Transactions on the Built Environment vol 30, 1997 WIT Press, ISSN

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'Project financing': an available tool for city administrations and transit companies. E. Musso* & C. Ferrari a Dipartimento POLIS, Universita di Genova, Stradone S.

1 'Project financing': an available tool for city administrations and transit companies. E. Musso* & C. Ferrari a Dipartimento POLIS, Universita di Genova, Stradone S. Agostino 37, Genova, Italy economia. unige. it b Istituto di Geografia Economica e Trasporti, Universita di Genova, Via Bertani 1, Genova, Italy economia. unige. it Abstract The purpose of this paper is to check the effectiveness of "project financing" techniques in funding urban transport infrastructures and long run transport policies. It is well known that in recent years urban transport policies have been mainly concerning short run tools and traffic regulation. This trend has been caused by the growing lack of available funds for city administrations and transit companies. As a result, the difficulties in financing long run and infrastructural policies cause policy makers to turn to short run regulations, even when the expected results of such policies are clearly less effective both for the users and for the companies. The financial technique considered in this paper prove to be useful namely for public transport infrastructures and point out the following benefits: ability to draw capital market on urban transport financing, reduction of construction times and costs, private management of transit facilities, optimization of resources' allocation, as capital goes towards more profitable projects. Thus, only tasks of planning, control, and residual financing to the global expenditure, are left to the "public hand". Finally, a case study is proposed, concerning a people mover system in a medium-size metropolitan area. [1] 1 Recent trends in urban mobility policies Urban mobility is evidently related to the production cost of transport service. This cost is borne by: 1. users of transport services; 2. public administrations (infrastructures, public transport services);

236 Urban Transport and the Environment for the 21st Century 3. the whole community who bears its externalities (air and acustic pollution, congestion).

2 236 Urban Transport and the Environment for the 21st Century 3. the whole community who bears its externalities (air and acustic pollution, congestion). While in the past users of transport services (then users of utility derived from urban mobility) were used to pay only a little portion of its real cost, in recent years the more relevant trend is represented by the growing shifting of costs from items sub 2) and 3) to item sub 1). On one hand, the growing financial straits of central and local public administrations reduce more and more their capacity of covering urban mobility expenses with a fiscal increase. Either construction of new infrastructures (like innovative means of transport on its own right-of-way that would be needed in urban transport system) or production of public services (with balance deficits of transit companies) need to attain management efficiency to the detriment of users' efficacy. On the other hand, community, or its political representatives, is more sensitive to environmental values then less inclined to bear external costs of transport. Congestion gives rise to a major deterioration on the level of urban transport service (buses) than on private mobility. In fact, public means of transport are less flexible in terms of routes, schedules, waiting and travelling times, due to the lesser speed of vehicles [2]. Growing regulations are adopted in order to face congestion - such as park and road pricing, aiming at internalizing a part of external costs of mobility. As a consequence, private users of urban mobility have to cope with higher costs and worse transport conditions. Usually they hardly accept the need of costcontainment policies, since they were used to: - use public transport systems at fares lower than costs; use free road infrastructures and parking spaces; drop pollution and congestion costs over community. Furthermore, as a result of increasing congestion and lack of adequate funds, a greater emphasis has been placed on short run interventions aimed at a better and more efficient use of existing facilities, or at implementing comparatively cheap capital works. These interventions usually fail to attain major improvements and adjustments of infrastructural equipment, and are not able to face effectively the problem of urban congestion. Thus, there is an actual danger that administrations try to solve it with unsuitable tools [3]. Finally, it should be considered that: residents usually oppose car-parks building (both because of discomfort deriving from works and because they obviously prefer free on-street parking spaces); - pedestrian precincts and road pricing regulations are generally strongly opposed by residents and car-drivers; regulations for rationalization of goods distribution are opposed by retailers and hauliers; - the above mentioned reactions easily find some politicians inclined to defend them

Urban Transport and the Environment for the 21st Century 237 The need for shifting mobility from individual and/or traditional transport systems towards innovative transit systems (namely towards

3 Urban Transport and the Environment for the 21st Century 237 The need for shifting mobility from individual and/or traditional transport systems towards innovative transit systems (namely towards automated systems on its own right-of-way) is connected to the need for an increase in both management efficiency (lower operating costs) and users' efficacy (lower travel time). Nevertheless, major financial problems arise due to investments required from these systems, even if there is a relevant net economic benefit. These problems are worsened by the growing shortage of public funds, so that the key point becomes the opportunity of involving private funds in financing public transport investments. 2 Advantages deriving from projectfinancingtechniques The adoption of economical-financial techniques of project financing seems suited to draw capital market on urban transport financing, namely for public transport infrastructures with high technological input. Furthermore, well-structured private participation not only results in more financing being available for infrastructure development, but efficiency and quality are enhanced [4]. Private investors, generally associated in an indipendent company called "Special Purpose Vehicle", finance a project only if the investment remuneration is at least comparable with alternative forms of long run investment. This implies a greater consideration for cash-flow generated by the project itself. The scheme of project financing foresees that the project will be carried out and managed by the sponsors for a long period of time (normally 10, 15 or 20 years) on the basis of a concession. At the end of the period the public subject may renew the concession or operate directly the work. The main improvement in relationships between firms and local government institutions is the participation of firms (regardless of their nature: private, mixed, state, cooperative societies, etc.) in production of transport services, while the public hand maintains functions of leadership, planning and control. For urban mobility, on one hand it allows the financing of investments (or, at least, of a relevant part of it). On the other hand, it offers a method for supporting planning choices and policy within efficiency market rules. Nevertheless, as far as infrastructures are concerned - and mainly in the transport field - not all projects are financially viable. In these cases, private investors may be supported through: 1. direct financial support, participating in the Special Purpose Vehicles (as any other investor), to lower the private investment; 2. indirect financial support (e.g. free land, assignment of revenues from existing public-owned assets, land development rights). Within a project financing framework the same subject builds the work and manages it: thus, the inefficiencies due to the time lag for the builder and the

4 238 Urban Transport and the Environment for the 21st Century manager to maximize their profit are overcome. The sole subject is not only interested in a low cost of construction but also in the quality, operating costs and the capacity of stand up of the work over time, since cash-flow will depend on them. From a legal point of view project financing is a set of contracts with various nature. There are different schemes of project financing according to the mix of contracts they include. One of the most important is the so-called B.O.T. (Build Operate Transfer): public-owned facilities are built and operated by privates for a certain period of time through a concession. When the term of concession expires facilities will be transferred under public control or a new concession will be signed. 3 The role for the public subject Even if the project financing scheme transfer some functions from the public subject to privates, the role of the first will remain important. First, it will need to keep funding those infrastructure facilities where insufficient private capital is available or where certain opportunities are of no interest to the private sector. Secondly, through the institute of the concession, management and operating control is transferred to private firms, but the public hand maintains functions of leadership, planning and control. The evaluation of the economic and social opportunity of the project, that is quite different from its financial profit, is up to the public subject. In this meaning the planning function should concern: [5] 1. general and sectional planning pointing out the achieving goals, available instruments and procedure of interventions; 2. methods and standards in the choice of projects; 3. public resources placed at privates' disposal; 4. works which are fully paid by the cash-flows or works which need the providing of direct or indirect financial support to attract private funds. Concerning the point 2., the goal of the public subject is the best allocation of resources. This goal is achievable by putting up all projects for auction and allocating the work to the party who either does not ask for state or local contributions, or asks for the least possible contribution with the greatest part or the totality of the risk of the initiative. This procedure also allows, namely when natural monopolies are concerned (like much transportation system), to overcome any asymmetric informative about propensity to risk between private sponsors and state or authority which have to safeguard the public interest [6]. Another important role for the public subject may be the shortening of times of administrative procedures for the issue of the necessary authorizations and advices. From this point of view, project financing techniques need the assumption of a sort of agreement between the Special Purpose Vehicle and the public

5 i Transactions on the Built Environment vol 30, 1997 WIT Press, ISSN Urban Transport and the Environment for the 21st Century 239 subject, which binds the latter to issue authorizations and advices at scheduled times and to undertake costs due to any possible delay. For sponsors, the punctual observance of the scheduled times of authorizations and advices, together with fluctuations of interest and inflation rates, as well as political instability, are the main factors of risk. Especially since they are not under the sponsor's control. As a matter of fact the relation between the size of the risk and the life of the project shows a curve increasing until the latter becomes operative and then rapidly decreasing, as in Fig. 1. And the sponsors' risk, due to the public subject behaviour, falls on the increasing stretch of the curve. Costs ' OTi = Planning and building stage _ TiT2 = Starting stage I f \^ 12X3 = Operating stage O Ti T2 13 Fig. 1 - Risk and life of the project 4 The fares control Sponsors consider a project viable on the basis of operating cash-flow. Then, the level of fares and their fluctuation are decisive, as the project income depends on them. Concerning the level of fares, the goals of the sponsors are different form those of the public subject. Sponsors try to maximize their profit while the latter aims to maximize public utility deriving from the use of transport service. Utility maximization implies the maximum satisfaction of transport demand regardless of costs (i.e. with fares lower than costs). Both goals are jointly met if fares equal long run marginal cost. Moreover, the public control on transit fares aims at avoiding that sponsors exploit their monopolistic position. In other words, it plays the role of the "authority". As fares fluctuations are concerned, the solution usually adopted is the "price cap" rule (or RPI minus/plus X). According to it, the firm who operate the transport service may vary fares every year at a rate equal to the retail price index less an X quantity that represents the lowest rate of increase in transport

6 240 Urban Transport and the Environment for the 21st Century service. In such a way, if the actual increase rate of productivity exceeds the scheduled one, the extra-profit is gained by the company. Benefits deriving from the use of the "price cap" rule are. * the spur to increase productivity; inflation containment; * neutral effects over investment choices; * easy implementation. Furthermore, the implementation of a market system for transit fares avoids the problem of income redistribution due to the backing of transit companies deficits through taxation. 5 A case study In this last paragraph an hypothesis of project financing is showed to prove its applicability. It concerns the replacement of a busline for an integrated system of escalators and lifts. At the present time, the busline serves a residential neighbourhood (3.250 persons) in Genoa, located at the top of a hill at 100 metres above sea level. As houses are near each other and neighbourhood has only a residential function - there are neither shops nor offices - transport demand may be considered localized in a few points. The project consists of a people mover system formed by 16 escalators (8 in each directions) and 2 lifts which link the neighbourhood with the local rail station. In such a way, all residential buildings are served and junctions from an escalator to another, or from an escalator to a lift, are all plain Supposing that a private company builds and runs the whole system, expenses are the following: Items Investment cost Annual ordinary maintenance Annual energy supply Annual operating cost 5,882,000 Amount US $ 49,882 83, ,882 Table 1 - Costs of escalators and lifts From the balance sheet of the local transit company (referred to 1995), only a the total cost per Km run by a bus is obtainable, and the figure amounts to 5.4USS. As the annual run of the busline to be replaced, is 298,743 kilometres, the annual cost, beared by the transit company, is nearly 1.6 millions $. Since this

7 Urban Transport and the Environment for the 21st Century 241 figure includes some fixed costs that do not vary according to the replacement or addition of a busline, we have considered only variable costs due to personnel, maintenance, fuel, insurance and taxes. Thus the figure lowers to 5.1 $ per kilometre, and the annual variable cost of the busline to be replaced is now 1,523,589$. The replacement of the busline with a system of lift and escalators, will determine a lower operating cost for the transit company of 1,390,707 $ every year. If the transit company is extending the bus network this lower cost will entirely turn in savings. In such a way, the economic profit for the local transit company deriving from the adoption of the project is proved Nevertheless, such systems are presently not carried out because transit company is already facing significant balance deficit, thus failing the opportunity of involving private capitals through the project financing. Furthermore, this system of escalators and lifts leads to other economic benefits for the whole community as it: lowers air and acustic pollution; lowers users' waiting times, as a consequence of a higher frequency; lowers cost of congestions, as the capacity of the whole system amounts to persons per hour. As a proxy of the transport demand for the busline, we have considered the last commuters census (1991) and applied the same ratio (20%), concerning people moving by buses, of the district to our neighbourhood. So the private company may rely on about 650 users a day (in each directions, i.e. 2 trips a day). Charging the use of the lifts (in both direction) at the same price of the bus (0.88 $), the private company earns every year 208,780 $. Thus the operating profit is 75,898 $. Supposing to apply a EOT (Build Operate Transfer) scheme - which does not include the private property of facilities - the "agreement", among privates and the public subject, could be the following: the private company undertakes to build, manage and upgrade facilities, while the community, mainly the public transit company, pays to it the amortization rate for ten years. At the end of the tenth year, the property of facilities transfers to the local transit company. In this way the transit company starts to pay for the people mover system when it does not bear the costs due to the replaced busline, transferring to privates only a part of the cost so saved. To cover the whole fixed cost (5,882,353 $), at an interest rate of 8%, the transit company has to pay an annual amortization rate of 876,644 $, a figure lower than the savings resulting from the replacement of the busline, whose annual cost is 1,390,707 $. Furthermore, sponsors gain every year, besides the interest due to the amortization rate, an annual operating profit of 75,898 $.

8 242 Urban Transport and the Environment for the 21st Century Thus the internal rate of return of the proposed people mover system is 10% and it is comparable with the actual rates of interest on the italian market of BTP (Long-Term Treasure Bond) - we think privates will be interested in financing urban transport facilities. References [1] 1, 4, 5: E Musso; 2, 3, 5: C Ferrari [2] Marchese, U. Lineamenti e problemi di Economia del Trasporti, ECIG, Geneva, 1996 [3] Musso, E. - Ferrari, C. Optimization of choices in urban transport planning: a multicriterial model, in Urban Transport and the Environment 77, ed. J.M. Baldasano Recio, L.J. Sucharov, Computational Mechanics Publications, Southampton, 1996 [4] The World Bank, Infrastructure Development in East Asia and Pacific, Washington DC. [5] Gorelli, C - Piacentini, P.M. - Rostirolla, P. II Project Financing e il finanziamento delle opere pubbliche, Bancaria Editrice, Roma, 1995 [6] Consiglio Nazionale delle Ricerche (CNR) II finanziamento privato delle infrastrutture, Franco Angeli, Milano, 1995

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