fares net payments by city or government Source: Simulation and graph done by Vickram Cuttaree. CHAPTER 4 In this example, the level of ridership (and thus revenue) is the main risk taken by the grantor. Project cash flows are shown in six 4.7.2 Minimum Revenue Guarantee monthly periods. The blue line represents the net cash flow for Structure The minimum revenue guarantee (MRG) is a payment by the the grantor. When the line is above the horizontal axis, it shows grantor to the developer that reflects the developer's appe- cash flows from the grantor to the developer; when it falls below tite for farebox risk and the lender's minimum sustainable the horizontal axis, it shows cash received by the grantor. cash-flow requirements (for example, minimum DSCR and STRUCTURING PRIVATE SECTOR PARTICIPATION debt-service funding requirements). The level of MRG payment As the figure indicates, during the first 36 months, there is a may vary each year according to costs and revenues. However, net cash payment from the grantor to the developer. This pay- after full debt repayment, the level of the MRG is likely to fall ment is meant to cover the capital grant and the period during significantly. The main difference between an MRG and an which the availability payment exceeds farebox revenues. This availability payment is that under an MRG, the developer does period corresponds to that when the project finance loans take some demand or farebox risk. See figure 4.8. must be repaid. After the developer has repaid these loans, the availability payment requirement will be much lower (mainly to cover operation and maintenance costs). During this subsequent period, farebox revenues are forecast to considerably exceed the availability payment, and there will be net income to the grantor from the project until the PPP agreement expires. The total amount to be paid by the grantor will be highly dependent on re- venue and cost assumptions. Figure 4.8 Diagrammatic Representation of a Minimum Revenue Guarantee 2012 revenue shared 2011 Currency X 2010 SECTION B 2009 2008 revenue guaranteed 2007 Time y minimum revenue revenue collected from fares availability payments revenue shared Source: Simulation and graph done by Vickram Cuttaree. 83 LIGHT RAIL - LIGHT METRO 4.7.3 Revenue Guarantee versus Availability Payment Availability payment and minimum revenue guarantee mechanisms both seek to manage demand risk in an LRMT scheme. The choice will depend on the specific conditions, and there is no right or wrong answer to the usage of either mechanism. Figure 4.9 and table 4.1 show a representation of the main differences between the two systems and compare the revenues under each. Figure 4.9 Revenue Guarantee versus Availability payment: Similar Mechanisms Creating Similar Exposure to the Grantor Availability payment Availability Availability > operating revenues payment payment => grantor pays the difference account Grantor Availability payment < operating revenues Availability grantor keeps payment 100% of difference Operating Operating revenues Revenue < revenue guarantee guarantee => grantor pays the difference Developer account Revenue guarantee Operating revenues > revenue guarantee Revenue guarantee Source: Diagram by Raymond Bourdeaux and Vickram Cuttaree. Table 4.1 Availability Payments and Minimum Revenue Guarantee Structures Availability payments Minimum revenue guarantee · Developer defines the · Developer defines the project's project's minimum DSCR. minimum DSCR. · Revenue is collected · Revenue is collected by the grantor. by the developer. · Availability payment is paid · Payment is triggered only when during operating years and DSCR for period is not achieved. indexed to inflation. · Availability payment · Level of payment each year can be reduced in duration varies depending on cost or level after x years and revenue. It can be reduced (usually after the debt after the debt has been repaid. CHAPTER has been repaid). Source: Author. 4 Checklist Risk Allocation Identify all responsibilities required to successfully deliver the project. Identify all risks associated with these responsibilities: o Macroeconomic risks o Sector risks o Project risks Create detailed risk matrix at design and development stage. Categorize risks into those that the grantor/developer will retain, transfer, and/or share. Allocate risks to the party best able to manage them during the life of the project. Develop risk and responsibility allocation framework. Define the payment mechanism upon which the arrangement between the grantor and developer will be based. Determine the level of government/grantor support of a PPP arrangement (if applicable) as basis of attracting private sector support. Establish whether an availability payment or minimum revenue guarantee will provide the basis for the arrangement's structure. Define the risk allocation rules framework, which will determine the mechanisms for enforcing the rules. Establish bonuses and penalties for enforcing the risk allocation rules. 85 LIGHT RAIL - LIGHT METRO CHAPTER PUBLIC-PRIVATE PARTNERSHIP DESIGN, SPECIFICATIONS, 5 AND PERFORMANCE MANAGEMENT Sofia, Bulgaria. Photo by and reproduced by kind permission of Rainer Hesse. Public-Private Partnership Design, Specifications, and Performance Management STRUCTURING PRIVATE SECTOR PARTICIPATION In designing the light rail­light metro transit (LRMT) public- This definition will directly affect the overall cost of the project. private partnership (PPP) arrangement, the grantor needs to Generally, the cost of providing the LRMT service exceeds the arrive at a final design that balances the provision of public cost that can reasonably be recovered from fares collected services against a bankable technical and economic solution. from the riders (the farebox income). Therefore, capital Additionally, once the contract has been established, the grants and project subsidies (through availability payments, grantor needs a mechanism by which it can ensure that performance payments, minimum revenue guarantees, or the public service objectives are met during the life of the similar mechanisms) may have to be provided. Once the final contract. balance among services, fares, and subsidies has been es- tablished (figure 5.1), the grantor can proceed to establish the In this chapter, we look at some of the key steps in the process final design, financial approach, and contractual basis of the of establishing and maintaining the PPP arrangement. The PPP arrangement. In the long term, the services to be provided process starts with the grantor's defining the scope of work by the developer need to be monitored and controlled, and for the service to be provided and the standards to be met. they need to be linked to some form of performance payment mechanism. Figure 5.1 Balancing Service Standards, Fares, and Subsidies Specify Estimate Set fares and Design Performance monitoring SECTION B service costs subsidies and finance and control Source: Author's representation. 87 LIGHT RAIL - LIGHT METRO 5.1 SETTING SERVICE STANDARDS · Reasonably minimize disturbances (during both cons- truction and later operational phases). In this chapter, we are interested in establishing the first step · Provide for safety (during both construction and later of the project design, where the grantor sets the service operational phases). standards targets to be achieved and the specifications and · Protect environmental resources. standards that will be used to achieve them. · Ensure accessibility for customers with disabilities. · Guarantee the acceptable hand-back condition where 5.1.1 Specifications and Standards private partners own or lease system assets for some The different roles of specifications and standards in PPP period. contracts must be clear: · Protect private partners from subjectivity in applica- · Specifications represent contractual obligations to tion of the contract. perform. In the case of LRMT PPPs, performance typically requires the delivery of particular outputs. Specifications serve to describe those outputs and 5.1.2 Setting a Service Goal The trend with modern LRMT PPP arrangements is a design their allowed variability. based on output, rather than on input. Under a traditional · Standards are criteria used to fairly and objectively approach, every aspect of an LRMT scheme is designed in measure the acceptability of performance. Transport detail, and the contractor must provide inputs exactly as authorities use standards to ensure that outputs specified. This arrangement results in an expensive, intensive, meet required needs (such as safety, punctuality, heavily detailed effort by the grantor. Effectively, the grantor functionality, and longevity). Private partners also has a high level of risk because it assumes that any changes derive a measure of protection from standards it makes to the detailed design are warranted. In the case of because their outputs cannot be expected to exceed Edinburgh, Scotland, the grantor went to great lengths to agreed standards without additional compensation. provide a warranted design for the scheme before the bidding process, taking on considerable effort and cost. Specifications and standards together form integral com- ponents of an LRMT PPP's overall allocation of risks and An output-based approach is well suited to making the best use responsibilities. Specifications set out the "rules of the game" of the private developer's ability to provide the most econo- for both developers and private partners. The relative precision mic and practical solutions within defined technical standards, of contractual specifications should always do the following: to meet defined policy objectives, and to attain defined levels · Fairly articulate expectations to prospective bidders. of service. The service goals are defined contractually (see the · Establish output-based design, operational, and "Performance Management and Control" section 5.6), and maintenance requirements--limiting their acceptable the developer must meet or exceed those goals. In addition to variability in accordance with public needs and the technical issues (for example, construction and provision expectations. of rolling stock and equipment), a number of key issues will be · Ensure long-term system reliability. set as service goals that must be met through the life of the PPP arrangement. These service goals need to be defined early in case, planners should consider (a) drafting new standards, the design process and must be chosen to ensure that achieving (b) using standards from other countries or jurisdictions, those levels of service will accomplish the long-term goals of the or (c) using standards proposed by the private partners or deve- PPP arrangement. lopers. These options are detailed in the paragraphs that follow. STRUCTURING PRIVATE SECTOR PARTICIPATION A full list of service-level goals can cover most aspects of the Drafting new standards LRMT scheme, but for successful contractual implementation, Creating new standards specifically for LRMT systems is it is more practical to consider the fewest "overarching" levels demanding and time consuming, but allow planners to incor- of service goals that will ensure that the project meets the porate both local norms and leading international best practices overall scheme objectives. Key level-of-service issues (given and can be used for current and future projects. A procedure for illustration purposes) could include extent of route served; needs to be developed to ensure that these new standards are investment, rehabilitation, or renewal programs; reliability of kept up to date and relevant. It should be noted that this process service; availability; punctuality; and timetabling. Key "soft" needs to include a way to manage the involvement of various issues could include passenger comfort, customer service, stakeholders. interline management and ticketing, ridership levels, and financial and operational business measures. Using standards from other countries or jurisdictions 5.1.3 Selecting Standards Adopting standards used in other countries is one option for LRMT schemes have a set of acceptable sector standards that quickly acquiring the benefits of international expertise. However, define the basic characteristics of the system and how it should it is not without risks, because standards from other countries perform. As an example, there are comprehensive international often reflect different underlying considerations. For example, standards for most aspects of rolling-stock specifications, and issues may include dissimilar climates, material availability, legal suppliers, contractors, and developers could reasonably be codes, and manufacturing practices (box 5.1). expected to conform to those standards. An indicative list of some of the standards is provided in annex 5. Box 5.1 Standards and South Africa's Gautrain Implementing LRMT systems involves trade-offs between effi- ciently using resources and providing for safety, functionality, Planners for the Gautrain Rapid Rail Link faced challenges regarding design standards for the system's viaduct structures. Existing and longevity. At one extreme, overdesign would be wasteful South African standards were originally intended to accommodate SECTION B and would result in excessive cost, delay, and disturbance. At the heavy freight rail loads--far in excess of Gautrain's needs. other extreme, underdesign could jeopardize the quality of LR- Resulting overdesign would have significantly increased system costs unnecessarily. MT services or, in the most extreme case, public safety. Standards guide designers in striking a reasonable balance between those Design specifications for Gautrain's contract therefore deferred extremes. However, some considerable effort may be needed to to "international standards" for comparable rail systems. This issue became particularly contentious when the concessionaire specify standards suited to the needs of particular LRMT PPPs. proposed a construction design (with only one reference source) Local standards may be limited or nonexistent in countries with that would have potentially limited the system's ability to no experience in implementing modern LRMT systems. In that accommodate heavier train sets. Although this design technically met specifications, Gautrain's grantor had doubts regarding the design's capacity for accommodating future development. Negotiations eventually led the concessionaire to adopt higher design standards, albeit at a greater cost to the public. 89 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ Using Standards Proposed by Private Partners amount of money invested. It includes money earned Allowing private partners to propose their own standards can (a return) on both debt and equity. Typically, the cost offer economic and service advantages. However, the grantor of debt is the interest that lenders charge, whereas will need to verify the appropriateness of the proposed stan- the cost of equity is the return to the sponsors of dards to ensure their adequacy and sustainability. In accepting the project, stripping out the return committed to the developer's standards, the grantor is implicitly accepting debt servicing. The so-called weighted average cost a higher level of risk. Additionally, verifying and controlling of (debt and equity) capital is usually considered an those standards will be a time consuming and possibly costly appropriate measure of the return on capital. process, and further protections will need to be established within the PPP agreement. 5.2.2 Capital Costs The capital costs of building the infrastructure for an LRMT 5.2 COSTING system are significant. Those costs depend on many factors, a After the initial objectives have been set, the grantor should dominant one being the vertical alignment of the LRMT system estimate the cost of providing the service. However, much con- (that is, the portion of the system that must be elevated), fusion still surrounds the definitions of cost of service and cost because vertical alignment typically requires more expensive recovery. This section focuses on average costs as the starting structures than when the system is at grade. point for determining the level of project investment and income required, as well as some issues about the role of fares The grantor should recognize that costs also depend on some in LRMT PPP schemes. of the following physical factors: · Design of a new system or progressive expansion of 5.2.1 A Definition of Cost of Service an existing system. · Ground conditions that may require special con- The cost of service has three elements: struction, increased foundations for elevated · Operating and maintenance expenses. These are the viaducts, and so forth. day-to-day expenses involved in providing services · Urban constraints and topography, including, and keeping the system functioning. They include for example, utilities (water, electricity, gas, tele- labor, electricity, materials, repairs to equipment, and communications, and so forth) that may need to be the like. diverted; proximity to buildings; ability to divert ta- · Depreciation. Depreciation is the reduction in value riff (both pedestrian and road traffic); environmental of system assets over time. It is roughly equivalent constraints; and earthquake protection. to the amount of money needed to replace assets as · Specific system features, such as longer stations that they wear out. may be required given rolling-stock specifications; · Rate of return on investment. Sponsors and lenders stations that have a dual purpose as civil defense will require a return on the debt and on the equity that shelters; air-conditioning or sound requirements to they raise for the project. The return is the amount of deal with specific weather conditions; and special money gained or lost on an investment relative to the access to stations and trains. · Design and safety requirements. CHAPTER 5 Source: http://www.sxc.hu/ Furthermore, a number of financial factors should also be considered, including the following: Box 5.2 The Capital Maintenance Approach to STRUCTURING PRIVATE SECTOR PARTICIPATION · Financing costs that may be affected by the willing- ness of the private sector and other lenders, as well as Costing the capital markets, to provide debt to the project The capital maintenance approach focuses on measuring the · Interest rates and maturities available for such debt expenditure needed to maintain assets at their current level · The debt-service coverage ratios that the lenders will of serviceability. This approach recognizes that assets such require and other associated conditions imposed by as track or rolling stock do not generally wear out and then the lenders, including the developer's level of debt get replaced all at once, but rather they are maintained and renewed in a continual process. Measuring expenditure on and equity capital maintenance for an asset can thus be an alternative to · The availability of bilateral, export credit, government, including depreciation of the asset in the measurement of cost and other funding sources for the project of service. · Exchange rates between the local currency in which In any particular period, capital maintenance expenditure and debt will be made available, including the cost of any depreciation can differ. When the asset base is relatively new, 1 currency exchange depreciation is likely to be higher than the capital maintenance expenditure because the new assets will require little main- · Land costs tenance. When the assets are old, capital maintenance costs · Labor costs might exceed depreciation. When the assets are in a steady · The tax and accounting regime, which will influence state, one would expect depreciation and capital maintenance such issues as the level of asset depreciation allowable, expenditure to be generally equal. The corollary is that depre- ciation charges can provide a guide to the appropriate long-term tax treatment of financing and interest payments, level of capital maintenance expenditure necessary to maintain and so forth the light rail­light metro transit project's asset base. 5.2.3 Cost Recovery Source: Tynemarch Systems Engineering and Stone & Webster Consultants 2002. LRMT systems differ from many other public service models in that the ideal of full cost recovery is not often met; the fare Accurately estimating the cost of service is onerous and tech- income is often insufficient to fund operating and maintenance nical. We do not look at the techniques for cost estimation here, costs and the major investment costs of new construction, but note its importance. The essential point is that the grantor SECTION B renewal, and renovation. Full cost recovery requires fares to will want a good estimate of the full cost of providing any level yield enough revenue to recover all these costs. However, even of service so that it can establish and monitor an operationally though full cost recovery may not be achieved, it is important and financially viable project. Simply put, for the LRMT system that the total costs of the scheme be assessed when the LRMT to be viable, the sum of tariffs and subsidies must add up to the scheme is designed. One approach is described in box 5.2. total cost of service. 1 In some jurisdictions, limitations are imposed on the level of foreign currency that may be used for a project, or a cap is imposed on the amount of profit that may be repatriated. 91 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 5.3 DETERMINING FARES AND SUBSIDY REQUIREMENTS 5.3.1 Farebox Income, Subsidies, Availability Payments and Shadow Fares, and Capital Grants After the cost of providing the LRMT service has been estimated, the next step is to check how much of that amount should be recovered through farebox income and how the balance of capital and operating costs can be recovered through the funding arrangement for the LRMT project (figure 5.2). Figure 5.2 Balancing Income with Cost of Service For project to be viable, fares + subsidies = total cost of service Capital grants Cost of capital Availability payment Depreciation/Renewal Shadow fares Fare box income Level of service COST OF INCOME SERVICE Source: Diagram by David Stiggers, 2009 CHAPTER 5 5.3.2 Fare-Setting and Cost Recovery Issues authority--or even the private developer--to allow the planned increase through fear of social or political In setting the income that the LRMT system must earn, the STRUCTURING PRIVATE SECTOR PARTICIPATION unpopularity. grantor needs to consider not just the full cost of service as · External benefits. Transport or environmental po- described previously but also the annual cash needs of the licies make it socially beneficial to charge people less developer and the financial ratios required by lenders. Some than cost (for example, to attract ridership from possible implications are described in chapter 6. other transport forms). A variety of issues associated with the LRMT scheme may benefit the community LRMT services may also have external costs, such as the costs at large, rather than just the riders themselves, and to relocate people and businesses on the chosen route. At a these issues may be a further reason to subsidize the social level, these are real costs. However, they need only be tariff system. For instance, transfer of other traffic incorporated in the cost-of-service calculation if the govern- to the LRMT system can (a) reduce road congestion, ment has decided to impose these costs on the LRMT system. (b) effectively reduce pollution, (c) improve social There are three reasons riders' fares that recover the full cost economic measures through reduced journey times, of service might be considered too high: and (d) foster planned urban development. As · Willingness to pay. People are unwilling to pay the full an example, the Kuala Lumpur LRMT project was cost of the service. An assessment of willingness to originally conceived to serve the Pan-Asian Games pay for various levels of service, together with traffic and was required as a key part of the new urban in- and demand forecasts, will be useful preparation for frastructure, although without government subsidy the LRMT system design. Willingness to pay is greatly it would not have been practical. In such situations, affected not only by service levels and comfort a case can be made that subsidies are justified to but also by route choice and competitive transport support these external benefits. alternatives. · Social acceptability. People are willing to pay, but it is considered socially unacceptable to require them to pay the full cost of service. Even when riders have indicated a willingness to pay for improved service le- SECTION B vels, authorities sometimes refrain from raising fare levels for fear of unpopularity. Similarly, this response to raising fares in advance to fund later improvements is also understandable. There may be justification for charging customers less than the actual cost initially in order to attract ridership to new lines, with the aim of a gradual fare increase to cover the actual cost as riders become committed to the new lines. However, that approach runs the risk, as illustrated in the case Amsterdam Light Rail, Netherlands. studies, that it may be difficult for the transport Photo by and reproduced by kind permission of Rainer Hesse. 93 LIGHT RAIL - LIGHT METRO 5.3.3 Deciding on Subsidies Having considered the cost of service, willingness to pay, social acceptability, externalities, and subsidy options, the government will face a choice of the farebox level that should Discounted Fares be applied. In some instances, the grantor may decide to set In July 2000, Joseph Estrada, then president of the Philippines, directed the DoTC to reduce MRT3 fares to between P$9.50 and fares below costs and to provide a subsidy to make up the P$15.00 in celebration of MRT3's full operational debut. This difference (box 5.3). Another option is to lower the cost of discount has lasted considerably longer than the six months service and, hence, fares. This approach could be achieved by originally intended. Although reduced fares helped increase changing service levels or by changing or reducing routes to MRT3's ridership, they have also created additional budgetary challenges for DoTC. reduce capital or operating costs. Inability to Increase Fares Box 5.3 In 2005, the DoTC petitioned to increase fares to between P$16 and Fares, Populism, Public Affordability, and P$25 to reduce subsidy requirements. President Gloria Macapagal- Arroyo's administration denied this increase, reaffirming her Manila's MRT3 administration's sensitivity to the plight of commuters. As of 2008, MRT3's fares have not changed other than rounding ticket Manila's MRT3 (Metro Rail Transit System line 3, also called the prices up to the nearest peso (that is, P$10 instead of P$9.50) in the Metrostar Express) was developed as a negotiated contract interest of efficient vending. between the Department of Transportation and Communications (DoTC) and the Epifanio de los Santos Avenue Light Rail Train (EDSA LRT) consortium. EDSA LRT was the only bidder to pass Budgetary Implications an initial prequalification phase involving four other prospective Widening operating losses and delays in providing subsidy funding bidders. Following a lengthy process of negotiations and legal from the national government have since prevented DoTC from challenges (noted in chapter 7), a revised concession contract regularly meeting its financial obligations under the concession was signed in 1993 and construction of MRT3 began in 1997. contract. For example, in January 2007, DoTC had fallen behind on US$35 million in equity rental payments, in addition to US$8 million in maintenance payments to the concessionaire. Terms of the Contract MRT3 revenues did enjoy a boost during the EDSA II Revolution of Under the terms of MRT3's concession contract, EDSA LRT would January 2001, when MRT3 transported thousands of protesters finance, design, construct, and maintain the MRT3 system in who were demanding President Joseph Estrada's impeachment exchange for regular lease payments to service debt, provide for corruption. During the height of those protests, fare revenues equity returns, and fund maintenance. Because of unique legal were nearly double the daily average of P$2.5 million to P$2.7 considerations, EDSA LRT was forbidden from operating the million. However, even unusually high ridership during that period system and instead leased MRT3 back to the DoTC for operations. still did not enable MRT3 to cover its operating and maintenance As part of this contractual arrangement, DoTC accepted all foreign costs, which were reportedly P$8 million per day. exchange and demand and revenue risks while guaranteeing the project's debt along with a 15 percent return on equity to the EDSA LRT consortium. Current Status Fares ranging between P$10 to P$15 per trip are affordable to most income levels in Manila and are only slightly greater than Lower-than-Expected Initial Ridership "jeepney" fares (approximately P$8.50 in 2008 plus additional An initial segment of MRT3 opened in December 1999, charging distance charges beyond 4 kilometers). MRT3 currently attracts fares of between P$17 and P$34, depending on distance traveled. roughly 400,000 passengers per day--near the upper limit of Ridership on this section ranged from 17,000 to 45,000 passengers its designed capacity. Despite currently robust ridership figures, per day during its first months of commercial service--well below the system's fares still do not allow DoTC to generate sufficient expectations. In its first six months of operations, MRT3 earned revenue to cover lease payments without subsidy funding. P$150 million (roughly US$3.6 million in 2000), requiring substantial The national government is currently working to buy back the subsidies to cover the DoTC's first semiannual lease payment of MRT3 concession in an effort to reduce future subsidy burdens US$40 million to its private partners. associated with MRT3's private financing. Purchase prices under discussion range between US$865 million and US$1 billion. CHAPTER 5 These decisions may involve consultation with customers and protect against any changes in the developer's costs. other stakeholders. It may be necessary to develop a range of For example, shorter contracts may be required if options and negotiate a solution, until finally an acceptable there is significant cost volatility. trade-off among fares, service, routes, and subsidies is rea- · What is the importance of continuity in the delivery ched. of the service. The grantor needs to bear in mind that under an LRMT system, services are likely to be 5.4 PPP AGREEMENT DURATION: required continually. Accordingly, it will need to weigh STRUCTURING PRIVATE SECTOR PARTICIPATION FACTORS TO CONSIDER the level of difficulty or inefficiencies that may result The PPP agreement duration is a function of several factors from a change in contractors or from the way in which that should result in the most suitable project for the grantor. the incumbent contractor can be incentivized in the The length of the contract should reflect considerations dri- run-up to the change of contractor. ven not only by the length of time required by the developer · What is the mechanism available to ensure that the 2 and its financiers to recover their investment, but also by such developer is incentivized throughout the life of the issues as the period within which the grantor would like the PPP agreement. For example, the grantor will need services to be delivered, the services that will be delivered, to ensure that if it chooses to have an agreement and the grantor's ability to forecast the quality and quantity over a long period (say, 20­30 years), the grantor of the expected output in the longer term. As part of its design must develop the necessary incentives within the PPP process, the grantor should clearly identify the duration of the agreement to ensure that the developer continues to PPP agreement before going to the market. be incentivized to provide services at an acceptable 5 The following are some factors to consider when deciding the minimal level. 3 duration of the PPP agreement: The debate about linking the term of the PPP agreement to · The types of services that are required from the gran- the life of the assets should be carefully understood. A balance tor. For example, the grantor may wish to enter into must be struck between the agreement or contract term and separate agreements or a single PPP agreement (dis- the nature of the assets being considered and whether they cussed in detail in chapter 7). retain some residual value. If a given asset (such as rolling stock) · What possibility exists that the grantor may want to retains residual value after the expiry, the price the developer extend the term of the original PPP agreement. should charge should be lower because the developer should · What is the life of the assets needed to provide the not expect to recover the full cost of financing the investment service, including the timing of major maintenance (that is, debt and equity return). and renewals. For example, a PPP agreement may en- 2 SECTION B The grantor must ensure that the length of the debt or loan visage a major refurbishment within a given period of instruments available to it in the capital debt markets does not dictate the contract length. the agreement, in which case the grantor will need 3 See HM Treasury (2006). These factors have been based on this resource to decide (and potentially trade off) the benefits bet- but modified to include LRMT sector-specific issues. ween certainty of service provision and a pricing risk premium that the developer may add to allow for 4 Whenever a developer is required to price the construction, goods, or services for a future project for it will need to "cost in" the risk of any price 4 costs 20 to 30 years in the future. differential between the moment it prices that project and the time in the future when it may be required to provide such construction, goods, or · What is the ability of the developer to accurately services. forecast the costs it will incur and the mechanisms 5 One important situation that the grantor must avoid in long-term arrangements and contracts is "asset sweating"--that is, the developer is that will need to be included in the PPP agreement to obliged to continue to maintain and refurbish assets in the later periods of the PPP agreement. 95 LIGHT RAIL - LIGHT METRO Another important consideration related to the term of the PPP agreement refers to the changes in technology and service 5.5.2 Implications for Designing issues (for example, growth in passenger demand). The gran- the Arrangement As part of its public transport policy, the grantor needs a tor should ensure that the PPP agreement is sufficiently long-term vision of its transport needs, the factors that flexible to allow for changes to the services under the PPP affect those needs, the ways demography will change, and agreement. Furthermore, if the grantor feels that radical so forth. LRMT schemes will require both the grantor and changes in technology may occur that could, for example, the developer to think about parameters that may change result in early obsolescence or redundancy, the grantor may over time and that may affect the system design. Clearly, choose to have shorter agreement or contract durations. how some of these issues are addressed will depend on the structure that is developed in the PPP agreement and the 5.5 PPP PROJECT FINANCIAL STRUCTURE 6 level of risk that is transferred to the developer. We offer AND DESIGN the following nonexhaustive list of the main parameters that may change over time: 5.5.1 PPP Project Financial Structure · System capacity. This parameter is heavily dependent Private participation is possible even if fares do not cover on accurate ridership forecasts. For example, a study costs. LRMT schemes are extremely capital intensive. To (Halcrow Fox 2000) on mass rapid transit provided thrive, they need capital for investment, as well as good examples of overestimation of capacity and thus management. The value and timing of the capital invest- overprovision of infrastructure and systems built. Of ment and operating capital requirements and how they nine developing city systems for which information will affect the funding of the LRMT project are important existed, five had actual ridership volumes lower than subjects that are covered in detail in chapter 6. the forecast of 50 to 90 percent and another three The whole subject of costs, fares, and subsidies needs had ridership volumes that were 0 to 50 percent considerable thought during the project design stage. The lower than the volumes forecast. Overestimating issues raised can have major implications on the way that demand sometimes results in infrastructure being the project is implemented in the long term. It is important underused. The system capacity should be desig- to consider the practical implications when designing ned on the basis of ridership forecasts that are the chosen PPP agreement model. For example, who benchmarked against reality and similar systems, as determines fare levels and future investments and who applicable. Incorporating a factor of safety to guard takes the collection risk will both have a major effect on against future capacity constraints should also be the successful outcome of the PPP arrangement. considered. In the author's opinion, the financial structure of the LRMT · Access to the system. The grantor should consider project will be determined by five main factors: how comfort standards for accessing the system may · The capital cost, including the time of construction. change over time. For example, escalators rather than · Operating costs. stairs may be required. The Manila MRT3 project did · Passenger traffic or ridership--and hence the reve- not originally provide escalators. nues that can be generated, including subsidies · Other commercial opportunities that may support the revenue stream of the project. 6 The manner in which some of these factors will be handled will depend on, for example, the level of ridership that the · The terms of finance. developer has selected. CHAPTER 5 · Comfort standards. For LRMT rolling stock, these stand- · Rights-of-way and corridors for system alignment ards should include heating or air-conditioning systems or · Site locations for construction activities (for example, should allow for a reduced level of overcrowding, which precast yards, locations for material and equipment may require the system to run more trains. storage) · Access by the travel impaired. Travel-impaired passengers · Availability and condition of publicly provided infras- include individuals with disabilities and encumbered tra- tructure, land, or rights-of-way velers, such as women with children and people with When developers deviate from the reference design, a con- STRUCTURING PRIVATE SECTOR PARTICIPATION 7 shopping bags. tractual acceptance procedure must be established. The gran- · Ticketing equipment. Over time, the grantor may wish to tor may need to retain qualified technical and legal advisers to introduce sophisticated ticketing systems or an integra- help manage any liabilities related to developer deviations from ted systemwide method that combines LRMT with other the reference design. modes of transport. Similarly, the developer may wish to The following are some benefits of the reference design appro- upgrade the ticketing equipment (for example, introduce ach: modern ticketing equipment with barriers and tickets · It provides a way to convey the general shape, align- readers). ment, and functionality of the system. · Aesthetics. The visual effect of the structures should be · It provides some base level of consistency between considered at the outset because future changes may be competing technical proposals and allows objective difficult or impractical (for example, an LRMT system's bid comparison. requiring elevated sections). · It clearly establishes the interface between any pub- licly provided assets (such as existing infrastructure, 5.5.3 Infrastructure Reference Designs rights-of-way, or land) and privately provided assets. The responsibility for the design of the required LRMT infras- · For example, a reference design may specify exclusive tructure can be allocated in various ways. In some cases, res- locations where contracting authorities will provide ponsibility for design is allocated mainly to the developer. unencumbered land for building LRMT structures. At the other end of the spectrum, the grantor specifies (and · It provides information that mitigates developer risks warrants) the full design. and reduces associated risk premiums. For example, reference designs may include site studies, such as At some intermediate level between these two extremes, the land surveys, ground borings, and environmental stu- grantor proposes a reference design that serves to specify dies. This information reduces the bidding costs for general technical details for the developers to follow in their prospective developers. proposals. The grantor typically assumes some limited liability · It provides transparent criteria against which the SECTION B for the information provided in the reference design. For grantor can assess the technical capacity of prospec- example, authorities often take responsibility for relocating tive bidders during the prequalification phases of the public utilities in areas designated by the reference design. The procurement process. reference design often includes the following information: · Site conditions and land survey data · Location of public utilities or locations that will be free of 7 It is important to note that in some jurisdictions, there is a distinction between acceptance and approval. public utilities Approved designs carry certain warrantees from approvers. · Conceptual architecture (that is, overall appearance, not In contrast, acceptance represents something closer to a statement of no objection, which permits the design detailed designs) without warranting it. 97 LIGHT RAIL - LIGHT METRO As part of its bidding strategy, the grantor will need to decide whether to allow deviations from the reference design. Generally, if bidding developers are allowed to offer deviations from the reference design, they may potentially add value to LRMT through innovative solutions, resulting in greater qua- lity, decreased costs, or faster project completion. However, deviations may also increase project risks or compromise desired outputs. Grantors need to carefully consider the implications of allowing deviations from the reference design. Thorough review processes will be needed to determine both the technical feasibility and the value for money associated with suggested modifications to the reference design. 5.6 PERFORMANCE MANAGEMENT AND CONTROL After the structure and desired outcomes of the PPP LRMT scheme are designed, there is a need to monitor and control the performance of the resulting contract. Contract management and control involve verifying that construction is operational and functional and that performance against all contractual norms and standards is met in the long term. 5.6.1 Contractual Compliance against Specifications The grantor has an interest in ensuring that the developer implements processes to ensure that it can comply with the specifications contained within the PPP agreement. This aspect is especially important given the public nature of the provision of service (for example, safety or environmental protection). Accordingly, the PPP agreements should require the developer to propose systems for managing its own compliance to the standards specified by law and within the PPP agreement. The proposed systems should include adequate review and acceptance procedures (table 5.1). Source: http://www.sxc.hu/ Table 5.1 Commonly Specified Systems for Managing Compliance Commonly specified LRMT Details and explanation elements Quality Quality management systems ensure that activities such as design, construction, management testing, commissioning, operations, and maintenance meet agreed specifications STRUCTURING PRIVATE SECTOR PARTICIPATION system and standards. Quality management systems often extend to any subcontracted system components as well. Safety Safety management systems ensure safe practices during construction, management operation, and maintenance activities. Contracts may require unique safety system management systems during a project's construction phase to reflect the different hazards involved. Environmental Requirements for environmental management may specify practices to control impacts on the management · Natural environment · Built environment · General urban environment Management Branding and visual amenity will influence customer perceptions of LRMT services. of branding and Specifications regarding branding and visual amenity may include requirements visual amenity for consistently managing · Station, depot, and civil work architecture · Vehicle design schemes (interior, exterior) · Station furniture and other amenities · Product design features of ticket vending machines, information displays, and gates · Graphic design elements of logos, employee uniforms, Web site materials, and so forth Other Contract specifications may also include requirements management for implementing systems to manage other elements, including systems · Project documents · Public information · Operations and maintenance SECTION B · Testing and commissioning processes · Engineering processes · Spare parts inventory · Corporate governance and financial management · Integration between system components · Construction activities · General project activities Source: Author's compilation based on recently developed specifications. 99 LIGHT RAIL - LIGHT METRO In Germany, a 100 m LRMT near the Hannover exhibition grounds. 5.6.2 Operations and Maintenance Box 5.4 Compliance Operation and Service Obligations and To meet the policy goals, the developer must deliver a reliable, Their Relationship to Demand Risk high-quality service that provides a good overall customer experience. Although the developer has a contractual If the developer does not assume demand and revenue risk, obligation to achieve relevant performance targets, it there are few self-incentives to deliver and maintain a system of customer service or operation that will increase demand and is generally considered necessary to include a system of passenger growth. It may not be possible to cover this issue incentives and penalties to ensure that the developer meets solely through the use of key performance indicators, and in or exceeds agreed targets. Although ridership is the ultimate this case, the solution is to be prescriptive about minimum technical and operational requirements and standards and to measure of LRMT's attractiveness, much of what determines link performance payments to demand levels. demand resides outside the scope of system operations. Attributing the entirety of this risk to the developer may be inappropriate, considering the impact that planning and policy that link performance assessment criteria to compensation on decisions have on ridership. Nevertheless, realizing many of the the basis of agreed formulas. Depending on the form of the advantages of private operations and maintenance requires contractual approach decided on, there will be a need to establish some method for aligning public interests in quality services several level-of-service indicators that can be used to monitor with private incentives to perform (box 5.4). Specifications the progress of the LRMT PPP arrangement in the long term. within the PPP agreement can offer a means of accomplishing that goal. Some of the criteria that should be considered for Although a whole range of levels-of-service parameters will have inclusion in the PPP agreement include the following: been set in establishing the design of the scheme and may form · Base operating days part of the technical obligations of the contract, there is generally · Service frequencies the need to limit the number of key performance indicators (KPIs) · Journey times to be established. Table 5.2 includes examples of common KPIs · Minimum required service capacities that are often included within PMSs. They are chosen to allow · System cleanliness the monitoring of the key performance areas of the contract. · Customer service functions They must be definable, significant, quantifiable, and able to be · Service reliability monitored and verified. Used to ensure compliance with major · Service availability contractual objectives, they can also serve as a means of asse- ssing the developer's level of performance and are frequently However, managing compliance with operations and main- used as a tool for implementing incentive schemes in areas tenance specifications can prove challenging. The dynamic where the developer may be expected to perform above the nature of LRMT operations requires frequent oversight and basic contractual norms. rapid feedback to adjust performance. There is a strong trend toward increasing the role of quality 5.6.3 Performance Management and measures in determining the rewards paid to developers in this way. It should be noted that some developers (public and private) Control argue that the key indicator of quality is the number of passen- Most LRMT PPPs involving private operations use performance gers, which is far easier to measure than the factors described in management systems (PMSs). PMSs include mechanisms table 5.2. CHAPTER 5 Table 5.2 Examples of Common KPIs for LRMT Systems KPI Details and explanation Reliability and punctuality Daily or monthly system reliability Number of actual trips compared with number of scheduled trips Early departures Number of trains leaving earlier than some specified window of time STRUCTURING PRIVATE SECTOR PARTICIPATION Late departures Number of trains leaving later than some specified window of time First or last trains Number of first or last trains departing earlier than the time tolerance departing early applied to early departures Customer satisfaction Performance on satisfaction surveys Annual, independent, published survey, with remedial actions and delivered improvements Received customer Number of responses to customer comments not made within some allowable window of time comments Availability of real Number of hours when displays were unavailable time information Timetable availability Number of designated timetable locations missing timetables or displaying and accuracy outdated information Availability of Level of availability of customer-facing staff relative to some agreed benchmark customer-facing staff (typically measured as a percentage of total staff-hours per station per period) Cleanliness and general upkeep Cleanliness of LRMT Number of complying cleanings made vehicles Removal of graffiti Number of incidences removed within some period of reporting from LRMT vehicles Repair of damaged Number of incidences reported and repaired before returning to service LRMT vehicles SECTION B Station cleaning Number of complying cleanings made Station graffiti Number of incidences removed within some time period of reporting removal Repair of general Number of incidences repaired within some time period of reporting damage to stations (can often include some number of unreported instances) Availability of ticket vending machines, Number of devices and hours unavailable or nonoperational offices, and gates 101 LIGHT RAIL - LIGHT METRO KPI Details and explanation Access and security Passenger alarm system availability Number of hours unavailable Closed circuit TV Number of hours unavailable availability Lighting availability Number of defects not repaired within some time period after first reported Elevator or escalator Number of hours unavailable availability Revenue security Achievement of some specified level of revenue security (often measured through (fare evasion) a comparison of collected revenues with automated passenger counter figures) Ride quality and noise emission Ride quality index Performance on periodic assessments of LRMT vehicles Noise and vibration Performance on periodic tests of noise and vibration levels inside each LRMT (within LRMT vehicles) vehicle over the entire system route Noise and vibration Performance on periodic tests of noise and vibration levels inside of system stations at (within) stations Noise and vibration Performance on periodic tests of noise and vibration levels generated by each LRMT (at locations on route) vehicle at locations along the system route Overcrowding Compliance with standing passenger density limits set out in performance specifications Source: Author's compilation based on recently developed specifications. CHAPTER 5 5.6.4 Specifying Performance Targets and Weighting KPIs Effectively applying information gathered through continu- The grantor may elect to assign different weights to certain ous KPI monitoring requires some system for consistently KPIs that have greater effects on the quality of LRMT services. STRUCTURING PRIVATE SECTOR PARTICIPATION normalizing data into a usable form. Normalizing data allows One method for incorporating weights into a total KPI combinations of KPIs that have dissimilar units of mea- adjustment factor applied by a PMS is surement (for example, number of occurrences, time, and qualitative rankings) to be used. Measuring the percentage of KPI Adjustment factor = (% Achievement for each KPI)* (Weighting Factor that KPI) achievement level for KPIs is one method. A continuous scale for the percentage of achievement may resemble something where similar to * 100% = (Weighting Factors for all KPIs) % Achievement = Measured Value * 100% Target Value Using this example, the grantor may choose to cap achieve- ment at 100 percent or some greater value when performance in excess of targets would be desirable. Alternatively, mea- suring achievement for KPIs could involve a stepwise series of thresholds similar to % Achievement = X% when measured KPI value target value A Y% when target value A measured KPI value target value B Z% when measured KPI value target value B SECTION B When KPIs involve subjective assessments, or when the grantor prefers to provide tolerance bands around a given metric, a stepwise methodology may be preferable to continuous measurement. Views of Light Rail system in Charlotte, North Carolina, USA. The Operations Control Center is under the direction one person. The system was opened in November 2007 and currently carries 14,000 passengers per day on 9.6 miles of double track. Photo by and reproduced by kind permission of James Dwyer. 103 LIGHT RAIL - LIGHT METRO An LRMT suspended railway in Wuppertal, Germany. 5.6.5 Tying Performance Specifications to Box 5.5 Payments Key Performance Indicators, Much of the value associated with PMSs comes from their Performance Management, and ability to affect compensation paid to the developer. Adjusting the Docklands Light Railway, United compensation is a delicate balance (box 5.5). Establishing an Kingdom appropriate level of sanctions either as a penalty payment or a deduction needs to be sufficiently high to force an expected The Docklands Light Railway (DLR) involves a delayered contractual structure with separate public-private partner- behavior by the developer, but at the same time, it must not ship agreements for different components of light rail­light be so high that it introduces revenue uncertainty. Reducing metro transit services. Only one of the DLR's contracts the certainty of cash flows can increase risk premiums, allocates substantial demand risk to private partners (that is, the Lewisham Extension infrastructure-only concession). reduce financial viability, and jeopardize project bankability. Accordingly, the Docklands Light Railway Limited (DLR's Conversely, too little value at risk may not provide sufficiently contracting authority) relies heavily on performance manage- strong incentives for performance. PPP agreements for ment systems to incentivize private partners. LRMT operations generally solve this conflict by limiting the For example, DLR's recent infrastructure concessions involve reach of PMSs to some reasonable fraction of total developer daily availability payment­based compensation schemes compensation. For example, a PPP agreement structured along with corresponding penalty regimes. On weekdays, around an availability payment may determine total developer 1,000 performance points are allocated (500 are allocated on weekends). A concessionaire's points affect compensa- compensation using a formula similar to tion paid; points deducted for nonperformance can lead to deductions in availability payments. For particularly important Compensation Payment = APFixed + AP Variable * (KPI Adjustmet Factor) performance measures, failure can lead to a 100 percent deduction of daily availability payments. where Similarly, DLR's operating and maintenance franchise uses a number of key performance indicators related to service · APFixed is the portion of availability payment guaran- reliability, facilities availability, and customer satisfaction (each with a target performance level). When the private partner teed by simply meeting minimum, easily attainable outperforms targets, bonuses may apply. Conversely, penalties standards for LRMT services apply when targets are not met. · APVariable is the portion of total availability payment Given high levels of satisfaction with private partners to date, subject to the terms of the project's performance DLR's future procurement processes will consider provisions management system for guaranteeing certain levels of payment after periods of · KPI Adjustment Factor represents the combined per- problem-free performance. The recent Woolwich Arsenal Concession contract, due to open in January 2009, includes formance on key performance indicators as weighted such a feature. Guaranteeing some (importantly not all) in the system's operating agreement of the availability payment once concessionaires demons- trate satisfactory performance aims at reducing the risk premiums included within private bids. Planners believe that this new system will increase the value for money of private sector participation through lower costs without sacrificing substantial amounts of risk transfer. CHAPTER 5 Determining an appropriate fraction of developer compen- Ratcheting penalty regimes can address these needs by sation at risk to a PMS should involve sound analysis and conti- effectively making every KPI significant. Ratchets work by nuous dialogue with prospective developers. Plan-ners should targeting habitually neglected KPIs and increasing their relative STRUCTURING PRIVATE SECTOR PARTICIPATION specifically consider three factors: importance during current assessment periods. For example, · Cash requirements for servicing any project debt, a ratchet mechanism could increase the relative weighting of covering operation and maintenance expenses, and a KPI by 5 percent (500 basis points) during each consecutive funding required investments period of failure until the developer takes remedial action to · Minimum sums that developers will consider mean- correct lagging performance. The grantor may also choose to ingful specify accelerated schedules for altering weights attached to · Level of KPI performance targets that the developer KPIs (for example, exponential increases). should be able to regularly achieve Ratcheting penalty regimes are certainly not without limitations. In setting up these regimes, the grantor should 5.6.6 KPI Ratcheting Mechanisms consider the following factors: Weighting KPIs differently depending on their relative · Bidders' (developers') willingness to accept greater influence on service quality is a useful technique for aligning risks associated with increased penalties and the performance incentives with public interests. However, additional costs this approach could create for public weights may also have undesirable consequences when the authorities developer neglects KPIs that have proportionately smaller · The wisdom of potentially assessing large penalties effects on compensation. Although underweighted KPIs for relatively insignificant criteria would likely correspond to less important factors, the grantor · Increased potential for bribes that may result when may still have an interest in compelling the developer to meet subjective criteria can significantly affect compen- every KPI target specified. sation SECTION B 105 LIGHT RAIL - LIGHT METRO CHAPTER In Birmingham, UK, the LRMT terminus is integrated with the mainline railway station. 5 Checklist PPP Design Specifications and Performance Management Define the scope of work in terms of service to be provided (for example, construction, rolling- stock selection). Define the standards to be met (for example, safety, punctuality, functionality, longevity). Have a long-term vision of transport needs and how they will evolve with changing parameters (such as demography). Obtain a good estimate of the full financial implications of the PPP arrangement. Consider the practical implications of costs, fares, and subsidies and who takes the lead role in setting these elements of the PPP arrangement. Consider the developer's cash needs and the investor's requirements in calculating fares and subsidy requirements. Set the duration of PPP agreement, ensuring that it details o How developers and investors will recoup their investment o The period during which the grantor wishes services to be delivered, the types of services that will be delivered, and the longer-term quality and quantity of output Define how the PPP agreement will be managed (for example, ensure that sufficient contract management and control systems are created that can verify that the construction is operational and functional). Ensure that sufficient performance management and control systems are created that can verify that performance complies with contractual agreements and standards. 107 LIGHT RAIL - LIGHT METRO CHAPTER FUNDING AND FINANCE 6 Dublin, Ireland. Photo by and reproduced by kind permission of Rainer Hesse. Funding and Finance Different contractual arrangements for private sector par- 6.1 SOURCES OF FUNDS FOR LRMT INITIATIVES ticipation can effectively prescribe the funding and financing LRMT projects are expensive. Project costs exceeding mechanisms for light rail­light metro transit (LRMT) projects. US$1 billion are relatively common. Obtaining funds of such The majority of project financiers will look at the proposed magnitude can be an onerous task, and failure to attract IMPLEMENTING AGREEMENTS transaction structure and try to find the funding structure such funding is one reason many projects fail to develop that best fits. This effort, in turn, can have significant effects beyond initial planning phases. There are three primary on other important considerations, such as affordability, sources for funding LRMT PPP projects: value for money, risk transfer, and overall project feasibility. · Debt. Through commercial bank loans (local and Because financial close usually occurs later in a project's de- international banks), publicly traded bonds, priva- velopment cycle, planners will inevitably be challenged to te debt placement, loans from project sponsors, anticipate the implications of their decisions before receiving supplier credit, export credit financing, loans from final investor feedback. Indeed, it should be borne in mind international financial institutions (IFIs), or develop- that sometimes the project may need to be restructured to ment organizations. 1 suit funding requirements. Understanding the basic financial · Equity. Typically sourced from consortium partners; considerations of LRMT projects is therefore essential when passive investors; investment funds (for example, seeking to align financing implications with public interests emerging market, infrastructure, or sector-specific during early planning stages. equity funds); domestic public entities; local property developers; IFIs; or development organizations. It is also important for public authorities to appreciate that · Grants. Often provided by public institutions (local, private capital comes with an expectation of reasonable national, or supranational); local property developers; SECTION C return. Rational, profit-maximizing developers and investors international donors; or other groups benefiting from are prepared to take risks only if they expect to earn commen- project implementation. surate rewards. Planners must consider how private investors will recover normal returns throughout project development Decisions made on policy, technology, and commercial issues and implementation. Public-private partnerships (PPPs) are during the development of LRMT projects may affect the ava- never free, and failing to understand the need for reasonable ilability of some of these funding sources. For example, grant rates of return can render projects financially nonviable funding may be available only to LRMT projects that aim to or result in underinvestment during subsequent stages of accomplish selected policy goals. Similarly, large amounts operation and maintenance. of private debt financing may not be available where private concessionaires must assume the entirety of certain major risks This chapter summarizes the more important funding and (for example, ridership risk). Understanding the implications finance issues that are likely to arise in LRMT PPP projects. that project structure has on funding and finance is a critical component of effective planning. 1 Terms such as leverage or gearing describe the relative proportion of debt in a project's capital structure. Highly geared or leveraged projects involve greater proportions of debt to equity, which has the effect of increasing lender project risk and reducing the sponsor or equity investor's project risk. 109 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 6.2 FUNDING THROUGH CAPTURED Property developers themselves have also been active in a number of private developer consortiums. For example, EXTERNALITIES the Tanayong Company, one of Thailand's leading residential One dimension of rail projects is that their benefits often and commercial property developers, led efforts to build accrue to those who do not pay fares. In many cases, revenues Bangkok's Skytrain system. and other financial benefits derived from sources outside of system operations have been sizable enough to fully support Box 6.1 operating losses associated with implementing and delivering rail services. Funding Contributions from Property Developers 6.2.1 Property Development The Docklands Light Railway (DLR) was originally part of Property development around stations is a common exam- a wider initiative to revitalize London's Docklands area. However, DLR's initial route layout terminated some 300 ple of an external benefit that results from investments in rail. meters from the nearest London Underground station, thus One particular type of development right that can often arise presenting integration difficulties between transportation in planning rail projects is "air rights," whereby a developer, services. When planners proposed a design-build extension through owning or renting land or a building, gains the right to to the Underground station, property developers with interests in the Docklands area were willing to partially fund use and develop the empty space above the property. Building project costs to increase the attractiveness of their real estate over tracks, platforms, depots, or stations is potentially very investments in the area. profitable and has been tried in developing a number of LRMT Manchester's Metrolink system has also benefited from local systems. Several LRMT projects have attempted to internalize developer funding. Metrolink's phase 2 expansion cost £160 the value of property development in order to offset opera- million, of which £12 million (7.5 percent) was funded by local ting losses resulting from insufficient farebox revenues. In New property developer contributions. York, for example, the Metropolitan Transportation Authority attempted to sell air rights over rail yards in Brooklyn for a basketball arena for the New Jersey Nets and on the west side of Manhattan (as part of the Hudson Yards Redevelopment Project near Penn Station) for a football stadium for the New York Jets (New York Times 2004). In Hong Kong, China, the development of sites above stations, depots, and associated transit interchanges, in partnership with private developers, generated revenues crucial to the financing of the Airport Railway and all other MTR (Mass Transit Railway) lines (Budge- Reid 1999). Other LRMT projects have successfully obtained upfront funding (equity or grants) from local developers whose other investments Hong Kong, China. The Tuen Mun LRT has exploited air rights development over its depot. stand to benefit from new transport services (box 6.1). Photo by and reproduced by kind permission of Scott McIntosh. CHAPTER 6 Real estate development, however, is not a panacea for LRMT's funding challenges and should not be seen as a substitute for 6.3 CONSIDERING BANKABILITY LRMT planners face a daunting challenge when planning carefully thoughtout, well-structured projects and sound for project funding and financing requirements. Finalizing a operations. Planning for new LRMT projects should focus on project's financial structure usually occurs during later stages providing intelligently designed, quality public transportation of planning and procurement--after many key decisions have services--not on development of new venues for consumer already been made. Revisiting public approval processes along IMPLEMENTING AGREEMENTS shopping. Overreliance on external development revenues the way can result in substantial delays and lost confidence can result in reduced scrutiny of system operations and service when amending earlier decisions. Therefore, it is imperative delivery. In some instances, project partners whose interests that early decision making take into account such requirements lie primarily in real estate may have perverse incentives to pro- and their effect on a project's future financial and commer- mote LRMT with little regard for sound transport planning. cial structure. Road shows and other events designed to test market interest can help planners get a sense for the market's 6.2.2 Advertising Revenue perception of proposed risk allocations and other project Well-implemented LRMT systems involve large passenger features. The term "bankability" summarizes the sentiments volumes and can therefore take advantage of associated of investors and lenders and their willingness to commit debt economies of scale and lower marginal operating costs. or equity capital to a project. It is important to realize that High passenger densities and the regularity of services considering bankability goes beyond financial analysis alone present an opportunity for marketing to captive audiences and should include much larger project considerations. through well-placed advertising messages. Advertising space Bankability generally depends on four broad criteria: provided on vehicles (internal and external) or in stations can · Creditworthiness offer opportunities for LRMT systems to capture additional · Legal viability revenue from external sources. Where LRMT stations service · Economic viability SECTION C a particular demographic or economic activity (for example, · Technical feasibility retail or business development), there may be additional marketing potential. For example, the Metro system in Table 6.1 summarizes many of the key questions investors Washington D.C., includes a stop at the Pentagon building (the and lenders will ask in assessing a project's bankability and administrative headquarters of the U.S. military). Billboards determining their level of interest in a project. Concepts throughout this station regularly feature advertisements from discussed in chapter 4 relate to many of these issues. various aerospace contractors aimed at Pentagon employees with procurement-related responsibilities. It should be borne in mind, however, that even in well-developed markets, such revenues are likely to be relatively small compared with farebox revenues. If such advertising revenues are to be considered an element of project feasibility, such revenue assumptions should Seville, Spain. Photo by and reproduced by kind permission be thoroughly market tested. of James Dwyer. 111 LIGHT RAIL - LIGHT METRO Table 6.1 Factors Influencing Project Bankability Project aspects Questions for determining bankability Creditworthiness · Are project cash flows sufficient to support envisaged levels of debt? · How risky are project cash flows? How certain are project revenues? Who bears ridership or farebox risk, and how realistic are ridership forecasts? Is there potential for regulatory "clawback" if actual ridership numbers exceed estimates and revenues are well above forecast? · Can the grantor meet its financial obligations to the project? · Does the project benefit from any grantor or sovereign guarantees or insurance on its debt (for example, partial risk or credit guarantees, political risk insurance)? · Is there sufficient equity cushion to protect lenders if the concession's value decreases? Do project developers have sufficient value at risk? · In the event of termination, what mechanisms guarantee debt repayment, and what proportion of the debt will be covered? · Do project developers have adequate capacity and incentives to deliver sustainable long-term operational performance? Do they derive significant value from ancillary activities outside the concession company (for example, local property development, turnkey construction contracts)? · Do the project's financial ratios meet lender expectations (for example, principal and interest cover ratios, debt-service cover ratio, loan-life ratio, debt-to-equity ratio)? Legal · Does the grantor have the authority to grant the concession? · Will the project require any additional legislation (for example, sector law, PPP law)? · How strong are the project's contractual arrangements with input suppliers (that is, rolling-stock suppliers)? · What legal protections or channels for recourse do investors have in the project's jurisdiction (for example, access to international arbitration)? · Are legal decisions enforced in the project's jurisdiction (rule of law)? · How strong are property rights in the project's jurisdiction? CHAPTER 6 Project aspects Questions for determining bankability Economic · Is there a market for the project's services? Does LRMT offer sufficient value IMPLEMENTING AGREEMENTS to transportation customers? · Are there threats from competing services (for example, buses) or technological obsolescence (for example, ticketing systems)? · Is the system's route aligned with target markets or population centers? · Does regulation protect against the threat of new market entrants? How stable is that regulatory environment? · Are project inputs (for example, electricity, rolling stock) available at reasonable prices? How stable are input supplies? Will new LRMT services require dedicated input suppliers (for example, a dedicated power plant)? · How stable is the project's macroeconomic environment? How would changes in inflation, foreign exchange, interest rates, and so forth affect project cash flows? How will such risks be mitigated in the LRMT contract? Have any standby credit facilities been arranged to deal with potential lags between financial shocks and tariff adjustments? Technical · Does the project use proven technology? SECTION C · Are construction costs reasonable and realistic? · Is the construction and commissioning timetable realistic? · Does the project rely extensively on proprietary technology? · What standards govern the construction of civil works, rolling stock, signaling and communication systems, and so forth? Are local standards available, adequate, and appropriate? · How flexible is the systems design? Can simple alterations to rolling-stock configurations increase system capacity? Are stations and platforms designed for additional growth? · Is the proposed technological solution appropriate for local conditions and the availability (scarcity) of skilled labor? Source: Author's compilation based on various sources. 113 LIGHT RAIL - LIGHT METRO 6.4 STRUCTURING FINANCE FOR LRMT (lenders, investors, developers, contractors, operators, suppliers, and so forth). PROJECTS · Long term. Repayments are usually over extended Financing for LRMT projects may take the form of either a periods (10 years or more) to accommodate high corporate structure or, more commonly for large projects, a capital costs and subsequent operating margins. project finance structure. The primary difference between · Highly structural. Project financing risk allocation me- corporate and project finance is the means by which lenders ans rigorous and comprehensive structuring among derive security for repayment. Project finance structures will the parties (see chapters 4, 5, and 7) . involve a special-purpose vehicle (SPV, an independent legal · Large. High development or transaction costs entity established for the purpose of undertaking the project) can usually be supported or justified only on large into which lenders and project sponsors contribute debt and transactions. equity to fund project costs. Because SPVs are legally separated · Mature. Particularly in developed countries, there are from project sponsors, lenders are said to have limited or no many experienced participants in the international recourse to sponsors regarding their debt investments. Limited PPP markets. Projects can, therefore, be smoothly recourse is the more usual variation and is used in financings structured by experienced financiers and advisers. where recourse either is limited to a fixed monetary amount For developing countries, the challenge is often to (for example, US$50 million) or is subject to certain performance attract such experienced participants and financiers. criteria (for example, cost and time overruns during construc- tion, revenue or cash shortfalls during operations when Other characteristics of project finance structures include developers commit further capital toward debt service). For · Financing provided through a special-purpose legal project financing, the loan structures rely solely on project entity whose only business is the project. cash flows for repayment, with the project's assets, rights, · Financing typically raised for greenfield development and interests held as secondary security or collateral. Project or larger extensions to existing systems. finance structures are very common for LRMT PPPs that require · Greater leverage (typically in the range of 60­90 substantial upfront private investments; such investments percent debt). exceed the capacity of developers' balance sheets. · Debt that is typically nonrecourse or limited recourse, meaning that lenders rely primarily on future project Project finance has a number of key characteristics: cash flows for repayment. · Cash-flow certainty. This stability underpins the struc- · Security for lenders from the concession contract or ture and risk allocation. PPP agreement. · Credit intensive. With the multitude of stakeholders · Financing reflecting the concession contract's time- and types of risk, project financing requires a multidisci- 2 bound nature. plinary and rigorous approach to risk allocation and management. 2 The tenor of project debt will be less than the · International. Most major projects in developing coun- concession's life, but usually linked to it (Yescombe 2002). tries tend to have extensive international involvement CHAPTER 6 IMPLEMENTING AGREEMENTS Kenosha, Wisconsin, USA, has a small new LRT scheme that opens up a former industrial site for new urban development. Photo by and reproduced by kind permission of Scott McIntosh. In contrast to project finance, lending for corporate finance projects derives security for debt repayment from the sponsors' or shareholders' balance sheets or other nonproject security. Corporate finance lenders typically have rights to all the borrower's assets in the event of default. Characteristics of corporate finance include: · Contractual arrangements between a grantor and a legal entity, which derives its financial strength directly from the SECTION C sponsors' or shareholders' balance sheets. · Generally smaller investment amounts compared with project-financed alternatives. · Absent or substantially reduced lender due diligence on the project, because the lender is taking the sponsors' credit risk, as opposed to project risk: Lender security is outside of the investment being financed. It is important to note, however, that this last characteristic applies only if the sponsor is considered to be a good credit risk. If not, project finance­type due diligence will still be needed. The relative merits of either structure will depend on the size and risk profile of the project in question. Larger greenfield LRMT projects will almost always take on some form of project finance to limit the liability of developers and raise sufficient capital. Nevertheless, smaller LRMT projects such as minor extensions or refurbishments may draw on corporate finance, depending on their size and scope. For example, the provision and maintenance of rolling stock may be financed using a supplier's balance sheet (trade finance). Different financing techniques have relative merits and limitations, as summarized in table 6.2 (Mandri-Perrott 2009). 115 LIGHT RAIL - LIGHT METRO Table 6.2 Project Finance versus Corporate Finance Structures Financing structure Advantages Disadvantages Project finance · Is off balance sheet · Requires greater transaction costs than · Separates project's credit profile from corporate finance. developers' credit profiles--the · In developing markets, is only available project company is insulated from for larger projects (exceeding US$100 developer default. Similarly, develo- million)--rarely a problem for LRMT pers are insulated from project initiatives). liabilities.a · Requires additional due diligence and · Can achieve high leverage ratios, associated time when structuring. which can provide greater rates of · May be subject to changing bid prices equity returns from smaller cash flows. when final price depends on prevailing · Can create greater tax shields because credit market conditions, such as of greater leverage--which can interest rates, because final financing reduce the overall cost of capital. terms may not be set until after · Reduces managerial discretion over preferred bidder selection. free cash flows because of lender imposed constraints. Given the complexities of project finance · Mitigates underinvestment bias.b structures and documentation, the time · Provides additional mechanisms for between (a) bid award and (b) financial risk spreading through syndication and close and project commencement may be securitization. lengthy (typically about 12 months, but · Provides additional lender due may be much longer if the project diligence, which can improve project structure is not bankable). This timeframe quality. can conflict with grantor's project timetable expectations and create Lender reporting and control require- political costs. ments can help achieve much greater transparency for the grantor with regard to project company operations and financial performance. This openness can be a very important implication when assessing performance-related payments and when setting or adjusting fare levels. CHAPTER 6 Financing structure Advantages Disadvantages Corporate finance · Has lower transaction costs because · Places sponsors' assets and balance sheet credit risk assessment is based on at risk. sponsor credit rather than complex · Involves lower debt-to-equity ratios. IMPLEMENTING AGREEMENTS project credit risk. · Is typically available only for smaller · Is simpler, easier to obtain, and faster investments (sponsor not willing to to structure than project finance. accept larger risk). · Requires smaller amounts of due · Does not allow isolation of project from diligence and associated time because sponsor credit profiles and vice versa of additional security provided by · May limit public control over refinancing sponsors' balance sheets. activities and prevent public sharing in · Depending on sponsor's credit rating, refinancing gains. may offer lower margins on debt. · May result in fewer benefits for public · Offers greater flexibility to accommo- authorities related to project transparen- date changes (such as renegotiations). cy than would a project finance structure. Source: Provided by Iain Menzies. SECTION C a. The degree of protection afforded by project finance structures varies among legal jurisdictions. b. Underinvestment bias means that a high proportion of debt increases management's reluctance to finance low-risk positive net present value projects because smaller returns belong almost entirely to lenders. Similarly, other high-risk positive net present value projects may be forgone because of the risks they pose to managers. Project finance can achieve higher leverage to enhance returns of smaller net present value projects and can also protect management's interests by partially insulating them from potential downsides of riskier projects (Yescombe 2002). 117 LIGHT RAIL - LIGHT METRO Krasnodar, Russia. Photo by and reproduced by kind permission of Rainer Hesse. 6.4.1 Some Differences between Private 6.5 PRIVATE FINANCING FOR LRMT PROJECTS and Public Project Finance Evaluation Initial lender due diligence and subsequent monitoring can The private sector approach to project evaluation is predo- enhance project transparency and quality. Because banks or minantly focused on the financial aspects of a project, whereas other lenders may require significant changes to a project's the public sector attempts to incorporate economic as well structure or agreed risk allocation before committing as financial criteria in its assessments. The differences can be financing, these institutions should be consulted as early as categorized as follows (Mitric 1998): possible in the procurement process. Although these changes · Economic evaluation uses first-year benefits as a timing can help rationalize risk allocations or enhance LRMT projects indicator and takes into account the entire life of the in other ways, they can take considerable time to negotiate, project. Private sector investors are highly focused on as well as damage project and grantor credibility. Hence, it is the returns generated in the early years of a project for important to focus, from project inception, on developing debt repayment obligations and for ensuring that the a project structure that is bankable. In this respect, it will be project lasts long enough to reach profitability. invaluable for public authorities to hire experienced transaction · Public policy requirements and project economics can and financial advisers who are familiar with taking PPP projects force a public authority to agree to a project with poor to market and financing them (typically investment or project projected financial returns. The private sector would finance banks or, in some cases, IFIs). walk away from any project with poor return pros- pects unless provided with a guarantee in the project Project financiers will look to the balance between sponsor structure. equity and debt financing (gearing) in a particular project. The · Financial approaches as used by the private sector project's gearing will reflect are concerned with costs and revenues, not costs and · How much debt project cash flows can support benefits. · How risky or uncertain the project's cash flows · The private sector is more accustomed to using scenario (market risk) are projection techniques in its risk analysis strategies. The public sector tends to view scenario analysis with Although many project financings aim to maximize gearing suspicion and uses it in a very limited manner. (debt is typically cheaper than equity), equity requirements · In the private sector, the division between analysts are nevertheless usually substantial enough to ensure that the and decision makers is more defined. Analysts gather sponsor's commitment makes it too costly to withdraw support information on the trade-offs and consequences but when the going gets tough. Debt-to-equity ratios of 75:25 or do not produce conclusive evaluations. Managers are 70:30 have been common, although some more conservative held responsible to make investment decisions on the export credit agencies have sought lower gearing (60:40). basis of an analysis of the information provided. In the More risky project structures, such as farebox risk transferred public sector, this division is not as black and white. to the developer, are also likely to induce lenders to insist on lower gearing, as well as to increase the cost of debt--a "double-whammy" effect on increasing project costs. CHAPTER 6 Risk allocation and the certainty of project cash flows will Box 6.2 determine the nature and amount of debt that projects can support. Spreads on project debt will also reflect perceptions Leverage and France's Orlyval of riskiness in addition to general market conditions at the time In the late 1980s, French planners sought to link Orly airport of issuance. Higher leverage for LRMT projects with riskier near Paris with the Réseau Express Régional (RER) train network. After competing with one other consortium, a group cash flow characteristics is a recipe for disaster, assuming that IMPLEMENTING AGREEMENTS led by Matra Transport won a 30-year concession contract sour-ces of debt and equity are even available on this basis. to implement an automatic VAL (véhicule automatique léger) light metro system. Of the project's FF 1.75 billion cost International commercial lenders are also increasingly cons- (including overruns), private banks financed FF 1.55 billion on FF 200 million of shareholder equity. At close, the Orlyval cious of the social and environmental impact of projects to project company was completely privately financed and had which they lend. This issue is relevant to LRMT projects that run a debt-to-equity ratio of roughly eight to one. along extensive alignments in populous urban environments. Orlyval's contract structure entirely allocated demand risks to the private concession company. After entering service, More than 60 of the world's leading financial institutions the system carried approximately 1.5 million passengers per have now adopted the Equator Principles, a voluntary set of year instead of the more than 4 million originally expected. Shortly thereafter the Orlyval Company became insolvent, guidelines in the financial industry to determine, assess, and and operations were transferred to France's publicly owned manage environmental and social risks in project financing. Régie Autonome des Transports Parisiens. These financial institutions have adopted the Equator Principles to ensure that the projects they finance are developed in a manner that is socially responsible and reflects sound en- vironmental management practices. To attract financing from such institutions, LRMT PPP projects must have been the SECTION C subject of environmental and social impact studies and public consultation before their launch. 6.6 THE NEED FOR PUBLIC SUPPORT As discussed, most LRMT services require public subsidy be- cause the large development costs cannot be funded through private investment alone while maintaining sustainable fare policies. Previous attempts at purely private LRMT conce- ssions do not have a good track record and the public sector was subsequently required to bail out insolvent projects (for example, France's Orlyval--see box 6.2). Modern LRMT PPPs have learned from these early mistakes, and all include some Attractive architectural station design in Charlotte, form of public support. Such support may take a variety of forms North Carolina, USA. and often combines elements that may include capital grants, Photo by and reproduced by kind permission of James Dwyer. output-based subsidies, public "soft" loans, direct government procurement of infrastructure, exemptions from taxes and import tariffs, loan guarantees, equity contributions, in-kind 119 grants, and export credit financing. LIGHT RAIL - LIGHT METRO 6.6.1 Capital Grants Payments based on system availability represent another output-based mechanism for structuring public support. Key The upfront capital costs required to construct new LRMT performance indicators, as discussed in chapter 5, can pro- systems are typically in the hundreds of millions of dollars. vide mechanisms for adjusting availability payments linked However, the tariff revenues subsequently generated from to developer performance. Availability-based compensation fare-paying passengers are often too small to service the costs schemes are also useful for insulating developer revenues of project debt required to construct a system's infrastructure. from demand risks. Accordingly, most recent LRMT initiatives incorporate an element of capital grant designed to offset the private The effects of both explicit and contingent liabilities associa- sector's initial construction costs and associated ongoing ted with output-based support mechanisms for LRMT services debt repayment obligations. Reducing debt service during need to be considered. Such liabilities should be factored into operations enhances the stability of concession companies and initial affordability analyses as well as into future budgetary helps to prevent default, which is often costly to public partners provisions. as well. Determining the appropriate level of capital grant and defining appropriate construction milestones are a challenge for project planners. Too much capital grant can reduce risk 6.6.3 Public "Soft" Loans transfer to the detriment of value-for-money incentives when Lending public money to private partners at concessionary private partners do not have sufficient "skin in the game." interest rates can help overcome disadvantages resulting Conversely, insufficient capital grants can result in potentially from the private sector's higher cost of capital. Preserving unstable concession companies and correspondingly large risk appropriate risk transfer to the concession company re- premiums (that is, poor project bankability). quires careful consideration when projects incorporate public financing. It is sometimes argued that to protect 6.6.2 Output-Based Subsidies public interests and ensure rational risk allocations, public loans should be senior in the project's capital structure and Structuring public support on the basis of measurable outputs should benefit from appropriately large junior debt or equity can help align public and private incentives for accomplishing cushions. Private lenders may, however, have an issue with project goals (Irwin 2003). In the case of LRMT services, output- such an approach to funding structuring. In this respect, it is based subsidies are often "shadow fares" paid by public important to clarify and agree whether the intention is that authorities on top of each fare directly collected from system the public loan will be treated as a quasi-grant, which should passengers. Shadow fares can be used to lower passenger be subordinated to senior debt. Ideally, substantial amounts fares to socially acceptable levels while still enabling private of private financing should still accompany public loans to take partners to earn reasonable returns. This arrangement can advantage of private lenders' due diligence and subsequent provide a good solution for transferring ridership risk to the oversight. Lastly, it is important to recognize that public soft developer while decoupling private compensation from fare loans cannot compensate for fundamental flaws in project risk levels when the cost of public transport is a politically sensitive allocation: A concession company may still be unable to ser- issue. vice debt even at lower soft interest rates. For example, Kuala Lumpur's STAR and PUTRA concessions both incorporated government soft loans. CHAPTER 6 Separation barriers between train and vehicle traffic. Photo by and reproduced by kind permission of Rainer Hesse. Nevertheless, ridership risk was fully transferred to the con- cessionaires, and subsequent ridership was so low that both 6.6.5 Exemptions from Taxes and Import companies became insolvent and required public bailout Tariffs Exempting developers from selected import and customs ta- (Abdul-Aziz 2006). riffs and local and national taxes (that is, tax holidays) can redu- IMPLEMENTING AGREEMENTS ce costs to public institutions and passengers. In most cases, 6.6.4 Direct Government Procurement such waivers will require legislative acts or close coordination of Infrastructure or Rolling Stock for Use between public agencies (see box 6.4). Early planning for exem- by Private Partners ptions and their associated legal requirements is essential for Public provision of specific infrastructure or rolling stock ensuring timely project completion. Also, public institutions assets can help reduce upfront costs to private partners. As should carefully consider the value for money associated with in the case of capital grants, careful consideration should be long-term tax exemptions (especially on corporate income). given, in such an approach, to ensure that private partners still Existing tax codes and accounting practices may already bear substantial risk when benefiting from this form of public provide large tax shields in early years through depreciation support. Direct public procurement also brings challenges and interest expense deductions. Providing tax breaks in regarding asset ownership and integration between contracts later years as well may reduce incentives for further capital and assets. Managing such contractual arrangements typi- investments and reduce potential public revenues. cally requires considerable public capacity or additional expen- ditures for engaging advisers to manage contracts on behalf of public authorities. Both the Manchester Metrolink and Box 6.4 Docklands Light Railway use this form of public support Taxes and Gautrain's Capital Grant SECTION C (box 6.3). South Africa's Gautrain Rapid Rail Link incorporates a subs- Box 6.3 tantial capital grant (approximately 87 percent) to fund Public Support and the Docklands upfront construction costs. Gauteng province disburses its capital grant through milestone payments to the system's Light Railway private concessionaire at each stage of the construction pro- cess in accordance with a preagreed completion schedule. The Docklands Light Railway (DLR) has benefited from Prior to a special legislative act, Gauteng's capital grants would considerable public support while still incorporating have constituted taxable income for the concessionaire. The meaningful investment from private partners. DLR's grantor additional cost of these taxes would have otherwise been actually contributes the bulk of funds toward new rolling-stock charged entirely back to Gauteng province in the form of purchases and other major infrastructure upgrades. DLR's higher bid prices. operating franchisee (Serco) is required to contribute funds to offset costs when improvements are mutually beneficial. Serco's franchise agreement also specifies some minimum level of investment over the contract's life. Each year, Serco and Docklands Light Railway Limited (DLR's contracting authority) agree on a list of capital projects in addition to Serco's contribution to those projects. 121 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 6.6.6 Loan Guarantees 6.6.8 In-Kind Grants Public guarantees (sovereign, municipal, and so forth) aim to Public authorities can provide land, rights-of-way, and other improve project bankability and to reduce the cost of debt in-kind grants to help support LRMT investments. Reference for private concessionaires. In some cases, lenders may not designs are a common means for public entities to define the finance a project without the provision of such guarantees, locations of such granted assets, although the condition of especially if the creditworthiness of the grantor is deemed such assets can be a significant risk transfer issue. deficient. However, wrapping project debt with the full faith and credit of public institutions comes with a measure of 6.6.9 Export Credit Financing caution regarding risk transfer and private incentives. Planners Export credit agencies (ECAs) promote and facilitate the should ensure that public guarantees on senior debt benefit foreign investment and export of goods and services of from adequate cushions of equity capital at risk. Contingent their particular nation's companies. In LRMT projects, ECAs liabilities associated with guarantees should also be priced have commonly supported the financing of imported rolling into any value-for-money analysis and should be transparently stock and associated signaling or communication systems. A disclosed. number of ECAs can provide project financing through banks or directly to the buyer through guarantees to the buyer's 6.6.7 Equity Contributions bankers. ECA financing can take the form of loan guarantees, Contributing public equity capital to LRMT concessions aims to political risk insurance, concessionary lending, or working align public and private interest in a system's financial success. capital guarantees. In some instances, ECAs require matching Sharing common equity can also provide a mechanism for contributions from private lenders. Most ECAs from the public influence on operating and investment activities. Organisation for Economic Cooperation and Development Public equity is often contributed in kind through public asset (OECD) countries abide by the "Arrangement on Officially transfers for brownfield concessions or through capitalization Supported Export Credits," which sets upper limits on the of capital grants. However, the drawbacks of public equity amount of assistance that foreign governments can offer in ownership often outweigh its benefits. Reduced risk transfer support of their exports. ECA financing may be particularly and increased likelihood of political influence can harm LRMT useful if local credit markets are underdeveloped or sovereign operations and compromise private incentives to perform; risks reduce the attractiveness of private finance. the shareholders' agreement must specifically and explicitly address these issues if such a structure is being contemplated. 6.7 MULTILATERAL AND BILATERAL Differences between public and private shareholders can result FINANCIAL ORGANIZATIONS in conflicting strategies or incoherent company objectives. Where local public resources are lacking, support may be available through multilateral or bilateral development institutions. Historically the World Bank, International Fi- nance Corporation, Asian Development Bank, European Investment Bank, Multilateral Investment Guarantee Agency, CHAPTER 6 and European Bank for Reconstruction and Development for a specific purpose (that is, earmarked funds) can also in- have been active multilateral agency project financiers. Most fluence or distort planning efforts and the analysis leading up of these organizations operate exclusively within developing investment decisions. countries. However, a select few also have mandates that allow IMPLEMENTING AGREEMENTS work in developed nations as well. For example, phase 2 of the Policy makers at all levels of government need to carefully Manchester Metrolink (see annex 1) incorporated financing assess the implications that different sources of public funding from the European Investment Bank. Multilateral and bilate- have on transportation planning functions. Local incentives ral financial institutions may offer support through for budgetary responsibility heavily depend on which levels of · Loans (potentially to both projects government fund items such as and governments) · Upfront capital costs · Grants · Construction cost overruns · Equity investments · Operating costs · Guarantees on debt and equity · Planning and feasibility studies · Advisory services · Later expenses arising from contingent liabilities Multilateral and bilateral support can help to make LRMT When national or regional governments fund the bulk of investments more financially viable and provide developers project costs or the majority of cost overruns, local planning and lenders with additional comfort on political and regulatory authorities may have perverse incentives to select capitally project risks. However, working with these institutions may intensive, risky projects that otherwise would make little sense also lengthen the project development process or constrain to pursue. Such incentives can also encourage overly optimistic SECTION C policy discretion. They may be very demanding in terms of estimates for elements such as ridership and operating costs. environmental and social safeguard requirements or im- Earmarked budgetary allocations, as previously discussed, pose stringent requirements on procurement procedures. can reduce competition for funds and similarly encourage Multilateral and bilateral financial institutions with strong suboptimal investment decisions (Pickrell 1992). development mandates may also be able to help planners determine whether LRMT would be a sound transportation 6.9 FUNDING ONGOING INVESTMENT NEEDS investment at all, as discussed in chapter 1. Expenditures required to maintain the condition and integrity of the LRMT system can be significant and periodic in nature. 6.8 SOURCES OF PUBLIC SUPPORT For example, rolling-stock refurbishment may occur only AND INCENTIVES once every 10 to 15 years but will require substantial capital Sources of public support can heavily influence both the investment. Fare levels, however, are continuous in nature and decision to pursue LRMT and the subsequent decision to will likely not cover the full costs of such large maintenance incorporate private sector participation. In some instances, investments at the time they are required. When private part- at least examining the potential for PPP-based procurement ners assume responsibility for funding such investments, is an explicit requirement attached to national or regional mismatches can arise between revenues and expenses-- government funding. Government funds exclusively allocated potentially jeopardizing the financial strength of project companies. To mitigate this risk, lenders or public authorities 123 LIGHT RAIL - LIGHT METRO may require special reserve accounts to pay for such irregular how many subsidies will be required during construction and expenses. These "sinking funds" (for example, maintenance and operations and in the testing of key policy decisions (such as the tariff rehabilitation reserves) continuously accumulate cash from project that can be applied while ensuring the viability of the project). revenues for future specific expenditures and, as such, will increase upfront project costs. Financial advisers are usually tasked with developing and running such models for the grantor, and the model will be needed at all Lenders will typically require rights over sinking funds as additional stages of the project life cycle security against project debt. In the event of a borrower's default, · To assess PPP project options and feasibility and affordability the assets of the sinking fund will help to offset any potential at the design stage losses on project debt in the order of seniority. Public authorities · To assess bidder feedback during the bidding stage would typically not specify sinking funds unless the responsibility · To evaluate financial bids received for maintenance investments resides with a private partner whose · To support negotiations with bidders and lenders up to value at risk is small relative to the envisaged expenditure (HM contract signature Treasury 2007). · To support negotiation of any contract variations after financial close 6.10 DEVELOPING A PROJECT FINANCE MODEL For the grantor to assess project value for money and PPP viabi- Figure 6.1 illustrates the cash-flow building blocks of a typical project lity or bankability, it must develop a robust financial model for the finance model. The outputs of such a model will be cash-flow and project, capturing all the funding and finance issues previously income statements and project balance sheets. The model will allow discussed, as well as the effects of performance payments the grantor to assess the effect of likely project costs and of passen- (chapter 5), risk allocations (chapter 4), and contractual arrange- ger and revenue forecasts on public funding requirements (capital ments (chapter 7). The financial model is also critical in determining grant, availability payment, minimum revenue guarantee) and associated project affordability. Figure 6.1 Building Blocks of a Typical Project Finance Model: Financial Equilibrium of an LRMT Project Dividends (equity) Capital Taxes and fees expenditure Debt servicing (interest and principal) Taxes and fees Operational expenditure Public grant Private equity Operating revenues or availability payment Private debt Construction Operations Source: Diagram by Vickram Cuttaree. CHAPTER 6 Sensitivity analysis is strongly recommended because any result from the financial model is based on a set of assumptions (figure 6.2). Differences between reality and the assumptions can compromise the viability of the project or directly result in a higher financial public contribution. Bidders are also likely to use different assumptions, which might result in a bid price different from the one estimated. Key sensitivities that should be run on the model ("stress testing") should include · Ridership forecasts (which are often optimistic) · Fare levels IMPLEMENTING AGREEMENTS · Capital costs (which are often underestimated) · Inflation · Financing assumptions (tenor, interest rates) Figure 6.2 Articulation of the Financial Model Some design assumptions Some financial assumptions Other assumptions Ridership Construction grant Fares Availability payment Taxes Capital expenditure Debt/equity ratio Value added tax SECTION C Operational expenditure Cost of capital Risks delays... Life of assets Grantor Project bidders Net payment (net present value) Financial performance: to or from the project Internal rate of return on equity Construction grant to shareholders Availability payment Taxes and value added tax Source: Author's representation. 125 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 6.11 CONSIDERING AND VALUING forecasting future changes in those underlying factors, econometric models endeavor to predict future loss CONTINGENT LIABILITIES distributions. For example, econometric models can be Risks associated with private sector participation in LRMT used to calculate government exposure on a direct loan projects invariably create contingent liabilities that can to a private developer by forecasting those elements influence the amount of public support services may require. that potentially drive default and the corresponding Contingent liabilities typically relate to the provision of public risk of loss or by predicting early repayment and asso- guarantees, but also reflect other potential public sector ciated reinvestment risk. obligations that do not appear or are not accounted for in · Contingent claims analysis. This method can be par- public budgets and accounts. Intuitively, public institutions ticularly useful when historical data are lacking or when should plan to cover the expected value of such liabilities as planners seek to evaluate a single specific element part of their efforts to budget for system affordability. This within a larger collection of risks. Contingent claims allocation can be accomplished either by verifying sufficient analysis employs many of the same techniques used to budgetary cushion in later years or by setting aside appropri- value financial options by identifying elements within ate amounts of reserves when future budgets are uncertain. larger risks that have options like cash-flow features. Proper budgeting is challenging to achieve in practice because For example, the value of a direct loan with risk would contingent liabilities correspond to uncertain cash-flow events, be deemed equivalent to the value of a risk-free loan and public funds have some opportunity cost associated with less the value of a put option on the borrower's default them. Allocating excessive reserves to cover such expenses (Lewis and Mody 1997). may divert public funds from other important uses. Conver- sely, allocating insufficient reserves may strain future budgets in periods when expenses occur. This shortfall can prevent 6.12 HEDGING Hedging instruments provide mechanisms that help public public authorities from meeting contractual obligations or authorities and private developers manage financial risks asso- from making necessary investments to ensure quality services. ciated with specific liabilities (both contingent and otherwise). Correctly valuing contingent liabilities is therefore a critical However, such instruments provide counterparties with certain funding consideration for public institutions. Methods for rights and obligations at some future date. Hedging is a common valuing contingent liabilities include: feature of LRMT projects and is often used to offset exposures · Actuarial or statistical techniques. These techniques to use historical data and current trends to estimate · Foreign currency movements (for example, swap and future losses related to uncertain events. The appli- forward contracts or options). cation of actuarial techniques is limited by the availa- · Large purchases of raw materials and other project bility of historical data and their failure to explain the inputs (for example, forward contracts for steel and patterns behind losses that they predict. concrete). · Econometric models. Unlike actuarial techniques, this · Interest rate movements (for example, swaps). method identifies factors that drive future losses. By · Counterparty risks (for example, credit default) CHAPTER 6 Source: http://www.sxc.hu/ Deciding when and how to hedge certain project risks requires It should be noted, however, that hedging comes at a sig- careful consideration of associated costs and benefits. nificant cost, with commercial lenders often earning as much Whenever projects procure hedging instruments from interna- from hedging instruments as they do from the project loans. tional markets, planners should ensure the following: Planners should, therefore, endeavor to construct natural IMPLEMENTING AGREEMENTS · Prices are fair and competitively obtained (see box 6.5). hedges that eliminate risky exposures altogether when cir- · Purchased hedges offset a risky exposure. cumstances allow. For example, when lenders can provide · Hedging instrument covers are purchased in appropri- loans in local currency, projects can match revenues with debt- ate amounts. service payments, avoiding the need for expensive currency swaps (Yescombe 2002) or the need for the public sector to bear foreign exchange currency risk. Chapter 4 discusses many of the risks that planners may want to consider hedging. Box 6.5 6.13 REFINANCING Hedging and Gautrain's Capital Grant The capital and debt structure of a project can significantly Constructing South Africa's Gautrain Rapid Rail Link involved affect both investor returns and a concession's financial risk a substantial capital grant that private partners used to profile. Striking the balance between stability and appro- fund the majority of upfront system costs. Many of the priate rates of return usually occurs toward financial close, expenditures covered by this grant were denominated in foreign currencies. Ensuring the project's financial viability when lenders conduct extensive due diligence and also specify therefore required some method to guard against potentia- restrictive covenants on project debt to minimize default risk. lly destabilizing fluctuations in foreign exchange rates. However, market conditions and a project's credit profile are SECTION C Gautrain's concessionaire originally assumed foreign exchan- rarely constant throughout time. Favorable changes in either ge risks during the project's construction period and passed of these factors may provide for additional value capture by associated hedging costs along to Gauteng province as opportunistically altering elements in a project's capital or debt a component of capital grant payments made at project structure. For example, a concession company may be able to milestones. However, this structure resulted in unfavorable forward currency pricing when the concessionaire's bankers extend the maturity of project debt (within the constraints of were not forced to compete on the forward rates they the term of the PPP contract), reduce interest rate margins, offered and took full advantage of the pass-through nature or replace the hedging instruments. These actions could of the project's hedging costs. In response to this situation, South Africa's national government intervened and decided reduce the debt repayment profile, leaving additional cash to take capital grant­related foreign exchange risks back from free for paying dividends or making investments in service the concessionaire during the construction period (effectively improvements. acting as a currency swap counterparty to Gauteng province). This solution eliminated the additional cost associated with unfavorably priced currency hedges and also insulated the The length of most LRMT concessions allows ample time for province from foreign exchange exposure on its capital grant potentially valuable refinancing during a project's life as risk payments. profiles or credit market conditions change. Postconstruc- tion refinancing is relatively common and typically planned. 127 LIGHT RAIL - LIGHT METRO Recently, it is often built into the original financing as a margin ratchet. However, other opportunities for refinancing could be less predictable, especially in rapidly developing countries, where sovereign risk spreads, one hopes, contract over time to reflect improving governance, increasingly stable macroeconomic conditions, or developing local capital markets. Financing terms may similarly become more favorable when systems demonstrate several years of sound operations and timely debt service or when contracting authorities show competence at managing privately financed infrastructure projects. In practice, the opportunity for later-stage refinancing often arises from a combination of public and private efforts. When not originally planned, some structure for sharing these unexpected "refinancing gains" between public and private partners is therefore reasonable to include in a well- crafted concession contract (box 6.6). Box 6.6 Refinancing Gain: HM Treasury The United Kingdom's Her Majesty's (HM) Treasury Department provides detailed guidance on refinancing and arrangements for sharing in version 4 of Standardisation of PFI Contracts (HM Treasury 2007). Specifically, in the October 2008 Amended Refinancing Provisions, HM Treasury states that the grantor ("Authority") is entitled to between 50 and 70 percent of such refinancing gains, depending on the amount and kind of gains generated and subject to the Authority's approval and value for money analysis. Transactions where sharing may be warranted include · Reduction in interest margins · Reduction or release of reserve accounts · Release of contingent junior capital · Extension of the maturity of debt · Increase in the amount of debt · Refinancing undertaken without the direct involvement of the contractor HM Treasury also mentions that certain transactions should not require an authority's consent and likewise would not require any form of sharing. These include · Disposal of junior capital, which in terms of rights is equity in all but name · Refinancing agreed in the project's base case financial plan · Transactions originally taken on a corporate finance basis · Gains on interest rate hedging · Changes in taxation or accounting policies · Qualified banking transactions, such as syndication or securitization of loans Considerable analysis should precede an agreement to refinance any portion of a project's capital structure. HM Treasury recommends that contracting authorities diligently analyze how refinancing can potentially increase termination liabilities or otherwise affect the operational/ policy flexibility of contracts. More information from HM Treasury can be found at http://www.hm-treasury.gov.uk. Profit-maximizing developers and investors would naturally may create additional termination liabilities for contracting pursue refinancing whenever gains sufficiently exceed asso- authorities. Value-for-money analysis should precede any ciated costs (for example, transaction fees, additional financial agreement to changes in a project's capital structure. Well- risk, and hedge breakage costs). However, the benefits of designed contractual arrangements should therefore also refinancing decisions for public institutions may be less clear include mechanisms for dealing with refinancing opportuni- given different policy objectives and reduced appetites for ties that may be in both the public and the private interest. risk. In addition, refinancing may limit a project's flexibility or CHAPTER 6 Checklist Funding and Finance Develop a robust financial model to successfully align Other questions to consider on bankability include financial implications with public interests during planning Does the project require public support? stages. Is a capital grant is required? Keep four factors in mind: Is operational cash-flow support required (for example, o Is the project affordable and creditworthy? availability payment or minimum revenue guarantee)? o Does it provide value for money? Is a guarantee required (for example, municipal, state or o Does it use a legally robust structure? sovereign, IFI, or partial risk/credit guarantees)? o Is its risk allocation in line with local or o Consider the suitability of output-based subsidies international practice? if there are concerns over the cost of the project Remember that private capital comes with an expectation to the public sector. of a reasonable return: o Ensure that all public guarantees on senior debt o Demonstrate how private investors will recover benefit from adequate cushions of equity capital normal returns throughout project development at risk. Contingent liabilities associated with and implementation. guarantees should be priced into any value-for- o Consult with banks and other lenders early in money analysis and be disclosed. the bidding process to ensure adequate due o Carefully consider the implications that different diligence, project transparency, and quality. sources of public funding have on transportation o Calculate levels of debt and equity projected to planning functions and incentives for budgetary be required. responsibility and discipline. o Market-test the project with potential o Consider the use of special reserve accounts to developers and investors. cover the expenditures and capital investment Understand the implications that the project's structure required to maintain the system's integrity and (policy, technology and commercial) will have on funding condition over an extended period. and finance sources: Ensure that proper budgeting mechanisms are used to o Hire an experienced transaction/financial allow sufficient cover for contingent liabilities. adviser familiar with PPP projects to assist in the Explore the use of hedging instruments to help manage marketing and financing of the project. the financial risks associated with specific liabilities. Consider potential revenues and benefits that can be Ensure that the concession contract contains scope for derived from outside the operation of the system. refinancing opportunities that may be in the interest of Consider the bankability of the project by exploring and both the public sector and the private sector. understanding the following: o Creditworthiness o Legal viability o Economic viability o Technical viability o Suitability of project finance or corporate finance for the project's needs 129 LIGHT RAIL - LIGHT METRO CHAPTER CONTRACTUAL ARRANGEMENTS 7 The tram-train system in Kassel, Germany, with a diesel LRMT system. Contractual Arrangements This chapter looks at some of the major issues to be conside- red when formulating the contractual arrangements for a 7.1 LEGAL FRAMEWORK light rail­light metro transit (LRMT) public-private partnership (PPP) scheme. By their nature, PPP arrangements are complex, 7.1.1 Authority and Enabling Legislation and each arrangement has its own set of interlinking contracts No one project or its jurisdiction will be the same. It is essential IMPLEMENTING AGREEMENTS and agreements that are needed to establish allocation of risks that a government or government entity that enters into a and responsibilities, as well as to deal with financial obligations PPP agreement or contract has the rights or the powers (vires) and cash flows. We use a PPP contract structure based on to enter into the obligations involved in the project and can the net-cost contract with investment (NCCI, or concession undertake its roles and responsibilities. All the grantor's actions contract) to illustrate some of the main contractual issues to must be allowable by law (intra vires). Acts that are outside the be considered. We detail some of the associated contracts that law or outside or beyond the powers of the party performing would typically be used by the grantor as a means of sharing its duties (ultra vires) must be avoided. All the grantor's the risk among the project participants. We also look at the decisions and acts must be enforceable and should not be importance of the overall legal regime of the host country subsequently rescinded or invalidated under applicable law. in which the potential PPP will take place and explore the In some instances, particular administrative or legal require- importance of ensuring that the grantor has the legal rights to ments will need to be satisfied before the obligations set out in enter into the PPP agreement. the PPP agreement can become binding. In many cases, major infrastructure projects will require special permission from Finally, given that it is impossible to give one "standard" either the central government or the governing authority. contract form, this chapter is designed to outline the key issues to be considered when designing and applying a new These entities may differ from the entity that will enter into SECTION C LRMT PPP contract. The majority of the new LRMT PPP the contract. In other words, the grantor may differ from projects reviewed in preparation for this book have involved the authority that provides the right to enter into the PPP major project investment, with investment commitment by agreement. Given that LRMT PPP projects are in many cases the private sector as well as the public sector. It should be greenfield operations, there is often no specific legislation for noted that many of the points covered here (that is, those not LRMT schemes. In this situation, it may be necessary to create specifically related to investment) will also apply to the other enabling legislation before developing and entering into a PPP noninvestment contract forms, such as operations contracts. agreement, especially in the case of countries with civil law We will look at the basic needs for contracts and their sub- jurisdictions, as will be discussed in the next section. Box 7.1 sidiary agreements, specifically to gain an appreciation for the describes issues that arose in the Philippines. potential complexity of a complete contract structure and the interlinking of the various contracts (for example, land leases, lenders' direct agreements, and technical annexes). 131 LIGHT RAIL - LIGHT METRO Box 7.1 Legal Issues and Manila's MRT3 Legal factors can exert tremendous influences on the via- bility of light rail­light metro transit projects. The case of Manila's MRT3 system demonstrates how varying legislative interpretations by public institutions and elected officials can result in delays, additional complexity, and increased costs. In July 1990, the Philippine government passed Republic Act 6957, which governs build-operate-transfer (BOT) concession agreements. This act authorized the country's public ins- titutions to enter into contracts with private parties for the financing, design, construction, operation, and maintenance of financially viable infrastructure services through BOT or build- transfer concession schemes. Later, in 1993, the government passed Republic Act 7718 (known as the Philippine BOT law), which revised and expanded provisions included within the original 1990 act. MRT3's planning and procurement progressed in parallel with the Philippine's new BOT legislation. In November 1991, the Department of Transportation and Communication signed a negotiated contract with the Epifanio de los Santos Avenue Light Rail Train (EDSA LRT) consortium, the only qualified bidder for the MRT3 project. Republic Acts 6957 and 7718 required a BOT concession structure because ESDA LRT was a foreign-owned entity and was therefore legally forbidden from operating infrastructure services under the terms of the two acts. Using this arrangement, the Department of Transportation and Communication would operate the system and make regular lease payments to the private conce- ssionaire. Halberstadt, Germany, features a new tram using the old tram lines. This is an example of using new trains on older tracks. Photo by and reproduced by kind permission of Rainer Hesse. CHAPTER 7 Source: http://www.sxc.hu/ 7.1.2 Choosing Legal Instruments The legal design of the PPP agreement must provide a and a private partner. In common law systems, that is not the sound legal basis for the transaction. Furthermore, the case, and there is no legal distinction between contracts that legal environment under which the PPP agreement is to be involve only private firms and contracts that involve a public 2 procured needs to be clearly specified. It is essential that authority and a private firm. The same law and the same courts the legal code that governs private participation be well govern private participation contracts that businesspeople understood, because it will set out the legal instruments that rely on for their transactions with each other. Common law may be used. Thus, mechanisms can be developed to ensure contracts are very flexible, and almost any agreement can be compliance with obligations. put into a contract and can be enforced. IMPLEMENTING AGREEMENTS The choice of instruments in any particular case depends Under a civil law tradition, some important administrative on the legal system, the practice of the country, and the rules seem to be common in many countries (for example, the instrument's purpose. There is no absolute structure or rule for rights of the grantor to unilateral modification and unilateral choosing legal instruments. In fact, a PPP agreement may rely cancellation). Even if some of these issues are part of the on several legal instruments. For example, the PPP agreement background law that applies to a PPP agreement, it may still may be authorized by a statute or spelled out in an executive be necessary to spell out the relevance of these rules because order, yet be given legal effect in the PPP agreement itself. the law may not be explicit enough about their application. Thus, writing clear rules into the contract is safest. It is ge- The PPP agreement is a contract that seeks to bind both the nerally a good idea to specifically outline in the contract the 1 government through the grantor and the developer. At first grantor's rights (for example, to demand unilateral changes in sight, the government may appear to be restricting its ability services) and to include provisions within the PPP agreement to act and thus may be reducing its flexibility. Yet one party's that explicitly address the circumstances under which the flexibility often equates to the other party's risk. If the grantor developer will be compensated. However, the legal validity of had complete freedom to change the PPP agreement during explicitly spelling out how an administrative law principle will the course of the life of the contract, the developer would be be applied within the PPP agreement will need to be checked. SECTION C unlikely to agree to such arrangement without receiving full For example, some civil law codes contain mandatory notice protection. To obtain the benefits of private participation, periods before termination for breach of contract; such rules the government must commit to certain behavior that will be cannot be avoided or overridden within the PPP agreement. regulated through the contract. Civil law and common law 1 When entering into a PPP agreement, the government must decide which institution it will use to represent it within the PPP agreement. Civil law is used in France, Spain, and most of their former colo- For LRMT-type projects, signatories to the agreement or contract are the developer (representing the private sector) and the grantor nies, as well a number of other continental European countries. (on behalf of the government), typically the government agency responsible for transport. In some jurisdictions, no PPP agreement may Common law is used in the United Kingdom, most of its former be entered into without the consent of the government entity that colonies, and the United States. represents its public finances (for example the ministry or secretariat of finance). Hence, the PPP agreement may in some instances be signed by three parties: the grantor, representing the transport policy In civil law countries, a separate administrative law usually of the government; the agency responsible for public finances; and the developer. governs relationships and contracts between the government 2 In some common law countries, administrative law or sovereign immunity law governs the relationships between the government and a private partner. 133 LIGHT RAIL - LIGHT METRO Zurich, Switzerland. Photo by and reproduced by kind permission of Rainer Hesse. Special privatization or PPP laws service. Although some officers within some authorities may In some countries, there has been a trend toward developing resent the consequent diminution of their power, many, in general laws on private sector participation. In others, special the interviews undertaken in preparation for this book, have laws allow the private sector to provide rail services, including expressed satisfaction that they no longer had to be involved LRMT. These special statutes can provide a clear framework in the day-to-day aspects of public transport operations. In for a PPP agreement. A well-designed law addresses such the case of a PPP arrangement, the contractual basis clearly issues as identifying which agencies have the power to initia- allocates the grantor's and the developer's responsibilities and te the introduction of private participation and set out the risks, as well as the benefits for all parties. mechanisms that will allow competitive and transparent pro- curement processes. At the same time, poorly drafted PPP 7.2.2 Allocating Risk through the PPP laws may hinder the PPP process. Even with specific laws Arrangement (either general or sector specific), there are often limitations. Each PPP contractual structure needs to be tailored to the Successful LRMT PPP agreements will include appropriate specific PPP scheme. We will use a typical NCCI contract methodologies and techniques that make optimal use of the to illustrate some of the key issues to be considered when approach described in this chapter. establishing a PPP arrangement. As a reminder, the NCCI is typically known as a concession-type contract or a form of the 7.2 CONTRACT FORM build-operate-transfer (BOT) or build-operate-own-transfer 3 (BOOT) type of contract. Here, the public authority contracts 7.2.1 Using Contracts to Help Shape Policy with an outside organization to provide (or in the case of existing systems, to maintain or upgrade) the majority of the Contracts are important and are required whether or not the fixed and movable assets while providing services to specified project is subject to a competitive procurement process. They quality-of-service standards. Consequently, the developer can define a wide variety of objectives--transport, economic, must provide the required inventory of fixed and movable financial, social, and environmental--not only on behalf of assets from internal resources or through external financing. the grantor but also on behalf of other local, regional, or Risk sharing may also extend into the areas of regulatory risk. national stakeholders. They help give clarity and an objective basis for LRMT development and operations. Consequently, the use of PPP agreements is often promoted by external 3 BOOT contracts envisage the developer's (private sector's) financing, building, owning, and operating a specific new facility regional, national, or supranational agencies to enshrine policy or system. After contract expiry, ownership of the assets is objectives and to implement specific policy actions. transferred to the public sector. Traditional BOOT schemes may have a number of variations, depending on the level of risk allocated to the parties. For example, one slight variation of Contracts have been used to change the relationship between the BOOT system is the build-transfer-operate contract. In this case, ownership of the assets is transferred to the public sector authorities and local publicly owned service providers, either upon completion of the facility or system, and the private firm is contracted only to construct and operate it. Another variation to replace these providers by new developers or to distance is the build-operate-own contract, whereby ownership is not authorities from the local publicly owned service providers transferred to the public sector but remains with the private firm that constructs and operates the assets. and to make the providers clearly accountable for quality of CHAPTER 7 A concession, in the form of some type of build-operate- transfer or design-build-operate arrangement, is often the most appropriate type of contract for situations where no services existed previously and where there is also a re- quirement to provide depots or other infrastructure (that is, greenfield projects). New light rail schemes are often covered by long-term contracts of this nature. NCCI contracts are generally long term and provide enough time for (long-term) IMPLEMENTING AGREEMENTS debt repayment and reasonable investment returns; contract periods of 20 to 30 years are not uncommon. This contract form can be adapted to include a variety of PPP arrangements in the development and financing of LRMT schemes, including (a) investment, (b) construction of new works, (c) refurbishment and renewal of existing works, (d) provision of rolling stock and equipment, and (e) long-term operation and maintenance of new and existing assets. The other contract forms, such as management contracts or leases, generally involve similar issues, but the developer has more limited involvement. Contracts allocate obligations and risks to the contracting parties, setting out the financial links between the parties. These arrangements are complex. One way to demonstrate SECTION C this complexity (and a useful tool in the analysis or development of a full contract arrangement) is to show the links between the different parties in two ways: · The contractual instruments linking the parties · The cash flows (or potential cash flows) linking the parties Figures 7.1 and 7.2 illustrate the necessary contractual and financial links between the parties. When designing a PPP arrangement, one may find it is useful to start by defining key links in this way. This approach can be used to establish agreement on the broad principles of the contract structure, before moving on to detailed contract design. Figure 7.1 shows all the main contract links in a typical LRMT project, each of which requires its own contract document or agreement, and figure 7.2 shows some of the main cash-flow links that are also addressed contractually. 135 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ Figure 7.1 Contractual Links Source: Author's representation. CHAPTER 7 Figure 7.2 Financial Links IMPLEMENTING AGREEMENTS SECTION C Source: Author's representation. 137 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 7.2.3 Contractual Links the developer will be keen to meet the construction deadlines because it will want to ensure that it can start operating the Figure 7.1 shows the typical relationships within a PPP 4 system and thus generate revenues to meet debt-service agreement. The grantor gives a right to a project company obligation as quickly as possible. or developer. The terms of the PPP agreement set out the rights and obligations of the parties. The PPP agreement The grantor will also seek to ensure that the developer allows the grantor to allocate project risk to the developer performs according to a minimum set of standards and overall and to define the risk sharing among the project partici- requirements. The grantor's requirements will cover such- pants. The PPP agreement may also set out the legal and tax issues as service frequency, reliability, maintenance needs, regimes applicable to the project, including the developer's passenger safety, and comfort. Effective performance is a key environmental obligations. issue for any project, but the grantor's requirements will de- pend on the type of contract. For example, under an operating In drafting the PPP agreement, the grantor must be clear on a and rolling-stock contract, the grantor will have performance number of matters, including in particular the following: requirements related to serviceability and passenger comfort. · The overall risk allocation (that is, which party If the PPP agreement is a concession-style contract, provision assumes or is responsible for managing specific risks). must be made to ensure that adequate maintenance is carried Annex 4 provides a risk allocation matrix that can aid out during the contract period to allow the replacement of in determining the optimum risk allocation. parts and materials. Furthermore, the grantor will want to · How the developer will likely raise the financing ensure that when the assets are transferred back at the expiry necessary to fund this significant capital expenditure of the contract term, they are in good working order. and, as a related issue, what type of financial support will be available from the grantor. 5 Delmon (2009a) offers a summary of the main issues that the PPP agreement will seek to cover: Therefore, it is not uncommon for the grantor to produce · Completion date. The grantor's need for the infras- subsidiary documents as part of the PPP agreement that define tructure in question is generally immediate (often as and describe in some detail the other contractual relationships much for political as for practical reasons). that are considered crucial for the PPP agreement's integrity. · Performance of the project. The grantor's require- An example is the need to include the way in which the land ments will cover such issues as input consumption, required for the LRMT will be allocated. This process is typically efficiency of operation, maintenance needs and costs, accomplished through a land-lease agreement or a license in- life cycle, health, safety, the environment, quality and corporated into the PPP agreement. quantity of the output or service generated, and cost of operation. Furthermore, the grantor will use the PPP agreement to address some of its basic requirements for the project. For example, the government may need the LRMT system to be 4 The type of legal system will likely govern the choice of a lease contract or a license granting use of the land. completed within a given time frame. This requirement may be driven by both political and practical reasons. At the same time, 5 Delmon's list has been modified to specifically relate CHAPTER to the PPP agreement under an LRMT scheme. 7 Source: http://www.sxc.hu/ · Maintenance regime. To mitigate the effects · Fees. The developer may be required to pay concession of wear and tear on the project during the PPP or lease fees for the privilege of obtaining a right to agreement period, the grantor will want to ensure operate and to offset grantor costs, payable before that the maintenance regime implemented (including commencement and possibly periodically during the IMPLEMENTING AGREEMENTS replacement of parts and materials) is sufficient, given PPP agreement period. the nature of the works involved. This regime is even · Restrictions on share transfers. The grantor may want more important later in the project term because the to restrict the transfer of shares to the developer or developer's incentive to invest funds in maintenance changes to the developer's shareholding. The gran- during the final phase of the PPP agreement period tor may want to (a) disallow any transfer (direct or may be diminished, owing to the imminent transfer of indirect) until a certain point after completion of the project to the grantor. construction (a lockup period), (b) exercise approval · Construction and operation. The grantor will over the identity of any transferee, or (c) maintain want to ensure that the developer's construction some guarantee from the original shareholders. and operation activities meet certain minimum · Grantor step-in and continuous operation. The gran- standards--both those imposed by law and those tor may want the right to continue operation of specified by the grantor--to ensure the quality of the the project when it terminates the PPP agreement. assets created, the quality of the services provided, This right is sometimes referred to as the right to and the protection of the public. continuous operation, because it ensures continuous · Government guarantees. The government may delivery of services. pro-vide guarantees for public sector bodies taking · Hand back. At the end of the PPP period, the grantor SECTION C part in the project whose credit risk is otherwise will either put the project out for retender or require insufficient. the developer to transfer the project assets to the · Exclusivity. The grantor may supply the project grantor or to a replacement developer. company with some form of exclusivity rights over the service to be provided to ensure a bankable revenue stream, with careful consideration of future requirements, such as demographic changes. · Know-how transfer. The grantor may want to maximize the interaction between the developer and local partners or the grantor's personnel to ensure the proper transfer of know-how. · Government interference. To protect the developer from a specific subset of political risk, the grantor may agree that the host government will not act against the interests of the lenders, the shareholders, Source: http://www.sxc.hu/ the developer, the performance of the developer's obligations, or the project itself. 139 LIGHT RAIL - LIGHT METRO Photo by and reproduced by kind permission of Richard Podolske. 7.2.4 Financial Links 7.3 GENERAL DESIGN OF THE PPP In every contractual arrangement, there will be some flow AGREEMENT: ONE CONTRACT OR MORE? of money to each allocation of key risks and responsibilities. One of the main decisions for policy makers is whether a Figure 7.2 illustrates the financial links between the parties. It is project should use a unified or layered approach. Under a an extremely useful tool for obtaining an early understanding unified system, the project is implemented on the basis of of and agreement on the key financial issues. This agreement one PPP agreement with a single private sector counterparty is crucial; lenders and shareholders will want assurance that that will assume responsibilities for all aspects of the project, their rights and obligations are protected within the PPP including financing, construction of the civil infrastructure, agreement. mechanical and electrical work, procurement of rolling stock, and operation of the system. 7.2.5 The Term Sheet Approach For complex contractual structures, such as LRMT PPP Alternatively, under a layered approach, the project may be contractual arrangements, the term sheet approach can split into two or more separate PPP agreements, which should help the grantor ensure that key issues are systematically and address the following: comprehensively established and agreed on before drafting · Construction of the infrastructure the detailed contract. As a preparatory step, the grantor (including mechanical and electrical work) or its advisers prepare a term sheet for each contract or · Procurement of rolling stock agreement, briefly summarizing the key issues to be covered · Operation of the system in the document. The main advantages of this approach are that key issues and contractual principles are sorted out early Regardless of the approach selected, the developer will be paid and the detailed drafting of the PPP agreement and other in full only if the infrastructure is complete and continues to be related agreements is carried out with more certainty, thus "available" throughout the life of the contract or project. reducing the need for later detailed revision. This approach should be more efficient and cost-effective and should also be Unlike a unified approach, which will have only one payment beneficial for establishing supporting documents, such as the stream and one set of lenders, the layered approach will operational and technical annexes. have a payment stream for each separate contract, and in 6 the case of the infrastructure work and the rolling stock, the payment streams will provide the basis for separate financing arrangements applicable to those parts of the project (that is, one set of lenders will fund the infrastructure and will rely on the infrastructure payments to repay their debt, and a separate set of lenders will fund the procurement of the rolling stock and will rely on the separate rolling-stock payments to repay their debt). Source: http://www.sxc.hu/ 6 Rolling-stock contracts usually include associated signaling and other related equipment. CHAPTER 7 This layered approach effectively means that the grantor would be exposed to a greater risk because there is no single point of contact and there are separate contractual arrangements for the construction of infrastructure and the provision of rolling stock and system operation. On the upside, this type of arrangement may be cheaper and more flexible in the longer term. In table 7.1, we set out the principal advantages and disadvantages of pursuing a layered approach vis-à-vis a unified approach. We detail the main considerations for the way risk is transferred in each type of approach and the implications for the grantor and the 7 developer under each. These considerations are discussed in more detail below. Table 7.1 Unified Contract System versus Layered Contract Approach IMPLEMENTING AGREEMENTS Consideration Unified system Layered approach or risk allocation Single-point responsibility and integration No Yes Expansions and extensions are possible, Expansions and extensions but the contractual arrangement would need Future expansions or network extensions are easier to manage to allow for extensions A contractual variation mechanism Contractual flexibility Yes is needed, which may be costly Grantor approaches private sector Private sector counterparties have to form Impact on procurement counterparties who are able to deliver consortia at bidding stage and demonstrate (including market appetite for the project) the grantor's requirements in their own right that they are able to meet the grantor's requirements Grantor has limited ability to distribute risk across various private sector Grantor has full freedom to manage Ability to transfer farebox risk and distribute risk SECTION C counterparties Risk is high, because the grantor is obliged Risk to grantor is lower, because Payment during partial failure the developer is responsible for integrating to pay even though some services of the system (firewall risk) all private sector counterparties are not being delivered Risk of blame culture between private sector Although possible, this risk More likely counterparties arising from failure of system is a developer responsibility Likely response of market Project specific Project specific Note: Private sector counterparties include the parties responsible for the construction of the civil Source: Compiled by Cledan infrastructure, the mechanical and electrical work (including signaling), the construction of rolling Mandri-Perrott and Iain Menzies. stock, and operation and maintenance. Failure of the system refers to any failure by one or all of the private sector counterparties. 7 The classification presented here was developed by Nigel Pritchard and Troy Edwards of Allen & Overy and has been adapted for use in this context. 141 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 7.3.1 Single-Point Responsibility and Integration to be fit for operation, trusting that the private sector will The main difference between a layered approach and a be able to remedy any problem. Thus, the grantor loses the unified approach is the way in which the interfaces bet- ability to influence the integration at a practical level and ween the civil infrastructure, rolling stock, and mechanical has limited ability to actively intervene and influence the and electrical works and the obligations for running the developer's behavior other than by the specific remedies services using those assets are managed. Conventional provided in the PPP contract. wisdom advocates that a single contract would be easier to manage because the grantor would have one private Conversely, under the layered approach, while the grantor sector contracting counterparty, and that counterparty will have to take the integration risk, it will be able to would have full responsibility for managing all the risks identify problems as they arise and find a solution that will associated with the various activities that together make help procure the timely opening of the system. The grantor up the project. can manage the extent of the integration risk through the following means: Under a layered approach, the responsibility for integra- · It can appoint appropriate in-house personnel or tion--and therefore the interface risk--lies with the external consultants who will have the specific grantor. The grantor will be responsible for ensuring that task of monitoring interface and integration issues it lets contracts and manages their implementation in throughout the development of the project so such a way as to ensure that the entire system operates as that any problems can be identified and addressed intended. This responsibility and the associated risk may be early. perceived as a major disadvantage of the layered approach · It can include provisions in each of the relevant when compared with the unified approach. project contracts to ensure appropriate liaison between the relevant suppliers or counterparties, However, with a unified approach, the fact that the de- perhaps with a specific coordination agreement veloper has assumed responsibility for the integration of for all relevant parties that identifies the pro- the individual components of the system does not mean cedures to be followed by each of the grantor's that this risk has gone away. If the developer mismanages counterparties to ensure that interface issues are the integration, the grantor will have remedies under the taken into account in the design, procurement, relevant PPP agreement (for example, it can withhold and construction processes. For example, each payments, apply deductions, and ultimately--if the problem contract could contain a design review procedure is not solved and is of significant magnitude--terminate the that would enable the grantor's counterparties PPP agreement). However, although the grantor will have to identify problems in any designs proposed by power under the PPP agreement to sanction the private others that would affect their own obligations. sector for failing to manage integration, the grantor will not have the power to intervene and correct the faults. 8 The grantor's ability to sanction the developer for failing to manage Hence, the grantor will need to wait for the LRMT system integration needs to be measured against the conditions under which such sanctions can be imposed. It is usual for the PPP agreement to identify "extreme or extenuating circumstances" where such sanctions would be inapplicable. CHAPTER 7 7.3.2 Future Expansions of the System 7.3.3 Contractual Flexibility In some countries, such as the United Kingdom, the unified A major advantage of the layered approach is that it enables approach is the model that has been adopted to date for the the public sector to adjust aspects of the project at various dis- majority of light rail projects. However, when the relevant crete points throughout the life of the project as conditions system needs to be expanded, this structure can be inflexible change, without needing to have recourse to any contractual and extremely expensive. Furthermore, there is a risk that variation mechanism or termination that would invariably IMPLEMENTING AGREEMENTS 9 the developer will not keep the system in good condition trigger cost claims from the incumbent developer. or be concerned about long-term failures in the system if it believes that its PPP agreement will be terminated within a For example, service levels may need to be varied from those limited number of years to permit the implementation of the originally envisaged at the outset of a project to meet changed next stage of the system. Similarly, the developer may not economic and social conditions. Under a layered approach, be concerned with running the system along sound business these new service levels can simply be introduced whenever lines if it believes that it will receive its full investment return a new operations contract is entered into (anticipated to be through the voluntary termination payment. In contrast, at five yearly intervals), avoiding the need to renegotiate the under the layered approach, separate contracts may facilitate whole PPP agreement with the incumbent developer. In some the on-time and on-budget delivery of major extensions much European countries, changes to shopping hours (for example, more efficiently (see box 7.2 for an example that contrasts the offering extended shopping hours during the week or opening two approaches). shops on Sundays) has had a significant effect on the times when the public requires (and expects) public transport Box 7.2 services to operate. Under the unified approach, the resulting Implications of a Unified Contract changes to the services to be provided by the light rail operator Approach for Network Extensions and need to be negotiated into the relevant PPP agreement. SECTION C Expansions Similarly, the grantor and the developer may well find them- The Manchester Metrolink system adopted the unified system. When the system was expanded, the grantor was obliged to selves with conflicting interests when increases in customer exercise the voluntary termination rights provided for in the levels cause overcrowding. In such circumstances, the grantor concession contract and consequently was obliged to buy out may wish to increase the capacity of the system to alleviate the existing concessionaire for a very large sum of money-- overcrowding, but the developer may prefer to price congestion equal to the predicted future profits that the concessionaire might have earned during the rest of the life of the PPP off the system, thereby optimizing the revenues arising from agreement. Because the Manchester Metrolink system has its existing assets, rather than making further investments. now been expanded twice, the grantor has already made two significant termination payments. Moreover, it is faced with the prospect of a third such payment because it plans to expand the system further. In contrast, the provision of separate layered 9 In reality, there will always be costs, even under a contracts has facilitated the on-time and on-budget delivery of layered approach, but they will be fewer because they major extensions of the London Docklands Light Railway. will affect only one of the counterparties or suppliers of the grantor. 143 LIGHT RAIL - LIGHT METRO Even if the developer bears no ridership risk, the grantor's sector party is willing to bid on the project, it will incorporate ability to require increases in capacity may be limited to the the cost of forming the required consortium in the final bid extent that it would require increased capital expenditure on prices offered to the grantor. Consortium members will also the part of the developer--or to the extent that the developer need to make themselves comfortable with the ability of their or its lenders believe such capacity increases would raise the fellow consortium members to perform different aspects of risks under the project. the project and may apply a financial premium to that risk. The increased flexibility provided in the layered approach Conversely, with the layered approach the grantor would may prove useful in addressing fare changes and introducing approach contractors that can deliver the grantor's require- common integrated ticketing arrangements. It may also ments in their own right, without needing to call on other provide greater flexibility if the grantor needs to schedule disciplines, and that can respond more quickly to the grantor's changes to the system's operation or needs to expand the requirements. Such entities are likely to be more comfortable network in the future. However, it must be noted that the signing on to obligations that are fully within their core layered approach does not in itself simplify the grantor's competencies. position when it wants to make changes. Different contracts imply that there are different parties and potentially different In theory, the layered approach has the advantage of allowing sets of lenders or financiers. Furthermore, the grantor will need the grantor to identify the preferred provider for each aspect to fully understand what effect (if any) the changes in one of of the project, rather than being presented with a consortium the counterparties' contracts will have vis-à-vis the others'. For that may be strong in some areas but weak in others. Balanced example, the grantor must ensure that in negotiating a system against this argument is the possibility that the layered expansion, it carefully assesses the effect of the contract on approach may not guarantee that the grantor will be able to the rolling-stock and operations and maintenance contracts. select the "best" suppliers for the system elements. Suppliers that may show interest under a unified approach may be less 7.3.4 Effect on Procurement--Including interested in supplying smaller shares for layered packages Market Appetite for the Project because of their high risk versus smaller turnover and profit. To respond to a prequalification request, bidders must be able to demonstrate that they have the ability to meet all As a general comment related to the procurement of the the grantor's requirements, which, in the case of a uni- project, the layering approach tends to place much greater fied approach, will inevitably require the formation of a demands on the managerial skills of the grantor. consortium that pulls together civil contractors, rolling-stock manufacturers, and operators. Forming such a consortium 7.3.5 Farebox Risk requires the private sector party to expend considerable time, Under a unified approach, the grantor has freedom in effort, and money. The private sector party's willingness to handling farebox risk. It may (a) transfer all farebox risk to the commit that time and effort to the project will depend, in part, private sector, (b) share the risk through a minimum revenue on the grantor's ability to identify its requirements clearly guarantee, or (c) retain it and make payments to the developer in the tender documentation at an early stage. If the private on an availability basis. Under the layered approach, farebox CHAPTER 7 risk can be transferred to the developer only by way of the a unified system, all the consortium members are incentivized operations contract (although the payment mechanism for to resolve the problem. However, it should be noted that under the infrastructure and rolling-stock contracts may include a the unified approach, the private sector party will have taken usage element), and given the much smaller revenue base into account the impact of deductions arising from failures in of operations contracts, the extent to which operators may individual parts of the system and will have made allowance for expose themselves to farebox risk may be insignificant. possible deductions in its risk premium. In other words, under IMPLEMENTING AGREEMENTS Although one could seek to transfer some ridership risk to a unified approach, although the firewall risk is not apparent, it infrastructure providers, doing so would conflict with a central will likely be reflected in the developer's pricing. tenet of PPPs--risk should sit with the party best placed to manage that risk--and thus would be unlikely to deliver value 7.3.7 Blame Culture for money. Under the layered approach, if the provider or counterparty to the grantor of one part of the system can establish that For the layered approach, the level of farebox revenue will it failed to meet its obligations because of the failure of be known after the first five years of operation, and so a another provider, then, as indicated above, it will be paid in farebox risk­sharing payment mechanism can be more easily full. This situation will likely trigger a blame culture among the developed and included in the new operations contract. The individual providers, with the grantor caught in the middle. To process whereby operations contracts are re-let every five mitigate the impact of such claims on the project, the relevant years therefore minimizes the problems resulting from the documentation needs to embody a robust dispute resolution grantor or bidders making unrealistically optimistic traffic mechanism to sort out these issues quickly and efficiently. In forecasts (as has been the case on the Croydon Tramlink the case of a unified system, the grantor will not be concerned System) or overly pessimistic traffic forecasts resulting in whether the individual providers blame each other, because superprofits for the private sector (as was the case for phase 1 the allocation of blame for the relevant failure should not SECTION C of Manchester Metrolink). affect the grantor. 7.3.6 Firewall Risk 7.4 PPP CONTRACTUAL ISSUES Under a layered approach, each contract that the grantor What is important in any PPP agreement is clarity about the enters into will result in a payment stream. Consequently, if manner in which risks will be allocated to the developer under the system is not working, it is most likely a result of a failure the terms of the PPP agreement and the other related project of only one part of the system--for example, a problem in documents. It is essential to incorporate the PPP agreement the signaling. In this example, although the payments due obligations into the associated documents to avoid any gaps to the rolling-stock or systems contractor will most likely be in the risk allocation of the proposed project. Regardless of reduced, the payments to the operator and the infrastructure whether the layered or unified approach is used, the main PPP provider will not be affected. Therefore, the grantor will still agreement between the grantor and the developer will require pay those parties in full even though no services are being several supporting documents (such as technical, operational, provided. The nondefaulting providers will be indifferent as to and financial annexes), as well as supporting subcontracts whether the defaulter sorts out the problem. In contrast, with and agreements. In this section, however, we focus only on 145 LIGHT RAIL - LIGHT METRO the main PPP agreement (using the concession form as an · The transfer of rights and obligations, authorized example) to draw out some of the contractual issues in LRMT body, and mandatory requirements to the developer. PPP arrangements and how they can be dealt with through Although the developer will generally be required to contract terms. work within local laws, norms, and standards, this section is used to detail specific covenants made by In the preparation of the PPP agreement, a number of matters the developer on both its status and ability to carry must be decided, but two in particular: out the contract. The developer indicates that it has · The overall risk allocation--that is, which party assu- fulfilled its part in establishing all necessary legal mes or is responsible for managing the specific risks. and contractual arrangements and has obtained (Annex 4 contains a risk allocation matrix that can aid any necessary approvals to allow it to enter into the in determining the optimum risk allocation). contract. · The way the developer will raise the revenues ne- · Compliance by the developer, its operator, and cessary to fund what will be a significant capital any subcontractors with lawful demands by public expenditure and, as a related issue, the type of sup- authorities. This stipulation could include matters port that will be available from the grantor. related to traffic; construction; technical, architec- tural, or environmental matters; public health; and Under the general provisions of the PPP agreement, the status fire and safety supervision. of the LRMT project and the legal basis supporting it must be · Some aspects regarding access to sites of works. 10 established. The contract starts by establishing the details of the parties to the contract. It then specifies the following: · The rights and obligations of each party to the PPP agreement (that is, the developer and the grantor). · The term of the PPP agreement; · The effective date of the agreement and the term of the contract (for example, 30 years) are set out, with the mechanism for agreeing to any change in duration. · The start date or commencement date of the PPP agreement, to distinguish the time (if any) from the Tramcar in Freiburg, Germany. Although these tramcars have since signing of the PPP agreement to the moment that been sold and Freiburg has updated its tramcar fleet. the services or actions detailed under the agreement Source: http://www.sxc.hu/ will start (that is, the date when the PPP agreement 11 becomes effective). 11 Conditions that must be met by both parties before the contract becomes effective or external conditions 10 Depending on the legal tradition of a country, the that must be met are usually described as effective date undertakings or as conditions precedent to the subject of the LRMT PPP contract is sometimes described. effectiveness of the contract and are typically detailed in an annex. CHAPTER 7 7.5 PROVISIONS DURING DEVELOPMENT 7.5.2 Land Rights, Permits, and Access STAGES The grantor should define the right of access to and use of the land required for the project. It should describe the party that 7.5.1 Grantor's Role after Signing of the PPP will provide the land, the terms of use (such as purchase or IMPLEMENTING AGREEMENTS lease), the mechanism allowed for obtaining land and rights of Agreement access, and the party that will be responsible for the acquisition. The grantor's role after signing of the PPP agreement and These determinations are particularly important when LRMT before the services become effective (that is, the system systems and their alignment are in highly urbanized areas begins to operate rolling stock in a part or all of the system) where access to land is difficult or may affect existing services, should be clearly specified to include at least the following such as utilities or road traffic. measures: · Reviewing and, as appropriate, commenting on the In the development of the PPP agreement, it is important to developer's plans for achieving the main construction define whether the grantor is responsible for helping the and service outputs of the LRMT PPP agreement, developer obtain the permits and licenses necessary for the including the developer's overall approach to infras- construction and operation of the LRMT project. The grantor tructure construction, method to be used, resources, should clarify its responsibility for the timely delivery of the land timetable, and business plan outlining the developer's required for the project, free of legal or physical encumbrances management and organization for the maintenance (and any future planning requirements) and should set out who and operations part of the LRMT scheme. will bear the costs of dealing with these encumbrances, if any. · Following infrastructure construction, clearly spe- Consideration should be given to the following issues related to SECTION C cifying procedures by which the developer de- approval and permitting risk: monstrates that it has completed the infrastructu- · The developer is normally responsible for the risks in- re construction and other actions required before volved in seeking approvals and permits connected to commencement of services. design and construction and related to any changes to · Developing the regime and associated procedures any reference design provided by the grantor. However, to be used in the event that the developer is unable it may be wary of accepting state administration risk if to meet the service commencement date, including the penalties for delays are severe. measures that would require the developer to miti- · It is critical that financiers and lenders see that the gate against such an occurrence and also defining procedure and timetable for obtaining the necessary the financial consequences if the situation is not rec- authorizations from relevant authorities are clear and tified. include full details of which authorizations are needed · Developing the necessary auditing and performance for each part of construction, opening, operation, and measurements systems. maintenance and how they will be obtained. If any authorizations are not provided within the agreed timetable (assuming the developer has complied with 147 LIGHT RAIL - LIGHT METRO its obligations to receive the authorizations), the developer 7.5.4 Conditions Precedent, Effective Date, may be entitled to compensation under a special-event and Financing Agreements protection clause (see "Special Events" section 7.10.2). The Conditions precedent (CPs) are basically a summary of the issues grantor reserves the right to terminate the arrangement if that must be completed before the effective date of the PPP the developer has not fulfilled its obligations in obtaining agreement. The effective date is when the CPs have been met; and approving the necessary documentation. The develo- a part of meeting the CPs would be the signing of the financing per will seek assurances that the permitted use of the land agreements. The financing agreements are the arrangements allows construction and operation of the system and is that the developer (including any associated companies) makes free from planning constraints. for financing the project. CPs are often a checklist of tasks or documents that need to be completed and, depending on the 7.5.3 Design Documentation legal regime in which the PPP agreement is set, may or may not Depending on the type of LRMT PPP scheme that is chosen, res- be part of the agreement itself. ponsibility for design will be allocated to either the developer or the grantor (see chapter 5 for a detailed discussion). The PPP agreement should be clear about the allocation of responsibility for developing 7.6 PROVISIONS RELATED TO CONSTRUCTION designs and related documentation, together with procedures for AND ASSETS Provisions related to construction should cover such issues as approval of the design documentation. CPs for the commencement of construction and the timetable and plan to which the developer has committed itself (including In typical LRMT PPP schemes, the developer assumes responsibility specific, appropriate milestones). for the design, construction, integration, testing, commissioning, operation, maintenance, and ultimate performance of any asset it The construction program is important because it is usually link- procures or develops. Accordingly, as a general principle, the deve- ed to the developer's loan drawdown schedule. Provisions relat- loper assumes the risk for whether the design meets the grantor's ed to addressing defects and determining how the developer and requirements. its subcontractors will handle them should be included. During Related to design documentation, the PPP agreement should the construction period, key decisions must be made regarding provide the following: the extent to which the grantor will be involved during this period · The procedure for the developer to submit its designs and and the monitoring systems that will be established to track information to the grantor progress before and on service commencement. The grantor · The maximum allowable time for any reasonable com- will wish to know whether the developer will deliver the project ments by the grantor (if any) on time and to the agreed specifications, whereas the developer · Time for the developer to take on board any comments will require reassurances that it is meeting expectations. The and suggestions (if any) that the grantor may have grantor should be wary of accepting too great of an oversight · Preagreement between the parties on the form and role. The developer should be granted the freedom to manage standard for presenting the design the project without interference from the grantor. The developer · Some flexibility for the grantor to require some minor assumes the risk of whether the design and development it has modifications that have no material impact on cost or service carried out and the operational procedures it has put in place are meeting the contractual requirements of the grantor. At the CHAPTER 7 same time, it is in both parties' interests that a design is developed 12 and implemented that can deliver the service. Other provisions related to quality control, quality assurance, quality control systems and manuals, and accreditation of contractors and subcontractors also need to be specified. In addition, compliance with health and safety standards, including documentation and procedural requirements, should be included. 7.6.1 Critical Dates In some instances, LRMT projects require specific dates by IMPLEMENTING AGREEMENTS 13 which the infrastructure construction must to be completed. Generally, the payment mechanism envisaged in the PPP agree- ment details procedures for the financial penalties for late ser- vice commencement. However, if there is a critical date beyond which the effects of the unavailability of service are totally unacceptable, the grantor should have a contingency plan that can be implemented at the developer's expense. 7.6.2 Acceptance of the LRMT System Acceptance of the LRMT system is one of the most critical aspects of the PPP agreement. It is essential that the PPP agreement provide clear, precise instructions for (a) notification of readiness by the developer, (b) inspection and testing to be undertaken by or on behalf of the grantor, (c) conditions for acceptance, (d) acceptance procedures and certification, and (e) remedies for defects. A procedure and timetable for recording title to the new SECTION C system assets should also be included in the PPP agreement. The scheduled completion date needs to be defined, and any liquidated damages for delay need to be detailed. Typically, the PPP agreement will have to differentiate between the construction of infrastructure and the provision of services. Accordingly, the types of tests that should be included in the acceptance procedure must be carefully set out, including the responsibility for cost and organization of the resources required for the tests. 12 In this respect, the grantor should ensure that if it identifies areas in which construction delivery does not meet specifications, it quickly notifies the developer. In some instances, it may be necessary to formalize such notification procedures within the PPP agreement. 13 For example, the LRMT system may be constructed as part of a city plan related to the opening of a major sporting event. In Halberstadt, Germany, tram lines are an example this case, the construction program needs to meet some specific 149 timescales. of using a new system on old infrastructure. Photo by and reproduced by kind permission LIGHT RAIL - LIGHT METRO of Rainer Hesse. Acceptance of the infrastructure constructed Service acceptance and commencement Notably, the PPP agreement needs to specify the party res- of payment for services ponsible for assessing satisfaction of the acceptance test. With regard to service commencement, the PPP agreement should include some specific tests. Approval for service As a general rule, it is advisable that the grantor and the deve- commencement should not be based solely on approval of loper do a joint assessment. Better still, and to minimize any the constructed infrastructure. In this respect, it would be potential disputes, an independent third party could conduct advisable for the grantor not to allow for staged completion 14 the test. In the case of LRMT projects, testing by a third party of infrastructure construction because that would generally would be advisable for the construction of infrastructure, but tend to dilute the developer's risk. However, if provision is in some instances, such as the approval of the rolling stock, made for the grantor to pay the developer a capital grant the grantor (or a government representative) may be the best in support of the construction phase of the project, capital 15 judge to deem acceptance. grant payments should be linked to milestone acceptance tests. Note that milestone capital grant payments should not constitute service acceptance on behalf of the grantor. The PPP agreement should be very clear on this aspect of the risk profile between the parties. The grantor must also recognize that it is not always practical to wait until all phases of infrastructure construction have been Zurich, Switzerland. Photo by and reproduced by kind completed. Indeed, under certain circumstances, the grantor permission of Rainer Hesse. may wish to start operating earlier. The grantor has the option of (a) accepting only when all construction has been completed or (b) accepting each phase as it reaches completion. Clearly, 14 It is important to note that the grantor should not each option has its implications. In option a, the grantor would allow a third party appointed by the lenders to act as its third party; an adviser appointed by the lenders will receive the full service for certain phases without paying not have the same overall objectives as the grantor. The grantor should appoint a fully independent third party for them, which may create an unnecessary burden for the that is acceptable to it and to the developer. developer. Alternatively, option b, where payment is phased as sections are completed, would be "easier" for (or more palatable to) the developer, but may disadvantage the grantor 15 This is particularly the case when, for example, if the developer delivers future works or services that are not rolling-stock compliance needs to satisfy a higher authority (for example, federal requirements). up to standard. In that event, the grantor may wish to make Here, it is within the grantor's powers to grant such acceptance. The PPP agreement would have to partial payments, retaining certain amounts of each phase, specify the procedures that would be used under such circumstances, and the developer would have to satisfy and to make a final or balloon payment when the whole system itself that obtaining the grantor's approval would not is up and running (and tested accordingly). constitute an unreasonable risk. CHAPTER 7 7.6.3 Early Works Agreements 7.6.4 Handover Provisions for Assets that In most cases, early works agreements are considered bad Transfer to the Authority practice for the following reasons: The methods for dealing with the transfer of the assets at · They may generate questions about whether the contract termination or expiry need to be determined in the IMPLEMENTING AGREEMENTS agreements have been procured in accordance with agreement. Five key areas need to be established: procurement laws and regulations. · The condition of the assets to be transferred and how · Under ordinary circumstances, contracting authorities required repairs will be paid for. should not be required to make any payments before · Any design life requirement after the expiry date financial close. · Inspection tests before handover. · Reaching agreements on early works contracts can · Provision for warranties, contracts, and other rights distract from the negotiations on the main contract · Resolution of any disputes related to any of these and delay contract closing. areas. · Early works agreements can lead to project inte- gration issues. Employees are also regarded as assets. The agreement should · Early works agreements can alter the balance of risk address how they will be dealt with (for example, transfer to on the procurement by altering the grantor's bar- another developer or to the grantor). gaining position. 7.6.5 Valuation of Terminal Payments on When early works agreements are required, the following Expiry Where Residual Value Risk Has Been rules should be applied: SECTION C · The enabling works should be planned and incor- Transferred The grantor has two main options for calculating payments for porated as part of the procurement strategy. assets with alternative uses at the end of the PPP agreement · A decision should be made on who should perform the period: works--the developer or a third party commissioned · Using the market value of the assets in their current by the grantor. use. · The early works program should deliver time savings · Using the amount bid by the developer during the and provide value for money. negotiations of the original contract and indexing it · Only essential works should form part of the enabling during the life of the PPP agreement. works. That means works that are not specifically re- lated to the developer's project plans but that would The market value of the assets is the most valid basis for de- be of general use to the grantor whether or not a termining terminal payments. But under the scenario of an contract is signed. They can include surveys, access extraordinary increase in the market value of critical assets roads, or other preconstruction enabling works. (without which service availability would be compromised), · The enabling works should not affect the risk allo- a payment cap should be set to guard against excessive pay- cation of postcontract work. ments. · The costs of the works should be controlled, and the grantor should allocate funds for this purpose. 151 LIGHT RAIL - LIGHT METRO 7.7 PROVISIONS RELATED TO SERVICE 7.7.3 Grantor Ability to Intervene and OBLIGATIONS Persistent Minor Breaches Within these provisions, it will also be necessary for the grantor 7.7.1 Performance of the PPP Agreement to retain the right to intervene. In exceptional circumstances, Under these sections of the PPP agreement, the main provisions some of the possible grounds for grantor intervention include related to the operation and maintenance obligations should be service levels below a specified threshold, safety breaches, set out. Identification of key performance indicators (KPIs) should imminent public danger, catastrophic disaster, and environ- include measures related to system reliability, system punctuality, mental concerns. satisfaction surveys, ride quality, noise levels, accessibility of travel information (including timetabling and disruption to services), Experience in LRMT design has revealed the need to establish ticketing and fare options, and staff services at platforms and en a mechanism to deal with persistent minor breaches. The PPP route, among others. KPIs must be linked to the key objective or agreement must include a regime that penalizes the developer purpose of the project to ensure that the developer is incentivized for such breaches. Because deductions and financial penalties in a manner consistent with the grantor's vision for the project. may be insufficient, the grantor may consider issuing a series KPIs may also be used as a mechanism to calculate the grantor's of warnings that ultimately lead to termination. payments to the developer. In addition, the grantor will likely need to modify the KPIs to give itself room to deal with its strategic plans, Other issues to be included within this section typically include which will inevitably change over the term of the PPP agreement. the following: · Commencement of operations and services Furthermore, performance mechanisms detailing the level of the · Existing services developer's project revenue at risk from performance deductions · General requirements (that is, specification and condi- need to be well specified. Additional rights available to the grantor tions that will apply to operations and maintenance) if deductions are beyond specified caps should also be included. · Obligation to maintain LRMT services If financial deductions are not used, performance points may be · Integration plan considered as an alternative mechanism. · Operation and maintenance plans and rules · Drafts, approvals, compliance, and updates 7.7.2 Early Commencement · Engagement of an operator To incentivize the developer to open the system early, a model could be constructed whereby any savings generated through 7.7.4 Price Variations and Value Testing early opening (for example, reduced financing costs through early Price variations will likely occur throughout the life of the servicing of senior debt) could be shared between the grantor PPP agreement. Such variations are normal given the lengthy and the developer. Alternatively, the early opening period could duration of these arrangements. It is critical that the PPP be treated as an extension to the project period, and the net agreement contain a consistent mechanism by which price additional revenue received (after allowing for the developer's variations would be allowed. Periodic testing of certain usual operating costs) could be shared between the developer and services provided by the developer can be included as part the grantor. of the PPP arrangement. Key to this arrangement is the CHAPTER 7 Source: http://www.sxc.hu/ developer's desire to ensure that protections are built into the PPP agreement that cover unexpected or unforeseeable 7.7.5 Payment Mechanisms and Farebox Risk Depending on the type of LRMT PPP scheme, under the material increases in costs. For example, pass-through of terms of the agreement, the developer may be entitled to certain costs that are outside the developer's control may be receive a capital payment (or capital grant) toward the cost of IMPLEMENTING AGREEMENTS considered, such as those associated with the introduction of infrastructure construction. new noise standards. The quantum and timing of capital payments and any appli- The grantor should be mindful that the PPP agreement should cable conditions precedent to them need to be clearly achieve a balance between the provision of certain protections developed. In determining the allocation of farebox risk, the and cost increases that are outside the developer's control. In provisions in the PPP agreement will need to consider how this respect, it may be beneficial for the grantor to consider, the PPP LRMT scheme may be affected by factors that are within the PPP agreement, provisions that would allow the outside the developer's control and from which it must be developer to value test certain services it provides. Value insulated--for example, competing transport mode issues testing can be accomplished by two means: benchmarking (including regulation of competing transport systems), and market testing. Market testing requires the developer connecting transport links, and establishment of interchange to retender a service in order to gauge the market price for arrangements with other public transport system operators the service. After this test, any increase or decrease should (including management of interface, through-ticketing, and be reflected in the price charged the grantor. Benchmarking scheduling issues). Furthermore, this section of the agreement refers to a procedure in which the developer compares its should address the following issues: costs for providing certain services with the market price for · What is the interrelationship between LRMT system SECTION C the services. Any changes may lead to an adjustment in the 16 fares and fares on other public transport systems? price charged the grantor. Formulation of fares policy and control of fares (setting and adjusting fares, controlling fare levels, arranging fares by reference to zones and single and multiple journeys, determining periods of travel, and determining concession and discount fares) need to be clearly specified (see box 7.3). 16 The United Kingdom's Private Finance Initiative experience suggests that market testing will likely provide the best value for money with the following recommended schedule: (a) on certain predetermined dates, the developer retenders the service and conducts a competition for the service, and (b) if the competition shows that costs can be reduced, the payment mechanism is adjusted and the developer can reduce its costs by appointing the winning Dublin, Ireland. subcontractor Photo by and reproduced by kind permission of Richard Podolske. 153 LIGHT RAIL - LIGHT METRO · Is there an opportunity to introduce integrated ti- Box 7.3 cketing systems across different modes of public Setting Fares: Phase 2 of the Manchester transport? Metrolink · What is the anticipated method for ticketing for the PPP LRMT scheme (for example, prepaid, pay Phase 2 of the Manchester Metrolink project included a full as you go, cash versus electronic credit)? What concession that allocated revenue risks and the ability to set tariffs entirely to a private developer. Following system expansion du- infrastructure, facilities, and human resources are ring this concession, demand for Metrolink's services was robust, required to support that method (labor needs, and there was a risk of overcrowding. The developer raised fares staff or automated operation of access controlled considerably, taking advantage of its substantial pricing power. Critics speculated that increased fares were an attempt to "price systems, wage expenditure)? off" demand and avoid additional rolling-stock purchases. · What is the anticipated method for fare collection and what is the regime for recovering revenues In contrast, the Greater Manchester Public Transportation Authority (a public body that sets transportation policy in Man- from operators of other public transport systems chester) sought to maximize ridership. Those conflicting objec- if ticketing is integrated across modes (data collec- tives partially contributed to the concession's early termination, tion system to calculate and apportion revenues)? which involved a substantial payment to the concessionaire. · What is the developer's ability to mitigate fare evasion risks (access control systems, penalty and infringement regimes, including policing and 7.8 AVAILABILITY PAYMENTS AND OTHER enforcement powers)? SOURCES OF REVENUE FOR THE DEVELOPER In the development of any availability payment regime, the The allocation of farebox risk is affected by (a) the responsible following issues need to be taken into account: grantor's or government's control over fare increases and · The maximum level of performance-related dedu- (b) the rights and obligations of the parties with respect to ctions that are to be imposed on the developer, overcrowded rolling stock and the strategies to mitigate its bearing in mind the consequences on financing. effects; the PPP agreement should be clear on these two · The KPIs that are to be used to calculate perfor- points. With respect to overcrowding, the PPP agreement mance related deductions--for example, availability, should clearly state who is responsible for addressing this issue waiting times, frequency, safety, fare evasion, graffiti, (who will procure additional rolling stock, how frequently condition of platforms, and standard of supporting services should be increased or decreased, and so forth). facilities (ticketing machines, timetabling informa- tion, journey assistance). · The best way to incentivize the developer to maximize farebox revenues (including minimizing fare evasion) if the developer is paid on an availability basis. · Rules and method of implementation and regulation of fare-setting mechanisms. CHAPTER 7 Access to other potential sources of revenue by the developer The loan agreements will therefore set out provisions such as needs to be specified. For example, entitlement to advertising the following to protect the lenders' interests: or property development rights (if any) needs to be identified · Drawdown schedule and the CPs that must be satis- and clearly specified in the PPP agreement. fied before each drawdown--in particular those related to completion of construction milestones and 7.9 PROVISIONS APPLYING TO FINANCING aggregate paid-up equity. IMPLEMENTING AGREEMENTS · Repayment schedule. 7.9.1 Financing of Developer Obligations · Funding and control of reserve accounts, where the Financing arrangements for PPI projects fall into two distinct developer must set aside money for contingencies-- phases. First, the lenders and shareholders provide funding in particular money to cover a specified number of during the construction phase to cover design and construction months of debt service--and major maintenance costs. The lenders will advance funding progressively during expenses. the construction phase; drawdowns are usually linked to · Events of default, which may lead to loan acceleration milestones and verified by an independent expert acting for or termination, such as failure to satisfy ratios (debt- the lenders and, possibly, the grantor. During this first phase, service coverage ratio, loan life coverage ratio, debt- the lenders will have predetermined the ratio of equity and to-equity ratio, and so forth); late payment; defaults debt funding and may require recourse to the shareholders under project contracts; and changes in management or to some other guarantor to cover the risk of any delays or project contracts without consent. or cost overruns that have not otherwise been satisfactorily · The right of lenders to stop disbursements to the de- transferred to the construction contractor. veloper, to control voting rights and other project company discretions (known as reserved discretions), The second phase is final completion of construction followed and to step in if things are not going as well as the SECTION C by operation. Completion of construction includes performance lenders would like (for example, if default arises or tests to ensure that the project is fit for purpose and ready to might arise). enter commercial operations (revenue generation). Approval of the final completion will release the construction contractor 7.9.2 Security, Step-In Rights, and Direct from certain liabilities and will therefore be carefully controlled Agreements by the lenders. During operation, after the project has begun Security rights (over different project rights and assets) are to produce output, the debt is serviced solely by the project both offensive and defensive: offensive to the extent that revenue stream. the lenders can enforce the security to dispose of assets and repay debt when the project fails, and defensive to the extent that senior security can protect the lenders from actions of unsecured or junior creditors. If comprehensive security rights are unavailable, the lenders may seek to use ringfencing covenants in an effort to restrict other liabilities, security 155 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ Source: http://www.sxc.hu/ over project company shares to allow the lenders to take over subcontracts, rather than determined after construction. control of the company, or creation of a special golden share that Predetermining such pricing will likely lead to a better and more provides the lenders with control in the event of default. Security efficient process and diminish possible areas of disagreement. rights may also allow the lenders to take over the project (to step The grantor should also ensure that changes in service are in) rather than just sell the project assets, because the value of allowed. Given that the PPP agreement will likely be long the project lies in its operation, not in completed assets (Delmon term, the contract should allow for both current requirements 2009b). of the grantor and its medium and long-term development policy for the sector. Changes may take various forms such The lenders and the grantor may enter into direct agreements as changes related to capacity or ridership, additional trains, with the project participants that specify step-in rights, notice additional service frequencies, or service specification. The requirements, cure periods, and other issues intended to grantor should carefully assess whether these changes could maintain the continuity of the project if the project company reasonably be anticipated, specified, designed, and priced as defaults. A project may not require separate agreements when part of the initial bidding process. provisions can be included in the relevant project document or when some other solution is available. 7.10.2 Special Events The grantor and the developer should agree on a list of 7.10 PROVISIONS APPLYING TO special events that would grant each party protections. IMPLEMENTATION Such a clause is required for such occurrences as grantor PPP agreements typically have long durations. Over long periods, step-ins, the discovery of archaeological remains, breaches changes are inevitable, and not all can be anticipated during of warranties, or uninsurable forces majeures or other contract design. Accordingly, the design of the PPP agreement events outside the developer's control. If the consequences must allow adequate flexibility. However, it is important that this of a special event continue for a long period, the developer flexibility does not open the door for full renegotiation of the may seek compensation, contract term extensions, or the basic terms of the contract. Adequate balance needs to be struck right of termination. between price, long-term flexibility, and certainty of whole-life costs. 7.10.3 Changes in Law Changes in law, including any adoption, modification, or re- 7.10.1 Variation and Changes peal, may happen at any time after a PPP agreement has Under any PPP structure, it is important for the grantor to reserve been signed and has gone into effect (the effective date). the right to request variations to the design and the operation Accordingly, provisions related to changes in law that are of the project, as well as to the PPP agreement. To maintain an included in the PPP agreement should detail which party will appropriate balance between the parties' rights and obligations, be responsible for costs arising from changes in law and how the PPP structure should permit variations with the consent such costs should be compensated. In some circumstances, of both parties. Such variations should not be imposed on one the grantor may be in a position to control any changes in law. party by the other. If a variation is carried out, the pricing should However--and in the case of LRMT projects in particular--the be determined as part of an initial agreement and reflected in grantor may be a regional or subnational authority that has no CHAPTER 7 control over changes in law. In such cases, careful consideration should be given to the possible mechanisms that can be 7.10.5 Step-In Rights and Remedial Action At any time during the term of the contract, the grantor should included within the PPP agreement if the developer can prove reserve the right to suspend the developer's rights under the to be more adept at managing the effects of changes in law PPP arrangement and step in under specific circumstances-- IMPLEMENTING AGREEMENTS and minimizing their effect. For example, it may be possible to generally, events of war and long periods of unavailable pass on the costs of changes in law to the customers of the service. When the grantor steps in, it must also comply with LRMT through a fare increase. all the performance criteria and be responsible for proper maintenance and operation of the system. The grantor may However, whenever the grantor bears the risk of a change in still need to continue availability payments to the developer law, the developer should be obliged to keep any associated 17 during the step-in period. In such circumstances, the developer costs to the minimum. It is important that the PPP agree- will require compensation for any damage caused during that ment allows costs to be recovered, but the agreement should time. not allow the developer to include costs that it would have normally incurred even if that change in law had not occurred. If the step-in continues for an extended period, the deve- In the case of LRMT projects, for example, a developer that loper will have the right to terminate the agreement. At the would be required under the terms of the PPP agreement to same time, the financiers of the project will undertake their replace some of the rolling stock under its normal maintenance own assessment of the project and will attempt to rectify program should not be allowed to claim such replacement as any breaches that would have led to termination. Financiers an additional cost resulting from the change in law. will not want to take significant risk before they have had the opportunity to assess the project and to assess whether they 7.10.4 Force Majeure SECTION C can put together a substitute plan that could take over the The PPP arrangement should include a detailed list of forces project and rescue it. If the financiers confirm that a breach majeures that can trigger termination and the respective has been rectified, control over the project may be returned rights of each party should such a situation arise. If such an to the developer. However, if the financiers decide that a event arises and neither party can reach an agreement within permanent replacement for the developer is required, they a specified period (generally six months), each party possesses would then seek to find a suitable substitute to take over the the right to terminate the contract. The developer is entitled rights and obligations of the project. In this event, the grantor to compensation payments, but the grantor can attempt should retain the right to approve the suitable substitute. The to prevent the termination request by continuing to pay the substitute should be granted a "clean slate" with regard to developer as if the event had not occurred. The grantor should presubstitution termination defaults. define the time period for these payments, after which it will review the situation. 17 This same principle applies to Private Finance Initiative­type projects in the United Kingdom. 157 LIGHT RAIL - LIGHT METRO 7.10.6 Termination of the PPP Agreement Each party to an arrangement intends to work toward ful- rities or the government reasonable time to rectify filling its terms and completing the contract until its expiration government actions before triggering termination. date. Provisions for early termination of the PPP agreement Compensation should be calculated on the basis of should be dealt with within the arrangement. The developer's full compensation for the developer and its financiers lenders will require the agreement to detail precisely what (that is, no better or worse off than if there were no compensation is payable if the arrangement is terminated default). early. 18 · Developer default. The grantor may seek to terminate the agreement for unacceptable performance or The key consideration for contracting authorities is to ensure service provision. A balance must be found between that the developer is motivated to perform optimally and not the effect of early termination from inadequate motivated to deliver a substandard performance because the service provision and the developer's and financiers' financial penalties are insufficient to motivate it to remedy interest in ensuring that termination occurs only the problem. A compromise should be found that meets both after material defaults, after all possible attempts at expectations. The cause of termination will determine the level rectification have been made and all other options of compensation to be granted. Additionally, a compromise have been exhausted. To counteract this eventuality, will need to be found for definitions of persistent breaches the grantor can incentivize the developer to deal with and the list of grounds for termination. When specifying persistent performance breaches. The institution termination thresholds, the grantor should be careful to not of a performance point system with respect to all make the termination triggers too stringent (for example, defaults is recommended, with a right to terminate hair triggers) because they will unlikely be accepted by the the PPP agreement if a certain threshold of points is developer or its lenders. The chief causes for early termination reached. When such a point system is inapplicable, include the following: 19 the grantor should retain a right to terminate the · Authority default. The developer should be granted contract for persistent breach if defaults occur the right to terminate the arrangement if the gran- without rectification. Warning procedures should tor or the government conducts itself in a way that be in place before termination procedures begin. compromises the contractual relationship and The amount of compensation payable because of makes service provision impractical or impossible. 20 contractor default is a key commercial issue. Termi- Authority default should be a last resort, and provi- nation compensation is paid to a developer to cover sions should be made to allow the contracting autho- the cost of debt repayment. 19 For a more detailed discussion on termination triggers and 18 In some instances, the maximum liability payable under a drafting of appropriate texts, see HM Treasury (2007), volume 4. termination event is limited or uncertain in law, leading to the lenders' considering the project not bankable. In that case, the lenders will likely require assurances for partial or full compensation 20 For example, if the developer requires visas for its foreign personnel to be in the country and the government (or the in the event of early termination and, in some cases, even for grantor) does not grant those visas, it would be impossible for the termination because of the developer's breach. developer to meet its contractual obligations. CHAPTER 7 · Corrupt acts and fraud. Termination can be triggered should address the possibility of termination for brea- by fraud or corrupt acts perpetrated by the deve- ches of refinancing provisions. A balance must be loper and its subcontractors. Careful consideration struck between the grantor's need to incentivize the must be given to each party's interests in handling developer to be open and honest with regard to its issues of corruption. It is perfectly understandable for refinancing and the senior lender's fear of threats to the grantor to wish to distance itself from a corrupt its loans attributable to actions by the developer. IMPLEMENTING AGREEMENTS agreement. The recommended approach permits the grantor to avoid terminating the agreement 7.10.7 Calculation and Payment of Early when the fraudulent act has been perpetrated by a Termination Liabilities subcontractor or by an employee acting on his or her The principles that apply to the calculation and payment of own. The developer should then be given sufficient early termination payments should be set out: time to impose sanctions on the relevant party, to · Compensation payment amounts and changes to terminate the relationship, and to locate alternative financing agreements. Compensation payments service providers. Any form of corporate corruption when any of the termination triggers above are will lead to immediate termination. activated are calculated in whole or in part by refe- · Voluntary termination by grantor. Certain events rence to the level of the developer's senior debt at the can make the agreement between the grantor and time of termination. The grantor must ensure that the the developer untenable, forcing the grantor to senior debt outstanding at any time is not inflated and voluntarily terminate the agreement. Such events can therefore will not increase the grantor's liability. include policy changes that make service provision · Setoff on termination. The grantor should be enti- redundant. The developer will receive a termination tled to place any of the developer's outstanding payment to ensure that it remains in the position it liabilities against the amount it pays in compensation SECTION C would have been in had the contract been fulfilled. in a developer default scenario. When termination is · Authority breakpoints. The grantor may also structure triggered for reasons other than developer default, the agreement to allow it the option to terminate the grantor is entitled to place the developer's the agreement on specified dates for a specified outstanding liabilities against all amounts it pays in compensation amount to cover equity and junior compensation, except amounts paid to compensate debt, as well as senior debt. The degree of increased senior debt. agreement flexibility for the grantor provided by the · Method of payment. When an incoming developer authority breakpoints will depend on the extent to pays market value on developer default termination or which the specified compensation amounts are less when the agreement is terminated because of grantor than the alternative amounts payable under voluntary default, the grantor should pay the developer a lump termination by the authority's circumstances. sum. Installment payment should be avoided because · Termination for breach of refinancing provisions. The unless affordability constraints hinder this option, agreement between the grantor and the developer interest will accrue on the compensation amount. 159 LIGHT RAIL - LIGHT METRO · Transition on handover. Handover of the LRMT damages may be necessary as long as they can provide value system at the end of the contract or early termination for money and take into consideration the effect of any other should cover the following: protections requested by the grantor, the developer, or the o Procedures, documentation, inspection, bonds, financiers. and survival of rights and remedies after handover Senior lenders will require construction subcontractors to o Assignment of assets and stock cover debt service through the period of delay with liquidated o Retention of assets by contractor on termina- damages paid to the grantor because the project's financing tion. When the developer retains assets after plan will assume on-time service commencement and cash termination, the value of the assets should be flows in accordance with a timetable. Subcontractors will like- deducted from any compensation payments ly include this risk in their price and inflate their costs and the made. When assets have no alternative use, timetables to allow more contingency time. In some situations, their value will be minimal and, therefore, no developers may refuse to allow liquidated damages clauses contractual options are required. Assets with because they believe the clauses unreasonably increase their residual value must be carefully considered liabilities and thus the project costs. If the developer causes because the commercial incentives can be a delay in the construction of the system, the developer will significant. For example, if residual values already be penalized by additional financing costs and loss of exceed original returns, they could distort the revenues from a shorter operating phase. effect of any compensation agreement and reduce the developer's incentives to perform Liquidated damages are worthwhile in situations where the o Information handover costs incurred by the grantor are large enough to justify an o Position of personnel increased availability payment for the grantor. They can also be justified if an asset has been lent to the project that could 7.10.8 Protections against Late Service have otherwise been used elsewhere during the period before Commencement: Liquidated Damages service commencement or if there are no other prior claims The grantor should ensure that it is protected against late on liquidated damages paid by a subcontractor and liquida- service commencement by the developer. The protections ted damages give value for money. If decided on, the grantor should give the grantor value for money and should consider should inform bidders early in the process of the liquidated the types of losses the grantor may suffer and the cost of damages requirement and the damages cap to allow the contingency plans that need to be activated. bidders to price such a risk. The grantor may also allow bidders to submit alternative bids without liquidated damages or with Liquidated damages for delayed service commencement are higher or lower caps. Estimates of the projected losses during a precalculated estimate of the projected actual losses or delays should be genuine; otherwise the requirement may be damages the grantor will suffer should the developer fail to viewed as punitive and may not be legally enforceable. begin service delivery on time. If the losses incurred do not exceed the availability payment, liquidated damages will not Additionally, the developer should be allowed to provide an apply. If the losses exceed the availability payment, liquidated alternative service option if it cannot deliver the agreed service CHAPTER 7 on time. The availability payment should be adjusted to reflect This situation occurs (a) when legal constraints prevent any the alternative service and any liquidated damages liability that practical alter-native option or (b) when assets have a useful will be deferred for the period of alternative service. economic life if retained by the grantor and conversion of the assets for other uses is costly. The grantor may also require the 7.10.9 Treatment of Assets on Expiry asset to continue providing service. of Service Period IMPLEMENTING AGREEMENTS Two distinct types of contract approaches deal with how The grantor should protect itself by not reducing the options assets are handled on expiry of the service period (HM Treasury it has available at or just before the termination of a contract. 2007): These options include the following: · Contracts where the grantor's taking over the assets · Taking possession of any assets at no cost on expiry represents value for money. Assets that · Retendering the service provision with the outgoing have no other feasible alternative use and are only of developer's making any assets available to the grantor value to the public sector entity are included. at no cost · Contracts where the residual value of the assets is · Removing any assets best transferred to the developer. Such assets have alternative uses and are not required by the public When the grantor retains the assets at no cost, consideration sector in the long term. Residual value refers to should be given to the developer's obligations to deliver the the market value of the assets associated with the assets in a serviceable condition. This concern does not apply contract at the time of agreement expiration. It is if the assets have reached the end of their useful economic life. classified as a risk because the residual value of the Importantly, the grantor should use operational requirements assets is unknown at the time the contract is signed. as its modus operandi rather than attempting to generate Estimations of the value of assets will be made, and residual value interest. SECTION C they will be incorporated into the financing structure of the agreement. Three key allocation questions need to be considered: · Which party retains the assets on termination? · Do these assets have alternative uses? · How do the alternative uses affect the termination payment (if any) payable by the grantor? The government of the United Kingdom's Private Finance Initiative Unit recommends that the long-term objectives of the contracting authority will be best served by requiring either automatic transfer or reversion of the assets to itself The French use the introduction of a new tramway as an opportunity to on the expiration of the agreement or, at the very least, an provide urban improvements such as this public open space in Mulhouse a city of fewer than 250,000 inhabitants. option to purchase the assets at nominal cost. Photo by and reproduced by kind permission of Scott McIntosh. 161 LIGHT RAIL - LIGHT METRO 7.10.10 Preserving the Conditions of the Assets 7.10.11 Intellectual Property Rights and on Expiry Other Standard Contractual Issues In the past, terminal payments related to the value of the assets Intellectual property (IP) rights are an important contractual at the end of the agreement were used as an incentive for the issue. Service delivery will require the developer to follow some developer to maintain high standards of service throughout form of IP protocol. This protocol may be created by a third the contract period. However, this system is flawed in that it party or the developer and may be specifically intended for the confuses payments for services and payments for asset trans- project or have general applications. When the developer does fer because the assets can be well maintained but the quality not own the IP, it must obtain a license to use such IP. If the of service can be low. grantor owns IP rights that will be required by the developer, it must decide how it will allow the developer to use those rights Instead, the availability payment should be the main vehicle for during the life of the agreement. The agreement must ensure incentivizing the developer to maintain standards throughout against infringements of IP rights, and the penalties for such a the life of the agreement. If, at the end of the contract, the breach should be detailed from the outset. The grantor does service will be retendered, the developer has further incentive not need to own the IP rights, but the developer must be able to continue to meet the grantor's service requirements. to use the IP required to provide the service. In the event of expiry, early termination, or authority step-in, agreements An alternative means of incentivizing the developer to should be made to ensure that the grantor has the right to maintain service standards when the asset has no alternative use the IP required to continue providing the service. The use would be to structure the agreement to give the grantor grantor should receive immediate access to the IP rights and the option of a secondary contract with the developer. The any information required to operate the system. New service grantor can exercise this secondary contract option at the providers will also need access to the IP rights before expiry expiry date, but this choice can be made after holding an dates so that they can familiarize themselves with the service open competition with other bidders. Under this system, and ensure a seamless transition. the developer is incentivized to maintain standards until Other issues that should be covered by the contract include the expiry date without the need for terminal payment. The · Confidentiality major difficulty with this approach is calculating the price for · Applicable laws the secondary contract during the negotiations for the first · Severability and entirety of the contract contract. · Responsible counterparts nominated by each of the parties · Annexes or other documentation forming part of the contract CHAPTER 7 Box 7.4 The Cost of Getting the PPP Agreement Wrong In July 2007, Metronet BCV and Metronet SSL, two companies set The cost of work under Metronet's contracts was expected to IMPLEMENTING AGREEMENTS up to modernize London Underground's infrastructure, went into be at least £6.9 billion over the first 7½ years of the contract in administration when they became unable to meet their spending 2002 prices (£8.7 billion in cash terms). As the condition of some obligations. Their failure resulted in London Underground Limited of London Underground's assets was unknown, Metronet could (London Underground) having to buy 95 percent of Metronet's be paid for unforeseen extra work that was necessary. The PPP outstanding debt obligations from its private sector lenders in arbiter was given the role of deciding, if asked, how far the public February 2008 rather than repaying this debt over the 30 years of the sector should be liable for extra costs which had been incurred contract. The Department for Transport (DfT) made £1.7 billion of economically and efficiently. grant available to help London Underground do so. The government provided funding for the modernization work on the basis that it Metronet is now owned by TfL. The DfT was forced to hand TfL would be carried out through public-private partnership (PPP) £1.7 billion in the wake of the Metronet collapse in order to pay off contracts. It accepted that stable funding was needed to remedy creditors following the default of the company's loans. Metronet's decades of underinvestment, but was concerned about London shareholders lost a total of £350 million in the collapse, leaving Underground's track record in delivering major enhancement and the taxpayer with the largest financial penalty. The NAO said the maintenance projects to time and budget. £1.7 billion was not entirely wasted because some of Metronet's work, covering three-quarters of the tube network, was still The government, therefore, decided that London Underground beneficial, but it found there was a shortfall of between £170 should focus on operating passenger services, and that the private million and £410 million in the amount of taxpayers' money spent sector should be used to deliver maintenance and major infrastruc- on Metronet and the value of the work done. In effect, the cost ture improvements. Metronet BCV and Metronet SSL were to the taxpayer of Metronet's inefficiency is nearly £500 million, responsible for two-thirds of the modernisation work under their which matches the cost in legal and consultant fees of drawing PPP contracts­Metronet BCV for the Bakerloo, Central, Victoria SECTION C up the PPP structure. and Waterloo & City lines, and Metronet SSL for the District, Circle, Hammersmith and City, Metropolitan and East London lines. Both companies, were ultimately owned by a consortium of Balfour Beatty plc, Bombardier Inc., WS Atkins plc, EDF SA (formerly Seeboard Group PLC) and Thames Water plc . The other PPP contract was awarded to a company called Tube Lines. DfT, the Treasury and London Regional Transport (which owned London Underground until July 2003 when it was transferred to 21 The United Kingdom's National Audit Office (NAO) report (2009), Transport for London (TfL) had the responsibility for the strategy blames Metronet's structure and management for the collapse: The main cause of Metronet's failure was its poor corporate governance and and design of the PPP arrangements. London Underground leadership." A damning assessment of the company's set-up claimed negotiated and managed the contracts. DfT retained a crucial Metronet's supply chain, which was comprised of its shareholders, was role after the PPP contracts were put in place. It gave assurances able to run rings around the management. The executive management to Metronet's lenders that it would not stand by and do nothing changed frequently and was unable to manage the work of its shareholder-dominated supply chain effectively. These suppliers had should London Underground be unable to meet its financial power over some of the scope of work, expected to be paid for extra obligations and provided an annual grant of around £1 billion for work undertaken and had better access to cost information than the the modernization. management." 163 LIGHT RAIL - LIGHT METRO Checklist Contractual Arrangements Legal Framework Ensure that the government or the government entity that enters into a contract has the powers (vires) to enter into obligations and can undertake the roles and responsibilities. Ensure that all actions by the grantor are allowable by law (intra vires). Where none exists, create enabling legislation to assist the government in developing and entering into PPP agreements. Specifically determine the legal environment under which the PPP agreement is to be procured and ensure that all parties understand the legal code that governs private participation. Contract Form Ensure that the PPP contractual structure is tailored to the specific PPP scheme. Ensure that the contract contains an appropriate overall risk allocation and clearly details the developer's sources of funding and the financial support that it will require from the grantor. Consider setting out subsidiary documents that provide detailed definitions and descriptions of the essential contractual relationships that underpin the PPP agreement. Include the following in the contract: o The minimum set of standards and overall requirements the grantor expects from the developer o A detailed description of how the land required for the LRMT will be used in the form of a land lease agreement or license o Rights and obligations, contract duration, mechanisms for changes to duration, and so forth Develop a diagram detailing financial links between all parties involved in PPP agreement. Prepare a term sheet before drafting a detailed contract (either the grantor or adviser can prepare the term sheet). General Design of PPP Agreement Determine whether the contract will use a unified or layered approach and understand the implications of each approach for the operation and management of the project. CHAPTER 7 Provisions during Development Establish the grantor's role after the agreement is signed and before service begins (for example, procedures for commissioning the LRMT system and procedures for addressing the developer's failure to meet the commencement date and performance measurement systems). Define the right of access and use of the land required for the project: o Identify who will provide land rights. o Identify the terms of use (for example, purchase or lease). o Provide information on the timetables for obtaining necessary authorizations from relevant authorities and the procedures by which they are to be obtained. Understand that it is the developer's risk whether the design meets the grantor's requirements. Provisions Related to Construction and Assets Ensure that conditions are laid out for the commencement of construction, that a timetable exists, and that a plan is in place for performing the work (including milestones) to which the developer has committed. Establish a general construction requirement that details the relationship between contractors and subcontractors. Detail provisions relating to treatment of defects and how they will be handled. Specify provisions for health and safety standards. 165 LIGHT RAIL - LIGHT METRO Contractual Arrangements Detail specific dates for construction completion: o Include in the payment mechanism provisions on financial penalties for late service commencement. o Ensure that capital grant payments are linked to milestones and acceptance tests. Detail clear, precise instructions for developer notification of readiness and inspection and testing to be undertaken by or on behalf of the grantor: o Include conditions of acceptance, procedures, certification, and so forth. o Distinguish between construction of infrastructure and commencement of service. Specify the party responsible for assessing satisfaction of the tests. Specify the details on the handover provisions. Determine the method of valuation and calculation of terminal payments with respect to assets with alternative uses at the end of the PPP agreement period. Provisions Related to Service Obligations Set out key performance indicators related to the operation and maintenance obligations. Ensure that the grantor retains the right to intervene should service fall below certain thresholds. Develop a system to address persistent minor breaches: o Develop a consistent mechanism to deal with price variations (for example, with respect to operating expenses, financial obligations). o Consider using value-testing services. Contractual Arrangements Availability Payments and Other Sources of Revenue Consider the level of deductions to be imposed on the deve-loper and the performance indicators that will be used. Provisions Applying to Financing Ensure protections for lenders through drawdown sche-dules, construction milestones, reserve accounts, and so forth. Develop security rights to ensure that lenders are protec-ted from unsecured or junior creditor actions. Provisions Applying to Implementation Allow for flexibility in contract design to take into account inevitable alterations in prices and costs. Ensure that the grantor reserves the right to request varia-tions to the design, PPP agreement, and financial model. Agree on a list of special events that would grant each party protections. Provide protections against changes in laws (adoptions, modifications, and repeals to laws can occur after PPP agreements have been made). Ensure that the grantor retains step-in rights to suspend the developer's rights under the PPP arrangement for certain situations, such as war or unavailability of service. Provide for early termination of the PPP agreement: o Outline precise details of possible triggers, compensation, and financial penalties. o Set out principles of calculation and payment of early termination payments. 167 LIGHT RAIL - LIGHT METRO CHAPTER PROCUREMENT 8 In Halberstadt, Germany, a new train runs on older infrastructure. Photo by and reproduced by kind permission of Rainer Hesse. Procurement This chapter presents an overview of the key issues to be offer and will provide adequate price, service certainty, and addressed in selecting and awarding a public-private part- appropriate risk allocation. Four key considerations govern nership (PPP) agreement to a suitable developer for light the award of public contracts: competition, economy and rail­ light metro transit (LRMT). Given the size and complexity efficiency, integrity and fairness, and transparency. IMPLEMENTING AGREEMENTS of LRMT projects, the chosen procurement method not only needs to meet local procurement standards but also generally 8.1.1 Competition will need to be adapted to satisfy international norms and Competition among bidders injects efficiency into the process standards, to ensure effective involvement of financing by allowing market forces to mold the procurement approach institutions and developers. The overall goal is to establish an selected by the grantor. The goal of the bidding competition is effective method for selecting a developer that is financially, to reduce the price of the project and to induce firms to offer technically, and operationally capable of the development the best technical and financial solutions. Bidders are aware and long-term operation of an effective LRMT system under of the other competing firms, and each firm or consortia will the PPP agreement. We focus on competitive bidding but compete by reducing its price and improving its technical and fi- note some key issues of other procurement approaches. The nancial proposals in order to be selected for final negotiations. selection criteria and assessment methods are issues to be Price is not the only consideration. The competitive process established early in the process. can spur greater innovation on the part of the bidders, and that can only benefit the grantor by providing it with technical and Given the nature of the development of LRMT PPP schemes, financial solutions that otherwise may not have been presen- it is beneficial to have continuing stakeholder consultation ted in noncompetitive tendering. throughout the procurement process, with the aim of SECTION C developing the optimal scheme. We show how the procu- 8.1.2 Economy and Efficiency rement process can be managed from an initial survey of Competitive bidding allows the selection of the developer that interest through to final bidding, negotiation, and award of is best able to complete construction and deliver a high-quality the PPP agreement and financial close. service with the most cost-effective or commercially attractive proposal. Promoting competition among bidders is the most 8.1 CHOOSING A SELECTION METHOD effective method for achieving this economy. The competitive The selection process is intended to achieve efficiency and approach can also be used to develop the most effective to maximize value for money within a dynamic and flexible technologies and operational methods. environment. Conducting a selection process requires balancing control, flexibility, and efficiency. The major parties Excessively costly and burdensome selection procedures can involved in the tendering procedures--the grantor, the bidders, dissuade bidders from participating in the proceedings and can and the public--will require assurances that the process has burden the grantor. Therefore, selection procedures should been carried out with transparency, that competition among be designed to select a developer within a short period, with bidders has produced the best price, and that the project minimal administrative burdens and at a reasonable cost to will deliver value for money and quality service. The winning both the grantor and the bidders. bidder will likely present the most economically advantageous 169 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 8.1.3 Integrity and Fairness The grantor should ensure that all procedures governing The selection procedure should be understandable and trans- developer selection are transparent and fully disclosed. parent and should ensure that all bidders are treated equally. Transparency in tendering procedures can improve com- Bidders can spend substantial amounts of time and money petition and reduce unexpected costs. It also serves to preparing bidding packages, and most will do so when they mitigate potential corruption. A clear record of the selection have confidence in the integrity of the selection procedures. proceedings will assist transparency and accountability and When they are unsure of the fairness of proceedings, bidding will help reduce potential disputes. Transparent tendering firms will likely decline to participate, or they will incorporate procedures can also attract the interest of nontraditional the higher risk of participation into their bidding packages. investors, thus increasing potential sources of finance for Participant confidence will be bolstered by an approach that bidders. shows fairness and also contains confidentiality mechanisms to protect the information detailed in the bids. Assurances should be made that no information will be disclosed to 8.2 MANAGING THE BIDDING PROCESS competing bidders and that all negotiations or discussions will A competent, efficient procurement management team, lin- be confidential (UNCITRAL 2001). No forms of abuse, either ked to careful planning and coordination of the procurement by the firms participating in the process or by the parties process, will ensure successful selection proceedings. The administering it, should be tolerated, and a clear system of grantor should establish a strong bid management structure sanctions will demonstrate the integrity of the approach. capable of handling the complexities of procuring the project and managing the bidding process. The grantor should ensure 8.1.4 Transparency that suitable administrative and personnel support is provided to undertake the selection procedure chosen. Representati- The transparency of the bidding process; the way it is ves from key public agencies should form a steering committee administered; and its scope, requirements, pricing, and to oversee the execution of the process. technical specifications should be clearly detailed. Not only will transparency reduce the need for clarifications Time and money should be invested into proper procurement during the process, but it will also allow the bidding firms preparation. When badly conceived, tendering processes to generate a clearer view of the risks, resource commit- can lead to delays and wasted capital. Before beginning the ment, and costs involved in participating. By giving every process, the grantor should ensure that it has thoroughly potential bidder the same information on the grantor's reviewed the project in detail, the potential risks, and the requirements, the costs of bidding and the probability of design requirements and is confident the project will deliver winning become much more calculable, thereby increasing value for money. Thorough project preparation will reduce the number of potential bidders and increasing the the potential developers' bidding costs, which will increase competitive environment. the number of parties able to participate and the level of competition, thus reducing the grantor's project costs. CHAPTER 8 8.2.1 Appointment of an Award Committee Demand analysis is a key area where external technical adviser participation is often crucial. Technical support is also required The grantor can establish an award committee that will be in the following tasks: responsible for evaluating the proposals and recommending · Preparing or reviewing construction costs and a selection. The committee should ensure a fair, transparent, assumptions for the feasibility review IMPLEMENTING AGREEMENTS and efficient procurement process, executed in accordance · Drafting output specifications and risk analysis with local and international laws and regulations. · Structuring the technical aspects of the bid docu- mentation The grantor decides the composition of the committee, · Evaluating and negotiating the technical aspects of with members of appropriate standing and skills. They will the bids be supported by a suitable technical, operational, legal, and · Reviewing designs financial staff. Outside expertise will be critical to establi- · Supervising construction shing the LRMT PPP scheme. Advice may be sought from inde- pendent experts or advisers to help determine the evaluation External legal advisers can assist in specialized legal aspects of criteria, performance indicators, and specifications and to the project, particularly in drafting the PPP agreement and all prepare the bid documentation. Other advisers and consul- bid documentation. Together with the grantor, they can ensure tants may be hired to assist the grantor in evaluating proposals that the bidding procedure fits with relevant procurement and drafting and negotiating the project agreement. Finan- legislation (Malagón and Morientes 2007). cial, technical, and legal advisers should generally be selected on a competitive basis, and they should demonstrate that they have skills relevant to the scope of the work. 8.2.3 Market Sounding SECTION C Market sounding is the process of assessing the reaction of The committee's responsibilities include overseeing the bid all potential bidders to a proposed project and procurement management team in (a) drafting bid documents, (b) iden- approach before formally initiating a procurement process tifying short-listed bidders, and (c) identifying the winning bid. (Office of Government Commerce 2005). Market sounding A separate team may be required to finalize negotiations with helps establish the existence of a market for the proposed the winning bidder. project, the level of investor interest, and the project's feasi- bility. It helps to obtain feedback on the basic fundamentals 8.2.2 Use of Advisers of a project and its key constraints. If the project's financial model is shared with the potential pool of bidders, insight on The procurement management team will require suitable fi- commercial viability can be sought. nancial, technical, operational, and legal support. It is especially important to have the participation of financial experts when In one approach, the grantor calculates the comparable cost establishing payment mechanisms, as these mechanisms have for the public sector itself to construct the project in order to a key influence on the long-term economic viability of the PPP ascertain a public sector comparator. This comparator can agreement. Other financial inputs include (a) preparation of be a useful measurement standard for assessing bids, and it the financial evaluation parameters and payment mechanism, provides another method for ascertaining value for money. (b) financial bid evaluation, and (c) support for negotiations with bidders. 171 LIGHT RAIL - LIGHT METRO However, the focus of market sounding is to obtain informa- tion on the following key areas: 8.3 SELECTION CRITERIA AND BID · Feasibility--whether the proposed project is feasible, EVALUATION Contracting authorities seek bidders with proven experience using experience from other similar projects and capability in the service being tendered. The award of pu- · Capability and capacity--whether potential bidders blic contracts is best achieved through methods that promote can execute the project competition among a range of bidders within structured, · Maturity--whether there is an established market formal procedures. Competitive selection procedures genera- for the requirement and whether a competitive lly provide optimum conditions for competition, transparency, procurement is possible and efficiency. Competitive election is generally carried out in two stages: Market sounding offers several important benefits: · Prequalification of suitable bidders · It confirms, through market reaction, that the scope · Formal bidding and selection of the winning bid and objective of the procurement are sound and achievable. Contracting authorities should decide on the methods, prin- · It flags potential issues or problems with the project. ciples, and scoring process and weights before starting the · It establishes that the requirement is packaged in selection process. Contracting authorities need to indicate such a way that the market is encouraged to respond the broad evaluation framework to the bidders to maintain and that real competition is stimulated. transparency and to increase bidder confidence. It may also · It lays foundations for contract and relationship be necessary to train staff members who will be reviewing the management with potential winning bidders. bids to maintain consistency in the evaluation process. In this · It manages stakeholder expectations of what can be chapter, we consider evaluation at both the prequalification achieved and delivered by the procurement process and bidding stages. with clear delineation of the business case for the pro- ject. 8.3.1 Selecting Criteria for Competitive It is critical that the market-sounding process be open and Bidding that all participants be treated equally and fairly. Giving any The complexity of many infrastructure projects requires con- potential bidder an inside advantage must be avoided to tracting authorities to design evaluation systems to compare preserve a level playing field. proposals from different bidders. Bidding packages that have passed the threshold of quality and technical aspects can be Market soundings can range from a request for comments, to judged solely on a single factor, such as a global price offered a full market-testing questionnaire, to road shows or meetings for the construction work and long-term operation or some with potential bidders to address key issues that may help basket of financial measures. However, price alone should not optimize project design and implementation. be the only determinant. Privately financed infrastructure projects are expected to be financially self-sustainable, maxi- mizing recovery of the development and operational costs from the project's own revenue and optimizing the amounts of subsidies needed. CHAPTER 8 Source: http://www.sxc.hu/ The grantor will therefore need to analyze the suitability of the analyzing the bidder's financial statements and determining technical elements, the commercial and financial feasibility of whether other financial institutions are supporting its bid. The the project, and the soundness of the financial models of the financial capacity of the bidder is evaluated at the initial stage bidding proposals. The manner by which the winning bid will only to see whether it has the resources to carry out work of the be selected must be determined before the tendering pro- size and complexity of the proposed LRMT PPP scheme. cess. The most common system uses the following evaluation Common quality criteria include the following: IMPLEMENTING AGREEMENTS procedures: · Technical skills · Prequalification. Firms interested in the project are · Personnel skills required to establish technical competence and fi- · Management team nancial viability. The purpose is to limit the field of · Supply chain management applicants to those that meet the minimum requi- · Methodology rements for participating in a competitive award · Environmental criteria process. The grantor reviews the information and · Relevant experience selects a short list of firms to invite to participate in · Past performance the next stage. · Evaluation of technical proposals. Technical proposals At the final bid stage, more precise technical evaluation cri- are submitted on how the developers would execute teria are required, specifically related to the detailed LRMT the project, and further technical and financial scheme and the type of PPP agreement. Depending on the capacity information is submitted. Grantors establish type of PPP agreement being bid, the emphasis of the technical technical evaluation criteria for assessing the pro- evaluation will differ: for a concession, the grantor will be posals. Bidders must achieve a minimum score more concerned with the construction, operation and main- according to the criteria to be chosen to participate tenance, and extension plans included in the bids, whereas SECTION C in the next stage. for a management contract, the evaluation will focus more on · Evaluation of financial proposals. Financial evaluation the quality and expertise of the management personnel, the criteria are then used to assess the bidders' financial management style, and the systems. Operational and capital proposals. The bidder with the best financial proposal works investment issues are the main focus of the technical is then awarded the PPP agreement. proposal. Financial information on the bidder's working capital and investment plans may also be included to ensure that 8.3.2 Technical Evaluation Criteria sufficient resources will be available. The technical evaluation criteria determine the fitness of a bidder to undertake the project if selected. The criteria are Technical evaluation of proposed business plans involves used during the prequalification and the technical evaluation a great deal of discretion and judgment, and care must be stages. As a prequalifying test, a bidder's operating capacity taken to ensure the continued transparency of procedures. may be evaluated by investigating the bidder's previous The grantor can coordinate with bidders on the technical and experience with similar projects, its human resources, and its service requirements before finalizing a technical package to be technical capability. Financial capacity can be established by bid on. 173 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 8.3.3 Financial Evaluation Criteria qualify can be selected to take part in the tendering phase. The prequalification process is also beneficial in helping to Many contracting authorities have opted for a process in which simplify the final bid selection process, because assessment of all the developers bid on the same technical specifications or ability and capacity to perform will not be required again. The service requirements, and the evaluations are based solely on prequalification process helps the grantor focus on developing the financial proposal. the project details in a clear, effective way, and the process can be used to get industry input in doing so. The developer's financial proposal will need to assure the grantor that sufficient financial resources will be made avai- lable to ensure that the technical proposal can be carried 8.4.1 Documents out. The financial proposal will be evaluated on the strength Key documents issued to potential bidders at the prequa- and deliverability of the financing plans, the equity and debt lification stage can include the following: providers' levels of commitment, and the risk allocation terms. · Background information memorandum on the pro- Criteria required for financial evaluation can include the follo- posed project wing: · Bidding process instructions and bidding selection · Customer and developer tariff required, availability criteria payments, and shadow fares · Prequalification questionnaire for all potential bid- · Upfront fee, periodic lease payments, or concession ders payments to the grantor · Price for shares or assets to be sold A key purpose of the prequalification questionnaire is not · Capital investment committed by the developer only to ensure the potential bidders' capacity but also to · Service quality targets reduce the number of bidders invited to cut the price to a · Service or management fees payable manageable amount. The grantor will evaluate the completed to the developer questionnaires and exclude the bidders that do not meet the · Subsidy payable to the developer minimum requirements of suitability (Office of Government · Subsidy payable by the grantor Commerce 2005). The prequalification questionnaire explores the following information 8.4 PREQUALIFICATION · The bidders' previous experience and expertise in the field With the size and complexity of privately financed infras- · The bidders' financial health and whether there are tructure projects, the grantor may decide to limit the number any risks to satisfactory contract completion. Infor- of bidders from whom more detailed proposals will be mation on the bidders' capacity to raise financing and requested to only those that satisfy the prequalification crite- the type of debt to be raised will also be critical ria. Prequalification is the selection of suitable bidding firms · The legal status of bidding firms from among all interested parties. It involves evaluation of · The quality of the personnel involved in the project bidders' qualifications and resources, as well as technical and financial capacity for handling the project. Those bidders that CHAPTER 8 8.4.2 Road Shows Before launching a prequalification process, governments The specific criteria required for large-scale infrastructure (aided by their advisers) generally undertake a road show to projects, such as an LRMT scheme, include the following: promote the potential transaction and to review the level of · Experience in managing financial aspects and expe- investor interest. By meeting potential bidders, contracting rience in operating infrastructure services under authorities can set the criteria to ensure that they will have public regulatory oversight (proven through quality a sufficient number of bidders based on their knowledge of indicators of performance in previous projects) investor interest and the technical and financial characteristics · Experience of the key team members to be involved IMPLEMENTING AGREEMENTS of potential bidders. in the project · Organizational ability (experience in construction, 8.4.3 Public Notification and Prequalifica- operation, and maintenance) tion · Financial sustainability (demonstrated by the amount In the interest of transparency and competition, the invitation of equity the bidder is willing to provide and the to the preselection proceedings should be handled in a ma- support of financial institutions defending the bidder's nner that attracts the broadest possible interest to ensure a financial standing) competitive selection process. The invitations should be pu- blished domestically and internationally to foster interest at The challenge is to identify the right parameters by which to home and abroad. The procurement process generally begins judge quality. Performance criteria may also be used that allow with a public notification in electronic and traditional media bidders to demonstrate a minimum level of efficiency in their outlets that details the tender opportunity. The details of the relevant operations elsewhere. notification will adhere to the requirements of the country's procurement laws and will contain information on the project 8.4.5 Dealing with Bidding Consortia with a request for qualified companies, groups, or consortia The prequalification process should be designed in a way to participate in the tender process. Companies expressing that ensures the participation of the broadest range of local SECTION C interest in the invitation are then sent prequalification docu- and international companies with relevant experience in ments. the field. The number of firms experienced in building and operating LRMT services is relatively small. In most cases, The preselection documents should contain clear, concise contracting authorities will be faced with consortia of real information identifying the precise infrastructure to be built estate developers, rolling-stock providers, and construction and the specific requirements expected of the developer companies. Developer consortia seek to offer the full range of selected, an outline of the financial structure, and a summary expertise and experience. of the terms of agreement envisaged by the grantor. Contracting authorities should be careful to evaluate the 8.4.4 Preselection Criteria full financial capacity of the consortium and whether the Bidders are required to demonstrate that they possess certain component firms have worked together in the past. The grantor attributes: needs to assess the forms of any joint ventures that have been · Technical and professional qualifications established for submitting a bid and the likely effectiveness of · Financial and human resources their varying types of equity or subcontract structures. · Managerial capability · Reliability and experience 175 LIGHT RAIL - LIGHT METRO For the sake of efficiency, one firm should be designated as the · Hybrid approach. The grantor interlaces the two representative for the entire consortium. It is recommended approaches above by creating a maximum quota of that the grantor oblige the members of the consortium to sign five firms that pass the threshold for being put on a an agreement committing them to remain in the consortium short list; at the same time, the grantor can ring-fence in the event of their selection. The grantor may also stipulate the right to choose the top two or three ranked firms that the members of the winning consortium create a special- if fewer than five bids meet the threshold. purpose vehicle for the entity. 8.5 CHOOSING THE BIDDING PROCESS 8.4.6 Evaluation of Prequalification Respon- Contracting authorities have at their disposal a broad range ses of options for the bid and award procedures. There are three The grantor should create a framework to evaluate the main approaches: responses to the questionnaire using a predetermined scoring · Competitive bidding matrix that determines the scale on which each component of · Competitive negotiations the questionnaire will be graded and the level of importance to · Direct negotiations the grantor (the weighting) that is to be applied. In practice, most award processes contain an interface bet- 8.4.7 Generating a Short List for Bid Selection ween competition and negotiation. In this section, we look at Potential bidders will prefer smaller short lists because they the competitive bidding and negotiation approach, the most increase the probability of their winning. Bidders may withdraw common and generally considered the most appropriate from the process if too many other firms are prequalified approach for LRMT PPP schemes. (more than five prequalified firms is the general threshold before firms evaluate their decision to proceed with a bid). After the prequalification stage, it is recommended that the At the same time, contracting authorities will seek to ensure grantor review its original feasibility study and project and greater competition among bidders by prequalifying more performance specifications in light of the information and bidders. Experience suggests that at least three bidders are comments gleaned from the prequalification process. necessary to ensure competition, with four chosen as insurance should one firm drop out. Quantitative preselection criteria are The design of the bid and award process can have a significant more easily applied and transparent than qualitative criteria: effect on the economic efficiency, transparency, and quality · Prequalification threshold. The grantor determines of the outcome. At this stage of the proceedings, the grantor a quality threshold, and all the bidders that pass the should then decide whether a single- or two-stage procedure threshold are placed on a short list. The disadvantage is or two-envelope bidding system will be used to request pro- that too many or too few bidders will be short listed. posals. · Set number of short-listed bidders. The grantor deci- des on a maximum number of bidders that will be 8.5.1 Single-Stage Bidding short-listed. The top-ranking bids are then selected If the grantor is confident that the final project specifications until the "quota" is reached. The disadvantage is the and performance indicators meet the required standards probability of including low-quality bids and excluding and designs, the selection process may be structured as a high-quality bids. single-stage process (figure 8.1). After prequalifying bidders, the grantor would then proceed to issuing a final request for proposals. CHAPTER 8 Figure 8.1 Single-Stage Bidding Process The authority Bidders offer responses The authority prepares and issues containing their evaluates the bid documents. final technical and combined proposals financial proposals. (technical and financial). Source: Author's representation. 8.5.2 Two-Stage Bidding IMPLEMENTING AGREEMENTS For complex projects, such as an LRMT PPP scheme, the two- bid requirements to take advantage of this information. No stage bidding process is generally the most effective. The negotiations on the terms of contracts take place at this stage. process includes a stage for dialogue between the grantor The process contains the following steps: and the eligible bidders that ensures that bids will more · The grantor issues a request for proposals (RFP) that likely meet acceptable standards (figure 8.2). The purpose of contains technical specifications and bidding docu- this initial stage is to determine what the market considers ments. The RFP should also include details on the risk feasible and bankable, and it allows the grantor to refine the allocation envisaged by the grantor. · Bidders submit a firstround bid containing only pre- liminary technical proposals based on the information contained in the RFP for comment and discussion. Figure 8.2 Stage 1 of a Two-Stage Bidding Process · The authority prepares a first-stage bidding document SECTION C A with functional performance specifications (not all detailed specifications). · Bidders offer unpriced technical proposals B (without financial proposals). · The authority evaluates bidders´qualifications along with C technical proposals and then indicates what bidders must do to make their bid technically responsive. Source: Author's representation. 177 LIGHT RAIL - LIGHT METRO · The bidders' responses to the proposed risk alloca- · After these discussions, the grantor should review tion can assist the grantor in assessing the feasibility and, if necessary, revise the initial project specifi- of the project. The grantor consults with each eli- cations. Any changes to the project specifications gible bidder to discuss the bids and any changes must be communicated to the bidders in the invi- that are required to improve the bids (see figure tation to submit final proposals. At this stage, bid- 8.3). The grantor must avoid disclosing details of any ders that do not wish to continue should be allowed discussions to competing bidders and must treat all to withdraw from the process. discussions as confidential. Figure 8.3 Stage 2 of a Two-Stage Bidding Process · The authority prepares a memoranda of changes for each A bidder (along with any addenda to the bid documents) to initiate the second stage. · Bidders offer amended bids containing their final B technical proposal along with their financial proposal. · The authority evaluates the combined proposals C (technical and financial). Source: Author's representation. CHAPTER 8 8.6 FINAL REQUEST FOR PROPOSALS The grantor's main responsibilities at this stage will include · Preliminary engineering design, along with the pro- (a) providing detailed information to the bidders along with posed schedule of works information on the tender rules and procedures and (b) con- · Project costs, operation and maintenance cost requi- sulting with the bidders to delineate the precise format and rements, and the proposed financing plan (debt-to- content of the proposals. Each of these responsibilities will equity ratios) ensure the maximum amount of transparency competition · Proposed organization, methods, and procedures for within the bidding process. the operation and maintenance of the project · Description of quality of services 8.6.1 Benefits of Providing Information IMPLEMENTING AGREEMENTS The contractual terms of the proposed risk allocation envi- The grantor should ensure that it fully discloses all information saged by the grantor should also be included in the bidding regarding the potential project and the precise expectations documents. If the grantor details its preferred risk allocation for the winning bidder. Full disclosure will minimize accusations (provided it is bankable), it can ensure that developers will bid of unfairness and corruption. In addition, it will allow bidders to against a common standard. Other essential elements to be prepare the best possible bids according to the requirements incorporated in the RFPs include the following: outlined. Having received the same information, bidders will · Information on the duration of the agreement likely produce easily comparable bids. Developers who have · Formulas and indexes to be used to calculate tariffs more relevant information will be more open to accepting the · Government support and investment incentives associated risks. When possible, the grantor should provide · Bid bond requirements the following information: · Regulatory agency requirements · Description of the project and expected outputs. This · Monetary rules and regulations description of works and services to be performed · Revenue-sharing agreements, if any includes technical specifications, plans, drawings, and · Transfer of assets at termination designs; time schedules for the execution of works and provision of services; and technical requirements for Information should be shared through the following channels: the operation and maintenance of the service. SECTION C · Bidding documents and information memorandums · Minimum applicable design and performance stan- · A data room dards. The description of design and performance · Meetings with the grantor standards, including environmental standards, should include details of the desired quantity and quality of A data room provides a one-stop location for bidders to obtain service. further information about the proposed project. All bidders · Quality of service. General obligations, availability of should have equal time and access to the project data. services, and relevant standards of quality to be used to assess the system should be set out. 8.6.2 Interaction with Bidders The bidders should provide as much information as possible Dialogue between the grantor and bidders can be beneficial so that the grantor can evaluate the technical soundness of to both parties. Consultation with potential bidders before proposals, the operational feasibility, and the responsiveness formally beginning the procurement process can increase to standards of quality and technical requirements, including investor interest in the contracts and can be tailored to increase the following: the attractiveness of the project. The main approaches for bidder interaction are bidder confe- rences and arm's-length consultation. 179 LIGHT RAIL - LIGHT METRO Bidder conferences disadvantages of this method include increased complexity Bidder conferences are arranged by the grantor to meet all and reduced private incentives to control costs. Alternatively, prospective bidders, to explain the bid process, and to consult fixed-sum "honoraria" may offer a simpler option for compen- with the bidders on their ideas for the project. The grantor may sating unsuccessful bidders (box 8.1). Setting the honorarium provide the conference attendees with draft documentation amount correctly is the obvious challenge for this latter before the conference, and bidders are given the opportunity method and will require expertise from similar procurement to raise questions or request clarifications of specifications. processes. These questions and clarifications are distributed to all potential Box 8.1 bidders before the conference. The goal is to ensure fairness and transparency of information. There are disadvantages to this Bidder Compensation and Canada Line's approach: Procurement · Bidders may not wish to share innovative plans with their Procurement for Canada Line (British Columbia) took more than competitors. two and a half years and began with a prequalification round · Bidders may not answer questions honestly during the followed by a request for proposals and then a best and final offer (BAFO) process between short-listed bidders. Out of 10 respon- conference. dents, 4 consortia were prequalified. Three of the prequalified · Bidders may seek to manipulate the transaction terms consortia chose to submit proposals, and two were short-listed through their comments on the draft documentation. for the project's BAFO phase. Following the BAFO process, Canada Line's grantor, Canada Line Rapid Transit (CLCO), a wholly owned · Bidders may seek to collude and persuade the grantor to subsidiary of Vancouver's transportation authority Trans Link, selec- take on more project risks than necessary. ted a preferred bidder, directly negotiated a concession agreement with it, and then guided the project to financial close. To maintain interest and preserve competition during later phases of the Arm's-length consultation procurement process, CLCO offered the bidders an honorarium to Alternatively, the grantor can use arm's-length discussions, where be paid as follows: bidders submit written and independent comments on the draft · During the BAFO process o Up to a maximum of Can$2 million to cover an unsuccessful bidding documents and the proposed PPP agreement. The grantor bidder's verifiable costs incurred during the BAFO stage reviews the comments and can gain a greater understanding of (provided that bidders acted in good faith, used reasonable the key issues and concerns held by potential bidders. Although commercial efforts, and provided bona fide BAFO submis- sions). this written process does not suffer from the competitive issues o If CLCO had terminated the project during the BAFO phase, of bidder conferences, it does not offer the advantages of the both bidders would have been eligible for this honorarium potential dialogue from a bidder conference. subject to the aforementioned conditions. o Can$2 million to the preferred bidder if CLCO terminated the project after the BAFO stage but before negotiating a Compensation for bid costs concession agreement (again, subject the aforementioned Bidding for LRMT concessions is expensive. Retaining at least conditions). o No compensation if a bidder withdrew from the BAFO two bidders until final selection is absolutely imperative for phase, acted in bad faith, or did not deliver a bona fide maintaining public bargaining power. Public support during the BAFO submission. final stages of the procurement process can offer good value for · After the BAFO process but before a concession agreement was money by keeping competing consortia involved and committed. signed (commercial close) o Can$4 million to the preferred bidder if contract However, structuring competition for unsuccessful bids can be negotiations failed (provided that each party acted in good difficult because actual bid costs are often unknowable. faith and used reasonable commercial efforts, but simply could not reach an agreement). · After signing the concession agreement (commercial close) but Bidder compensation based on a percentage of proven expen- before financial close ditures is one solution for compensation when parties can agree o Can$2 million plus the preferred bidder's verifiable costs to qualifying expenses and an open information exchange. The incurred during the post-BAFO negotiations phase up to a maximum of Can$10 million if CLCO terminated the project. 8.6.3 The Technical Proposal In evaluating the proposals, the grantor should ensure that the In the RFP, the grantor must clearly specify the precise in- bidders' plans fulfill the terms of the bidding documents and formation and format required in the bidders' technical can ensure the service levels stipulated in the proposed PPP proposals. The format and content should relate directly to the agreement. In general, the evaluation process will look at the grantor's evaluation system because that will facilitate easier following aspects: comparison and scoring of bids. Each bid package will include · The scope, clarity, quality, robustness, and a technical section containing the details of how the bidder deliverability of the proposals proposes to design, construct, commission, operate, maintain, · The technical effectiveness of the proposals in IMPLEMENTING AGREEMENTS and hand over (if stipulated in the contract) the project to the relation to the reference design and performance grantor (Mott MacDonald 2008). Bidders must respond to the specification performance and construction specifications that are detailed · The superiority of the operation and maintenance in the invitation to bid. The marking scheme and weighting proposals allowances that the grantor will use to evaluate the bids should · The inherent quality, reliability, availability, and not be revealed to the bidders before bid closure. maintainability of the proposed system · The robustness of the program methodology, Technical proposal formats differ, but their general purpose is schedule, and delivery plans to demonstrate the bidder's ability to execute the proposed · The technologies to be used for the supply, project according to the standards specified in the RFP. construction, operation, and maintenance Bidders should provide sufficient details to give the grantor a · The program management systems good understanding of the essence of the development work · Compliance with environmental and sustainability that the bidder would undertake should it be awarded the requirements concession. We give a separate checklist for a typical LRMT PPP technical proposal in annex 6. Normally, the technical proposal includes details on the following: 8.6.4 The Financial Proposal SECTION C · Design, planning, and system management The financial proposal will demonstrate the developer's · Examples of previous projects that are similar to the detailed financial approach to providing the technical solution LRMT system being bid, showing the procedures the detailed in its technical proposal. We provide a separate bidder has used checklist for a typical LRMT PPP financial proposal in annex · Procurement and subcontracting strategy 8. The financial proposal typically includes specifics on (a) · Design management the financial plan (funding as well as operational) and (b) the · Approvals management financial model (provided by the bidder), demonstrating key · Health, safety, quality, and environmental manage- financial parameters and assumptions, additional proposals ment made by the bidder, and the required levels of state financing · Project program and work structure (for capital and availability payments). · Other critical events and factors · Civil works The structure of the financial proposal is critical because it · Testing and commissioning can have important effects on the funding and the operation · Operation and maintenance of the project--and ultimately on consumers. The financial · Handover of the LRMT system to the grantor plan within the bid is used to demonstrate the adequacy and feasibility of project financing proposals. 181 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ The grantor should follow two basic principles: · The grantor evaluates the technical proposal and fi- · The structure should be as simple and transparent as nancial proposals separately and does not open the possible so that the bid award is automatic (avoiding financial proposal until the technical evaluation is complex formulas or anything requiring subjective complete. judgment). · The technical and financial scores are combined · The structure should promote economic efficiency on using a suitable scoring methods, and a winning the part of the developer and users of the proposed bid is selected. system. This approach eliminates price as an influence during an The bid evaluation committees will check whether the finan- evaluation of the technical proposals; therefore, the more cial proposals comply with the requirements of the invitation subjective technical evaluation is less vulnerable to mani- to bid and whether they correspond to the legal and technical pulation. However, care must be taken to ensure that technical parts of the bid criteria. Generally, an evaluation panel awards criteria do not exclude solutions that are technically adequate a coefficient to each financial part and considers the quality of and that might offer more competitive financial advantages. the financial plan and the model with respect to its maturity International institutions such as the World Bank do not and feasibility. generally support such procedures because of the difficulty in objectively evaluating proposals under such a system. 8.7 SUBMISSION, OPENING, AND COMPARI- SON OF BIDS 8.7.2 Two Stages Given the complexity of the tendering procedures for large As an alternative to the two-envelope system, the grantor infrastructure PPP projects and the multitude of criteria to receives both technical and financial proposals in one package, be evaluated, it is recommended that contracting authorities but the evaluation is structured in two stages. The grantor opt for a two-step evaluation process. The technical proposal establishes minimum quality and technical score thresholds is evaluated separately from--and generally before--the and rates each proposal according to the degree to which financial proposal to avoid placing greater weight on price the requirements specified in the RFPs have been met. The considerations to the detriment of nonfinancial criteria. weighting and scoring mechanisms will be detailed in the RFP to ensure transparency. The grantor will then proceed to 8.7.1 Two Envelopes evaluate the financial proposals of all the technical bids that The two-envelope system has been used in past tendering have scored at or above the threshold. competitions. The process has four steps: · The grantor prequalifies bidders on the basis of their 8.7.3 Bid Evaluation technical and financial capacity. The overall approach to selecting the winning bidder should · Bidders simultaneously submit technical and financial be decided at the initiation of the tendering process. The proposals in separate envelopes. specific evaluation criteria and their use for determining the winning bidder should be detailed in the bid procedure documents. CHAPTER 8 Compliance Financial and technical evaluation The grantor should review each bid submission to ensure As discussed previously, technical and financial evaluations that it complies with the procedures and requirements set are performed sequentially but not simultaneously to ensure out in the bid procedure documents. In certain jurisdictions, unbiased analysis and to ensure that cost considerations are not IMPLEMENTING AGREEMENTS elimination may be mandatory at this stage. Any form of factored into the analysis of technical proposals. Public opening material noncompliance may lead to either the elimination of of financial proposals is commonplace, and the primary benefit the bidding firm from the evaluation process or a request for a is to avoid allegations of impropriety in the evaluation process. revised proposal. Arrangements are frequently made for opening major bids in public, with the media in attendance. The grantor should review any changes made to the proposed Financial criteria will depend on several factors: PPP agreement. Any changes to the proposed PPP agreement · The type of arrangement proposed should be marked clearly so that suitable risk adjustments can · The level of cost recovery achieved by existing fares be made to ensure that all bids are evaluated using the same · The predictability and value of future fare-based risk parameters. revenues · The grantor's objectives Bids should fulfill the requirements following any reference · The rules for setting future fares engineering design and should address core requirements · The need to prevent bidders from deliberately that include commercial, technical, operational, maintenance, underpricing their bids (low balling) and financial details. · The likelihood that terms proposed by the developer in the bid can be taken to financial close SECTION C Source: http://www.sxc.hu/ 183 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 8.7.4 Bid Weighting After assessing both the technical and financial viability of bids, the grantor must then select the best overall bidder in accordance with the conclusions formed from the assessments. Some technical and financial criteria can be firmly established as crucial; but other elements of bids, such as personnel, are not completely objective criteria. Nevertheless, they can be key in ascertaining whether a company can successfully execute a project. Therefore, a common approach is to choose weights for the technical and financial scores and then combine the scores to produce an overall score (table 8.1). Table 8.1 Weighting Bids: Price versus Quality Features Weighting feature Advantages Disadvantages Price based · Easily administered · Lack of innovation · Widely used and accepted · Tendency for change · Clear and objective · Tendency for orders selection process and cost overruns · Tendency for mediocre quality Quality based · Potential for quality · Some criteria subjective · Potential for innovation · More effort and skill required from the tender · Best-qualified organization evaluation team · Better people skills · Best methodology potential · Potential for project success Source: Pakkala 2002. CHAPTER 8 To be most effective, the weighting of these factors should be his technical assessors. The completed sheets should be kept appropriately defined and measured as objectively as possi-ble securely for a number of years after the completion of the (Pakkala 2002). Each factor will be weighted differently, and bidding process. The detailed marking scheme and weighting weighting will depend on the contracting authorities' preferred of the marks should not be revealed to the bidders or any IMPLEMENTING AGREEMENTS combination of quality and price. Some considerations should other party before bid closure. After bid closure, bidders may be kept in mind: privately request access to examine the bid marking sheets · To reward quality or price aspects, the grantor should related to their own bid once the bid assessment process has distinguish the bid weighting accordingly to reward been completed. bids that match these criteria. Therefore, to improve innovation and have the best-qualified organization 8.7.6 Other Weighting Methods provide the maintenance activities, the grantor should use appropriate percentages for the quality aspects. Technical threshold, highest financial score · Technical proposals are usually evaluated first; scores The technical threshold method is used for concession con- are communicated to the bidders, and then the tracts. All bidders are evaluated on their technical proposals financial proposals are assessed. The final scores are and a technical threshold score is set. All bids that do not calculated using the predetermined formula, and the achieve this score are rejected. The remaining bids are then winning bidder is then chosen. judged on their financial proposals, and the best financial offer · The weighted-average score can be manipulated. wins the PPP agreement. The technical score is subjective and is decisive for determining the winning bid. An avenue for corruption This method is simple and transparent. Because it is based SECTION C is therefore opened when an unwarranted higher on the objective criterion of price, it is harder to manipulate. technical score can be granted, with little chance of However, it eliminates higher-priced bids that would provide detection, thereby allowing a favored bid to win. higher-quality solutions. In many cases, the lowest bid does not necessarily provide the best value over the long term. 8.7.5 Assessment Marking Within the invitation to bid document, the grantor should indi- Fixed budget, highest technical score cate the percentage of total assessment marks that will be Under the fixed budget method, the grantor sets a budget awarded to the different aspects of the bidding packages-- and informs the prospective bidders. The bidders are then the financial, legal, and technical sections. The technical assess- asked to submit their best technical proposal based on the ment and marking will allocate a percentage to each section of set budget. For management contracts, the bidders would the performance specifications and the code of construction then compete on the amount of money they would use to practice; marks are awarded to the bidder's response to each pay the management fee. This method encourages creativity section of the documents. The marks are recorded on bid concerning quality rather than focusing on minimizing cost. marking sheets, which are then forwarded to the grantor by 185 LIGHT RAIL - LIGHT METRO 8.8 FINAL SELECTION competitive nature of the negotiated transaction. Competitive After completing the evaluation of the technical and financial negotiations are suited to complex, nonstandard projects. proposals, the grantor may proceed by selecting the proposal However, the process is less transparent and more subjective. that contains the highest combined scores on price and non- The negotiated bidding process involves the following steps: price criteria. Alternatively, the amount of capital grant or · The grantor details its requirements and requests availability payment required may be used as the deciding expressions of interest through a request for propo- factor. The winning bidder will likely present the most sals (RFP). economically advantageous offer, with adequate price and · The grantor reviews the proposals and selects those service certainty and appropriate risk allocation. The award that are technically responsive to the RFP. committee is advised to offer written explanations for its · The grantor negotiates the PPP agreement terms selection that go beyond simply accepting the lowest-priced with the selected bidders. bid. Competitive negotiations have several advantages: Negotiations then commence with the best-rated bidder. If · Bidders are induced to submit innovative and creative more than one bid obtains a high score or there is a minimal project proposals. difference between bid ratings, more than one bidding firm · "Optimism bias" in bids is reduced, and bidders are or consortia can be invited for further negotiations over the discouraged from deliberately underbidding to win transaction documentation and to answer any queries from PPP agreements. the bidders' lenders. If negotiations are unsuccessful, it may · There is greater dialogue between contracting autho- be necessary to restructure and rebid the whole selection rities and more opportunities for the grantor to eva- process. luate bidders on criteria beyond bid prices alone. 8.8.1 Noncompetitive Negotiations Competitive negotiations have the following disadvantages: · Nonstandard bids make comparisons difficult. The best-rated bidder is invited to a final round of · The increased level of closed dialogues between negotiations to finalize the elements of the project. contracting authorities and bidders decreases If final agreement cannot be reached, then generally transparency, thereby increasing the potential negotiation is started with the bidder that was rated next for corruption. best. However, using the consultative selection process · The prolonged bidding process and the costs involved suggested, combined with acceptance of contract terms at may deter some firms from engaging in the process. the bid stage, the risks of nonagreement at this stage can · Bidders may attempt to make changes that funda- be mitigated. mentally alter the price or risk allocation originally contained in the proposal, thereby distorting the 8.8.2 Competitive Negotiations criteria on which the bid was originally rated. In competitive negotiations, the grantor simultaneously ne- gotiates with two or more bidders in order to enhance the CHAPTER 8 At this stage, the grantor should inform the remaining bidders · Prospective bidders are invited to begin a dialogue that they may be contacted to negotiate should negotiations to identify and develop the best solution to the infra- with the highest-rated bidder fail to produce an agreement. structure requirement. The grantor must clearly des- If this situation occurs, the grantor will inform the bidder of cribe its needs to assist the process and to ensure that its decision to terminate negotiations and then proceed to bidders do not use the dialogue to market test ideas. negotiate with the next-highest bidder. It is recommended · The grantor can reduce the number of prospective that contracting authorities do not reopen negotiations with bidders that it continues discussions with as long bidders with whom failed negotiations have been conducted. as sufficient competition is ensured. If there are IMPLEMENTING AGREEMENTS an insufficient number of prospective bidders, the 8.8.3 Competitive Dialogue authority can continue its dialogue with the remai- A process called competitive dialogue is an innovative addi- ning bidders. tion to the procurement options available to contracting · Contracting authorities can discuss all aspects of the authorities. Pioneered by the European Union, the process PPP agreement with the chosen candidates, but care allows dialogue between the grantor and prequalified bidders must be taken to ensure that all candidates are trea- to permit them to fine-tune, specify, and clarify their bids ted fairly and evenly. (Office of Government Commerce 2006). The competitive · The prospective bidders submit their proposals in dialogue system has four main features: writing, and the award criteria contained in the PPP · Dialogue is permitted with selected suppliers to agreement notice are used to evaluate the proposals. identify and develop solutions to the grantor's project At this point, the number of bidders can then be requirements. further reduced. · Dialogue occurs in successive stages; at the end of · The grantor decides which proposals meet its requi- each stage, the number of bidders and number of rements, and those proposals' proponents are then solutions are reduced. asked to submit their final offers on the basis of the · The grantor makes its decisions on the basis of the bid dialogues with the grantor; the final tenders should SECTION C that provides the most value for money. be as complete as possible because there are various · No changes are allowed to bids in the post­final ten- limits on post-tender discussion and alterations to der or postaward stage. bids. · The bids are then evaluated against the award criteria, The procedure is executed as follows: and the most economically advantageous proposal is · Contracting authorities publish a PPP agreement selected as the winner. notice that explains their needs and requirements. · Post-tender discussions with candidates that submi- · A prequalification questionnaire is completed by the tted final tenders are permitted to clarify, fine-tune, interested parties and is evaluated by the grantor's and provide additional information on their proposals. bid evaluation team. Prospective bidders are then No changes to the fundamental nature of the bid are selected. permitted. · Dialogue with the preferred bidder will allow further delineation of design, PPP agreement finalization, and financial due diligence. 187 LIGHT RAIL - LIGHT METRO Adelaide, Australia. Photo by and reproduced by kind permission of Scott McIntosh. The dialogue process should be used to identify the best means controversy, and history suggests that such scenarios lend of satisfying the grantor's needs. The intention of this dialogue themselves easily to corruption. Additionally, the competitive phase, while there is still a competitive element to the process, dialogue with the wider industry and financial sector, which is to encourage bidders to promote more value for money and can be used to develop and refine the LRMT PPP agreement, more innovative solutions. Although competitive dialogue is lost. potentially extends the competitive phase, it should shorten the closure phase after a preferred bidder has been selected The subject of unsolicited proposals and direct negotiation 1 and should lead to a shorter procurement timetable. is important, and one that the grantor may consider before establishing the best competitive solution (Hodges and 8.9 UNSOLICITED PROPOSALS AND DIRECT Dellacha 2007). We give more details of this approach in annex 8. NEGOTIATIONS Unsolicited proposals usually originate from the private 8.10 CONTRACTUAL ISSUES sector and are generally not requested by a government. Important contractual issues related to the bidding procedure Unsolicited proposals are typically developed by companies include the following: with ties to a particular industry (such as land developers, · Bid bonds. Bid bonds provide insurance that com- rolling-stock suppliers, and financiers). They use their own pensates the grantor should the winning bidder resources to develop a project idea and then approach the decide to withdraw from the project. The bonds serve relevant government or grantor for the required official to guarantee the grantor that the winning bidder will approvals (Hodges and Dellacha 2007). Government openness implement the project and has the means to fulfill the to receiving unsolicited proposals can incentivize the private terms of the PPP agreement. sector to come forward with innovative ideas. Additionally, in · Acceptance of process. The grantor may require all smaller municipalities, where it may be too costly or difficult bidders to sign a legally binding agreement that con- to arrange a competitive bidding process, direct negotiations firms their satisfaction with all aspects of the bidding increase the chance of private sector interest in infrastructure process, their willingness to accept the outcome of development projects. the process, and their assurance that they will not challenge the decision. This agreement aims to limit However, for grantors, a major disadvantage of unsolicited bidders from seeking to reopen the bid evaluation proposals is that they are associated with a lack of competition process on the basis of complaints over procedures, and transparency, and they do not guarantee the most evaluation criteria, or lack of information. It is linked effective or economical solution. with a need for the grantor to conduct the process with full transparency and to treat all parties equally. The granting of exclusive rights to private entities without · Signed PPP agreement and associated documen- the accountability of a transparent tendering process courts tation. After selection of a winning bid, a long nego- tiation period between the grantor and the winning bidder begins. During this period, there is a great risk 1 More information on competitive dialogue is available at http://www.4ps.gov.uk. CHAPTER 8 Manila, Phillipines. Photo by and reproduced by kind permission of Samuel Zimmerman. that the selected bidder will attempt to change parts simultaneously with two or more bidders. The bid- of the agreement. To mitigate this risk, the grantor can ders compete against one another with the aim of require the bidders, before selection, to provide a sig- generating a better deal for the grantor. A major IMPLEMENTING AGREEMENTS ned PPP agreement as part of the bidding package. criticism of this approach is that it encourages "private" negotiations between the grantor and the bidders, and 8.11 NEGOTIATING WITH PREFERRED BIDDERS the transparency of such negotiations is questionable. Contracting authorities have various options available to them Competitive negotiation may be formalized to include after completing the financial and technical evaluations: the best and final offer (BAFO) approach. The BAFO · Choose the firm with the highest score according to method is becoming common in some European the bid procedure criteria at the price stated in the projects. After bids have been evaluated, the bidders firm's bid. are called back to give a best and final offer, with the · Enter into negotiations with the selected firm. aim of increasing benefits to the grantor (see box 8.2). · Hold another round of bidding because of · Additional round of bidding. All submitted bids are (a) additional issues remaining to be agreed with the shared among the bidding teams, and an additional preferred bidder or (b) the opportunity for a better round of bidding is then held. offer. 8.12 OTHER PROCUREMENT ISSUES Several negotiation alternatives are possible: Other issues that contracting authorities may come across · No negotiation. All previous technical and financial include dealing with variant bids, dealing with unsustainable SECTION C consultations with the bidders have removed any bids, and allowing flexibility and retendering. issues over their bids, allowing the bidding teams to include signed and unchanged PPP agreements and Box 8.2 associated documentation in their submittals. The grantor then accepts the signed PPP agreement after The Downside of BAFO Processes selecting the preferred bidder. Best and final offer processes can both benefit and harm · Negotiation with the preferred bidder. The grantor the public interest. Reduced bid prices or increased design negotiates outstanding issues with the preferred value can clearly benefit the value for money that public authorities de-rive from public-private partnership structures. bidder. The contracting authority should ensure that However, BAFO processes can add time and complexity to the it maintains the resources to negotiate on level terms procurement process while introducing an overabundance with the more experienced bidders to ensure that the of subjectivity into the selection of preferred bidders. Com- promises made during BAFO processes can potentially harm modifications requested by the bidders are justifiable the economic viability of concession companies, which may and are not attempts by the bidder to take advantage lead to insolvency or renegotiation at a later date. Planners of the grantor's lack of experience. must be aware that sometimes the most accommodating bidder is not the best choice. · Competitive negotiation. The grantor negotiates 189 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ 8.12.1 Dealing with Variant Bids Shadow models Contracting authorities will expect bidders to submit standard Shadow models are created by the grantor to project what a bids that are based on the bidding requirements. Additionally, standard and financially viable bid might look like. Comparing bidders can be allowed to submit variant bids with alternative the actual bids with the shadow model gives the authority proposals for technical or financial provisions. The grantor must greater information to query bids. decide whether variant bids will be evaluated simultaneously with the standard bid or whether variant bids will be considered Vigilance only after a preferred bidder has been selected. This system The grantor creates a bidding procedure that allows encourages innovation and can lead to the grantor's getting discussions and clarifications, with the option to withdraw better value for money. Bidders must indicate the precise from discussions. Requesting higher-performance bonds can differences between their standard bids and variant bids, with also protect the grantor from the risk of developer failures. explanations of the effects on costs and risk allocation. Variant bids also allow the grantor to test the costs of different risk Reputation risk profiles between the authority and the potential developer. The grantor prequalifies only those firms with a track record Contracting authorities can hold meetings with the bidders and reputation at stake. Firms with PPP agreement experience to clarify or negotiate any issues emerging from the bids. All will have observable behavioral patterns and therefore evi- bidding teams must be dealt with fairly and equitably. dence of low balling in their past can be factored into the bid evaluation. 8.12.2 Dealing with Unsustainable Bids With complex, competitive negotiations, a mistake or delibe- Complaints and appeals rate misrepresentation of information is likely. Contracting Every procurement process runs the risk of being challenged authorities should develop clear, sustainable guidelines on on the grounds of unfair competition, partisanship, or how to deal with such scenarios. Deliberate underbidding or questions over procedures. Establishing guidelines on even a genuine mistake by a bidder may assist the bidder's methods to deal with such eventualities is advisable. These financial proposal and increase the attractiveness of its bid guidelines may determine how complaints and appeals to the grantor. However, acceptance of the bid based on an will be heard and on what grounds and how they will be unsustainable project means that in the long term the PPP evaluated. agreement will need to be renegotiated or dissolved and rebid, both of which are expensive in time and money for the grantor. Experience shows that certain risk evaluation and mitigation 8.12.3 Allowing Flexibility and Retendering The bid details should clearly establish the process for techniques should be followed to ensure the sustainability of addressing the end of the long-term PPP agreement. It should the bids and to avoid performance or financial issues. Some of ensure that the grantor has the flexibility to extend the PPP those techniques are mentioned here. agreement or to retender the whole agreement. This matter should be dealt with in the contractual agreements. CHAPTER 8 Checklist Procurement Choice of a Selection Method Consider the relative importance of competition, economy and efficiency, integrity, and fairness and transparency. Establish a competent, efficient procurement management team; an award committee; and suitable financial, technical, operational, and legal support. Initiate market sounding to determine interest in proposed project. Selection Criteria and Bid Evaluation Set technical evaluation criteria for prequalification. Set financial evaluation criteria for prequalification. Set technical and financial evaluation for bidding--that is, what is the bidding variable? Determine how the technical and financial criteria will be combined, decide on bid weights, and determine how they will be marked. Prepare documents detailing the proposed project. Management of Bidding Stages Conduct road shows to promote the project and review the level of investor interest. Carry out public notification and prequalification of bidders on the short list. Specify the contents required of bids in the request for proposals and choose a bidding process: single stage or two stages. Evaluate the bids. Negotiate or allow bidders to further improve their bids, if necessary. Make a final selection on the basis of noncompetitive negotiations, competitive negotiations, or competitive dialogue. Other Issues Consider how unsolicited proposals and direct negotiations will be handled. Ensure that contractual issues related to the project are clearly established. Determine the methods for dealing with variant bids. Determine the methods for dealing with unsustainable bids. 191 LIGHT RAIL - LIGHT METRO CHAPTER CONCLUSIONS 9 The LRMT in Rotterdam, Netherlands, showing a grade system that is made to look less intrusive by grass-covered tracks and a modern sculpture that are system features. Conclusions This chapter contains thoughts and opinions that the authors examples exist where the latter method may be the preferred SECTION D CONCLUSIONS have formed from their research and interviews with light option for procuring PPPs in LRMT. However, several recent rail­light metro transit (LRMT) experts. The views expressed LRMT PPPs have been successfully let as full concessions. here are ours alone and as such are not official positions of the Planners for the Nottingham Express Transit, Gautrain Rapid World Bank, its Board of Executive Directors, or its affiliated Rail Link, and Canada Line projects have all elected to use full organizations. Rather, the information provided here is concession models (Dachs 2008; Hand 2008; Hewitt and Louie intended as a summary for the reader's benefit. Local policy 2008). goals and the individual realities of unique transport problems will ultimately determine the applicability of the observations For established systems with several years of successful that follow. operation, or for limited line extensions, the argument for full design-build-operate-maintain concession agreements 9.1 VALUE FOR MONEY IN LRMT CONCESSIONS becomes less clear because of reduced complexities AND OTHER PUBLIC-PRIVATE PARTNERSHIPS and associated risks. Infrastructure-only concessions or New LRMT systems are complex, one-of-a-kind systems. Inte- management style PPP agreements for publicly procured grating the complex and varied elements of public-private and owned assets may offer the best value for money option partnership (PPP) agreements requires substantial technical for established systems. Docklands Light Railway's London and contractual resources and capability and carries signifi- City Airport and Woolwich Arsenal Extensions were both cant risks. Traditionally, the LRMT system was procured structured as infrastructure-only concessions (Keep 2008). through public contracts for implementation. However, Likewise, phase 3 of the Manchester Metrolink system will whereas many public entities have elected to pursue this employ management-style contracts for publicly procured model (most notably in the United Kingdom), others have assets (Hand 2008). found value for money in PPP structures that transfer the risk of integrating the contractual elements to private partners. Lastly, the decision to implement LRMT as a solution for urban The most common means for accomplishing such transfers transportation should be decoupled from the decision to are PPP agreements with private developers that fully finance, procure new services on a PPP basis. Planning processes should design, build, operate, and maintain the concession. follow formal procedures that should insulate projects from irrational biases wherever possible. Historically, that has been Finally publicized failures and expensive bailouts of LRMT difficult to achieve because of perverse funding incentives and concessions, such as Kuala Lumpur's STAR (Sistem Transit other bias-creating factors. Although fair, unbiased planning Aliran Ringan) and PUTRA (Projek Usahasama Transit Ringan is indeed challenging to implement, the consequences of Automatik), Bangkok's Skytrain, and France's Orlyval, have inappropriate investments in transport can be severe. It is also led some experts to question the value of the full concession important to realize that even the best PPP agreements cannot model. They instead propose a model of public infrastructure substitute for sound transportation planning. procurement combined with management-style operation and maintenance PPP agreements for LRMT services. Indeed, 193 LIGHT RAIL - LIGHT METRO 9.2 THE VALUE OF PRIVATE FINANCE Any contradictions between planning decisions, private incentives, or customer needs will inevitably reduce the Simply stated, debt disciplines the actions of both planners likelihood of project success. Public authorities are the parties and system managers. Initial lender due diligence can enhan- best suited to reconcile policy goals and craft customer- ce project quality and supplement public review processes. oriented LRMT strategy. Such authorities should be keen to Continuous lender oversight can also help monitor conce- design systems that offer clear value to customers instead of ssion company operations during later stages of project hoping that targeted customers find LRMT services attractive. implementation. LRMT PPPs that do not require leveraged Although hope is indeed a virtue, it is not a strategy for private sector capital contributions forgo this value along with success. the additional benefits associated with placing some measure of private money at risk to further incentivize partners. 9.3.1 Positioning LRMT Services and PPPs to However, it is important to realize that private financiers Meet Customer Needs are neither transportation experts nor guardians of the Integrating with other modes of transport is particularly public interest. As past failures illustrate, the ability to access important to attract targeted customers. System design financing does not necessarily guarantee the wisdom of doing requirements should include appropriate integration links so. Many factors that determine bankability reside beyond the to other forms of public and private transportation when control of LRMT planners. Ill-conceived projects may be able customers may require them. For example, park-and-ride to access private financing when macroeconomic conditions and kiss-and-ride facilities can create value for customers at are sufficiently favorable or when lenders are not fully savvy stations located to attract private vehicle commuters. When about project risks. Unfavorable macroeconomic conditions customers display aversion to existing feeder and distribution may conversely place private financing out of reach for even modes, project promoters should consider adjusting the PPP the best-planned projects. Bankability is therefore not an agreement's scope to provide a more acceptable service. absolute measure of an LRMT initiative's quality. Neverthe- Gautrain's use of cobranded buses in lieu of traditional public less, considerations related to private finance can help improve bus transportation illustrates how such adjustments can be planning and monitoring processes. accomplished. 9.3 DEVELOPING A STRATEGY FOR SUCCESS Headways, transfer requirements, service schedules, and Decisions related to the structure of private sector participa- other operational characteristics should also reflect cus- tion in LRMT initiatives must be coherent. Contractual mecha- tomer needs. For example, systems that target daily business nisms, technical specifications, policy elements, budgetary commuters may attract additional ridership by using allocations, and other factors should align with one another express services during morning or evening rush hours. as part of some overarching strategy for project implementa- Key performance indicators designed to manage private tion. Likewise, the plausible business case for private sector developers should also focus the greatest weight on those investment should create incentives for concessionaires and features most important to customers. developers to act in support of any strategy for supplying new services. CHAPTER 9 9.3.2 Aligning Technical Factors with Imple- 9.3.3 Matching Contractual Structures with mentation Strategy Strategies for Growth The technical aspects of LRMT systems should balance Strategies for further system development have an important customers' willingness and ability to pay against the public influence on the contractual structure that planners should sector's willingness and ability to subsidize. In addition, choose for incorporating private sector participation. Full CONCLUSIONS planners should consider the appropriateness of privately concession models may be incompatible with strategies that proposed technical solutions with regard to local conditions involve frequent line extensions, given that such contractual (for example, cost and availability of skilled and unskilled agreements are often inflexible regarding increased scope. labor, cost and availability of local materials, and operating Public bargaining power may suffer in negotiations with environment). Kuala Lumpur's PUTRA system, which incumbents for expanded concession scope when failure to incorporated sophisticated proprietary driverless Bombardier agree triggers large termination payments. The early termi- technology, is an example of a technical solution misapplied nation of the Manchester Metrolink's phase 2 concession to local realities--ultimately at additional cost to Malaysian illustrates the potential incompatibility of full concession SECTION D taxpayers (Halcrow Group 2004). agreements and system expansion. Although shrewd PPP agreement design can facilitate extension, complex and Strategies for implementation should also drive route align- potentially lopsided negotiations are still very likely. ment. Stations should be located where targeted customers work, live, and play. Alternatively, when the strategy for Strategies for LRMT development that entail relatively fre- implementing LRMT services involves urban development (for quent piecewise system expansion may require "delayered" example, Docklands Light Railway), route alignment should contractual structures. The Docklands Light Railway employs locate stations where planners want future customers to this model for private sector participation by using modular eventually frequent. Incorporating existing rail rights-of-way infrastructure-only concessions for civil works together with into system routes can help reduce upfront system costs. an expandable operation and maintenance franchise. Similarly, However, available rights-of-way should not align routes away the Manchester Metrolink uses separately procured contracts from targeted customers. Lower-than-expected ridership for different system components, including operation and on Kuala Lumpur's STAR system (which simply followed maintenance. Delayered contractual structures can offer an abandoned industrial rail line) illustrates the potential greater flexibility for accommodating extensions by reducing consequences of misaligning routes relative to targeted the scope of required changes to existing PPP agreements. customers. However, managing the interface between various contracts can potentially become difficult and may require additional Finally, contractual technical specifications should also insist capacity that some public institutions lack. on access for customers with disabilities. Beyond the obvious moral obligations, providing access to people with disabilities can make good business sense by helping to accommodate aging populations or by eliminating the need for costly future station upgrades. Bangkok, Thailand. Photo by and reproduced by kind permission of Samuel Zimmerman. 195 LIGHT RAIL - LIGHT METRO Full concession models for private sector participation may Province 2008). Ideally, such integration should occur before deliver better value for money when the strategy for imple- making large investments and committing substantial public menting LRMT does not involve frequent extension over resources. the concession contract's life. Canada Line is one example. Nevertheless, full concession contracts should include at least 9.4 MANAGING FARES INTELLIGENTLY basic mechanisms for dealing with possible extensions--even Fares play a critical role in the outcome of LRMT investments. when their probability is remote. Circumstances change with Some major considerations related to fares that planners time, and strategies set during initial planning stages may should appreciate follow. evolve to require expanded contract scope. 9.4.1 Opportunity Costs of Subsidizing the 9.3.4 Integrating Public Planning in Addition Farebox to Transportation Services Fares exert critical influence over both ridership and revenues. Several sections of this book have mentioned the importance The inverse relationship between those two factors creates of integrating LRMT systems with other modes of transport. an obvious challenge. Policy goals will generally emphasize Private transportation links and publically available feeder and ridership over revenues, depending on the availability of public distribution networks enable LRMT to leverage advantages support committed to an LRMT system. However, this approach in greater passenger capacity, faster travel speeds, and lower may not be in the public's best long-term interest given the marginal operating costs. In practice, integration has been additional amounts of support required to sustain operations. difficult to achieve for several of the systems mentioned As for private capital, public money also carries opportunity here. Besides budgetary and technical limitations, service costs. Subsidies devoted to LRMT services could potentially integration often suffers when various public authorities fail have better uses elsewhere. Planners should consider how to coordinate planning efforts under one centralized body. best to manage fares intelligently to reflect policy goals with The consequences of poor integration can be dire for LRMT an appreciation for rational allocation of public funds. PPPs, as the Bangkok Skytrain demonstrated. When private partners do not take substantial demand risks, the need for 9.4.2 Price for Competition and Policy Objec- service and planning integration is particularly important to tives guard the public interest. Fares need to reflect the customers' willingness and ability to pay. In addition, fares should align with policy goals, such In some circumstances, the size and highly publicized nature of as encouraging switching from private to public transport LRMT investments can help drive public organizations to begin or providing services to poor transport customers. In some strategic metropolitan planning efforts. For example, Gau- instances, policy goals may conflict with one another. For teng province in South Africa recently announced the creation example, increasing fares to achieve higher farebox ratios (and of the Gauteng Management Transport Authority, which will minimize public operating support) may effectively exclude oversee and align various transportation programs across poor customers. the province's municipalities. Recently, large investments in the Gautrain system have helped create political impetus for this new centralized planning body (Dachs 2008; Gauteng When such conflicts exist, planners must either prioritize or concession's value). Malaysia's STAR and PUTRA systems may find creative solutions to allow for mutual success (for example, have suffered from this problem when discounts designed cross-subsidy schemes). to correct lagging ridership became impossible to reverse. CONCLUSIONS Phase 2 of the Manchester Metrolink also demonstrated the 9.4.3 Leveraging of Private Incentives and politically sensitive nature of fares when public outcry partially Efficiencies contributed to the concession's premature termination. Effectively managing fare levels also requires flexible Demand for Metrolink's services had been greater than mechanisms for adjustment within PPP agreements. Providing expected, and the system's developer was able to exploit developers some freedom to set fares in order to shape de- significant pricing power by increasing fares considerably. mand or to take advantage of profitable routes (such as airport connections) can be in both public and private interests-- 9.5 THE STRUCTURE OF PUBLIC SUPPORT SECTION D especially when public authorities take the majority of revenue- DETERMINES OUTCOMES related risks. For example, Gautrain's contractual agreement LRMT's upfront capital costs exceed the capacity of tariff provides mechanisms that allow fare adjustments on specific revenues to support purely private scheme financing. Imple- links (that is, trips between certain stations). Gautrain's menting LRMT services therefore requires some sensible concessionaire has a particularly large amount of freedom to structure for incorporating public support. Most recent LRMT adjust fares on Gautrain's link to O. R. Tambo International PPPs have included substantial capital grants to reduce the Airport--a key revenue route that will effectively subsidize amount of private finance necessary for funding upfront costs. other parts of the system. Together with an agreement for This approach has become fairly standard for modern LRMT sharing revenues that exceed a preagreed threshold, this PPPs: Canada Line, Gautrain, and recent extension projects agreement provides additional value capture by incorporating on both the Docklands Light Railway and the Manchester greater private efficiencies and incentives to maximize both Metrolink systems have all incorporated sizable capital grants. ridership and revenue. Although the need for public support is quite clear (through 9.4.4 Provision of an Avenue for Political capital grants or otherwise), the obvious challenge for planners Influence is not to offer an excess of public support. Providing for risk Fare levels are always politically sensitive. Implementing LRMT transfer requires that private partners have something to lose requires substantial public support as we have previously for nonperformance at every stage of project implementa- discussed. Large contributions of taxpayers' money, combined tion (Dachs 2008). Inevitably, this approach implies value at with high visibility and the scale of LRMT services, can create risk in significant amounts. Project finance structures provide political opportunity for conspicuous intervention into system limited recourse vehicles that allow sponsors to take such risks operations. Requiring government approvals of fare levels together with lenders that provide debt. Although bankability is often the preferred outlet for exercising such influence. concerns surrounding project finance may reduce options Problems can arise when private partners' revenues link and pose formidable challenges for project promoters, there back to fares and the required public approvals become is considerable value in lenders' due diligence and active mechanisms for regulatory taking (that is, expropriation of the oversight. Overly generous capital grants can potentially 197 LIGHT RAIL - LIGHT METRO Source: http://www.sxc.hu/ sacrifice those benefits by excessively reducing the size and bailout for failed projects is quite strong. Abandoning a leverage ratios of private sector investments. Consequently, functioning LRMT system would simply be politically una- this practice can reduce value at risk and weaken incentives for cceptable in most cases (although not unprecedented). private sector performance. The design of LRMT PPPs should account for this fact because 9.5.1 Funding Sources Matter any risks transferred to private partners have the potential Although public authorities lack profit incentives that inspire of returning to public institutions if the private sector private firms, their behavior is similarly affected by mone- partners fail. Contracting authorities should therefore focus tary considerations. Local transportation authorities are on transferring the right risks to private partners and only in particularly subject to incentive structures created by regional appropriate amounts. If private partners cannot reasonably or national government funding. When different levels of handle enough risk to justify value for money, projects should government pay the bulk of upfront project costs and cover be procured on a traditional basis. Overloading partners with potential overruns, local authorities may have added incentive irrationally allocated risks or responsibilities can backfire when to select riskier, more capitally intensive transport solutions public authorities find themselves once again holding the (such as rail-based public transportation). The ability to localize product of a failed PPP. Even when irrational risk allocations do the benefits of transportation investments while externali- not cause a PPP to fail, public authorities may suffer reduced zing the bulk of their associated costs is a major driver behind value for money when private parties endure inappropriate irrational decision making and biased mode selection. That risks. Docklands Light Railway's Lewisham Extension, which capability may similarly have detrimental effects regarding the allocated an element of demand risk to an infrastructure value for money of LRMT PPPs when local governments can concessionaire, is an example of risk misalignment. rely on national funds to support suboptimal risk allocations. Guarding against such perverse incentive structures requires 9.6 MANAGING DEMAND IS CRUCIAL TO careful oversight within the government itself. National or SUCCESS regional PPP units with legal authority over project approval Effective management of demand is crucial to the success of can help protect the broader public interest. any LRMT scheme. However, many of the factors that influen- ce demand for LRMT services will be outside the influence 9.5.2 Implicit Guarantees Always Exist of the private developer (for example, transport pricing, LRMT systems supply valuable public services to a range of integration with other modes, and licensing for competing beneficiaries extending beyond fare-paying customers. Local services). Typically, the grantor, as the responsible authority, merchants, developers, non-LRMT commuters, employees, will have potentially more influence over these factors and, equipment suppliers, and myriad other parties all potentially thus, often takes more of the demand risk. benefit. Even when the outcome of LRMT investments is less than ideal, substantial interest in maintaining services will The grantor can help ensure that demand is optimized almost always exist because of the numerous stakeholders through the way that the PPP agreements are designed involved. Consequently, the likelihood of a publicly sponsored and implemented. A system of well-designed incentives CHAPTER 9 Source: http://www.sxc.hu/ through a sound performance management system, linked to · Rolling-stock manufacturers. Showcasing new ro- CONCLUSIONS performance-related payment, will help ensure that the deve- lling-stock designs and developing captive buyers for loper meets or exceeds the planned performance target. The proprietary technology can incentivize project promo- Gautrain and Canada Line case studies demonstrate examples tion without sufficient regard for the business case for of contractual structures that allow private partners to share new services. in the benefits of increased system ridership. Designing public support structures so that partners still have 9.7 PARTNERS' OTHER INTERESTS MATTER considerable value at risk in project operations is the most LRMT projects deliver substantial benefits to parties whose obvious way to mitigate the undesirable effects of external SECTION D interests reside outside the scope of system operations. interests. As previously discussed, the balance between too Project planners should be keenly aware of how such external much and too little public support is difficult to achieve. In cases interests can influence the behavior and incentives of pri- where private partners' external interests far exceed their vate partners. For example, concession shareholders with interests in long-term system operations, realizing this balance substantial real estate investments along proposed LRMT may even prove impossible. Planners and policy makers must routes may expect the majority of their returns through the be cautious when selecting private partners and structuring development of nonproject assets as opposed to revenues contracts to ensure that such impossibilities do not arise. from system operations. Although lower expected returns on private operations would seem to benefit public institutions, 9.8 INTERNATIONAL SPORTING EVENTS AND the effects of external interest can also harm the sustainability LRMT of LRMT PPPs. Limited recourse project finance structures Major international sporting events present unique manage- combined with significant external interests may pervert ment challenges for LRMT planners. Accommodating increa- incentive structures that would otherwise promote sustainable sed demand for services during and around the dates of system design and operations. Partners with interests outside competition is perhaps the most obvious challenge associated the scope of LRMT concessions include the following: with such events. However, beyond ferrying large numbers · Construction contractors. When upfront capital of spectators between venues, host-city or host-country grants are excessively large compared with the pri- transportation networks are expected to showcase the best in vate investment, construction margins may be large local planning and project implementation. The increased media relative to operating returns. This situation, in turn, attention that accompanies such events can influence global can reduce the effective value that such partners perceptions, thus carrying considerable economic and political have at risk during the system's operational life. consequences. Such consequences, in turn, can create strong · Real estate developers. Property development along incentives to implement or upgrade public transportation LRMT routes can yield proportionately large returns solutions before receiving the world's attention. International that can lead to aggressive project promotion wi- sporting events have influenced completion, expansion, or thout appropriate consideration for sustainable ope- extension efforts for several of the case studies mentioned rations. within this book (see table 9.1). 199 LIGHT RAIL - LIGHT METRO Table 9.1 Case Study Systems Influenced by International Sporting Events System name Sporting event Effect Targeted completion of link between O. R. Gautrain Rapid Rail Link 2010 FIFA World Cup Tambo International Airport and Sandton before World Cup event Olympic and Paralympic Targeted full system Canada Line 2010 Winter Games completion before games System completion (PUTRA) and extension Kuala Lumpur STAR 1998 Commonwealth Games to serve the National Sports and PUTRA systems Complex (STAR) before games Targeted capacity increase 2012 Olympic of 50% by 2010, requiring Docklands Light Railway and Paralympic platform extensions Summer Games to support three-car rolling-stock configurations Sources: Canada Line Rapid Transit 2008; Gautrain Rapid Rail Link 2008; Mohamad 2003; Transport for London 2008a. CHAPTER 9 Major sporting events create hard deadlines for completion, which are known to all parties. Those hard deadlines can both 9.9 RECOMMENDATIONS help and hinder contracting authorities. Ensuring completion FOR PROCUREMENT The technical and contractual complexities of LRMT systems before major events can help galvanize government planning make for lengthy and involved procurement processes. This and approval processes. Conversely, publicized completion CONCLUSIONS factor can expose public authorities to additional risks related dates can force a government's hand by requiring preworks to price indexations and waning bidder interest. Intelligently contracts or additional expenditures aimed at accelerating designed and disciplined procurement processes are therefore project completion. Public negotiating power may also suffer essential for protecting the public interest. In plans to procure when private counterparts perceive time constraints on LRMT PPPs, the following elements should specifically be the procurement process or when the public "walk-away" considered. alternative loses credibility. Historically, large sporting events may also have contributed to 9.9.1 Using a Systematic and Disciplined SECTION D irrational decision making when choosing between transport Procurement Management Approach solutions. Speculations suggest that both the STAR and PUTRA A competent and efficient procurement management systems were heavily influenced by the Malaysian government's approach will help ensure the success of the selection desire to showcase technological sophistication and build- procedure. A dedicated management team--supported by an operate-transfer capacity during the 1998 Commonwealth effective high-level steering group established by the grantor, Games in Kuala Lumpur (Halcrow Group 2004). That may with adequate power and resources--is a key element in be especially true for the PUTRA system, which employed developing, procuring, and implementing the LRMT PPP complex, fully automated driverless Bombardier rolling stock agreement. Using an experienced transaction adviser to despite less costly alternatives. help guide and establish the PPP agreement will contribute to the success and effectiveness of the entire design and Planners must be keenly aware of the influence that inter- procurement process. national sporting events can exert on LRMT projects. The importance and global publicity tied to such events will inevi- The design, development, and successful implementation of tably create both opportunities and potential hazards that LRMT PPP schemes are the result of an expensive and lengthy warrant special consideration. Well-established and formal process. We have described the extensive measures that processes for selecting transportation solutions can help must be taken to produce an effective LRMT PPP scheme. In guard against irrational decision making. Similarly, intelligent the same way, we can say that time and money invested into procurement strategies can also help preserve public nego- proper procurement preparation and management will have tiating power. Procuring private partners well in advance of a positive effect on the ultimate success of the long-term known deadlines can lend credibility to rebidding options or project. other undesirable consequences of failed negotiations. 201 LIGHT RAIL - LIGHT METRO 9.9.2 Retaining Sufficient Technical Capacity It is important that the results of consultation at all stages of throughout Procurement the process be used to shape a more effective design of the Concessions or turnkey contracts do not eliminate the need for PPP agreement, to offer increased benefits, and to ensure public sector technical capacity. It is important for the grantor attractiveness to developers and financiers. to retain sufficient engineering capacity to evaluate and continually monitor the technical aspects of LRMT proposals 9.9.4 Using Prequalification Processes and subsequent operations. Experiences from the Gautrain The complexity of LRMT projects warrants prequalification Rapid Rail demonstrate that maintaining in-house enginee- processes to ensure selection of capable bidders and to pre- ring capacity may prove valuable for contracting authorities. serve reasonably attractive and competitive prospects for Gautrain's construction specifications had adopted interna- qualifying developers. However, prequalification standards tional standards for viaduct construction because South must not become a tool for eliminating competition entirely. African standards (intended for heavy rail overpasses) would For example, during the procurement of Manila's MRT3 have required significant overdesign. Engineers working for system, four out of five competing consortia failed to pass the Gautrain Management Agency (the grantor) discovered prequalification. Negotiations with the sole remaining bidder that viaduct designs included in the winning proposal met resulted in a contentious contractual agreement that was selected international standards, but they would have been partially responsible for later conflicts among government underdesigned for heavier train sets that could potentially run agencies, elected officials, and private partners. on the system following the end of the concession term. 9.9.5 Avoiding Early Works Contracts The Gautrain Management Agency subsequently negotiated Adhering to targeted completion deadlines for LRMT systems for more robust viaduct design. Although this redesign came can require infrastructure work to begin before completion of at a greater cost to Gauteng province, it will likely help avoid final negotiations. These contracts for early works can allow technical problems later in the system's life. lengthier negotiation periods without affecting promised system delivery dates. However, contracts for early works 9.9.3 Using Consultation to Reach a Success- also substantially reduce the public sector's negotiating ful PPP Agreement power by limiting the credibility of any walk-away alternative. A key to successful development of any LRMT PPP agree- Abandoning early works for a highly publicized LRMT system ment is to draw on the experience, advice, and resources of would result in public criticism and political pressure. Similarly, industry stakeholders and to use them to mold and adapt the early works may be incompatible with a reserve bidder's agreement to the best advantage of the project. The deve- proposed technological solution. lopment and procurement processes must be structured to take advantage of this possibility. This approach has proved Ideally, contracting authorities would implement procurement particularly effective in complex LRMT PPP schemes. We processes early enough to avoid the need for early works have shown a variety of ways that consultation can be used contracts. Actual conditions are rarely ideal, however, and most effectively at various stages--including the use of initial the need for such arrangements will likely arise on future market soundings to establish developer interest and bidder LRMT projects. When circumstances leave no other option, conferences--during the formal procurement process. quantitative and qualitative examination together must ulti- CHAPTER 9 mately decide the trade-off between the disadvantage of 9.10 FINAL THOUGHTS forgone negotiating power and the advantage of earlier cons- Incorporating private sector participation in LRMT initiatives truction. can offer good value for money, but it requires carefully managed planning and implementation. The complex and 9.9.6 Compensation for Unsuccessful CONCLUSIONS massive nature of LRMT investments has a direct effect on Bidders the type and form of private sector involvement, and ensuring Bidding for LRMT concessions is expensive. Retaining at least adequate public and private sector funding requires a major two bidders until final selection is desirable to maintain public investment in commitment, time, and resources by the bargaining power. However, the bid costs for LRMT PPP sche- grantor. mes are extremely high, and suitable bidders may be deterred from completing the full selection process if they believe they Development of LRMT schemes using PPP arrangements are unlikely to recoup those costs if they are unsuccessful. entails the rigor of a structured approach that will satisfy both SECTION D Some grantors, such as those for the Canada Rail project, public and private sector objectives. have successfully used some form of bidder compensation (for example, compensation based on a percentage of proven Funding for LRMT schemes can be difficult to structure bid expenditures or some form of fixed-sum "honoraria") to because of large upfront costs. However, using a structured maintain the number of effective bidders. PPP approach, the scheme can be designed to incorporate current best practice, and through market consultation, it 9.9.7 Adhering to Timetables can be tailored to optimize the scheme's bankability and Private bidders and public institutions alike incur greater attractiveness. costs as procurement processes lengthen. It is therefore important for contracting authorities to set and adhere to Sound transport policy, prudent risk allocations, coherent im- reasonable procurement deadlines. Private partners also plementation strategies, and well-structured public support show preference for disciplined procurement management are the best tools to achieve a successful LRMT PPP scheme. and early elimination in the event that proposals are not Although I hope this work has presented some thoughts on competitive. Establishing credibility with regard to deadlines how best to develop LRMT PPP schemes, it is clear that there is can be especially important for LRMT contracting authorities no one-size-fits-all solution. Accordingly, investments in LRMT that choose to use delayered contracts for various system PPPs should warrant extensive case-by-case consideration, components. Delayered contractual structures can increase drawing on the best current experience and incorporating the the frequency of procurement cycles and, in so doing, can very best in local talent and international expertise. magnify the benefits of credible procurement management. The Docklands Light Railway uses such a delayered structu- re. Through this structure, Docklands Light Railway Ltd. (Docklands' grantor) secures the value of disciplined, credible, and timely procurement management (Keep 2008). Source: http://www.sxc.hu/ 203 LIGHT RAIL - LIGHT METRO ANNEX 1 SELECTED CASE STUDIES Table of Case Studies - Manchester Metrolink - United Kingdom - Docklands Light Railway - London, United Kingdom - Kuala Lumpur STAR and PUTRA - Malaysia - Gautrain Rapid Rail Link - Gauteng Province, South Africa - MRT 3 'Metrostar Express' - Manila, Philippines - Bangkok Skytrain - Thailand - Canada Line - Vancouver, Canada The Case Study Approach This annex presents case studies, selected from recent major international LRMT PPP schemes, and chosen to represent a diverse range of scheme options, from which to draw the most relevant and practical lessons. The text drew heavily on these case studies to illustrate the issues covered, and in the diagram below we show how the case study approach is integral to the development of this work: Figure: 1 Case Study Approach for Presenting PPPs in LRMT Identify Explain Provide Provide important critical Discuss illustrative additional issues elements outcomes examples details Some of these LRMT initiatives yielded outcomes that differed substantially from what was originally envisaged. For example, several of the LRMT PPPs studied terminated before their planned completion dates. One main reason was that the challenges encountered were typically more complex than originally envisaged (often including political and macroeconomic factors outside the project's scope). Nevertheless, there appear to be specific measures that can enhance chances for success in an uncertain world, and we draw on this experience. Table A 1.1 Technical and Known Financial Elements of Selected Case Studies System / Bangkok Canada Docklands Docklands Docklands Docklands Gautrain Kuala Kuala Manchester Manchester Manila Phase Skytrain Line Light Light Light Light Rapid Rail Lumpur Lumpur Phase 1 Phase 2 MRT 3 Railway Railway Railway Railway Link STAR PUTRA 1987 (Lewisham) (City Airport) (Woolwich) Notes - - Without - - - - Including - - Eccles Phase extensions extensions extension 1 only Track (km) 235.0 19.0 13.0 4.20 4.40 2.50 77.0 27.0 29.0 31.0 6.40 16.80 Number 23 16 15 5 new 4 1 10 25 24 26 10 13 of stations 2 reconstructed Opening Dec. 1999 2009 (est.) Aug. 1987 Nov. 1999 Dec. 2005 Feb. 2009 2010 (est.) Dec. 1996 Sept. 1998 April, 1992 Dec. 1999 Dec. 1999 date (est.) (phase 1) (partial) (partial) July 2000 July 2000 Dec 1998 (full) (full) Approx. cost B54b Can$1.904b £77m £220m1 £140m £180m ZAR22.3b RM3.5b RM5b £145m £160m US$655m (2003 Can$) Approx. cost2 797 881 184 1086 609 1165 286 455 607 130 474 494 (2008 US$)/km Physical Elevated 7.5 km Elevated Elevated, Elevated Elevated 14 km of Primarily Primarily Mostly At grade and Approximately description elevated 800 m with 1.8 km underground elevated at grade at grade `on street' 3/5 elevated with with and 2/5 6.5km cut and viaduct across bored track, 200 approximately approximately at grade with cover tunnel Deptfort tunnels bridges / 4.4. km of 9.4 km 1 underground 2.5 km bored Creek, under the viaducts underground of elevated station tunnel bored tunnels Thames track track 8 2 km at grade under the elevated Thames stations Capital grant NA Can$1.247b NA LDDC3 DoT. £30m unknown ZAR19.2b NA NA £145m £65m NA (2003 dollars) £50m Investment IFC equity Private NA DoT 50m DoT 30m EIB £100m ZAR3,094 m unknown unknown Small £5m unknown unknown details4 and debt Investment £165m RBS £178m of senior debt private concession fee investments Can$500 debt bonds £4m in RBS £115 investment paid by KfW debt Can$157 4.5m mezz. equity6 senior debt, (approximately private investment equity debt 24m equity 85% debt) consortium 1.5m equity bridge loan7 11m loan stock5 1 United Kingdom National Audit Office. Improving public transport in England through light rail. (2004) 2 Estimated by converting costs into US$ at the first year of full operations and then adjusting those figures by the US CPI index 3 London Docklands Development Corporation 4 Note: figures for investment details do not total official project costs in a number of cases 5 Duff and Phelps Rating Co. City Greenwich Lewisham Rail Link PLC £165,000,000 Secured Bonds Due 2006-2020. (1966) Bond Rating, London Annex 1 6 Project Finance. PPP/Municipal Finance. (2003) Project Finance Magazine 7 Project Finance. Deal Analysis DLR Woolwich: Fab prefab. (2005) Project Finance Magazine 207 Table A 1.2 Contractual Elements of Selected Case Studies System / Bangkok Canada Docklands Docklands Docklands Gautrain Kuala Kuala Manchester Manchester Manchester Manila Phase Skytrain Line Light Light Railway Light Railway Rapid Rail Lumpur Lumpur Phase 1 Phase 2 Phase 3a MRT 3 Railway (Other Infras- (O&M Link STAR PUTRA (Lewisham) ture only) franchise) Contract date / April 1992 July 2005 1993 for 24.5 Feb. 2003 1997 for 7­9 Sept. 2006 Nov. 1991 for Feb. 1993 for Sept. 1989 for April 1997 May 2008 1991 - 1993 duration for 30 years for 35 years years & May 2005 years for 20 years 30+30 years 30+30 years 15 years for 17 years for 10 years for 25 years both for 30 years Structure Full Full Infrastructure Infrastructure O&M Full Full Full Small Full O&M Concession for PPP concession concession only only franchise concession concession concession concession concession contract w/leaseback concession concession (fee of £5m) to public operator Mechanism for In-kind Capital grant, Capital grant, Capital grants, Capital grants Capital Soft loans, Soft loans, Capital grant, Capital Full public Lease public support grants in-kind grants in-kind grants in-kind grants for large grant, in-kind in-kind in-kind grants, grant, procurement payments purchases in-kind grant grants grants some detailed in kind grants of assets (i.e., rolling stock) design Treatment 100% private 98% public Public during Public Public (with small Downside is 100% private 100% private Public Private Public Public of demand 2% public early years, volume based entirely public. risk later private `sweetner for Upside is split operator') Source of Farebox Availability / Availability Availability Availability Availability Farebox Farebox Farebox Farebox Availability Govt. lease private quality payment payment and payment payment payment and payment payments compensation and volume based shadow fare farebox above shadow fare min. rev. Fare setting Private with Public Public Public Public Private with Private with Private with Private Private Public Public a regulated a regulated a regulated a regulated cap cap cap cap Known Currently Nearing Operational Operational Operational TBD Insolvency Insolvency Terminated Terminated TBD Operational, outcomes undergoing operational and public and public at 4 year but govt. is court debut bailout bailout option mark looking to approved buy back the restructuring concession Table A 1.3 MANCHESTER METROLINK ­ UNITED KINGDOM General Summary Planners originally sought to link Manchester's Piccadilly and Victoria Stations via an underground tunnel as a means of integrating regional train services. After initial examination, the "Picc- Vic tunnel" solution was deemed too expensive and otherwise unjustifiable. Phase one of the Metrolink project presented a lower cost option for linking Manchester's train stations. Additional Metrolink stops also replaced an aging legacy system of electric railcars. Metrolink's development has progressed in three distinct stages: Phase 1 included the original link between Victoria and Piccadilly stations in addition to stops previously served by Manchester's aging electric railway system. Phase 1 was a publically funded project with private contracts for design, construction, operation, and maintenance. Phase 2 further expanded the Metrolink system and was a full concession aimed at leveraging private sector resources to fund system expansion. Like phase 1, this contract allocated design Discussion construction operation and maintenance responsibilities to the private sector. Because of delays in commencing Phase 3, phase 1 and 2 upgrades were required to provide essential improvements and/or renewals. These were/are being undertaken as separate tasks. They include supply of eigth additional (Bombardier Flexity Swift) vehicles (to be delivered in 2009) power supply upgrades, and major infrastructure upgrades including renewal of the track. The total cost of the public sector works was approximately £102 million phased over 4 years. Phase 3 (also known as "the big bang") was originally proposed as one large system expansion, but was later scaled down into two smaller phases ("a" and "b") of price escalations and limited public funding capacity. Phase 3a involves separate contracts for · Design and construction, including electrical and mechanical works · Tram operations and maintenance · Operating systems and infrastructure maintenance · Rolling stock provision · Fare collection (which forms part of the operations contract, although farebox risk is retained by Greater Manchester Passenger Transport Executive (GMPTE). · Management of other contracts (e.g., for separate projects such as the Queens Road Depot expansion). The M-Pact Thales consortium has been selected to design and construct phase 3 of the Metrolink system. Bombardier will supply 32 new Flexity Swift LMRT vehicles, and Stagecoach will operate and maintain the system (having won both operation and maintenance contracts). Annex 1 209 Manchester Metrolink Continuation of General Summary Phase 1: September 1989 Contract award date(s) Phase 2: April 1997 Phase 3a: May 2008 Phase 3b: To be determined Phase 1: Concession (with a very small amount of private investment) Phase 2: Concession Type of contract Phase 3a, 3b: Operation and maintenance contract along with a separate design-build contract and other publically procured asset Phase 1: 15 years Contract duration Phase 2: 17 years Phase 3: (Operation and maintenance contracts) 10 years Phase 1: the GMA Group System operator Phase 2: Serco (part of the Altram consortium) Phase 3a: Stagecoach Phase 3b: To be determined Phase 1: Terminated Current status Phase 2: Terminated Phase 3a: Active Phase 3b: To be determined Greater Manchester Passenger Transport Authority (GMPTA): A planning and policy body Relevant public institutions representing 10 district councils in the Greater Manchester Area Greater Manchester Passenger Transport Executive (GMPTE): An independent entity that implements the policies of GMPTA. GMPTE owns the assets of the Manchester Metro- link Phase 1: the Altram consortium: John Liang (26.1%), Ansaldo Trasporti (26.1%), Private stakeholders Serco (26.1%) and 3i (21.7%) Phase 2: the GMA group: GEC, Mowlem, and AMEC Phase 3a: the M-pact Thales consortium: Thales, Laing O'Rourke, and GrantRail Phase 3b: To be determined Table A 1.3 Manchester Metrolink Noteworthy Contractual Elements Phase 1: Unknown Treatment of demand / Phase 2: The private concessionaire assumed all downside revenue risks and was obliged to revenue risks partially share upside with GMPTE above a certain threshold Phase 3a: GMPTE assumes all revenue risks but, Stagecoach is accountable for revenue security Allocation of other Unknown major risks Phase 3's funding and contractual structure aims at enhancing the system's flexibility to expand or increase capacity without requiring a large termination payment (as encountered during phase 2). Provisions for During phase 3a's tendering process, bidders were required to specify indicative prices for system expansion /extension expansion. These "option" prices are non binding but offer a reference for future negotiations. Mechanisms for dispute Unknown resolution As an added quality assurance mechanism, the design and construction contract for Metrolink's phase 3a expansion includes a period during which the design / build contractor will maintain Other new works. This feature also aims at synchronizing the procurement of Metrolink's maintenance services with the expiration of Stagecoach's current contract. Summary of Policy Elements Strategic Metropolitan GMPTA formulates transport policy for the greater Manchester area, that GMPTE then imple- Transport Planning ments. Metrolink's services form a major part of GMPTA's strategic planning efforts. (SMTP) Metrolink was originally proposed as a means of connecting Manchester's Victoria and Piccadilly Value proposition of stations to allow for easy integration between various regional train services. Additional phase 1 project Metrolink services cannibalized a legacy electric train system in need of replacement. Subsequent expansions have aimed at reducing automobile dependence and increasing urban development in previously unserved areas. Justification for PPP National government policies have prescribed and encouraged PPP. Value for money analysis approach performed after the Phase 2 concession has led to an alternate approach in phase 3 for incor- porating private sector participation. Annex 1 211 Table A 1.3 Manchester Metrolink Continuation of Summary of Policy Elements Robust demand for Metrolink services allowed the phase 2 operator to raise fares signi- Affordability / ficantly. Critics speculated that increased fares were an attempt to "price off" demand and equitability avoid additional rolling stock purchases. In contrast, GMPTA sought to maximize ridership. These conflicting objectives contributed to the concession's eventual termination. Metrolink operates within an environment of regulated competition with other modes, Other including private vehicles. Proposed congestion based road pricing will endeavor to make Metrolink's services even more competitive with private transportation. Technical Summary Phase 1 new works: 31 System length (km) Phase 2 new works: 6.4 Phase 3a new works: 22.5 km Phase 1 new stations: 26 Number of stations Phase 2 new stations: 10 Phase 3 new stations: unknown General characteristics Predominantly surface system with some underground and elevated segments. Approximately 75% of the Metrolink system is segregated from general traffic. Metrolink currently uses three different types of rolling stock. Phase 1 originally incor- Rolling stock porated stations from a legacy British Rail stations that had elevated platforms. All Metro- link stations and trams now accommodate this feature. · Metrolink does not incorporate any barriers or conductors · UK transit police have jurisdiction on Metrolink trains · CCTV cameras monitor system security · For phase 3, the operator employs ticket inspectors and is evaluated on system revenue security as one KPI Ticketing, barriers, Metrolink is an open system but passengers do not have the legal right to board Metrolink's and security trains without a ticket and must purchase them before boarding the train. A schedule of escalating fines serves to dissuade potential fare evaders according to the number of their offences within a 12 month period: · 1st offense: £10 on the spot or £15 within 21 days · 2nd offense: £20 on the spot or £30 within 21 days · 3rd offense: £40 on the spot or £60 within 21 days · 4th offense: £80 on the spot or proceed to prosecution Table A 1.3 Manchester Metrolink Metrolink's current phase 3 operator (Stagecoach) employs inspectors who check passenger tickets and issue citations. GMPTE, in turn analyzes the revenue security of the Metrolink system as a key performance indicator when judging Stagecoach's performance. While Stagecoach ultimately bears no revenue risks, this format gives incentive to reduce fare evasion. Metrolink succeeded in linking Victoria and Piccadilly stations as originally intended. Metrolink's Integration with current operator (Stagecoach) also operates a number of bus services in the Manchester area other modes helping to achieve integration. Accuracy of initial Phase 1 and 2 exceeded demand forecasts. Phase 3 is to be determined. forecasts Other - Financial Summary Phase 1: £145 million Approximate cost Phase 2: £160 million Phase 3a: £575 million (estimated) Approximate Phase 1: US$13 million / km cost (2008) / km Phase 2: US$47.4 million / km Phase 3: To be determined Phase 1 (£145 million): £15 million (10%) Borrowings from the European Investment Bank £48 million (33%) Department of Transport Section 56 Grant £13 million (9%) European Regional Development Fund £69 million (48%) Borrowings by GMPTA Sources of funding and Phase 2 (£160 million): financial structure £95 million (58%) Altram £12 million (7%) Developers £10 million (8%) European Regional Development Fund £26 million (16%) GMPTA cash contribution £17 million (11%) Borrowings by GMPTA Phase 3 (TBD): Funding for Phase 3b will be a key part of the GMPTE 2007 Transport Innovation Fund bid. This is closely linked with proposals for the introduction of road user congestion charging. Phase 3 will not incorporate any private capital Annex 1 213 Table A 1.3 Manchester Metrolink Continuation of Financial Summary Donor funding / European Investment Bank (phase 2) financing European Regional Development Fund (phases 1 and 2) Public support Upfront capital contributions in differing proportions for all phases in addition to in-kind grants Operational Summary Fares and fare structure Zone based, with day, multiday, or season ticket options Operator assessment Metrolink uses a Performance Management System with KPIs that focus on "what customers and incentive structure can see." A ratchet type system of punitive measures seeks to incentivize timely correction of lagging KPIs without jeopardizing the operator's solvency. Refurbishment and maintenance were bid evaluation criteria during phase 3 procurement. Key performance indicators from Manchester's phase 2 performance management system (e.g., runtime, noise levels, appearance, etc.) were intended to ensure appropriate maintenance and rehab without necessarily prescribing these things in the contract. Phase 3's performance management system goes slightly further and includes prescriptive minimum maintenance requirements. Other - Other Information Other - Table A 1.3 Manchester Metrolink Table A 1.4 DOCKLANDS LIGHT RAILWAY ­ LONDON, UNITED KINGDOM General Summary Dockland Light Railway (DLR) originally began as a publically procured £77 million feeder service project within an overall urban regeneration initiative for London's Docklands area. It was envisaged as a modern, innovative, and attractive system servicing low level developments, and initial ridership projections were based on this assumption. Demand for the DLR's services Discussion increased beyond original predictions in response the Canary Wharf high rise development. Planners decided to network extensions/upgrades on a PPP basis even before the DLR's first stage was fully complete. Docklands Light Railway Limited (DLR's public sector contracting authority) manages the system through a single O&M franchise and several de-layered" BOT infrastructure concessions for new lines/network extensions. Current Operations and Maintenance Franchise: 1997 Lewisham Extension Concession: 1993 (opened Nov. 1999) Contract award date(s) City Airport Extension Concession: February 2003 (opened Dec. 2005) Woolwich Arsenal Extension Concession: May 2005 (due to open last quarter 2009) Current Operations and Maintenance: Franchise agreement Lewisham Extension: Infrastructure only concession Type of contract City Airport Extension: 30 years Woolwich Arsenal Extension: 30 years Operations and Maintenance Franchise: 7 years with a 2-year extension option Lewisham Extension Concession: 24.5 years Contract duration City Airport Extension Concession: 30 years Woolwich Arsenal Extension Concession: 30 years System operator Serco Group Plc Operations and Maintenance Franchise: Active Lewisham Extension Concession: Active Current status City Airport Extension Concession: Active Annex 1 215 Table A 1.4 Docklands Light Railway Continuation of General Summary Woolwich Arsenal Extension Concession: Active Transport for London: Presides over all transportation services for which the mayor of London is responsible including: · London's Buses Relevant public · London underground system institutions: · Docklands Light Railway · London overground · Tramlink · London river services · Victoria coach station Docklands Light Railway Limited: Owns the assets of the Docklands Light Railway and functions as the system's contracting authority within Transport for London. Lewisham Extension Concession: John Mowlem, Hyder Investments, London Electricity, and Mitsui and Co. Private stakeholders City Airport Extension Concession: AMEC and the Royal Bank of Scotland Woolwich Arsenal Extension Concession: AMEC and RBS Noteworthy Contractual Elements The office of the mayor of London sets DLR tariffs through Transport for London. With the exception of the Lewisham concession, private partners do not take farebox risks as part of their base compensation. Serco's operating and maintenance franchise does, however, include the opportunity for additional upside depending on system use. Treatment of demand / revenue risks DLR's first concession (Lewisham) was the first transportation Private Finance Initiative (PFI) project in the United Kingdom. It was structured such that the concessionaire (City Greenwich Lewisham Rail plc) was paid an availability fee for the first 10 years and took farebox risk for the final 11 years of the concession period. Experience showed that this approach to risk allocation did not offer good value for money because the concessionaire, as infrastructure provider, was not involved in system operation; could not influence the quality of service and therefore not do anything to directly increase the ridership. Consequently, subsequent concessions are based entirely on an availability payment system. Allocation of other Both franchise and concession availability payments include RPI indexation. major risks Table A 1.4 Docklands Light Railway Using de-layered infrastructure concessions allows the DLR to easily extend the network and Provisions for expansion / add new lines by bidding out new concession contracts for infrastructure only. Operational extension responsibilities for the extensions are added to the scope of the existing franchise agreement. The franchise contract provides mechanisms for these extensions and also includes costs established with the franchise bid for operation of additional services on a marginal cost basis. Docklands Light Rail Limited (the system contracting authority under Transport for London) serves as an initial layer of dispute resolution between private partners. To aid in cooperation Mechanisms for dispute and communication efforts, private partners actually maintain offices adjacent to Dockland resolution Light Railway Ltd. Collocation helps to ensure close coordination among private partners and with the DLR's contracting authority. Major periodic infrastructure refurbishment (such as track renewal) is included within the scope of DLR's infrastructure concession contracts and so priced into the original bids. For new rolling stock purchases and major operational upgrades, Docklands Light Railway Limited pays the bulk of new capital / refurbishment costs. However, DLR's franchisee is required to contribute funds when improvements are mutually beneficial. Serco's operating and maintenance franchise agreement also specifies some minimum level of investment. Serco and Dockland's Light Railway Ltd. together agree on a plan for annual capital projects. This plan sets out those improvements Other that both the authority and the franchisee see as necessary for maintaining high service quality and keeping the DLR system operational. A pre-agreed formula within the franchise agreement determines what proportion of these costs DLR's private franchisee is obliged to cover. DLR's new concession agreements include "breakpoints" at various dates. As part of the bidding process, concessionaires were required to indicate the costs of "breaking" the contract at certain dates. These were 2013 and 2020 (which are possible end of franchise periods) in case DLR wished to do any consolidation. Pre-agreed costs at these dates provides the DLR's contrac-ting authority a basis for accurate decision making without having to enter into negotiations with little or no bargaining power. Annex 1 217 Table A 1.4 Docklands Light Railway Summary of Policy Elements It is unknown whether the DLR was part of a master transport plan, although it now resides Strategic Metropolitan within the larger Transport for London system. DLR was developed stage by stage, rather than Transport Planning as one huge project, which improved deliverability on a PFI basis. This approach also offered DLR (SMTP) the opportunity toopportunity to gain by experience each stage and refine the PFI/PPP model with each successive extension. The DLR is an example of transit oriented urban development. In addition to providing access to the Docklands area, the image of a modern and sophisticated rail system was seen as adding Value proposition of further value to redevelopment efforts. Light rail rolling stock incorporating articulated joints project also offered the ability to construct track with very tight corners ­ a requirement for servicing the Canary Wharf development. `Value for Money' analysis and national government policies in favor of or requiring private sector Justification for PPP participation/ private finance initiative (PSP/PFI) led to the DLR's current PPP arrangements. approach Sources suggest that much of the credit for early and on budget completion of DLR's various extensions belongs to the United Kingdom's PFI model. DLR's services never explicitly targeted any single group. Approximately 60-70% of the system's Affordability / current riders are commuters who work in the revitalized docklands area. Other riders include equitability local residents many of whom are lower income. Other - Technical Summary Original 1987 DLR: 13 Lewisham Extension: 4.2 System length (km) City Airport Extension: 4.4 Woolwich Arsenal Extension: 2.5 Original 1987 DLR: 15 Lewisham Extension: 5 new 2 reconstructed Number of stations City Airport Extension: 4 Woolwich Arsenal Extension: 1 Table A 1.4 Docklands Light Railway Original 1987 DLR: Elevated Lewisham Extension: Elevated, 800 m viaduct across Deptford Creek, bored tunnels under the General characteristics Thames City Airport Extension: Elevated Woolwich Arsenal Extension: Elevated with 1.8 km bored tunnels under the Thames DLR currently owns 94 trains/cars and is in the process of receiving 55 new trains ­ this contract was tendered to 5 bidders, but the current supplier (Bombardier) submitted the most attractive proposal. Cars are automatically guided allowing conductors to patrol passenger areas and ensuring revenue collection and assisting customers. Rolling stock DLR's rolling stock incorporates articulated joints which enable them to traverse track with very tight corners ­ a requirement for servicing the Canary Wharf development. At present, DLR uses a two car configuration but upgrades are currently underway for incorporating three cars in an effort to expand system capacity. · DLR has previously been an open system with no barriers. However, the new Woolwich extension will incorporate ticket gates this is the only DLR station with barriers. There are also barriers at the London Underground stations to which DLR connects ­ Bank, Stratford and Canning Town. Ticketing, barriers, and · DLR's current operation and maintenance franchise agreement requires Serco to security achieve greater than 97% farebox collection. · Ticketing is completely integrated with Transport for London's Underground and other systems. · British Transport police have jurisdiction on DLR trains and are paid jointly by the O&M franchisee and Docklands Light Railway Limited. DLR's initial route layout terminated some 300 meters from the nearest underground station presenting integration difficulties between transportation services. When planners proposed a Integration with other design-build extension to Bank underground station, property developers with interests in the modes Docklands area were willing to partly fund project costs in order to increase the attractiveness of their property ­ related investments. Accuracy of initial DLR's planners originally designed the system to carry 1,500 pphpd (this assumed the Docklands forecasts area would develop in a low rise fashion). The current system carries 15,000 pphpd. Future capacity will increase with further line extensions and the new three car system. Other - Annex 1 219 Table A 1.4 Docklands Light Railway Financial Summary Original 1987 DLR: £77 million Lewisham Extension: £220 million Approximate cost City Airport Extension: £140 million Woolwich Arsenal Extension: £180 million Original 1987 DLR: US$18.4 million Lewisham Extension: US$108.6 million Approximate City Airport Extension: US$60.9 million cost (2008) / km Woolwich Arsenal Extension: US$116.5 million Original 1987 DLR: Sources of funding and · 100 percent public ­ sources unknown financial structure · DoT30 million · RBS £178 million £4 million in equity Lewisham Extension: · £50 million central government contribution through the London Docklands Development Corporation · Private investment: o £165 million bonds o £4.5 million of mezzanine debt o £11 million of loan stock o £1.5 million of equity City Airport Extension: · Department of Transport grant of £30m · Private investment: o £178 million in debt o £4 million in equity Woolwich Arsenal Extension: · Private investment: o £100 million of senior debt from the European Investment Bank (EIB) o £150 million of senior debt and £24m equity bridge loan from commercial banks Donor funding / EIB helped finance the Woolwich concession through the concession company. financing The Lewisham concession benefitted from a sovereign guarantee on Docklands Light Railway Public support Limited's availability payment. Subsequent concessions have required only a guarantee from Transport for London. Table A 1.4 Docklands Light Railway Operational Summary Fares and fare structure The office of the mayor of London sets DLR fares through the system that Transport for London manages in accordance with the city's larger public transport objectives. Engineers from Docklands Light Railway Limited monitor the condition of physical assets in addition to service quality. All of the PPP contracts associated with the DLR use some form of penalty regime. For DLR's infrastructure concessions 1,000 performance points are allocated on weekdays (500 on weekends). A concessionaire's points affect compensation paid points deducted for non performance can lead to deductions in the availability payment. For par- ticularly important performance measures, failure can lead to a 100 percent deduction to the daily availability payment. Operator assessment DLR's operating and maintenance franchise uses a number of KPIs relating to service reliability, and incentive structure facilities availability and customer satisfaction (each with a target performance level). Where the private partner outperforms targets, bonuses apply. Conversely, penalties apply when targets are not met. Given high levels of satisfaction with private partners to date, DLR is considering provisions for guaranteeing certain levels of payment after a period of problem-free performance (this has already been implemented on the Woolwich Arsenal Concession contract - opened in the first quarter of 2009). This arrangement aims at reducing risk premiums assigned by private concessionaires during the concession bidding process. Other Information The Lewisham concession required a special parliamentary act. DLR's activities now fall under the Transport and Works Act, whereby powers to build the system follow on from a public inquiry Other process, subject to a government appointed inspector's agreement with submissions made in response to any objections. This process has become less burdensome since network extensions are now generally welcomed (improved public transport services, enhanced property prices, urban regeneration). Annex 1 221 Table A 1.4 Docklands Light Railway Table A 1.5 KUALA LUMPUR STAR AND PUTRA ­ MALAYSIA General Summary NOTE: Detailed information relating to the STAR and PUTRA concessions falls under Malaysia's Official Secrets Act (OSA) of 1972, which substantially limits public disclosure. The summary presented here represents the authors' best efforts to collect facts from a variety of non- official sources. While this particular case study does not include the level of detail shown in other cases, it does demonstrate several key lessons. Kuala Lumpur STAR began as an unsolicited proposal by a private developer (Taylor Woodrow / AEG Schienenfahrzeuge GmbH). The STAR system's original route took advantage of existing heavy rail rights of way that were unused. A build-operate-transfer (BOT) concession with a 60 year lease provided the contractual mechanism for private sector participation in the system's initial design, construction, operation and maintenance. STAR's sister system (PUTRA) was concessioned to Renong Bhd, a Malaysian conglomerate with significant experience with toll road concessions. Kuala Lumpur was home to roughly 1.2 million people when the STAR LRMT system (now renamed Ampang) began revenue operations in 1996. Since that time the city's population has expanded by more than one quarter, and the STAR system's ridership has approximately Discussion doubled. Even with this increase in ridership, STAR still operates at only approximately 60 percent of its original designed capacity. Despite lower than expected ridership, STAR expanded to serve the National Sports Complex in advance of the 1998 Commonwealth Games. STAR's sister system PUTRA has achieved greater ridership and currently operates near 140% capacity. Whereas STAR's original route layout followed an existing disused industrial rail line, PUTRA's route was intentionally designed to serve densely populated middle class neighborhoods where LRMT offered an attractive alternative over private automobile use. STAR and PUTRA's concessions ultimately failed because of disappointing revenues and large debt service requirements. Additional pressures from the Asian financial crisis of 1997 further destabilized the concession companies leading to an eventual government restructuring in 2002 when Syarikat Prasarana Negara Berhad (SNPB) (a public owned, national infrastructure holding company) purchased STAR and PUTRA's debts for approximately RM5.5 billion. Contract award date(s) STAR: November 1991 PUTRA: February 1993 STAR: Full concession Type of contract PUTRA: Full concession Table A 1.5 Kuala Lumpur Star and Putra STAR: 30 + 30 Contract duration PUTRA: 30 + 30 Initially: · STAR: Sistem Transit Aliran Ringan System operator: · PUTRA: Projek Usahasama Transit Ringan Automatik ­ a wholly owned subsidiary of Renong Bhd Currently: Rapid KL (a public company) Concession companies for both the STAR and PUTRA systems became insolvent and were Current status unable to repay debt. Assets from STAR and PUTRA were purchased by SNPB. Both concessions are now defunct. Syarikat Prasarana Negara Berhad (SPNB): A public owned, national infrastructure holding company under the Ministry of Finance. The Ministry of Transport: has jurisdiction over private vehicles and Kuala Lumpur's urban rail network Rapid KL: A wholly owned public company that currently operates the STAR and PUTRA lines Relevant public under the Ministry of Finance institutions The Ministry of Finance: oversees Rapid KL and owns the assets of both STAR and PUTRA in addition to Rapid KL's fleet of buses. The Ministry of Entrepreneur and Cooperative Development: oversees commercial vehicle licensing (i.e., buses) The Ministry of Works: oversees Malaysia's road network Local town councils: manages traffic control. STAR: · Taylor Woodrow / AEG Schienenfahzeuge GmbH (30%) · Malaysia's Employee's Provident Fund (20%) · Lembaga Urusandan Tabung Haji ­ a state administered Muslim pilgrims' fund (15%) Private stakeholders · Apfin Investment Pte Ltd ­ owned by the government of Singapore (5%) · American International Assurance Co. Ltd (10%) PUTRA: · Renong Bhd · Bombardier Discussion other - Other - Annex 1 223 Table A 1.5 Kuala Lumpur Star and Putra Noteworthy Contractual Elements Treatment of demand / Allocated entirely to private to concession companies revenue risks Allocation of other Unknown major risks Provisions for expansion / STAR expanded to serve the National Sports Complex in advance of the 1998 Commonwealth extension Games. As compensation to the private operator for servicing this low revenue route, Malaysian authorities also allowed expansion into densely populated, higher revenue neighborhoods. Mechanisms for dispute Unknown resolution Other - Summary of Policy Elements Strategic Metropolitan STAR and PUTRA were not part of a transport master plan. Neither of these systems benefited Transport Planning from rational transport planning or feasibility study/economic analysis. This was especially (SMTP) evident in the STAR system's route layout, which simply followed an abandoned industrial rail line. Kuala Lumpur still lacks a single public transportation authority as of 2008. Rail services sought to alleviate traffic congestion and pollution in Kuala Lumpur. In addition, the Value proposition of government also saw urban rail as a means for showcasing technological prowess in advance of project the 1998 Commonwealth Games. This was especially evident in the design of the PUTRA system, which was the world's longest automated, driverless urban rail system upon opening. Justification for PPP During the mid, 1980s and early 1990s, Malaysia had successfully concessioned a number of toll approach roads, and the national government was keen to further implement infrastructure projects on a BOT basis. Affordability / Unknown equitability Low cost, locally produced proton" cars, inexpensive parking, and subsidized fuel reduce the attractiveness of public transportation services for many Kuala Lumpur residents. The government has recently considered reductions in fuel subsides (estimated to have cost RM14 17 billion in 2005 alone) in an effort to rationalize pricing and balance budgets. Planners have also Other recently been considering congestion, based charges for private motor vehicles. In June 2005 the Malaysian government increased the price of petrol by 78 sen to RM2.70 per liter while increasing the price of diesel by RM 1 to RM2.58 per liter. That same month, Rapid KL saw a 3.9% increase in LRMT ridership along with a 7.5% increase in bus ridership. Table A 1.5 Kuala Lumpur Star and Putra Technical Summary System length (km) STAR: 27 (post extension) PUTRA: 29 STAR: 25 (post extension) Number of stations PUTRA: 24 STAR: Primarily at grade with approximately 9.4 km of elevated track, General characteristics eight elevated stations PUTRA: Primarily elevated with approximately 4.4. km of underground track STAR: Trains are relatively simple by LRMT standards and rely on drivers to operate manual controls. Rolling stock PUTRA: Sophisticated Bombardier driverless vehicles using linear induction motors allowed for high levels of automation. At opening, PUTRA was the longest automated LRMT system in the world. Recent system "glitches" have resulted in highly publicized disruptions. Ticketing, barriers, and Rapid KL has recently introduced "Touch'n Go" stored value ticketing throughout Rapid KL's security transportation network. Lack of coordination between ministries resulted (results) in incoherent transport planning which complicates network integration. For example, the Ministry of Transport previously granted 17 different bus licenses to private operators in KL who intended to compete with Rapid KL's (under the Ministry of Finance) subsidized bus routes. Rationalizing KL's bus service based Integration with other on a hub and spoke model proved difficult when these private bus operators stole ridership modes from major trunk lines. Integrating with other modes has also been historically challenging because of poor quality bus services. At one point during 2005, only 50 percent of the Rapid KL's buses were serviceable on any given day. When operating, fleet averaged 30 to 50 breakdowns per day. Recent attempts have aimed at improving integration with private transportation and have included designated "kiss and ride" drop-off lanes at several stations. STAR's original ridership projections were overly optimistic because of poor route alignment and problems integrating with other modes of transportation. Whereas 170,000 passengers per Accuracy of initial day were considered necessary for breaking even STAR initially averaged just 49,468. forecasts PUTRA's route alignment was better planned that that of the STAR system, yet initial ridership was still well below expectations. Approximately 40,188 passengers per day rode the system when phase 1 opened in 1998 ­ less than half the number predicted. Other - Annex 1 225 Table A 1.5 Kuala Lumpur Star and Putra Financial Summary STAR: RM3.5 billion Approximate cost PUTRA: RM5 billion Approximate STAR: US$45.5 billion cost (2008) / km PUTRA: US$60.7 billion Sources of funding and Unknown financial structure Donor funding / financing JEXIM (the Japan's export / import bank) While the Malaysian government issued no explicit guarantees on project debt, STAR did benefit from public support in a number of ways. One source suggests that STAR purchased land at very favorable rates while also enjoying an exemption from both import duties and local sales tax. As an added incentive, the project was also able to deduct 70% of its capital expenditures Public support from income taxes in, addition to normal depreciation allowances. Various credits would have rendered the project free of all taxes for approximately 15 years. STAR's initial capital structure also benefited substantially from generous public support. The Malaysian government also furnished an estimated one third of the project's debt through soft loans with concessionary interest rates. Operational Summary Fares and fare structure Unknown Operator assessment and NA incentive structure Other - Other Information Other - Table A 1.5 Kuala Lumpur Star and Putra Table A 1.6 GAUTRAIN RAPID RAIL LINK ­ NAUTENG PROVINCE, SOUTH AFRICA General Summary The idea of a rapid rail link between Pretoria and Johannesburg originally began with a prelimi- nary study sponsored though a twin city (sister city) partnership. This initial study recommen- ded rail as the preferred solution for traffic congestion along the N1/M1 highway corridor. Subsequent feasibility studies applied more rigorous analysis and considered possible road expansions in addition to bus rapid transit (BRT) and other less proven solutions. Eventually, Discussion planners chose rail over bus although this issue remains contentious to the present day. South Africa's Gautrain rapid rail project is currently the largest PPP initiative in South African History and involves an approximate project cost of ZAR20 billion (1.7 billion). The system will span 80 kilometers of track and include 10 passenger stations. Planners anticipate more than 100,000 passengers per day will ride Gautrain upon completion. Phase one of the Gautrain project linking Sandton to O.R. Tambo International Airport should enter service in time to transport passengers for the 2010 World Cup. Contract award date(s) September 2006 Type of contract Full concession Contract duration is 20 years (including construction) with no provisions for renewal. This dura- tion was chosen for several reasons including the following: · Government wanted the shortest contract duration possible because it assumed Contract duration downside revenue risks while splitting potential upside with the concessionaire. · Financial analysis showed that longer concession periods would not result in more favorable bid prices. System operator Régie Autonome des Transports Parisiens (RATP) Current status Under construction Gauteng Province: South Africa's geographically smallest, yet most populated province con- taining the Johannesburg, Tshwane and Ekurhuleni metropolitan areas. Relevant public Gautrain Management Agency: Gautrain's contracting authority under the Gauteng Provincial institutions Government. National Treasury PPP Unit: South Africa's national office in charge of overseeing all PPP agree- ments. Annex 1 227 Table A 1.6 Gautrain Rapid Rail Link Continuation of General Summary Murray and Roberts Ltd.: A major South African contracting and construction company Strategic Partners Group: The project's required Black Economic Empowerment (BEE) share- holding partner Bombardier UK: A major rolling stock supplier for numerous LRMT projects around the world Private stakeholders Bouygues Travaux Publics: A major French ``design and build'' contractor with extensive exper- tise in underground tunnel works. The J&J Group: An investment management and holding company Absa Group Limited: One of South Africa's largest financial services organizations (a subsidiary of Barclays Bank PLC). Other - Noteworthy Contractual Elements Government guarantees a minimum revenue level and also requires revenue sharing above a specified threshold established as follows: Gauteng province provided bidders with an estimate for system revenues throughout the concession's life. Bidders in turn specified two things in their proposals: 1. Their own expectations for system revenues. Treatment of demand / 2. The minimum required revenue level they needed to meet contractual obligations revenue risks and realize return on investment. The difference between minimum required revenues and a bidder's projected revenues set the basis for a minimum required government operating subsidy. Revenues above the specified minimum require sharing on a 50 / 50 basis between the concessionaire and the province. This methodology protects the concessionaire from downside revenue risks, while also offering incentives for maximizing system ridership. Allocation of other Payments to Gautrain's concessionaire include indexation major risks Provisions for expansion System extensions lead to a no-fault termination if the existing concessionaire does not win the / extension bid to extend. Mechanisms for dispute Unknown resolution Two consortiums ended up competing for the Gautrain concession. Keeping both bidders committed during the long bid / negotiation period required the province to reimburse 50% of approved bid costs. While this created disincentives to control costs, retaining two competing Other consortiums throughout the procurement process was essential for maintaining Gauteng province's negotiating power. The benefits (on a value for money basis) of a highly competitive bid process were seen by the province to far out-weigh the additional bid cost support. Table A 1.6 Gautrain Rapid Rail Link Summary of Policy Elements Gautrain was not originally part of a transport master plan. Indeed, the project's size and scope eventually galvanized transport planning efforts throughout Gauteng province. Planners fore- saw problems with integrating Gautrain to other transportation services early the project's Strategic Metropolitan development stages ­ there was a history of ``turf wars'' between the national Metrorail agency Transport Planning and the three principal cities and their independent bus transportation authorities. Public (SMTP) transportation is relatively unpopular in South Africa because of security concerns and generally poor perceptions. Accordingly, Gautrain's concession includes its own cobranded feeder and distribution bus service designed to provide door to door services. ``Park and ride / kiss and ride'' facilities also aim at integrating Gautrain with private vehicle transportation as well. Gautrain will endeavor to attract customers who would otherwise drive between Tshwane (Pretoria) or O.R. Tambo Airport and Johannesburg. Traffic congestion along South Africa's N1/ M1 highway corridor increased 7 percent each year between 1995 and 2005. Estimates value the ill effects of this increased congestion at ZAR300 million annually (26 million) when accounting Value proposition of for direct costs, lost work time and expenses related to increased accident rates. Commutes project along the 50 kilometer route between Tshwane and Johannesburg can average as long as two hours. By comparison, Gautrain's service should reduce travel times to a more manageable 42 minutes. The decision to use a PPP was originally decoupled from the decision to pursue the Gautrain project at all. Private sector participation eventually offered value for money on a public sector comparator (PSC) basis by transferring risks associated with integrating the system's complex design, construction, operational and maintenance obligations within one organizational structure (i.e., a concession company). Planners estimated that achieving similar outputs using Justification for PPP traditional public procurement would have required something on the order of 40 separate approach contracts. Coordinating between various contractors would have required significant public capacity and would have also required the Gauteng province to assume substantial risks beyond its current management capabilities. Gautrain specifically targets middle income customers who would otherwise use private trans- port (cars) to commute between Pretoria, O.R. Tambo Airport and Johannesburg. Affordability / Social objectives such as Black Economic Empowerment and developing small, medium and equitability micro enterprises (SMMEs) were factored into bid evaluations along with the concessionaire's subsequent procurement of subcontracted services. Gautrain required provincial legislative acts to allow Gauteng province to obtain necessary land Other required for the project and to create the Gautrain Management Agency. Annex 1 229 Table A 1.6 Gautrain Rapid Rail Link Technical Summary System length (km) 77 km Number of stations 10 · 100% segregated General characteristics · 14 km of underground track · 200 bridges / viaducts South Africa's own Union Carriage and Wagon has partnered with Bombardier to participate in constructing Gautrain's rolling stock. Final assembly of the 96 Electrostar vehicles for the Gautrain system will take place in Union Carriage and Wagon's facility near Johannesburg. Partially constructing rolling stock in South Africa was a bid requirement. Rolling stock Gautrain will run on 1,435 mm gauge track instead of RSA gauge 1,065 mm. Larger 1,435 mm gauge track is more commonly used around the world enhancing Gautrain's ability to access internationally produced rolling stock and components. Greater distance between rails also increases Gautrain's stability and ride comfort at higher speeds. Ticketing, barriers and Closed system security Planners foresaw problems integrating Gautrain with other transportation services early in the project's development stages, coordination between municipal governments, national agencies, and independent bus transportation authorities had historically been poor. Spatial planning in South Africa has also resulted in low population densities which would eventually limit Gautrain's walk-on ridership. Furthermore, market analysis showed that Gautrain's target customer group viewed existing public transportation as `a transport mode of last resort' Integration with other because of long travel times, poor timeliness, security concerns and generally bad perceptions. modes Together, these considerations suggested that simply integrating Gautrain with existing public transportation services would not compel significant conversion from private transportation. To avoid initial integration issues and to improve ridership demand, Gautrain's concession includes its own co-branded feeder / distribution bus service. The Bombela consortium (Gautrain's private concessionaire) will operate this network alongside rail services. A bus specific performance management system will help to ensure high quality bus links and will include key performance indicators (KPIs) emphasizing both safety and security. Selected Gautrain stations will also feature park and ride / kiss and ride facilities aimed at complementing private vehicle transportation and allowing customers to reduce personal vehicle use. Table A 1.6 Gautrain Rapid Rail Link Accuracy of initial forecasts To be determined Other - Financial Summary Approximate cost ZAR22.3 billion Approximate US$28.6 million cost (2008) / km Sources of funding and Approximately ZAR19.2 billion capital grant in addition to ZAR3,094 million private invest- financial structure ment (of which approximately 85% is debt) Donor funding / Strategic Partners Group raised its share of equity capital through funding from the Develop- financing ment Bank of South Africa and the Industrial Development Corporation. Gauteng province provides a substantial capital grant (roughly 87% - paid in Rand) in addition to a minimum revenue guarantee and in-kind grants. The minimum revenue guarantee includes an operating subsidy (described below). Setting the government's capital grant was relatively complex. Larger upfront government Public support contribution increased the project's financial viability because government's cost of capital benefited from a 250 basis point advantage relative to private financing. However, ensuring that the concessionaire took adequate amounts of risk required some minimum acceptable amount of private financing. Gautrain's contract also includes liquidated damages and penalties related to construction along with demanding milestone compliance arrangements to help protect the province's financial interests. Gauteng Province disburses its capital grant through milestone payments to the system's private concessionaire at each stage during the construction process in accordance with a pre- agreed completion schedule. Prior to a special legislative act, Gauteng's capital grants would Other have constituted taxable income for the concessionaire. The additional cost of these taxes would have otherwise been charged entirely back to Gauteng province in the form of higher bid prices. Many of the expenditures covered by Gautrain's capital grant were denominated in foreign currencies. Ensuring the project's financial viability therefore required some method to guard System length (km) against potentially destabilizing fluctuations in foreign exchange rates. Gautrain's concessionaire originally assumed foreign exchange risks during the project's construction period and passed associated hedging costs along to Gauteng Province as a Annex 1 component of capital grant payments made at project milestones. However, this structure 231 Table A 1.6 Gautrain Rapid Rail Link Continuation of Financial Summary resulted in unfavorable forward currency pricing when the concessionaire's bankers were not forced to compete on the forward rates they offered and took full advantage of the pass- through nature of the project's hedging costs. In response, South Africa's national government intervened and decided to take capital grant related foreign exchange risks back from the concessionaire during the construction period (effectively acting as a currency swap counter party to Gauteng Province). This eliminated additional cost associated with unfavorably priced currency hedges and also insulated the province from foreign exchange exposure on its capital grant payments. Operational Summary Gautrain's contractual arrangement provides mechanisms that allow for fare adjustments on specific links (i.e., trips between certain stations). Gautrain's concessionaire has a particularly large amount of freedom to adjust fares on Gautrain's link to O.R. Tambo Airport­a key revenue Fares and fare structure route that will effectively subsidize other parts of the system. Together with an agreement for sharing revenue upside above a preagreed threshold, this arrangement provides for additional value capture by incorporating greater private efficiencies and incentives to maximize both ridership and revenue. Beyond the standard KPIs associated with headway, availability, cleanliness, and so forth. Gautrain's performance management regime includes a strong emphasis on system security. Operator assessment This is critically important for attracting Gautrain's target market which has traditionally shown and incentive structure aversion to public transportation. Also, · The concessionaire must achieve or exceed 95% revenue collection · Gautrain's feeder bus network also has its own set of KPI's designed to guarantee good service Other - Other Information Initial assessments of Gautrain suggest that the project is meeting its objectives regarding eco- nomic development within Gauteng province. Official estimates maintain that the Gautrain project has contributed ZAR1.89 billion in the 2007/2008 fiscal year alone to qualified broad based black economic empowerment (BBBEE) and small medium and micro enterprises (SMME). Other In addition, the project has been credited with creating 29,400 direct, indirect and induced jobs between 2007 and 2008. According to the Gauteng provincial government, Gautrain construction alone should boosts the province's gross geographic product by R6 billion per annum. Gautrain also recently received the Gold Quill Award of Merit from the International Association of Business Communicators (IABC) for exemplary media relations and corporate communication. Table A 1.6 Gautrain Rapid Rail Link Table A 1.7 MRT 3 `METROSTAR EXPRESS' ­ MANILA, PHILIPPINES General Summary The Manila metropolitan area (also known as the National Capital Region) is home to approxima- tely 11.5 million people (about 13% of the Philippines' total population). Traffic congestion and air pollution are major detractors from quality of life and economic development in the Manila metropolitan region. Travel speeds in Manila average only 10 km/hr ­ among the slowest in major Asian cities. Together with bilateral and multilateral donors, the central government has Discussion implemented several initiatives aimed at improving public transportation including several rail based transportation systems. Beginning in the 1970's Manila began examining urban rail as an environmentally friendly solution to its traffic congestion problems. Manila's light rapid transit network consists of three separate systems: LRT1 (yellow line) MRT2 (purple line) and MRT3 (blue line). LRT1 began operation in 1984 followed by MRT3 in 1999 and MRT2 in 2003. Although each system uses rolling stock with light rail characteristics, their civil works and operating performance more closely resemble light metros. MRT3's route runs along Epifanio de los Santos Avenue (EDSA) ­ a major transportation artery in Manila. Contract award date(s) November 7, 1991 (later re-negotiated, amended and re-signed in 1993) Type of contract Concession with a leaseback feature to a public operator Contract duration 25 years System operator Department of Transportation and Communications (a public agency) Active ­ although the national government is currently working to buy back the concession to Current status save on future lease payments Annex 1 233 Table A 1.7 Manila MRT3 Continuation of General Summary The Light Rail Transit Authority (LRTA): a wholly owned government corporation responsible for design, construction, operation, maintenance or lease of MRT3's sister light rail lines. Department of Transportation and Communications (DoTC): MRT 3's contracting authority and Relevant public operator. institutions National Economic and Development Authority (NEDA): The Philippines' social and economic development planning and policy coordinating body. NEDA is a cabinet level agency headed by the President of the Country. Land Transportation Franchising and Regulatory Board (LTFRB): (under the DoTC) sets routes, regulates fares, and oversees licensing requirements for land based transportation services (including jeepney and taxis). Private stakeholders Eli Levin Enterprises and various other Filipino property developers Other - Noteworthy Contractual Elements Treatment of demand / 100% assumed by DoTC revenue risks DOTC assumed foreign exchange related risks on its payments to private investors. Throughout the project's implementation, DoTC engaged SYSTRA (a French consultancy) to supervise design / construction, manage utility relocation, train operating personnel, liaise with other government Allocation of other agencies, and assist DoTC during the system's first five years of operations. major risks MRTC was responsible for the design, construction, equipping, testing, and commissioning of the system, including the supply of rolling stock, signaling equipment, facilities, and spare parts. In addition, DoTC can increase or decrease MRTC's availability payment to accommodate system, capacity down to a lower threshold of 450,000 passengers per day. MRTC is guaranteed an availability payment based on this minimum threshold. Provisions for Unknown expansion / extension Mechanisms for dispute Unknown resolution Table A 1.7 Manila MRT3 In July 1990, the government of the Philippines passed Republic Act No. 6957 governing BOT concession agreements. This act authorized the country's public institutions to enter into contracts with private parties for the financing, design, construction, operation, and maintenance of financially viable infrastructure services through BOT or BT concession schemes. Other Later in 1993, the government passed Republic Act No. 7718 (known as the `Philippine BOT Law') which revised and expanded on provisions included within the original Act from 1990. The legality of MRT 3's concession contract with respect to RA 6957 was initially contentious but later reaffirmed by the passage of RA 7718 and by a Supreme Court ruling. Summary of Policy Elements Strategic Metropolitan The Manila Metropolitan Region encompasses 17 different local government units. Until 1995, Transport Planning when the Metropolitan Manila Development Authority was formed to transcend municipal (SMTP) boundaries, national government agencies sponsored only mode-specific plans and policies. Often little regard was given to integration and coordinated planning across agencies. Value proposition of MRT 3's route alignment follows Epifanio de los Santos Avenue and was intended to help allevia- project te traffic congestion and associated pollution along this major thoroughfare. MRT 3 began as an unsolicited private sector proposal from Eli Leven Enterprises. The pro- ject evolved in conjunction with the Philippine's new BOT legislation and was meant as a demonstration of the government's BOT capacity. Justification for PPP MRT 3's contract was eventually structured as a build-lease-transfer arrangement whereby the approach EDSA LRT consortium would finance, design, build and maintain the system and subsequently lease operations to the DOTC. This structure was chosen because EDSA LRT was legally forbidden from operating a public transportation service on account of foreign ownership. Fares for MRT 3's services range from P10 to P15 per trip ­ affordable to most income levels Affordability / but still greater than jeepney fares, which were approximately P8.50 in 2008 (plus additional equitability distance charges beyond 4 km). Other Various government agencies regulate competition between transportation modes. Annex 1 235 Table A 1.7 Manila MRT3 Technical Summary System length (km) 16.8 Number of stations 13 General characteristics Approximately 3/5 Elevated and 2/5 at grade with one underground station Rolling stock CKD Dopravni Systemy supplied rolling stock MRT 3 is a closed system that uses a distance dependent fare structure. In July of 2006, MRT 3 introduced an optional Radio Frequency Identification Device (RFID) based ticketing system Ticketing, barriers, and offered by Globe Telecom. This new "G-Pass" system automatically deducts fares when par- security ticipating customers pass under RFID sensors mounted on ticketing gates. G-pass does not currently work on Manila's LRT 1 and LRT 2 lines. Customer's purchasing a "Flash Pass" ticket and voucher package are able o take advantage of integrated ticketing across Manila's three mass transit rail lines (LRT 1, LRT 2 and MRT 3). However, Integration with other given the initial lack of coordinated transport planning across modes and jurisdictions, Manila's modes public transportation network has suffered substantially from poor integration between services. A recent loan and small grant from the World Bank has helped the government of the Philippines to finance infrastructure improvements aimed at improving transport integration throughout Manila. Accuracy of initial DOTC's own Urban Transport Development Project estimated MRT 3 passenger forecast forecasts volumes of about 626,000 passengers per day. As of 2008, average volumes are approximately 400,000 passengers per day. Other - Table A 1.7 Manila MRT3 Financial Summary Approximate cost US$655 million Approximate cost (2008) / km US$49.9 million Sources of funding and US$190 million equity, US$465 million debt financial structure Donor funding / Czech Import Export Bank financing DoTC paid all taxes except the concessionaire's income tax in addition to import duties. In addition, private investors were explicitly guaranteed a 15% return on equity. Planners originally estimated that the DoTC would cover payments to private partners using fare revenues. Public support However, lower than expected ridership combined with reduced fare levels has required substantial subsidy support from the national government. At times this support has been delayed, and DoTC has fallen into arrears on its payments. Operational Summary Fares and fare structure In July 2000, President Joseph Estrada directed the DoTC to reduce MRT 3 fares to P9.50 ­ P15 in celebration of MRT 3's full operational debut. This discount was originally intended to last 6 months. As of 2008 MRT 3's fares have not increased other than a rounding up of the minimum ticket price to P10. Operator assessment NA and incentive structure Other - Other Information Other - Annex 1 237 Table A 1.7 Manila MRT3 Table A 1.8 BANGKOK SKYTRAIN ­ THAILAND General Summary The city of Bangkok initially sought a segregated rapid transit system in response to extreme levels of traffic congestion. Limited physical space available at grade required that such a system would either be elevated or underground. Preliminary analysis concluded that an elevated network represented the `low' cost solution which eventually led to the Skytrain concept. Early proposals resembled a modest people mover. However, Bangkok's extraordinary levels of traffic congestion suggested that demand was sufficiently robust enough to support a larger more complex system. Discussion Debt and equity investors in the Skytrain project eventually suffered considerable losses when actual ridership figures fell well below preliminary estimates. Despite relatively high service quality, the Skytrain system failed to meet expectations for the following reasons: · The unreasonableness of initial ridership forecasts. · Adverse macroeconomic conditions that negatively impacted revenues, increased costs of borrowing and created other foreign exchange related problems. · Poor integration with other modes of transport. Many of these problems resulted from lack cooperation and coordination between government agencies that each ran different aspects of Bangkok's transportation network. Despite difficulties with Skytrain's concession arrangement, the system continues to deliver high quality public transportation services. Contract award date(s) April 1992 Full concession: civil works were structured on a build-transfer-operate (BTO) basis. Electrical Type of contract and mechanical works followed a build-operate-transfer (BOT) model. 30 years from the commencement of commercial operations. Bangkok Mass Transit System Contract duration Corporation Limited (BTSC) was required to make any request for extension at least 3 years before the existing concession contract expired System operator BTSC ­ initially a wholly owned subsidiary of the Tanayong Corporation. Current status Currently undergoing court supervised financial restructuring Table A 1.8 Bangkok Skytrain Bangkok Mass Transit System Corporation Limited (BTSC): a private corporation established to own the Skytrain concession. Relevant public Bangkok Metropolitan Authority (BMA): the city of Bangkok's contracting authority. BMA also institutions contributed land and rights of way to the Skytrain project. Ministry of Transport and Communications: exercised partial control over Bangkok's bus system through budgetary control over BMTA (the public bus company). Tanayong Public Company Ltd.: a major Thai real estate developer Private stakeholders Credit Suisse First Boston (CSFB): an international financial firm that eventually acquired both debt and equity investments in BTSC Other - Noteworthy Contractual Elements Treatment of demand / 100 percent allocated to BTSC revenue risks BTSC's concession contract provided automatic tariff indexation for normal levels of inflation in 5% increments. The following events would also trigger a full fare renegotiation: · Changes in inflation greater than +/-9% in one 12 month period · Fluctuation in exchange rate greater than +/-10% from the base case specified in the concession contract · Changes in the interest rate on BTSC's foreign debt by +/- 10% from the base case Allocation of other specified in the concession contract major risks · Changes in the interest rate on BTSC's Thai Bhatt denominated debt by +/- 10% from the base case specified in the concession contract · Substantial increases in electricity costs to BTSC · Major investments in excess of the originally agreed scope of work · Other exceptional events (e.g., force majeure, macroeconomic shocks, etc.) Prior to opening for revenue service, BTSC negotiated an increase to offset the impact of Asia's financial crisis. This negotiation also resulted in a distance based tariff regime instead of the flat rate system previously agreed. Skytrain's original contract granted BTSC a first right of refusal on system expansion although the legality of this clause was later questioned. Thai laws governing public procurement Provisions for expansion prescribed that all such major public infrastructure projects should be competitively bid, and / extension so removed scope for the negotiation of extensions with incumbents. These provisions were originally introduced in an effort to reduce corruption. BTSC actually sought to expand the system in an effort to aid debt repayment given that farebox ratios were sufficiently high. Annex 1 239 Table A 1.8 Bangkok Skytrain Continuation of Noteworthy Contractual Elements Skytrain's concession contract provided structure for dispute resolution through arbitration. As a first attempt, both BTSC and BMA would appoint arbitrators who would together attempt to Mechanisms for dispute reach resolution. In the event that was not possible, the arbitrators would subsequently appoint resolution a single ``umpire'' who would continue considering the dispute. Civil courts could intervene and appoint an umpire following a motion by either party if the arbitrators were unable to reach consensus. BTSC was contractually obliged to absorb costs associated with relocating public utilities up to Other a specified threshold amount. For its part, BMA was required to provide details and plans as to the location of such utilities. Summary of Policy Elements Strategic Metropolitan Skytrain was never part of a Strategic Metropolitan Transport Planning initiative. Problems with Transport Planning modal integration and difficulties coordinating between various public authorities may have (SMTP) been avoidable through some kind of coordinated planning effort. The Skytrain project aimed at providing relief from Bangkok's extraordinary levels of traffic Value proposition of congestion. Skytrain also offered considerable value by stimulating property development. project BTSC's original backers included Tanayong Public Company Ltd.­a major Thai real estate developer. Justification for PPP The decision to pursue a PPP was largely driven by Thai law which prescribed procurement approach methods and private sector involvement. International financial institutions (i.e., IFC and KfW) associated with the project also advocated a PPP approach. Affordability / Skytrain's tariffs remain affordable to most segments of Thai society. However, Bangkok's poor equitability often prefer buses, which cost substantially less. Other - Table A 1.8 Bangkok Skytrain Technical Summary System length (km) 23.5 Number of stations 23 General characteristics Elevated Siemens supplied electrical / mechanical systems in addition to Skytrain's rolling stock along Rolling stock with a short term (5 year) maintenance contract. Ticketing, barriers, and Skytrain is a closed system that requires passengers to purchase tickets before accessing the security station platform. Here lies one reason for the Skytrain concession's financial problems: Different government ministries were each planning / implementing transportation solutions in Bangkok with very little consideration given to integrating between systems. The Ministry of Transport exercised partial control over the city's bus system (through budgetary control over the bus company - Integration with other BMTA) while the State Railway of Thailand controlled its own projects including the Hopewell modes elevated railway. Coordinated planning between public entities was deficient or lacking entirely. Later in 2004 Bangkok's underground ``Blue Line'' opened with noticeably better integration between BMTA buses and rail services. Unlike the Skytrain project, the Blue Line was implemented under the Ministry of Transport. Original estimates predicted ridership in the neighborhood of 600,000 ­ 700,000 passengers Accuracy of initial per day. Initial ridership was approximately 150,000 passengers per day . Over time, ridership forecasts has grown to approximately 460,000 passengers per weekday in 2008 but has yet to reach levels initially predicted. Other - Annex 1 241 Table A 1.8 Bangkok Skytrain Financial Summary Approximate cost B54 billion Approximate US$79.7 million cost (2008) / km Sources of funding and 100% financed by commercial banks and development institutions. Exact amounts and financial structure proportions are not public information. Donor funding / IFC made both equity and debt investments. KfW ­ debt only. financing BMA originally supplied land to the Skytrain project along with rights of way. BTSC was exempted from selected import duties, corporate taxes (for eight years) and taxes on dividends Public support (for eight years). Any goodwill copyrights or other rights were also excluded from tax for a five year period. Operational Summary Skytrain's fares were priced below the cost of a taxi (for a single person), but above the cost of other public transportation services (i.e., buses). Lack of fare integration between modes had a Fares and fare structure negative impact on BTSC's ridership. Under the terms of the concession contract, BTSC required BMA's approval before adjusting system fares. The system's current fare structure is zone based with options for monthly passes. Student discounts are also available. KPI's were largely service related with additional emphasis on environmental factors (specific Operator assessment KPI examples include noise levels and service frequencies). This never became a contentious and incentive structure issue for the Skytrain project. Most assessments indicate that the system delivered high quality service even when actual ridership levels were well below predictions. Other - Other Information Special thanks to Vannee K. Dalla and Chalida Charansuk for lending their expertise regarding Other the Bangkok Skytrain. Table A 1.8 Bangkok Skytrain Table A 1.9 CANADA LINE ­ VANCOUVER, CANADA General Summary Canada Line will be a 19 km automated light metro implemented through a 35-year design- finance-build-operate-maintain concession signed in July 2005 with the ``In Transit BC'' con- sortium (led by SNC Lavalin). While the project is not the first PPP in Canada, it is among the first within the province of British Columbia. At its northern terminus, Canada Line will integrate with Vancouver's Skytrain LRT system, West Coast Express commuter rail service, bus services, Seabus (marine transit), and cruise ship terminal. An additional spur line will also provide services to YVR Airport. The Vancouver International Airport Authority has contributed towards the project's upfront capital costs in order to make this connection possible. Discussion Canada Line is part of a larger public transport strategy developed by the South Coast British Columbia Transportation Authority (TransLink). This strategy aims at: · Reducing greenhouse gas emissions · Increasing the use of non-motorized transport · Using the region's transportation network as a tool for promoting economic development · Promoting the densification of jobs and housing along frequently used transit routes Planners estimate that Canada Line will begin revenue services in November 2009 ­ in time for the 2010 Winter Olympic games in Vancouver. Although the Canada Line was not part of Vancouver's bid for the 2010 Games, the project's construction schedule was partially driven by the Games. Contract award date(s) July 2005 Type of contract Full concession Contract duration 35 years (including construction) System operator InTransit BC (SNC-Lavalin) Current status Preparing to open for revenue operations in late 2009 Annex 1 243 Table A 1.9 Canada Line Continuation of General Summary The Greater Vancouver Regional District (GRVD): one division of a cooperative planning body representing 22 communities of the Vancouver Metropolitan Region. The South Coast British Columbia Transportation Authority (TransLink): the greater Relevant public Vancouver Metropolitan Region's transportation authority responsible for planning, financing, institutions implementing and operating an integrated transport system. TransLink is required to consult with GVRD and derives its legal authority from the provincial government. The Greater Vancouver Airport Authority (GVAA): the organization responsible for managing YVR airport. GVAA has no shareholders and reinvests all profits in airport development / service improvement. GVAA granted capital to the Canada Line project to partially fund the system's linkage to YVR airport. InTransit BC owned by · SNC-Lavalin Private stakeholders · Investment Management Corporation of BC (IMBC) · Caisse de Dépôt et Placements du Québec Other - Noteworthy Contractual Elements Canada Line's contract ties 10% of the concessionaire's payment to the system's customer volume. Calculating this volume payment involves: · A base forecasted credit ridership estimate (excluding `airport only' ridership) · An agreed base volume payment · An agreed shadow fare per paying customer During the system's operating phase this information determines three possible payment Treatment of demand / scenarios as follows: revenue risks · If ridership equals forecasts, the concessionaire receives the base volume payment · If ridership exceeds forecasts, the concessionaire receives the base volume payment plus the difference between actual and forecasted ridership multiplied by the agreed shadow fare · If ridership falls below forecasts, the concessionaire receives the base volume payment minus the difference between forecasted and actual ridership multiplied by the agreed shadow fare Table A 1.9 Canada Line Independent consultants (Halcrow) prepared Canada Line's initial ridership study that forms a basis for the system's base credit ridership estimate. However, Canada Line's contract specifies automatic revisions to this forecast at the commencement of services, two years after service commencement, and every five years thereafter. In addition, both TransLink and the con- cessionaire can trigger a forecast reassessment if any of the following events occur: · The system's service plan changes · Planners expand services by adding stations along the existing route · Bus services change · Changes occur in the region's Traffic Demand Management initiatives (e.g., changes in road pricing or tolls) · TransLink increases fares more than 5% (in real terms) over the average fare during the 5 years prior · Changes in the system's fare structure · Average morning peak hour ridership during a three month period exceeds a certain level near the system's maximum designed capacity · TransLink owns Canada Line's the fixed assets (line, stations, etc.) · InTransit BC owns nonfixed assets (vehicles, signaling, etc.), builds, operates and maintains the system ­ accepting the majority of associated risks During Canada Line's procurement, bidders assumed all risks associated with price fluctuations except for items included in the project's early works contract, which allowed for construction progress between commercial close and financial close. TransLink provided full protection and Allocation of other 100% reimbursement for early works in the event that financial close was not possible. major risks Other noteworthy elements of Canada Line's risk allocation structure include the following: Inflation during the construction period: Capital grant payments were specified as pre- agreed milestone payments during the construction period (based on nominal dollar values as negotiated at financial close). The concessionaire endures the risk of higher inflation during the construction period in addition to any effects related to delays in reaching agreed construction milestones. Annex 1 245 Table A 1.9 Canada Line Continuation of Noteworthy Contractual Elements Inflation during the operating period: base payments for the operating period (roughly 70% of the concessionaire's compensation) are specified in real dollars for later inflationary adjustment based on an agreed formula as follows: · Some fraction of base payments attributable to direct operating costs (40% before June 30, 2035, and 55% after) will adjust based on the Consumer Price Index (CPI), Electric Index, and Labour Index. · The balance of the base payments not attributed to direct operating costs will adjust as follows: o 50% adjusts at a fixed 2.1% per annum o 50% adjusts with the CPI Planners estimated that system extension was highly improbable and not part of TransLink's Provisions for expansion / long term strategic transportation plan. Therefore, Canada Line's contract does not include a extension mechanism for accommodating this. However, stations and platforms have been designed to accommodate future system capacity expansion. Mechanisms for dispute Amicable negotiations followed by arbitration and possibly litigation. resolution Other - Summary of Policy Elements Canada Line is part of TransLink's larger public transportation plan that aligns with the policies of the Greater Vancouver Regional District (GVRD). In 1996 GVRD established a Livable Region Strategic Plan (LRSP) containing objectives to: · Protect the ``Green Zone'' (agricultural lands and parks) Strategic Metropolitan · Build complete communities Transport Planning · Achieve a compact metropolitan region; (SMTP) · Increase transportation choices In 1993 GVRD adopted the `Transport 2021 Long Range Transportation Plan' that identified three corridors for upgrading to "intermediate capacity transit systems." Value proposition of The Canada Line project represents an effort to realize the policy goals of the greater Vancouver project region as discussed above. Table A 1.9 Canada Line The provincial government has a policy that every publicly-funded project over Can$20 million Justification for PPP must be considered as a possible PPP. This policy involves, Partnerships British Columbia, a approach company responsible for bringing together ministries, agencies and the private sector to develop projects on a PPP basis. Partnerships BC is registered under the Business Corporations Act and is wholly owned by the province of British Columbia (reporting to the Minister of Finance). Affordability / equitability Unknown Other - Technical Summary System length (km) 19 Number of stations 16 · Three Water Crossings (2 bridges and 1 tunnel) · 7.5 km (40.5%) elevated General characteristics · 6.5 km (35%) cut and cover tunnel · 2.5 km (13.5%) bored tunnel · 2.0 km (11%) at grade There is no explicit obligation on the concessionaire to develop a replenishment fund or to replace rolling stock after a prescribed period. Refurbishment is not specified explicitly. Rolling stock Contractual terms seek to force concessionaire behavior with respect to system upgrade, maintenance, and upgrade. The system's PMS system will incentivize refurbishment after an appropriate interval through KPIs designed to measure service quality. · Canada Line will initially be an open system. · TransLink is responsible for revenue collection and revenue security. In addition, TransLink will supply a special transit police unit to patrol Canada Line's trains and stations. Ticketing, barriers, and · The concessionaire is not evaluated based on revenue security but is required to assist security with fare checking / fare compliance. · Ticketing is fully integrated with Vancouver's existing integrated transit system, including the Skytrain LRT, West Coast Express commuter rail, TransLink bus network, and Sea Bus (marine transit) services. · Canada Line stations are designed to readily accommodate fare gates / barriers at some future date. Annex 1 247 Table A 1.9 Canada Line Continuation of Technical Summary TransLink will provide feeder / distribution bus linkages with Canada Line's stations. There are three significant bus exchanges being constructed at key Canada Line stations as part of these integration efforts. The Canada Line project also includes a 1200 stall park and ride facility at Bridgeport Station to divert personal vehicle traffic before crossing the Fraser River. All Canada Line stations outside of downtown Vancouver also include kiss and ride facilities along bicycle lockers. Canada Line also includes a spur linkage connecting the system's main trunk route with Integration with other Vancouver International Airport (YVR). Three Canada Line stations will provide services on modes airport lands. Travel between these three stations is free as part of an agreement with the Vancouver International Airport Authority (VIAA). VIAA contributed a substantial capital grant (Can$ 245 million) to the Canada Line project and accordingly will use these free services to shuttle airport customers / employees between the main airport terminal, long term parking lots, future rental car facilities, and other airport support businesses located near YVR's Canada Line stations. TransLink plans to derive benefits from increased pricing power provided by Canada Line's airport linkage. Customers will pay a premium fare for traveling to YVR from stations not on airport land. Canada Line's linkages with the Vancouver Skytrain and West Coast Express rail services will also help the system attract airport commuters from a relatively large geographic area. Accuracy of initial To be determined forecasts Other - Table A 1.9 Canada Line Operational Summary Fares and fare TransLink will set Canada Line's fares. While the system's exact fare structure is being worked structure out, TransLink does plan to charge a premium for passengers traveling to YVR airport. Canada Line will employ a full performance management system to provide incentives for service availability and quality. The current structure envisages availability payments to be done Operator assessment against performance KPIs. Accordingly, remuneration to the concessionaire is done as follows: and incentive 70% for availability and quantity of service, 20% against quality (e.g., cleanliness, graffiti, etc.) and structure 10% is payable as a percentage of achieved ridership (measured through automated passenger counters) against forecast ridership. The last payment constitutes a provision for a bonus / penalty for the concessionaire to encourage the promotion of higher ridership. TransLink and the concessionaire will agree to a list of KPIs at some future date. Other - Other Information Other - Annex 1 249 Table A 1.9 Canada Line ANNEX 2 TARGETING THE URBAN POOR AND ACCESS FOR ALL A 2 TARGETING THE URBAN POOR AND ACCESS FOR ALL LRMT's potential for serving the urban poor should not be discounted despite the number of systems aimed at middle class populations (intentionally or otherwise). Latin America's experience with rail transportation in general has shown that lower income riders constitute the majority of rail system customers in certain instances. Table A2.1 shows the percentage of users below city/regional average income levels for selected rail transportation systems in Brazil. Table A 2.1: Below Average Income Rail Customers in Brazil Percentage of customers Rail System (year of sample data) below city (region average) Recife suburban rail (1997) 55.7 São Paulo Metro (1997) 57.4 São Paulo Train (1997) 80.4 Rio de Janeiro suburban rail (1996) 85.5 Belo Horizonte (1995) 55.6 Source: Gwilliam (2002) Experience from Brazil illustrates that the income distribution of rail transportation customers is not a miraculous occurren- ce. Decisions made during planning and subsequent operation will determine which income groups are most likely to benefit from a project's services. Factors that influence an LRMT system's socioeconomic customer characteristics include · Fare levels · Station locations and route map · Extent and reach of any "feeder" transportation networks · System security and safety · Locations of transfer points · Operating hours and overall availability · Integration and connection with other modes of transport · Accommodation of non-motorized transport (i.e., bicycles) A 2.1 Targeting low income customers A co-financed World Bank / UK Department for International Development (DfID) study led by consultants at Halcrow Fox, identified four broad approaches for targeting low transportation customers includingthe following: · Individual targeting: this requires some method for identifying poor passengers such as Brazil's ``vale transporte'' scheme. While individual targeting is the most efficient way to allocate subsidies, identifying poor customers is often challenging if not impossible on account of limited identification mechanisms. · Targeting selected groups: discounting fares for identifiable groups that tend to be lower income can direct subsidies towards poor customers. For example, group targeting could focus on groups such as students or the elderly, where commonly carried pieces of identification offer a means for verifying eligible customers. This methodology may suffer from subsidy misallocation when substantial numbers of numbers of middle and higher income customers belong to target groups. · Geographic targeting: Aligning transportation routes and stations to serve poor neighborhoods is an effective way to target poor customers. Discounted fares along specific linkages can also ensure that services are affordable. Similarly, flat fares (i.e.,fares that do not depend on distance) can also offer a means for allocating subsidy when poor populations generally reside on the outskirts of urban areas. · General targeting for all public transportation services: this involves a general subsidy for all public transportation customers based on the assumption that anyone riding public transportation is poor. This is the least efficient means for allocating subsidy and may require the greatest amounts of public support. Targeting LRMT services and subsidies towards poor populations can be an intelligent strategy for reducing poverty and increasing development. However, planners should also consider the opportunity costs of funds used for this purpose. It may be that poor customers would benefit more if transport subsidies were instead allocated towards some other form of assistance. Contractual arrangements for LRMT PPPs should also accommodate policy decisions for subsidizing transport without affecting private compensation. Later sections will discuss this in greater detail. A 2.2 Ensuring Access for All Planners, Developers and policy makers have a moral obligation to ensure that persons with disabilities enjoy good access to LRMT services. Public-private partnership agreements in LRMT should recognize this fact and included provisions addressing basic accessibility features including: · Lift access to underground or elevated structures · Designated drop-off points with ample room for specialized vehicles · Ramps where appropriate · Accessible lavatory facilities · Directional signage · Tactile guidance systems · Wider fare gates for accommodating wheelchairs (also helpful to passengers carrying baggage or parcels) · Generally barrier free facilities · Appropriately designed gaps between platforms and rolling stock Ensuring good access also includes working to improve transport services that integrate with LRMT. For example, feeder networks should include low floor buses with extendable ramps or raised boarding platforms at bus stops. Providing good access to disabled customers requires important consideration when evaluating proposals and crafting PPP specifications for new LRMT services. Failing to properly incorporate such considerations can result in substandard facilities or large retrofitt- ing expenditures later on. Annex 2 253 ANNEX 3 ANALYTIC AND ADVISORY WORK A 3 ANALYTIC AND ADVISORY WORK Designing and implementing an arrangement requires economic, financial, technical, as well as legal expertise, as well as the coordination of that expertise. Detailed work is needed to refine the option to be implemented and the legal measures to support it, and to prepare complex documents, such as laws, bidding documents, and draft contracts. Governments or municipalities usually lack the full range of expertise within the civil service to carry out these tasks and so will need advisers to provide some of these skills and specialized expertise. Management of transactions of major LRMT schemes with private sector involvement need a specialist management ex- pertise that is generally not found within the public contracting organization, and it is likely that transaction advisory support from specialist advisers will be needed to help lead the whole process. There will be times when more or less work is needed, and the appropriate combination of advisers will always depend on the particular circumstances. The costs of advice always need to be weighed against benefits. A 3.1.1 Sector Strategy An established and comprehensive transport sector strategy is a major help in establishing policies for development of LRMT projects. If the transport sector strategy has not already been established, advice on sector strategy involves judgments on issues such as the tradeoffs between various transport forms (including LRMT), economies of scale, and the responsibili- ties of, and relationships between, various institutions and levels of government. Advice on sector strategy will typically be led by economists or others with experience in the transport sector and experience with institutional analysis. The lead advisers will need input from specialists who can advise on technical, financial, and legal possibilities and constraints on the various transport forms, particularly with the role of LRMT in the sector, and from social researchers to understand the local situation. A 3.1.2 Technical Issues We are looking principally at the work specifically associated with establishing the PPP arrangement. However, this approach takes as a starting point that there is the development of a strong and robust physical and technically effective LRMT system. Each project has its own mix of technical and operational elements, and the level of use of consultants for development of the physical infrastructure and technical systems will depend on the need for support required by the contracting authority. However, since these schemes are typically complex, the issue of coordination and management of these advisers is key. The work of these advisers (e.g., on costing and operational issues, for instance), feeds directly into the tasks of the other advisers and the decision makers establishing the PPP arrangement. A 3.1.3 Setting Service Standards, Tariffs, and Subsidies Traffic specialists will usually be needed to determine the level of service currently being received, the services people want, and people's willingness to pay for them. Researchers may also consult with riders and organizations that represent them. Economists and traffic specialists are typically needed to develop demand forecasts from surveys and consultations. These forecasts should take into account the sensitivity of demand to price. Technical engineering consultants may estimate the cost of achieving service standards in areas such as headway and punctuality, as well as other issues such as environmental levels. This will feed into developing reasonable performance targets and methods for measuring performance. Most private developers will also wish to conduct their own technical due diligence to draw their own conclusions, as this area is one that will have direct impact on future operational and commercial success. The demand forecasts and the results produced by the technical consultants will be inputs for the financial consultants. The technical consultants' assessment of the assets' physical condition, judgment on the assets' remaining useful life, renewal and maintenance of rolling stock and equipment, and an estimate of the capital expenditure required to construct new works, as well as to meet performance criteria, will all be inputs to the financial model. This will also have a direct involvement in developing the investment plan. The technical consultants' estimate of the human resources or levels of automation required to provide safe, efficient service will feed into the analysis of the likely staffing costs and any retrenchment compensation. These results will also go to the team that consults with workers and their unions. The financial advisers will assist the government in determining the tradeoffs between tariffs, subsidies, and other financial variables. This analysis entails developing a financial model and discussing with the government the policy assumptions that should be included in the model. The model will be used to test the viability of the proposed service objectives and their impact on the tariff. To do this effectively, the model needs to incorporate the demand forecast and the investment plan. Economists will likely be involved again in advising on tariff structure and subsidy arrangements to balance the objectives of efficiency, cost recovery, and social acceptability. A 3.1.4 Risk Analysis and Design of the Arrangements Ideally, all disciplines will be involved in the risk analysis. This may be led by the transaction adviser, or coordinated by the financial experts, especially if risks are estimated in a quantifiable way using a financial model. Based on the risk analysis and the other analytic work, the outline of the arrangements will be developed. As the issues to be covered by any risk analysis and the LRMT PPP arrangement are such an extremely important part of the arrangement design and implementation, refer to chapter 4 for these issues. Lawyers are then needed to turn the outlines or drafting instructions into a complete, legally binding regime. We give a more detailed review of the development of the contractual arrangements for LRMT PPP schemes in chapter 7. Good lawyers will focus on making the intended risk allocation legally effective and developing an arrangement that minimizes future disputes. Annex 3 257 A 3.2 Coordinating Advice and Packaging Advisory Contracts Coordinating the advisory work described above is a difficult task. Tight integration of all the elements and interaction bet- ween various disciplines are needed to produce a coherent package. The government needs someone with an overarching view of all the advisory and analytic work who is responsible for managing and coordinating the advisory work. This person may be a strong and experienced member of the government. But often the government will need to hire an external transaction adviser with the experience and capacity to manage all elements of the design and implementation. Transaction advisers traditionally have a financial background, but this is not essential. More important is that the chosen adviser has the following attributes: · The ability to understand how the work of the various specialists from different disciplines fits together · Strong communication skills, to understand what government and other stakeholders want, communicate the options to them effectively, and help them make informed choices · Knowledge and understanding of the potential developers and financiers, their objectives, and their constraints · Strong planning and management capabilities to keep a complex, commercially, and socially sensitive process moving forward in a controlled way How advisers are coordinated depends largely on how the contracts under which they are hired are structured. One option is to hire a single consortium of firms with the requisite economic, technical, consultative, financial, and legal skills, to be led by the transaction manager. Another option is to procure the technical, legal, financial, economic, and other inputs under separate contracts. There are intermediate options, such as packaging some but not all components of the required advice or hiring a single lead adviser to assist the government in hiring other specialists or advisers for particular tasks. Hiring different advisers for different areas may make it easier for the government to get the best advice in each area, but this should be done only if the government can coordinate all the specialists effectively. If the government's reform unit lacks capacity and experience, it will probably want to hire a transaction adviser to coordinate the work. Key areas of coordination include the following: · Between technical and financial plans--the specification of service standards and the investment plans necessary to achieve them are a key determinant of costs, and thus tariffs, subsidies, and financing structures · Between mechanisms for setting tariffs including the role of any regulatory agency, and the allocation of risk, since the two are closely connected · Between economic and financial plans--design of tariffs and subsidies should reflect social and environmental goals, as well as provide for cost recovery Another coordination question is whether a single adviser should be hired to help in all stages of the transaction or whether different advisers should be brought in at different points. Some firms that are good at designing policy are not good at managing transactions, and vice versa. One common approach has been to employ one or more sets of advisers to develop policy and options for private participation with a separate transaction manager to implement the transaction. This approach allows the transaction manager to be paid a success fee, without the government needing to worry about whether the success fee would bias the advice given on policy or the best option for private participation. A disadvantage of employing different advisers at different stages is that much of the work done in the early stages can be lost in the transition to a new adviser. In practice, the knowledge and understanding gained earlier in the transaction can seldom be fully embodied in the adviser's reports. More important, the success of the transaction depends on policy choices. Advisers who are not responsible for the final outcome may not pay sufficient attention to the requirements of bidders, reducing the usefulness of their advice. Annex 3 259 ANNEX 4 SAMPLE LRMT RISK MATRIX Table A 4.1 Risk Description Proposed Allocation 1. Design and Construction Network expansion Risk of inadequate design and thus options need full To grantor assessment e.g., incorporation of underused heavy rail lines into new LRMT systems needs to be assessed carefully Inadequacy of local standards Risk that existing local standards are inadequate for an LRMT To grantor but to be discussed as it will affect concessionaire to be applied to LRMT scheme thus need to identify differences between local standards and current best international practice Third party / relevant Risk that the proposed design developed is not approved To be discussed, this is a key risk that needs to be evaluated authorities approval risk by the relevant authorities within a larger framework of bid submission and bid evaluation Design risk Risk of error in design that leads to failure of project to satisfy To concessionaire - Intention is to use an output specification, requirements / law therefore whole of design risk can be transferred Design risk related to extension The wide range and dissimilarity of each tramway means that To be discussed of tramway bidders, irrespective of the procurement method, have had to consider anew the implications of each tramway separately Fitness for purpose This process adds to the set-up costs of each scheme for both To developer public and private sectors and in itself adds an element of risk Design fault Risk that the design proposed is not fit for purpose To developer Latent defect in design Risk that a fault in design is found after design has been To developer. The design will be left to the concessionaire approved by relevant authorities, creating delays or additional and the grantor will only provide approval to the design costs presented by the developer Design life expectancy Risk that a latent defect is discovered later in the life To developer of the project Consistency of design Risk that the design proposed is not adequate for the Shared with urban surroundings duration of the project Permits and access Risk that the major implications on architectural and To grantor (and a blanket permit to be provided urban design are not well understood as a condition of effectiveness to contract) Redirection of utilities and network Risk that permits from city, municipality or borough To be discussed depending on the complexity of the tasks are not granted Delay / increase costs due to change Risk that utilities network are not located where To grantor in design required by Grantor they are supposed to be, or that their relocations are more costly or time consuming than what is required Change in design due to legislative. Risk that grantor require changes in design that are not To grantor, the concessionaire cannot protect itself against Regulatory changes warranted by the initial specification proposed and / or by this type of risk the existing legislations / process A change in law / regulation leads to a requirement to change the design and increase costs and or delays Increased design costs Risk that the full design costs increased as the project is being To developer developed, because of bad initial estimate of the design cost Risk Description Proposed Allocation 1. Design and Construction Change in design required Risk that a change in design will lead to delay / increase To developer by concessionaire costs because of a change required by the concessionaire Change in law / regulation Risk that a change in law / regulation during construction To grantor during construction will lead to delay in construction or additional costs Land acquisition Acquisition of right to use the land (over and below ground) To grantor ­ benefit from expropriation rights at law and asks to construct the tunnel grantor to manage the complexity of rights to site under the river Access to land and site Access to land with rights to build and operate project To grantor ­ benefit from expropriation rights at law and asks grantor to manage the complexity of rights to site under the river Site / ground conditions Site ground conditions might lead to increase in costs To developer ­ as long as the site ground conditions are properly (except sub surface conditions or delays in construction time. This is different from documented, the developer should be able to bear the risk that and man made artifact) subsurface risk and risk of discovery of man made artifact the site ground conditions are likely to lead to increased costs (see below) or delay in construction Subsurface risk Risk that subsurface conditions are different than To grantor ­ it would be expensive for each bidder and inefficient those anticipated to conduct its own survey, and therefore to assess what are the subsurface conditions. Therefore the risk should be borne by the grantor to the extent subsurface conditions are different than those indicated in the geological surveys performed by the grantor Man-made artifacts The risk that the discovery of man-made objects during To grantor ­ to the extent discovery was not foreseeable. construction requires special treatment to remove This is a typical risk allocation, each bidder cannot know them, introducing delay in time and increased costs in advance whether (say) archeological artifact of importance could be discovered, and if so how the grantor / government would want to deal with them Increase in construction costs Price of labor, materials and other elements To developer ­ able to manage in this risk through due to contractor of construction cost construction contract Time overruns due to contractor Risk of delay in construction related to contractor To developer ­ general risk of delay, to be transferred error or external influences to construction contractor, subject to below Latent defect in existing work In the event of existing works, risk that such works might To grantor contain latent defect that might affect the quality and extent of work needed to be undertaken by the developer Site safety Risk that accidents happen on site because of poor To developer safety procedures Industrial action Risk of strike by construction companies or subcontractors To developer (not general strike) Annex 4 263 Risk Description Proposed Allocation 1. Design and Construction Adverse weather conditions Weather conditions prevent or slowdown construction To developer specified unless these are exceptional weather work, resulting in delays or increased costs conditions. It should be valuated what such "exceptional conditions" could be Performance of sub contractor Risk that one of the subcontractor to the developer To developer does not perform leading to increase in costs or delay Misinterpretation of specifications Risks that the project specifications are misinterpreted To developer and this leading to increase in costs and / or delays Force majeure time delay - Shared Force majeure cost implications - Shared Development costs Increase in development costs for the developer To developer Delays / costs because of grantor changes - To grantor Cost increase because of increase in - Shared, typically the risk that inflation costs, interest rate costs inflation, increase in interest rate and Foreign exchange rate movement create higher than planned or movement in foreign exchange costs between bid submission and financial close are shared between the grantor and the developer. Following financial close, this tends to developer risk Surrounds Risk of damage to surface and subsurface structures due To developer ­ generally the developer should be responsible for to construction work and settling of ground following its own construction methods and their impact on the surrounds. construction This will be an important part of the developer's design risk. This said, the context of the project will require additional consideration by the grantor to understand the extent of surrounds risk, and whether investors will be able to assess this risk in the time permitted. If investors do not have sufficient time, they will price this risk accordingly and it may be more financially efficient for the grantor to bear some of this risk 2. Commissioning Time, and cost to satisfy commissioning - To developer Fit for purpose O&M manuals, - To developer approval, and statutory certificates Availability of services / utilities See risk assessment under item 2 Operation Shared (traffic signals, etc.) Risk Description Proposed Allocation 2. Operation Revenue and ridership - Shared Integration / interchange with Risk of insufficient or inadequate integration or competition Shared other modes of transport from other modes of transport, or risk of insufficient or inadequate interchange with other forms of public transport etc. Obtaining and maintaining licenses to - To developer comply with regulatory requirements Interface with subcontractors - To developer Monitoring of performance There are varying degrees of expense involved in operating Shared different performance regimes from the fully automatic self-reporting to the labor intensive inspection force. Penalties to be imposed by the promoter and the method for withholding money from the developer ­ or recovering money ­ must be fair and easily understood Operational under different Ability to operate in local weather conditions To developer but mitigated through the contract's weather conditions performance indicators and possibly penalty scheme Technological Ability to develop and implement new technological solutions - to deliver requirements to time and budget; ability to take account of future growth within initial phases; interface between the differing elements rolling stock, signalling, structures and interfaces with other elements of the transport network Undue benefits from To ensure that the concessionaire does not benefit unduly Alternative schemes that could be considered and the need future extensions from any future extension to the system, various payment to maintain financial control over future extensions mechanisms need to be examined. These could include is not seen as an insurmountable problem a payment regime that acknowledges a certain amount of escalation during the construction phase and for this to be extended into any future extension. If the value of the escalation were to be proposed by the bidders in their tenders, it would ensure that a low rate was maintained Standard of performance Whether the service provided to users and to the benefit To developer ­ as a general consideration, but subject to a other non availability of service provided to the grantor corresponds to the obligations aspects of risk allocation discussed here, for example change set out any concession agreement and at law in law, subsurface conditions developer Costs of compliance with general - To developer change in legislation and statutory requirements Changes in scope of services due - To grantor to grantor requirements Annex 4 265 Risk Description Proposed Allocation Change in scope of services because - To developer of concessionaire requirements Danger to users through health - To developer and safety Public liability - The grantor Damage to infrastructure other - To developer, shared than for Grantor default Latent defect in infrastructure Risk that a defect in the construction is found out during the To developer once constructed operation of the tunnel and that repairing such defect creates additional costs or disrupt the operation of the tunnel Cost of operation Risk of increases in the cost of labor, utilities and the To developer this risk can be largely managed by the developer replacement of equipment (incl. inflation) through on O&M contract and through its own operational efficiencies Cost of maintenance Risk of increases in the cost of maintenance and replacement To developer such maintenance is foreseeable and the developer of the works, including resurfacing and major maintenance will be in the best position to manage its costs through its own ( incl. inflation) operational efficiencies 3. Traffic Volume Traffic or ridership levels Risk that traffic does not achieve the levels forecast. To be agreed between grantor and developer The overall state of the economy drives ridership. Risk transfer would require the bidder to take ridership risk but he has no control over many of the drivers of demand Revenue risk Two options: gross cost contract (where all fares taken To be agreed between grantor and developer on the system are paid direct to the City treasury and a guaranteed revenue ­ subject to penalty deductions ­ is paid to the developer); or a net cost contract (where farebox revenue is passed to the developer and City grants form a supplementary revenue stream) Demand for service Regulatory change (local development policy, taxation policy, To be agreed between grantor and developer road provision and user charging, policy on the integration of the LRMT with other parts of the public transport network) will have a huge influence on transport demand Ticket levels Risk that the ticket levels are insufficient to achieve - the revenues anticipated Ticket collection strategy Risk that the toll collection technology and strategy is not To grantor the most efficient or that the grantor changes its approach Risk Description Proposed Allocation 4. Environmental i. Existing Damage to the environment existing before commencement To grantor of work ii. New Damage to the environment caused during or after To developer commencement of work Noise Excessive noise causing noise pollution To developer Stakeholder consultation Risk that stakeholders have not been consulted and inadequate To developer and grantor support is mustered to deal with urban disruptions during construction. Also stakeholder interface risks such as adjacent property and land owners with differing objectives for the project 5. Financial Access to finance / financial close Risk that the developer is unable to attract the financing To developer, before completion of the bidding process. required for the project, at a sufficiently low cost The grantor will use best efforts to facilitate financing and accelerate the due diligence process by lenders Interest rate Risk that the interest charged on financing increases To developer, though a grantor will bear part of risk that interest rate changes between project award and financial close Inflation Risk that higher than forecast inflation increase project costs To developer, though a grantor will bear part of risk that inflation rate changes between project award and financial close Change in VAT and taxes - To developer if applicable indiscriminately, to grantor if change is limited in application to (say) tunneling companies or PPP companies Foreign exchange Risk that financing is obtained in foreign currency, To developer, though this will need to be reviewed once clarity but revenue stream is in local currency is achieved on currency of financing and availability of hedging Tenor Length of debt insufficient to achieve financial viability To developer, subject to the above review of the source of financing, in the context of a long-term concession for example if the grantor decides that it would rather source debt in local currency, it may need to provide some support of debt tenor 6. Social/Political/Legal Protestor action Disruption of construction or operation by individuals To grantor, unless caused by developer act or omission or groups against the project Legal challenge Legal actions against the grantor or the developer that To grantor, unless caused by developer act or omission restrict the developer's ability to build or operate the project Political interference Governmental or political act interfering with the project To grantor to the extent contrary to the concession agreement or the developer or law Change in Law Change in legislation, regulation or tax To grantor Force majeure - Shared between grantor and developer Nationalization/expropriation Governmental acts seizing the property of the developer To grantor or the project Annex 4 267 ANNEX 5 EXAMPLES OF INTERNATIONAL STANDARDS FOR ROLLING STOCK Table A 5.1 Common International Standards for Rolling Stock Standard No. Version Description BS EN 14752 2005 Railway applications ­ Bodyside entrance systems BS EN 13452-1 2003 Railway applications ­ Braking ­ Mass transit brake systems ­ Part 1: Performance requirements BS EN 13452-2 2003 Railway applications ­ Braking ­ Mass transit brake systems ­ Part 2: Methods of test BS EN 12299 1999 Railway applications ­ Ride comfort for passengers ­ Measurement and evaluation BS EN 14813-2 2006 Railway applications ­ Air conditioning for driving cabs ­ Part 2: Type tests BS EN 14813-1 2006 Railway applications ­ Air conditioning for driving cabs ­ Part 1: Comfort parameters BS EN 14750-2 2006 Railway applications ­ Air conditioning for urban and suburban rolling stock ­ Part 2: Type tests BS EN 14750-1 2006 Railway applications ­ Air conditioning for urban and suburban rolling stock ­ Part 1: Comfort parameters BS EN 13104 2001 Railway applications ­ Wheelsets and bogies ­ Powered axles ­ Design method BS EN 13103 2001 Railway applications ­ Wheelsets and bogies ­ Non-Powered axles ­ Design method BS EN 14752 2005 Railway applications ­ Bodyside entrance systems BS EN 12663 2000 Railway applications ­ Structural requirements of railway vehicle bodies BS EN 50125-1 1999 Railway applications ­ Environmental conditions for equipment ­ Part 1: Equipment on board rolling stock BS EN 50218 2001 Railway applications ­ Communications, signaling and processing systems ­ Software for railway control and protection systems BS EN 50206-1 1999 Railway applications ­ Rolling stock ­ Pantographs: Characteristics and tests ­ Part 1: Pantographs for main line vehicles BS EN 50206-2 1999 Railway applications ­ Rolling stock ­ Pantographs: Characteristics and tests ­ Part 1: Pantographs for metros and light rail vehicles BS EN 50163 2004 Railway applications ­ Supply voltages of traction systems BS EN 50121-1 2006 Railway applications ­ Electromagnetic compatibility ­ Part 1: General BS EN 50121-2 2006 Railway applications ­ Electromagnetic compatibility ­ Part 2: Emissions of the whole railway system to the outside world BS EN 50121-3-1 2006 Part 3-1 Rolling stock ­ Train and complete vehicle BS EN 50121-3-2 2006 Part 3-2 Rolling stock ­ Apparatus BS EN 50155 2001 Railway applications ­ Electronic equipment used on rolling stock BS EN 50215 1999 Railway applications ­ Testing of rolling after completion of construction and before entry into service BS EN 50126 1999 Railway applications ­ Specification and demonstration of reliability, availability, maintainability and safety (RAMS) BS EN 3381 2005 Railway applications ­ Acoustics ­ Measurement of noise inside railbound vehicles BS EN 3095 2005 Railway applications ­ Acoustics ­ Measurement of noise emitted railbound vehicles BS EN 6853 1999 Code of practice for fire precautions in the design and construction of passenger carrying trains IEC 60077-1 1999-10 Railway applications ­ Electric equipment for rolling stock ­ Part 1: General service conditions and general rules Standard No. Version Description IEC 60077-2 1999-03 Railway applications ­ Electric equipment for rolling stock ­ Part 2: Electrotechnical components ­ general rules IEC 60085 2004-06 Electrical insulation ­ Thermal classification IEC 60310 2004-02 Railway applications ­ Traction transformers and inductors on board rolling stock IEC 60322 2001-03 Railway applications ­ Electric equipment for rolling stock ­ Rules for power resistors of open construction IEC 60494-2 2002-08 Railway applications ­ Rolling stock; Pantographs characteristics and tests ­ Part 2: Pantographs for metros and light rail vehicles IEC 60631 1978 Characteristics and tests for electodynamic and electromagnetic brake systems IEC 60747-9 2005-06 Semiconductor devices ­ discrete devices ­ Part 9: Insulated gate bipolar transistors (IGBT) IEC 60947-2 2006-05 Low voltage switchgear and control gear ­ Part 2: Circuit breakers IEC 60947-3 2005-06 Low voltage switchgear and control gear ­ Part 3: Switches, disconnectors, switch-disconnectors and fuse combination units IEC 60947-4-1 2005-06 Low voltage switchgear and control gear ­ Part 4-1: Contactors and motor starters ­ Electomechanical contactors and motor starters IEC 61133 2006-10 Railway applications ­ Rolling stock ­ Testing of rolling stock on completion of construction and before entry into service ISO 1005-1 1994-08 Railway rolling stock material ­ Part 1: Rough rolled tyres for tractive and trailing stock; technical delivery conditions ISO 1005-2 1986-11 Rolling stock material ­ Part 2: Tyres, wheel centres and tyred wheels for tractive and trailing stock; dimensional, balancing and assembly requirements ISO 1005-3 1982-04 Railway rolling stock material ­ Part 3: Axles for tractive and trailing stock; quality requirements ISO 1005-4 1986-11 Railway rolling stock material ­ Part 4 Rolled or forged wheel centres for tyred wheels for tractive and trailing stock; quality requirements ISO 1005-6 1994-08 Railway rolling stock material ­ Part 6: Solid wheels for tractive and trailing stock; technical delivery conditions ISO 1005-7 1982-11 Railwayrolling stock material ­ Part 7: Wheelsets for tractive and trailing stock; quality requirements ISO 1005-8 1986-11 Railway rolling stock material ­ Part 8: Solid wheels for tractive and trailing stock; dimensional and balancing requirements ISO 1005-9 1986-11 Railway rolling stock material ­ Part 9: Axles for tractive and trailing stock; dimensional requirements ISO 9000 2005-09 Quality management systems ­ Fundamentals and vocabulary ISO 9001 2000-12 Quality management systems ­ Requirements ISO 14001-0-8 2000 Environmental management systems UIC 651 2002-07 General specification for driver´s cab of railway vehicles Annex 5 271 ANNEX 6 OTHER SPECIFICATIONS COMMONLY INCLUDED IN LRMT CONTRACTS Table A 6.1: Examples of Specifications for LRMT PPP Contracts Commonly Specified Details and Explanation LRMT Elements General System-Wide Specifications Applicable technical standards These provide guidance for engineers during design, construction, testing, commissioning and operations. For example, technical standards will aid designers as they size system components (i.e., beams, columns, foundations, etc.) Design life for major assets Specifying minimum design lives for LRMT system assets provides for level of comparability between bids because of such information is an essential requirement for generating engineering / architectural designs. Examples assets with specified lives often include · Structures · Track · LRMT vehicles · Station platforms · Station superstructure · Signaling equipment · Ticketing machines · Power supply infrastructure (third rails, overhead cables, etc.) · Substations and equipment · Overhead lighting equipment Electromagnetic compatibility Electrical equipment (e.g., LRMT vehicles), communications devices (e.g., radios) and signaling hardware can create electromagnetic disturbances which can have adverse effects on non system assets (e.g., local cell phones). LRMT system planners should consider requiring continual monitoring of electromagnetic compatibility in addition to compliance with pertinent regulations Other human related design elements Designing LRMT systems for good human interaction requires ``softer'' considerations beyond simply engineering for functionality. Some of the additional elements that contract specifications may elect to mention include the following: · Good ergonomic design for reasonable levels comfort and utility · Simple and intuitive graphical user interface (GUI ­ pronounced `gooey') design where applicable (e.g., ticket vending machines, information kiosks, control rooms, etc.) · Sensible physical interfaces for customers, equipment developers, maintainers, and others that provided for safe, convenient and efficient interactions Provisions for future growth and expansion Planners should be keen to ensure that private design proposals align with future strategy for system expansion and extension. Accommodating greater services at later dates should encourage planners to specify some amount of overde- sign of elements such as · Power systems · Station capacity · Trackwork · Structures · LRMT vehicle fleets · Signaling equipment · Communications equipment · Depot capacity · Other infrastructure (ducts for cables, heating ventilation and air conditioning systems, etc.) Providing additional capacity for growth and expansion may result in greater upfront costs. Some form of financial analysis should help to determine the optimal level of additional capacity that planners should specify Requirements for standard equipment, Affordable operations, maintenance and procurement following hand-back may suffer when privately designed LRMT software and non proprietary technology systems unnecessarily incorporate proprietary technology or custom equipment. Many LRMT planners elect to address this selection concern by specifying general requirements for using non proprietary, commonly available components wherever possible Commonly Specified Details and Explanation LRMT Elements Maintainability General contract specifications often include requirements to design system components for maintainability. Designing for maintainability implies positioning components for easy access and convenient replacement. This is an especially important consideration for system elements that require frequent maintenance. Universal access for all customers Contractual specifications for these considerations will often defer to local or international codes. Beyond the obvious requirements regarding disabled passengers, specifications for accessibility should accommodate the needs of customers carrying small loads, tending to children, or transporting luggage. Requirements for non technical design Providing for positive customer perceptions requires considerations beyond LRMT services alone. Contractual elements specifications often include general requirements for consistent and pleasingly designed · Logos · Uniforms · Marketing literature · Station /LRMT vehicle interiors and exteriors and furnishings Specifications for Particular Systems or Processes Overall civil works Contractual clauses pertaining to general civil works often include specifications regarding · Route alignment · Bridges and viaducts design standards and related requirements · Requirements for general compliance with reference designs or procedures for addressing deviations · Requirements for certain engineering considerations (e.g., fatigue life, loading conditions, fire resistance, drainage, etc.) Stations Specified station elements may include the following · Capacity · Signage · Platform shelter requirements · Minimum platform sizes · Requirements for passive information sources (e.g., maps, information boards) · Basic facilities (lighting, lavatories, elevators, little bins, etc.) · Other design requirements (e.g., fatigue life for subcomponents, specified lives for surfaces) Trackwork and alignment General specifications for trackwork and alignment may include items relating to · Applicable standards · Lateral acceleration requirements · Track gauge · Various alignment criteria (e.g., curve geometries, maximum gradients) · Minimum safe distances · Positional tolerances · Noise / vibration protection · Rail welding · Electrical insulation · Turnouts · Expansion joints Annex 6 275 Commonly Specified Details and Explanation LRMT Elements Rolling stock Items mentioned within specifications for rolling stock include the following · Applicable standards · Minimum design criteria (maximum dimensions, availability of seating, required failsafe functions, etc.) · Maximum energy consumption characteristics · Accessibility requirements · Weight limitations · Noise / vibration requirements · Minimum vehicle performance characteristics (e.g., braking, acceleration, jerk limit, speed, directional control, etc.) · Aesthetics · Durability · Crashworthiness · Heating, ventilation and air conditioning · Lighting · Auxiliary systems · Required safety, and emergency systems Power supplies Power supply specifications often include requirements for (e.g., overhead lines, third rails) · Design capacity · Appearance · Electrical protection · Isolation and lightning protection · Grounding requirements · Electromagnetic compatibility Signaling Signaling specifications may include requirements for · Reliability · Design capacity · Requirements for train identification · Control room interfaces Control and communications systems Specifications relating to control and communications systems may include requirements relating to · Voice and data radios · LANs / WLANs · Passenger information systems · Automatic vehicle monitoring systems · Public address systems · Data and storage systems · Closed circuit television (CCTV) systems · Fire detection and alarm networks · Clock systems · LRMT vehicle on-board communications systems Commonly Specified Details and Explanation LRMT Elements Depots Depot specifications may include requirements for · Design capacities · Functionality · Safety features · Layout · Essential equipment and capabilities Ticketing, barriers and fare collection Specified elements for ticketing, barrier and fare collection systems often include requirements for systems · Wider transportation network compatibility (e.g., through `smart cards' or transfer passes) · Design capacity · General performance (e.g., passenger flow, minimum gate availability, accessibility standards) · Acceptable ticketing forms · Emergency evacuations Testing and commissioning Specifications for testing and commissioning may include requirements for · Some period of ``shadow running'' · Meeting applicable testing standards · Tests after opening at certain milestones (e.g., one year and two year tests) · Demonstrating that baseline criteria have been met Support facilities for public authorities When private partners assume responsibility for designing / constructing facilities for public authorities to use in monitoring performance and compliance, specifications should include specific requirements for those facilities such as · Acceptable locations · Spatial capacity · Essential amenities Annex 6 277 ANNEX 7 TECHNICAL AND FINANCIAL PROPOSALS: CHECKLISTS A 7 TECHNICAL AND FINANCIAL PROPOSALS: CHECKLISTS These checklists are given to assist in development of bid documentation for LMRT PPP schemes as described in chapter 8: Procurement. They are for guidance only, and will need to be adapted and expanded to suit individual scheme requirements. A 7.1 The Technical Proposal Technical proposal formats differ but their general purpose is to demonstrate the bidder's ability to execute the proposed project according to the standards specified in the request for proposals. Bidders should provide sufficient details to enable the grantor to obtain a good understanding of the essence of the development work that the bidder would undertake should they be awarded the concession. The technical section could be structured as follows: · Executive summary · Design, planning and system management · Examples of previous projects similar to the LMRT system being bid on where the procedures proposed have been used by the bidder · Procurement and subcontracting strategy · Design management · Approvals management · Health, safety, quality and environmental management · Project program and work structure · Other critical events and factors · Handover to the grantor · Civil works · Testing and commissioning · Operations and maintenance · Handover of the LMRT system to the contracting authority A 7.2 The Financial Proposal The financial proposal demonstrates how the technical proposal will be implemented: 1. General a. The financial proposal should be developed by the bidder in accordance with the requirements of the invitation to bid b. Information should be provided on the level of availability payment (AP), or other compensations terms, which is the amount of compensation paid by the grantor to the selected developer during the actual operation of the LMRT system c. Capital grant ­ the amount of state financing for capital expenditure required for the project, and payment program 2. Financial Plan a. The bids should clearly state the amount of funding to be provided by the bidder and the debt and equity amounts b. The proposal should provide sufficient information to satisfy the evaluation commission that the bidding team/ consortia is appropriately structured, financed, and capitalized, and that the bidder's are capable of raising finance on satisfactory terms and within the time period specified c. Information should be provided on the finance raising strategy, the cash flows during construction and operation, the strategies for reaching financial close, mitigation measures to avoid delays in reaching financial close, the obligations of each consortium member, and the main institutions involved in the debt finance raising process and their role d. Details should be provided on the references interest rates, reference foreign exchange rates and risk mitigation measures taken to address foreign exchange risks, inflation risk, and movement in base interest rates between bid submission and financial close, and during construction and operation e. Information should be provided on the type or types of equity to be utilized f. For the debt financing, bidders should provide term sheets under which the debt facilities are to be made available g. Bidders should also provide an executive summary of the financial plan that summarizes the main features of the plan, payment structures and plans to deal with cost overruns, delays in construction completion and the hedging strategy (for interest rates, inflations rates and Forex fluctuations) 3. Financial Model (Provided by the Bidder) a. The model must contain the information required in the tender documentation and it should function in a manner consistent with the bidder's financial plan b. A concise commentary summarizing all the relevant input and output data should be submitted in order to facilitate the bid evaluation committee c. The model should prove the viability and sustainability of the bidder's proposal from a financial, commercial, and economic standpoint d. The model should also be easily manipulated by the bidding evaluation committee to allow the running of sensitivity analyses with minimal adjustments (these changes are likely to include variations in construction periods, changes in capital costs, changes in operating costs, changes in tariffs and passenger traffic volumes) e. The model should provide financial projections from financial close until arrangement expiry f. Additional proposals by the bidder. For each form of finance, the model should provide details on payment schedules, assumed rates and hedging arrangements g. The model should include information on the tax liabilities of the developers h. The model should also provide detailed information on the amount of capital grant and the calculation of the availability payment, additionally, the impact of variation in rates on the grant and payment should be provided i. All relevant financial ratios should be declared along, with financial statements 4. Additional Proposals by Bidder a. The bidders should provide information on the risk insurance it intends to enter into, including the names of relevant organizations and their financial reliability b. Details on the risks insured and the insurance premiums on each risk should be provided 5. Amount of Capital Grant a. Each bidder should indicate the requested value of the capital grant payable for each year of construction of the proposed system b. Each bidder should indicate the requested amount of the availability payment (AP) payable for each year of operation of the proposed system Annex 7 281 ANNEX 8 UNSOLICITED PROPOSALS A 8 UNSOLICITED PROPOSALS This annex draws heavily on a paper by Hodges and Dellacha, 2007 and UNCITRAL, 2001. Unsolicited proposals usually originate within the private sector and are generally not requested by a government. Unsoli- cited proposals are usually developed by companies with ties to a particular industry (such as land developers, suppliers, and financiers) and that use their own resources to develop a project idea and then approach the relevant governmental or grantor for the required official approvals. Government openness to receiving unsolicited proposals can incentivize the private sector to come forward with innovative proposals. Additionally, in smaller municipalities where it may be too costly or difficult to arrange a competitive bidding process, direct negotiations increase the chance of private sector interest in infrastructure development projects. A major disadvantage of unsolicited proposals for contracting authorities is that they are associated with a lack of competition and transparency. The granting of exclusive rights to private entities without the accountability of a transparent tendering process courts controversy, and history suggests that such scenarios lend themselves easily to corruption. Recent research suggests that unsolicited proposals, if properly handled, can contribute to the overall infrastructure goals of a country, particularly where governments or contracting authorities do not possess adequate in-house capacity to develop projects themselves. The base principal recommended by recent research advises that unsolicited proposals should be channeled into a transparent, competitive process where challengers have a fair chance of winning the tender. Incentives are provided for the private sector to come forward with innovative infrastructure solutions, while retaining the benefits associated with awarding the project through a transparent and competitive tender. Figure 2 Benefits of Proposals by Procurement Method Solicited proposal awarded Solicited proposal awarded through sole-source through open tendering negotiations process Increased transparency Unsolicited proposal Unsolicited proposal awarded through awarded through sole-source negotiations open tendering process Increased competition Unsolicited Proposals Circumstances Private proponents of infrastructure projects often claim special circumstances as the primary driver of their proposal: · Intellectual Property Rights ­ companies can claim that proprietary technology developed by the proponent that is essential for the infrastructure project, cannot be sourced elsewhere. Therefore if the government undertook a competitive process, the government would be violating the proprietary rights of the proponent by exposing their technology. The counter argument to this is that often substitute technology of similar quality can be sourced. Governments can define a selection process which details the expected output of a project without necessarily dictating the technology required to enact the project. Each bidder can then suggest an alternative process or method, which is then compared to the unsolicited proposal without violating the original proponent's rights. Licensing arrangements can also be organized in case the proponent's proprietary technology is required but the proponent is not the optimum choice for developing the project. · Lack of Private Sector Interest ­ proponents of unsolicited proposals can claim that the characteristics of the proposed project are such that no other private sector entity will be interested in participating in a competitive tender process. These claims are particularly made where projects are targeted in remote areas or in smaller municipalities. A tendering process is still advisable in situations where there is only one bidder. Awarding projects without conducting a competitive bidding process can create unwarranted accusations of corruption because the lack of transparency. An open tender will demonstrate the contracting authority's commitment to transparency and will openly reveal the lack of other bidders. · Cost Efficiency ­ private proponents argue that contracting authorities can save on expensive tendering processes because they believe their proposal is superior to any potential rivals', and will almost certainly be selected under a tender process should one be conducted. Rushing the selection process can lead to much greater project development issues later on which can delay the project by several years. Competitive processes assist contracting authorities in defining their project objectives and reveal hidden costs through greater interaction and evaluation with bidders and other specialists. Long term standards and risks can be evaluated with a greater eye to mitigation. Private proponents in most cases will not share the same long-term concerns as the grantor and this disparity in interests will be clear during the negotiating process. Hidden costs are an especially salient feature of direct negotiated projects and contracting authorities may be forced to take on more contingent liabilities. Conducting a tendering process can deliver financial benefits even if the original proponent is selected to develop the project. If other bidders participate, the grantor gains more leverage over the original proponent because it now has other options to execute the project should the original proponent be unable to reach financial closure or complete the project. This can also alter the original proponent's behavior during the life of the contract because it will be less inclined to demand alterations to the concession agreement with the knowledge that there are other Annex 8 entities willing to take over the project. 285 · Speed of Project Development ­ it is argued that under special conditions, directly negotiated unsolicited proposals can satisfy urgent infrastructure requirements. Equally true is that sole-source negotiations can take much longer than expected. Instead, while a competitive bidding process may be time-consuming in inception, once the grantor gains experience in holding a tendering process, future projects can be enacted more quickly and efficiently. Managing Unsolicited Proposals Clearly, for contracting authorities that are willing to entertain unsolicited proposals, the most important challenge is to synthesize the advantages of private sector participation in the initial project design stages along with the benefits of the increased transparency and efficiency associated with a competitive tendering process. Recent research recommends that contracting authorities should clearly delineate their procedures for dealing with unsolicited proposals and how they intend to manage them. Formal management systems are generally divided into two stages: · Proponent presents the project to the government, internal assessment is conducted and the project is prepared for public tender. · The second stage sees the initiation of a competitive tender process. The exact manner in which this process is conducted will differ according to the array of incentives or benefits offered to the original proponent of the project. Approving Unsolicited Proposals The specific procedures generally followed for dealing with unsolicited proposals are as follows: · The private proponent submits the conceptual description of the project to the appropriate ministry or agency ­ the level of detail required at this point is dependent upon the managerial procedures decided by the relevant contracting entity. · After a review period, the proponent receives a response as to whether the project falls within the public interest or within the strategic goals of the contracting authority. At this point, additional financial, legal, and environmental studies are requested, financed by the proponent. · If the grantor accepts the project description, the proponent is usually granted formal recognition for developing the concept. · The grantor should have information on: 0 The feasibility of the project 0 Estimated total costs and financing plan 0 Income and expenditure plan for operation 0 Project justification arguments 0 Environmental impact studies The detailed proposal is then reviewed and further negotiations can then occur between the proponent and relevant grantor to further delineate project characteristics. At this point, the project will be approved to go forward for a competitive process or rejected. A bid bond may be requested in order establish the seriousness of bids. Tendering Unsolicited Proposals The initial selection stages are conducted and then the competitive tender process is concluded through one of three methods: · Best and Final Offer BAFO The project is published in relevant media outlets inviting interested parties to bid. Information on the bid price is not disclosed to the other bidders and the original proponent has to resubmit a formal bid. Bids are received, evaluated, and ranked. The two most attractive bids are selected to participate in another round. If the original proponent is not selected as one of the two most attractive bids, it is then automatically allowed to participate in the final round as well. The remaining bidders will then review and negotiate the project documentation with the grantor in order to generate their "Best and Final Offer" (BAFO). In the final round, if the original proponent's bid is within a set percentage of the best offer (generally within 5 to 10 percent) then the original proponent's offer is selected. However, if the difference between the best bid and the original proponent's offer is more than 5 percent but below 20 percent, then the two bidders will be invited to submit their BAFO. The winning bid is selected in this second round and final round. The grantor will retain its bargaining position by negotiating with the prospective bidders. If necessary, the grantor can retain the right to introduce one or more of the remaining pre-qualified bidders into the negotiation if there are issues with the remaining final bidders. · Bonus System A bonus in the formalized bidding process is awarded to the original proponent. The bonus can take a variety of forms but is generally determined as an additional theoretical value applied to the original proponent's technical or financial proposal. In other systems, the bonus is awarded in the form of additional points in the total evaluation score. Once the grantor approves the project concept, the original proponent is officially awarded a bonus, the value of which is determined by the grantor. The project is published in relevant media outlets inviting interested parties to bid. The value of the bonus to be awarded to the original proponent is also published, along with and the estimated reimbursable costs for project development. Interested parties are then allowed to submit bids. During the bidding phase, the original proponent is allowed to bid on the project using the bonus or it may decide not to bid. In some systems, the original proponent can sell its bonus to another bidder. If the original proponent loses the bid or chooses not to bid, then the winning bidder may be asked to compensate the original proponent for project development costs. If the original proponent's bid is within the bonus margin granted (for example, within 10 percent of the lowest tariff or bid), then the original proponent will be awarded the project. Annex 8 287 · Swiss Challenge System A competitive tender is held and third parties are allowed to submit alternative proposals. The original proponent is granted the right to match any offer that undercuts its own. After the first stages of the approval process takes place, the following procedures take place: The project is published in relevant media outlets inviting interested parties to bid. In some systems, the original project proponent is required to submit and bid bond in order to verify that the original proponent has the means to execute the project. The grantor can publish information on the unsolicited proposal (such as pricing and specification) or it can choose to conduct a blind challenge. If a lower priced bid is submitted and approved, the original project proponent is granted a specified amount of days in order to match the price. If the original proponent does not match the price, then the project is awarded to the lower price project. In other systems, the original proponent is awarded the project if the price is matched; in other countries, if the price is matched by the original proponent, the evaluation committee will then judge the proposals based on technical merit and then select a winning bidder. Research demonstrates that developing an effective system to manage unsolicited proposals is a challenging task. Contracting authorities must negotiate coordination between various agencies, effective long term planning, and also ensuring that the private sector remain appropriately incentivized to come forward with unsolicited projects. This latter point is perhaps the most important because the probability of success for third party challenges will influence the incentives for the private sector to propose projects. Table A 8.1 Transparency in Unsolicited Proposals Influencing Issues Factor Value of bonus Large bonus will discourage potential challengers; a low bonus will discourage submission of unsolicited proposals. (under bonus system) A bonus may be used for a technical score or economic score. Ability to match price Many challengers are reluctant to allocate resources for counter proposals because they can be matched. (under Swiss challenge) Sufficient time is required to develop counter-proposals. Amount and timing of Information on the original proponent's economic offer may entice challengers to offer counter-proposals, especially if the information disclosed tariff is very high. If the original proponent's bid is not disclosed, it is more likely that challengers will present their best offers. 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