International Railway Journal - January 2008 - (Page 2) This month The thorny issue of metro funding clearly the best option, as it is usually the cheapest and quickest solution. Unfortunately, governments are increasingly either unwilling or unable to fund projects in their entirety. There are two reasons for this. First, government finances are under pressure from things such as defence, security, health, education, etc, meaning there is insufficient tax revenue to go round, and transport usually has a fairly low priority, despite being the one area fundamental to all. Secondly, the cost of building metros has increased. There are several cost drivers: spiralling land values, the increasing number of underground utilities for such things as data transmission, such terms as build, operate, transfer (BOT), as our Brazilian regional editor, Theodor Gevert, reminded me: “Early in the 20th century, Buenos Aires metro was built on a sort of BOT basis, as underground costs were fairly low and fares were fairly high.” But the scheme came unstuck when competition from low-fare buses forced the metro to reduce its fares. Herein lies the nub of the problem: metros can rarely charge fares sufficiently high to generate enough revenue for a private operator. One solution being proposed by a city desperate to expand its metro is to guarantee the private operator an agreed level of revenue. But this is quite a commitment for a BOT that governments and city authorities need to avoid in trying to attract private sector funding through either schemes like BOT or some form of public-private partnership (PPP). There is little point in sticking out for a small contribution from the private sector simply to claim for political reasons that the project is a PPP. Setting up PPP deals is extremely time consuming and very costly, so there must be real benefits to make them worthwhile. Another fact that politicians often fail to grasp is that the more risk is transferred to the private sector the greater the overall cost will be. Private companies are not charities: they need to make a profit. This profit will be built into the price, as will the perceived risk. The rule of thumb for South American metros at the moment seems to be a 70:30 funding split between the public and private sectors. The public sector needs to have a contingency plan to step in if the PPP or BOT deal fails. This can happen for a variety of reasons, such as major cost overruns or delays, over-optimistic traffic or revenue forecasts, unforeseen changes such as aggressive bus competition, or simply the failure of the private-sector partner. Thought needs to be given as to whether the existing deal can be renegotiated, or a new private partner can be brought in, or whether the public sector should take control. There is no simple solution to funding metro projects, but opportunities do exist provided they are well thought through, are appropriate for the city in question, and are not being pushed through to satisfy political dogma. David Briginshaw Editor-in-Chief O UR reports this month on the huge expansion of metros underway in Shanghai, Taipei and Kaohsiung are illustrative of the numerous metro construction projects either in progress or planned in other cities in China and India. Elsewhere in Asia cities, such as Hanoi, Ho Chi Minh City and Jakarta desperately need to invest in rail to solve worsening traffic congestion and pollution. The need to cut global CO2 emissions will only intensify the need to build new metro and light rail lines. This brings us to the thorny question of how to fund metro construction. If governments are both willing and able to provide the funding, this is Tunnelling costs have risen due to the large number of utilities to be relocated. Setting up PPP deals is extremely time consuming and very costly, so there must be real benefits to make them worthwhile gas, water, and electricity that have to be moved, the need to protect historic buildings, archaeological finds, more stringent health, safety, and environmental regulations, and higher labour costs. At-grade or elevated lines are obviously cheaper to build than underground ones, but this is only possible if there is the space and little opposition to it. So what are the options for bridging the gap between the government contribution and the total cost of a project? Raising loans, issuing bonds, and - where the law allows increasing local sales or property taxes, are all measures that come without strings attached. The introduction of road-user charging could provide a steady source of funding provided the money is allocated to public transport. Beyond this lies the much more problematic area of trying to get the private sector to contribute. There is nothing new in deal lasting typically 30 years. There are some opportunities where it is relatively easy to attract private funding. For example, an airport keen to have a rail link to the city centre may be willing to contribute to the capital cost, and airline passengers are more likely to pay a premium fare than commuters. Similarly, the developer of a new housing area, shopping centre, or other commercial venture could be persuaded to help fund a metro line to serve it. Hong Kong’s Mass Transit Railway repaid the loans used to build most of the metro from property development above its stations and depots, but this was only possible once construction was completed. This may not be an option in some cities where either the land is unavailable or planning restrictions rule against it. There are several pitfalls db@railjournal.co.uk IRJ January 2008
For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.