Public-Private Partnerships Case Study #6

Automatic Collection System (AFCS): The Case of Manila By Mathieu Verougstraete and Ed MacDonagh (February 2016)

This case study examines how governments may benefit from involving the private sector in integrated ticketing services for urban systems and how Public- Private Partnership (PPP) structure can be used to introduce modern technology

BACKGROUND ADVANTAGES OF THE SYSTEM Contactless smartcards, first implemented In Manila, the smartcard technology brings in the late 1990s in Hong Kong and Seoul, now important benefits to the more than 1 are increasingly favoured for urban transport million daily passengers who use the fare collection systems.1 Typically the size of lines, to the authorities operating these lines, a credit card, smartcards hold a microchip as well as to the wider public.3 which stores and transmits data through radio frequency identification (RFID), allowing the Benefits for the government / operator smartcard to communicate with a device (within 10 centimetres) without physical Efficient fare collection: contact. Smartcards are also able to store Traditionally, the cost of collecting cash from enough information to process monetary multiple fare-collection points in a city has transactions and profile a card holder’s details been considerable. Such a system requires for security purposes. With these systems, security, and a lot of manpower is expended users no longer need coins, tokens or paper counting coins and reconciling trips with tickets. the amount collected.4 Smartcards can reduce these expenses while allowing ticket Recognizing the benefits of these smartcards, inspectors to spend more time in targeting public authorities in the Philippines decided areas with higher incidence of illegal or irregular card use.5 Accuracy of revenue to introduce this technology for the three ESCAP supports govern- Systems in Manila: namely collection is also greatly improved, as with ments in Asia-Pacific in the Light Rail Transit Line No. 1 (LRT 1), the automatic fare collection systems, no money implementing measures Light Rail Transit Line No. 2 (LRT 2), and the needs to be counted, and inconsistencies are to efficiently involve Mass Rail Transit Line No. 3 (MRT 3). eradicated as there is an accurate record of the private sector in every transaction. infrastructure develop- All three lines (including 44 stations) have ment. This case study been utilizing magnetic stripe card - fare Cases of fraud can also be greatly reduced – is part of this effort and collection technology. However, this system a UK Department for Transport study shows promotes exchange of experience among the that since the introduction of the Oyster is currently at the end of its usability. Such countries of the region cards are more fragile than smartcards, Card (i.e. the smartcard system used on easily damaged and no longer readable if in London), the percentage For further information scratched or bent. Furthermore, the memory of irregular (journeys made with consult our website capacity of these cards is significantly lower either no ticket or the wrong ticket) fell by or contact than smartcards. This not only limits the approximately 2.5% to 1.5% of total journeys Transport Division made. It was estimated that this reduction in complexity and range of ticket types than can United Nations ESCAP be ascribed to the card, but also means that fraud represented cost savings of up to £40m recording the identity of the card holder is not per year.6 Telephone: usually practicable.2 (66) 2-288-1371

Email: [email protected] More informed transport planning: Benefits for the passenger AFCS data can Typically, the data used to inform transport User friendly/integrated ticketing system: help governments policy and the planning of service provision has been gathered from sources such as Smartcards are, first and foremost, simple to understand use, allowing passengers seamless transfers passenger travel annual travel surveys, which are costly and inevitably provide only a small sample of all from one line (or mode of transport) to demands, providing journeys undertaken in the system.7 AFCS another, which in turn, can also allow for enhanced planning data can supersede traditional manual greater flexibility in a passenger’s travel & optimum asset surveys because its collection at the time of plans. A single multi-purpose card can utilization transaction incurs essentially no marginal also encourage more people to use public cost to the transport agency. AFCS data also transport as well as facilitate multimodal represents a complete sample of journeys travel behaviour that is encouraged by made by passengers using smartcards. operators and transport planners. Journeys For these reasons, AFCS data is hugely no longer need to be pre-scheduled and valuable and can support governments in tickets bought in advance. ‘Pay as you go’ understanding passenger travel demands, (PAYG) features also ensure that passengers thus allowing for better operations and get exactly what they pay for, as the card is planning and for optimum asset utilization.8 swiped at the beginning and end of every journey. Enhanced demand management: Governments primarily aim to promote public Reduced journey time: transport usage by investing in the supply A key advantage of smartcards for passengers of new infrastructure and rolling stock. is shorter journey times (through faster Implementing smartcard ticketing provides an transaction times and reduced queueing opportunity for governments to considerably at ticket offices and barriers). Typically, influence the demand for public transport a smartcard transaction takes just 150 and to support a move away from private cars. milliseconds to complete, and with public With open access to complete travel data on transport employees no longer required to the demand side, transport operators can collect and issue tickets, smartcard provide discounts on journeys to and from ticketing systems enable substantial savings specific locations at certain times to stimulate in times. In London for example, the the spread of demand across a network, has contributed to a significant maximizing its revenue earning potential and reduction in queue times at ticket machines: encouraging increased patronage in off peak the average ticket office queue time has gone periods.9 down from 129 seconds pre-Oyster to 78 seconds post Oyster - a reduction of 40%; this is in spite of a reduction in the number of ticket offices in operation.10 An improved daily passenger flow in and out of stations can Revenue streams also, in turn, ease congestion - particularly The Philippine’s in densely populated urban environments Importantly, the Philippine’s new AFCS new AFCS system such as Manila, and cases where ridership system will come at no extra cost to the will come at no is increasing year on year. Consequently, passenger, as well as to the government. The extra cost to the operators are able to increase service government support for this project in this respect is very limited, with the government passenger as frequency, enhancing the utility of transport well as to the assets. only providing a 5-year exclusivity right on the ticketing services for the light rail systems. Government The private operator will be installing the PPP STRUCTURE new ticket gates as well as operating the Where Manila’s AFCS system differs from system and is not expected to make any profit its counterparts in Singapore and Hong- on fare transactions. In effect, the winning Kong is that the provider of the fare system bidder pays the government a premium of is not a subsidiary of the public operator. It Php1,088,103,900 (roughly $23.4 million) is a private company contracted through a on top of the project cost of installing and Public-Private Partnership (PPP) structure. operating the AFCS; probably a first in the In January 2014, the AF Consortium, led history of this type of system.12 by Metro Pacific and Ayala, was awarded In return, the private consortium expects the P1.72 billion / USD 38.22 million to make an appropriate return on capital Automatic Fare Collection System contract invested out of areas it will expand into such by the Department of Transportation and as commercial payment in shopping malls, Communications. The AF Consortium will run customer loyalty schemes, etc. Indeed, the system for 10 years, inclusive of 2 years the AFCS system has been designed to development/delivery, and will be responsible accommodate a roll out into other modes for the financing, installation, construction, of transport and/or micro-payment services refurbishment, and maintenance of the outside of public transport.13 In this respect, automatic gates for the existing LRT ½ and the large and widespread user base of the MRT 3. A central clearing house system card system will make its expansion a highly will also be introduced by the private sector viable option - as in the case of the Octopus that will perform validation and clearing of Card in Hong Kong, which was initially all transactions. In effect, the private sector launched in 1997 for use on and will build, operate and maintain the fare MTR. Currently the is used by collection system throughout its duration. 99 per cent of people in Hong Kong aged Competitive tendering between 16 and 64 and for over 13 million transactions a day, valued at over HK$160 In the procurement of Manila’s new AFCS, million.14 A large share of revenues for the the government of the Philippines was Octopus Card are coming from outside able to induce healthy competition in the transport, with the card system currently bid to operate the new AFCS system, with involving over 7,000 service providers. 33 prospective bidders and 5 prequalified For example, the Octopus card is used for bidders initially competing for the payment in outlets such as supermarkets and opportunity. This was perhaps a consequence convenient stores, for controlling access to of the technology being in a well-developed and as a platform for loyalty reward market and standardized, with a number of schemes.15 suppliers providing these services already. The high number of bidders may also have been System Implementation a result of the Philippines attractive policy The first year of implementation, post- environment which has improved considerably signing, is crucial, as it is during this in recent years. In 2014 the Economist time where there is a real risk for PPPs. Intelligence Unit (EIU) named the country Public authorities (particularly those new as having the ‘most improved regulatory to PPPs) have a tendency to focus on the and institutional frameworks’ and ‘improved transaction only, whilst losing focus on later 11 investment climate and financial facilities’. managing the contract once signed. Proper Many bidders, including the winning AF implementation of the project, however, Consortium, also saw the potential to expand depends on the quality of the post-signing the AFCS system into other transport areas management so that governments do not as well as the retail sector. As a result of the take on any unnecessary risks. Once the number of bidders, operation costs were, contract is signed, senior government officials therefore, driven down within such a highly and policy makers (in the executive office, competitive environment. ministry of finance, ministry of planning, transport ministries, etc.) have an important • Through accessing the efficiency of the role to play in reviewing plans, protecting private sector, the new AFCS system brings consumer rights, providing information, and a range of benefits for the government so forth. There must be a shared vision on including risk transfer (to the private implementation, a strong project management sector), enhanced demand management, plan, clear defined roles and responsibilities more informed transport planning and for all involved parties, and close efficient fare collection. collaboration between public and private bodies for a PPP project to be successful. • It will also provide a secure and reliable With a PPP structure there is however a strong form of ticketing for passengers, both easier incentive for the private sector to speed up to use and reducing journey times, thereby the implementation as revenues can only be improving the overall passenger experience. generated once the system is in operation. • Fundamentally, such benefits are coming at no extra cost to either the government or System expansion passenger, as the investment in this new Large cities such as Manila are particularly system has come entirely from the private well suited to AFCS implementation, owing sector. to their high volume of people and large Manila is, therefore, an excellent case study customer base. Such elements offer huge showing the positive potential of private sector incentives for expansion and the new Manila investment as an alternative implementation AFCS system is planned to service other method for governments. Learning from this transport modes (i.e., buses, taxis, etc.) and experience, other countries in the region are become the preferred payment method for considering a similar approach. For example, each of them. After this, the new smartcard the Kyrgyz authorities hope to introduce ticketing system may also be rolled out to an electronic payment system in public parking, small merchants, vending machines, transportation. The estimated cost for this etc. serving as an electronic micropayment project will be USD 2.4 million (currently at solution in convenience stores and bringing the feasibility study stage) and the project is multiple economic benefits with it. In also designed to apply contactless payment doing so, the contactless will for taxi fares, public parking, etc. offer a single integrated card that meets the requirements of both transit and retail- financial payment applications: ease of use, End Notes fast and accurate transactions, ability to 1 TCRP (2003), Report 94 - Fare Policies, Structures and replace cash, security and data collection for Technologies: Update 2 improved customer identification and service. European Commission (2011), Study on Public Transport In order to be effective across multiple Smartcards – Final Report – European Commission 3 markets, decision makers from both the Republic of the Philippines – Department of Transportation and Communications & Light Rail Transit Authority (2012), public and private sector in this PPP project Project Information Memorandum. will need to work closely together. For future 4 RFID Journal, http://www.rfidjournal.com/articles/view?12137 extension work to be done easily with other (Accessed November 10, 2015) suppliers, it is essential that the system is 5 Hong, Y. (2006), Transition to Smart Card Technology: How Transit Op- kept open by requesting the private operator erators Can Encourage the Take-Up of Smart Card Technology. Thesis, Master to publicize the exact technical specifications of Science in Transportation, MIT. 6&10 UK Department for Transport (2009), Smart and Integrated of the system. However, the private Ticketing Strategy companies concerned, may wish to keep it a 7&9 Tourism & Transport Forum (TTF) (July 2010), Position closed system to ensure a monopoly position. Paper Smartcard ticketing on public transport. 8 Rail Transit OD Matrix Estimation and Journey Time Reli- ability Metrics Using Automated Fare Data (2007), Chan, CONCLUSION AND OUTLOOK: Joanne, S.M. Massachusetts Institute of Technology, Citable For the Philippine government, the URI: http://hdl.handle.net/1721.1/38955 11 Economist Intelligence Unit (EIU), Evaluating the environ- introduction of a private partner to implement ment for public-private partnerships in Asia-Pacific The 2014 and run a new AFCS system was an ideal Infrascope scenario in a number of respects: 12 Intervierw with Rebel Group 13 Project Information Memorandum, 2012, Department of • Primarily, the PPP mechanism was a Transportation and Communications & Light Rail Transit Authority - http:// way of investing in much needed public www.dotc.gov.ph/images/PPP/2012/1.7BContactlessAFCS/Project%20 infrastructure, achieving efficiency Information%20Memorandum%20(DP%2012-21-12).pdf 14 Octopus http://www.octopus.com.hk/web09_include/_document/en/com- improvements, whilst limiting the impact on pany_profile.pdf - accessed February 2016 public budget. 15 http://www.intangiblebusiness.com/news/marketing/2005/06/smart-cards-cashing- in-on-an-untapped-market & http://www.octopus.com.hk/octopus-for-businesses/ business-applications/en/index.html - accessed February 2016

Please note that this case study has been issued without formal editing