Experience from EBRD's urban transport sector financing

Abbas Ofarinov, Principal Banker27 September 2013

Partnering for urban development

15 years of municipal finance at EBRD15 years of municipal finance at EBRD

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Business volume Net Cumulative Business Volume

Activity started in 1994

300 projects signed

€5bn invested by EBRD

2011 a record year with €600m invested

EBRD and municipal financeEBRD and municipal finance

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Appetite for private and non-sovereign risk for municipal infrastructure

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Diversified across municipal sectors

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Diversified across EBRD sub-regions

New EU member states: Romania & Bulgaria

Other CIS

Western Balkans

New EU member states: Central Europe

What attracts EBRD to the urban transport sector?

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Balance and benefits

Urban transport investment provides multiple advantages and has long-term effects: Unique ability to provide high-quality alternative to urban travel Acts as antidote to urban congestion Scalability, both in network and capacity Value-added for urban environment (property values, air quality, carbon

reductions) Revenue generation, rises with economic growth Able to be commercialised Can attract Private Sector Participation (PSP) if structured adequately Lasting investments: urban rail investments produce benefits measured in

decades, not years Varied and complementary investments in sector all part of solution, with public

transport, ITS, parking management, road maintenance, road safety, and smart-card ticketing

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50+ urban transport projects and €1000 million invested thus far since mid-90s

Kazakhstan

CNG Buses, Trolleybuses

Serbia

Belgrade Sava Bridge, trams, buses, ITS

Ukraine

Kiev (Metro, Trolleybus, Bus, ITS); Lviv Trams and ITS

Armenia

Yerevan (Metro)

Macedonia

Skopje ITS

Project examples:

Poland

Warsaw (Metro & Tram), Krakow, Gdansk; Lodz; Sopot

Romania

Bucharest (Multisector); Iasi Tram; Arad Tram

Bulgaria

Sofia (Tram), Plovdiv, Burgas

Turkey

Istanbul Ferries, Bursa LRT, Gaziantep CNG Buses

Kyrgyzstan

Bishkek (Trolleybuses)

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The Typical UT Challenge faced by EBRD

Poorly managed municipal public transport company

Obsolete asset base – 20 year old bus fleets, and 40 year tram fleets

not uncommon

Maintenance depots dating from the 60s

Over-staffed, a legacy of the Soviet era

Cash/coin-based paper ticketing system – cash leakage endemic

Chronically loss-making entities

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Municipality

Annual, ad hoc subsidy payment (Dependent on budget

availability, other priorities)

Passengers

Revenue from fares (cash-based) collected and distributed

Downward spiral effect

Typical Arrangement for Public Transport Companies prior to EBRD involvement

Chronic financial gaps

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The EBRD Approach to financing urban transport projects

The EBRD promotes decentralised decision-making and financing to both public and private clients

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EBRD promotes broad trend in urban transport finance

DECENTRALISATION

EBRD’s ‘bread and butter’ How is this done?

EBRD is not dogmatic -- we structure projects across the whole spectrum, e.g., from sovereign loans when legally necessary, municipal loans, public utility loans backed by muni guarantee, operational concessions (DBOM), PPPs based on DBFO to full privatisations

The Public Service Contract: the lynchpin of EBRD urban

transport financing

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Needed Foundations for Lasting Improvement in Urban Transport

Create a stable revenue and define revenue sources for public transport – key

for creditworthiness

Focus on operating cost and service quality for users

Invest in new rolling stock & infrastructure

Give citizens real alternative to private transport

Strengthen regulation

HOW? Public Service Contracting (PSC) between public owner and public transport

operator (either municipal or private)

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A Contract with a municipal operator to define clearly how public sector “compensates” the municipal public transport company fairly (no over-payments) for operational services delivered, rather than old-style subsidization (“state-aid”)

PSC is a commonly used regulatory tool in EU (EU Regulation 1370/2007, in force from Dec 2009)

What is a PSC?

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Roles and Responsibilities within PSC

Municipality as the Client: Defines network, policy, service standards, tariffs Sets & enforces regulatory framework Formally agrees to amount and quality of services Makes support payments to cover difference between

tariff revenues and full operational costs, due to social nature of services

Operator as Service Provider: Takes on operational and managerial risks Provides services according to key PSC performance

levels (reliability, punctuality, safety, cleanliness, customer satisfaction);

Operates & maintains new and improved rolling stock

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Municipal Support Agreement to Sign and Maintain PSC for

duration of loan

Municipality

PSC (Payments per km for services

rendered ) based on pre-defined performance standards

Passengers

Revenue from e-ticket fares collected and distributed

Loan Agreement

Lending structure: EBRD corporate loan to Muni Operator backed by PSC, off-balance for City

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Support Agreement to Sign and Maintain PSC for duration of

loan

Governorate and TRA

PSC (Payments per km for services

rendered ) based on pre-defined performance standards

Passengers

Revenue from e-ticket fares collected and distributed

Loan Agreement

Possible Lending structure: EBRD sovereign loan (Central Bank), beneficiary agreement with CTA, backed by PSC

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Basics Steps to set up a PSC

DEFINE STANDARDS: For quantity and quality of public transport service

PAYMENT FOR PERFORMANCE: Multi-year agreement on total level of service along quantity and quality indicators in exchange for payment by public sector (Municipality) to public transport operator (total payments per km basis)

ALLIGN LONG-TERM INCENTIVES: Indicators & payment support levels defined in PSC up-front -- introduces multi-year stability for all parties, enhances creditworthiness for modernizing rolling-stock and depots.

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Operational & commercialised focus: Payment for quality controlled services only

Gives incentives to public transport company to focus on operational efficiency

Simplifies public sector budgeting by linking payments to PSC payment formula -- smooth & predictable over many years

Penalties and remedies for failure to provide required quality

International experience shows 10-15 per cent savings initially on price/km basis

E-ticketing introduction has an additional 10-20 per cent improvement on the sector’s finances

Advantages of PSC for City

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Provides multi-year stable revenues per contractual formula in PSC – very similar to availability payment stream in PPPs

Sharp operational focus: public payments based only on delivered services as per PSC agreed operational plan and KPI compliance – similar to UK PFI approach

Passenger demand risk transferred to City within the PSC Annual indexation formula linked to key cost inputs (labour,

fuel, inflation, etc.) Incentives and penalties for performance quality Increases ridership over time as quality improves

Advantages of PSC for Public Transport Operator

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A) State objective of PSC: full ‘all-in’ compensation for services delivered

B) Define operational plan C) Arrange for ticketing collection D) Benchmark costs to deliver operational plan, with inputs

such as labour, energy, materials, depreciation and capital costs E) Establish indexation basis over life of PSC for variable costs

(e.g., labour, CPI, fuel/energy costs) F) Set duration of the PSC, linked to asset life to be financed G) Describe vehicles types; safety goals; service

quality/KPIs; tariff system H) Define payment formula: When the operator retains fare

revenue, a net payment is made following this basic formula: Net Payment/km = Opex Costs + Asset Depreciation + Financial

Costs – Fare Revenue – Other compensation from City/State (e.g., for social category passengers)

Basic Content of a typical PSC

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• I) Define City obligations to provide transport infrastructure and traffic control measures in good condition

• J) Other standard contractual clauses: Supervision; Control and auditing; Invoicing and payments; Amendments; Force Majeure; Dispute resolution; and Termination clauses

• K) Technical Appendices o Service and operations plan; Vehicle requirements; Service

Quality Indicators (% of operational plan executed; availability of fleet; safety; customer satisfaction); Tariff plan; Penalty system for poor performance; Indexation formulae

Basic Content of a typical PSC (cont.)

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Additional EBRD Value Added

Package of Technical Cooperation in Support of EBRD Financing:

Project preparation (Sector Strategies; Feasibility Studies, EIA)

Tender preparation and procurement support Development of PSC and training of operator Corporate development (Business plan, Management

Information System, bench-marking on efficiency and costs, twinning arrangements)

Regulatory development (tariff planning, electronic ticketing development, PSC monitoring)

Project Examplesbased on PSC

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POLAND: Warsaw Metro Wagons

Borrower – municipally-owned Warsaw Metro Company,an internal operator of the Warsaw underground system

Project – Approved in 2011, financing part of the investment programme for acquisition of 35 metro trains (210 individual wagons) (Rolling-stock procured from Siemens-NEWAG)

TC - The Bank provided technical assistance, funded by Austria, aimed at monetising the Project’s anticipated emission reductions as carbon credits under the Kyoto Protocol’s Joint-Implementation (“JI”) Mechanism to assist with the monetisation of the resulting carbon credits

Total Investments – PLN 1.1 billion (equivalent to €273 million)

EBRD Loan – PLN 322.6m (equiv €80 million) under A/B structure

Co-financing – with EIB and EU

Status and Timing – Wagons to be delivered in 2012/13, on-schedule

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TURKEY: Bursa LRT (Phase II) : clean and TURKEY: Bursa LRT (Phase II) : clean and modern urban transportmodern urban transport

Borrower – Bursa Municipality

Project - extension of Bursa LRT system (9 km, 8 new stations), purchase rolling stock (30 new vehicles), other investments

Total Investments– EUR 219 mln

EBRD Loan – EUR 50 mln

– Tenor – 15 years, including a 3 year grace period

– Pledge of selected assets

Co-financing - with EIB

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……to to serve the mobility needs for the serve the mobility needs for the continued growth of the economycontinued growth of the economy

City – 2 million people

Carbon Monetisation of Clean Urban Transport -- The LRT Project has significant carbon emission reduction effects

Corporate Development of Burulas -- the municipal transport company: Burulas will be assisted to deepen its managerial and operational capabilities, in line with the growth of its LRT network and fleet

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UKRAINE: Lviv Trams

Borrower – Lviv Electrotrans Company

Project – Approved in 2010, modernisation of tram track Lines 2 and 6, associated depots, and road reconstruction to prioritise tram mode

TC - The Bank to provide procurement and implementation support, PSC development, e-ticketing, regulatory improvements

EBRD Loan – EUR 40 million

Local Contribution – EUR 7 million

Status and Timing – Under implementation, completion by 2013

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KAZAHKSTAN: Almaty CNG BusesKAZAHKSTAN: Almaty CNG Buses

Borrower – Almaty Electric Transport Company (AlmatyElectrotrans)

Project – Approved in 2010, introduction of the first 200 Compressed Natural Gas low entry buses in Almaty, setting new standard in sector. Procured a fleet compliant with EURO-5 emission standard rendering services for more than 40 million passengers per annum

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Almaty CNG BusesAlmaty CNG Buses

TC – Development of PSC, a new institutional and regulatory framework for urban transport and design, procurement and implementation of sector-wide electronic ticketing system

EBRD Loan – USD 30 million

Local Contribution – USD 10 million

Status and Timing - Implemented, full fleet in operation, ridership doubled on average as compared to standard buses

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Contacts

Matthew Jordan-TankSenior Transport Specialisttel: +44 20 7338 7498email: jordantm@ebrd.com

Abbas OfarinovPrincipal Bankertel: +7 727 332 0019email: ofarinoa@ebrd.com

European Bank for Reconstruction and DevelopmentOne Exchange Square, London EC2A 2JN

www.ebrd.com/mei