Lessons from Urban Rail PPP

Projects in Asia
Knowledge sharing event-Organized by TCoP Railways
Place
of presentation
here
and
PPP subtitle
and Innovative
Financing Advisory
Teams

16 October 2014

Takeshi Fukayama
Transport Specialist, CWTC

Introduction
Given public sector budget constraints/
cost of urban rail systems, PPP models
are seen as potential mechanisms to
incentivize private funding/improving
system operations.
This presentation focuses on 4 case
studies of urban rail PPP Projects in Asia,
and discusses the lessons.*
2

*Analysis in this presentation is based on H. Yamauchi, T. Fukayama et al,

Transport Infrastructure and Private Finance (in Japanese; 2014)

Contents
Background of Applying PPP Models
Framework/Case Study Overview
Case Studies
o Seoul (Metro Line9)
o Manila (MRT-3)
o Kuala Lumpur (STAR)
o Delhi (Airport Line)

Lessons/Implications to ADB
3

Background of Applying
PPP Models

Trend of Transport PPP Projects

(Million USD
25000

20000

15000

South Asia
East Asia and Pacific

10000

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

5000

Figure: Investments in Transport (Airports/ Roads/ Railways/ Seaports)

PPP Projects in Asian Region
SourceWorld Bank PPI database
5

Reasons of Increasing PPP

Projects in Asia after 1990s*
Strong infrastructure demand/limitation of
public finance
Expectations to private sectors
o Private entities management knowhow and
technology
o Efficient operation through market mechanism

Requests by IMF, IBRD and ADB for

privatization of infrastructure market
*Ryuichi Kaga, Infrastructure Business in Asia (2013)
6

Typical Characteristics of
Urban Rail Project
Capital intensive/long term project
Lower tariff/less tariff escalation
High demand risk due to:
o Less conversion from other modes
o Less integration with other modes
o Insufficient urban planning/execution

Comprised of various subsystems

Various stakeholders involvement
7

Typical Business/Financing Model

of Urban Rail Project
Shareholder

Lender

Finance

Government/
Public Utility

Concession
agreement,
etc.

O&M
contract

SPC

EPC contract
Construction
Supplier

E&M
Supplier

SPC: Special Purpose Company

EPCEngineering, Procurement and Construction
O&M: Operation and Maintenance
E&M: Electrical and Mechanical

Operator
Maintenance
Supplier

Framework/Case Study Overview

Framework of Case Study

Background and needs
o PPP system -intuitional settings in the country
o Transportation needs -in the city

Urban rail development (brief history)

Business/financial scheme (actors)
What happened
o Output/outcome
o Risk occurred (e.g. revenue risk)
o Exit from the project
10

Case Study Overview

City

Seoul

Manila

Kuala Lumpur

Delhi

Line

Metro Line 9

MRT-3

STAR

Airport Line

Opened

2009

2000

1996

2011

Route extension

26km

17km

27km

19km

PPP scheme

BTO

BLT

BOO

BOT

Period of project

30 years

25 years

60 years

30 years

Investmentb$

1.6

0.7

0.9

1.2

Financial resources
Government
Equity
Debts

80%
7%
13%

0%
28%
72%

10%
10%
80%

50%
15%
35%

Partially
supplemented by
subsidy
Contract cancelled,
government took
over

Supplemented by
Viability
Gap
Funding(VGF)
Contract cancelled,
public corporation
took over

Supplemented by Burdened
by
Minimum revenue government
guarantee (MRG)
through lease
Transferred
to
Withdrawal
of
Exit from project
governmentmajor shareholder
affiliated institution
Revenue risk
hedging

11

BTO: Build-Transfer-Operate
BOO: Build-Own-Operate

BLTBuild-Lease-Transfer
BOT: Build-Operate-Transfer

Case Study 1
Seoul Metro Line 9

12

Backgrounds and Needs

PPP system
o PPI Act (1994)
o Amendment of PPI Act (1999)
o Two PPP schemes: BTO and BTL

Transportation needs
o Car transportation rapidly grew in 1970-80s
o Mass Transit Plan under Mayor Lee Myung-bak
o Bus system revolution (2003)
PPI: Private Participation in Infrastructure
13

Urban Rail Development

2

Seoul Metro operates Subway Line 1-4.

Seoul Metropolitan Rapid Transit
Corporation operates Lines 5-8.
Inefficient operation by those public
utilities were criticized

Line 1 Opened in
1974

14

Line 9 Opened in
2009 to connect
east-west of Seoul.

Business/ Financial Scheme

Shareholder
Contribution in kind: 8 Companies (Hyndai Rotem, etc) 51%
Capital investment:6 Companies(Macquarie Korea
Infrastructure Fund, Shinhan Bank, etc) 49%

Lender

Finance
Seoul
Metropolitan
Government
Civil work

Construction
Supplier
15

BTO for 30
years with
MRG

SPC
Metro9

Operation for
10 years
Maintenance

EPC contract for Track,

Station and E&M

Construction
Supplier

E&M Supplier
Hyundai Rotem, etc.

MRG: Minimum Revenue Guarantee

Operator
Seoul 9

Maint.
Supplier
Maintrance

Shareholder
Veolia 80%
Hyndai
Rotem 20%
Shareholder
Hyndai
Rotem 80%
Veolia 20%

What Happened
Output/outcome
o Efficient management and operation
o Expected return to shareholders

Risk materialized
o Announcement of a fare increase (2012)
o Criticism to MRG

Exit
o Macquarie to withdrawal (2013)
16

Case Study 2
Manila MRT-3

17

Backgrounds and Needs

PPP system
o BOT Law (1990)
o Amended BOT Law (1994)

Transportation needs
o Traffic worsened from 1970s
o High density, high hazard risks
o Many transportation plans have been made
by JICA , World Bank, etc.
18

Urban Rail Development

2
LRT-2 opened in
2003 using ODA
from Japan.

1
LRT-1 opened in
1985 using ODA
from Belgium; and
renewal
investments were
provided by ODA
from Japan.

19

3
MRT-3 opened in
2000 using a PPP
model. Alignment
is on EDSA.

Business/ Financial Scheme

Shareholder
Ayala, Fil-Estate, etc.

Lender

Finance

DOTC
Operation

BLT for 25
years
(DOTC pays
ERP to SPC)

SPC
MRTC

Maintenance

Maintenance
Supplier
Sumitomo Corp
TESP(Affiliated
company of MHI)

Turnkey EPC contract

EPC Supplier
Sumitomo Corp
Mitsubishi Heavy Industry
20

DOTC: Department of Transportation and Communication

ERP: Equity Rental Payment

What Happened
Output/outcome
o Continuously increased passengers
o Land development at stations

Risk materialized
o Insufficient capacity
o Low fare level
o Maintenance problems

Exit
o Original shareholders were taken over by the
government-related financial institutes
21

Case Study 3
Kuala Lumpur STAR

22

Backgrounds and Needs

PPP system
o 6th Malaysia Plan (1991-1995)
o Bond finance, including Islamic finance

Transportation needs
o Road based -highways developed in 1990s
o Cheap gas price with subsidies
o KL urban plan indicated the needs for urban
rail (1984)
23

Urban Rail Development

2
PUTRA (Kelana
Jaya Line) opened
in 1998. The
railway system is
using a linier
motor technology.

3
KL Monorail
opened in
2003.

1
STAR(Ampang
Line) opened
as the first
urban rail in
Kuara Lumpur
in 1996.

24

Business/ Financial Scheme

Shareholder
KL Transit Group Assets* 30%
Malaysian Employees Provident Fund 25%, etc.

Lender

Finance
Government
of Malaysia

Concession
for 60 years

SPC
STAR
EPC contract

Construction Supplier
Taylor Woodrow

25

E&M Supplier
Adtranz (ABB Daimler Benz
Transportation)

*A 50:50 joint venture between Germanys AEG Pte Ltd, the electronics
division of Daimler-Benz, and British construction firm Taylor-Woodrow.

What Happened
Output/outcome
o Introduction of rail systems with foreign technology
o Incubation of the railway industry

Risk materialized
o Optimistic demand forecast
o Asian currency crisis (1997)

Exit
o Ownership of STAR/PUTRA/KL monorail transferred
to 100% government-owned PRASARNA (20042007)
26

Case Study 4
Delhi Airport Line

27

Backgrounds and Needs

PPP system
o PPP system established in mid-2000s
o VGF scheme (2005)

Transportation needs
o Serious traffic problem since 1980s
o A need to connect the airport to center-city
o National plan recommends to develop a metro
system when PHPDT >20,000 for at least
5km, etc.
28

VGF: Viability Gap Funding

PHPDT: Peak Hour Peak Direction Traffic

Urban Rail Development

Delhi Metro started
operation in 2002;
and currently 6 lines
are operated.
Planed total length
in Delhi Metro is
400km, 20 routes,
and 200 or more
stations.

29

Airport Line
opened in
2011 using PPP
model.

Business/ Financial Scheme

Shareholder
Reliance Infra 95%
CAF 5%

Lender

Finance

DMRC

BOT for 30
years

Civil work

Construction Supplier

30

SPC
DAMEPL
EPC contract
EPC Supplier
CAF(Rolling stock),
Siemens(Signals) etc.

DMRC: Delhi Metropolitan Railway Corporation

DAMEPL: Delhi Airport Metro Express Private Ltd.
CAF: Construcciones y Auxiliar de Ferrocarriles

What Happened
Output/outcome
o Efficient procurement -zero VGF bidding

Risk materialized
o Services suspended due to civil structure
problems
o Services resumed but with speed limit of 50km/h

Exit
o The contractor suspended services/announced
cancellation of the concession contract (2013)
o DMRC took over the operation
31

Lessons/Implications to ADB

32

Lesson (1)- Funding

Government funding share:
o Seoul 80%
o Manila 0%100%
o KL
10%100%
o Delhi : 50%

Required an explicit definition of the

governments funding portion at the design
stage
33

Lesson (2) Risk Sharing

Revenue risk incurred by the government:
o Seoul Up to the limit of the MRG
o Manila100%
o KL
: 0%
o Delhi : 0%

Required an agreement on demand/

revenue risk sharing and the governments
commitment at the design stage
34

Lesson (3)-Incentive setting

Output/outcome:
o All cases: Transportation assets through buying
time in terms of funding and technology
o Seoul: Introduction of efficient management
o Manila: Synergetic effect with land development
o KL: Incubation of railway industry

Required a design of incentives for the

private sector to realize the governments
policy intentions
35

Implications to ADB
No cases made all stakeholders happy
PPP in railway might work in such
conditions as:
o Under availability payment mechanism
o Smaller size project in cost/scope
o Cases in which require competition

ADBs role not only for a project execution

but also for whole railway policy setting
36

Thanks.

37