Experience from EBRD's urban transport sector financing

Abbas Ofarinov, Principal Banker 27 September 2013

Partnering for urban development

15 years of municipal finance at EBRD EBRD and municipal finance

700 5000

4500 600  Activity started 4000

in 1994 500 3500

3000  300 projects 400 signed 2500 300 2000  €5bn invested by EBRD 200 1500

1000  2011 a record 100 year with 500 €600m 0 0 invested 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Business volume Net Cumulative Business Volume

3 Appetite for private and non-sovereign risk for municipal infrastructure

4 Diversified across municipal sectors

5 Diversified across EBRD sub-regions

New EU member states: New EU member states: & Central Europe Western Balkans

Other CIS

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What attracts EBRD to the urban transport sector? 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

8 50+ urban transport projects and €1000 million invested thus far since mid-90s

Project examples: Kazakhstan ( & Tram), Krakow, CNG Buses, Trolleybuses Gdansk; Lodz; Sopot Serbia Romania Belgrade Sava Bridge, trams, Bucharest (Multisector); Iasi Tram; buses, ITS Arad Tram Bulgaria Kiev (Metro, Trolleybus, Bus, ITS); Sofia (Tram), Plovdiv, Burgas Lviv Trams and ITS Armenia Istanbul Ferries, Bursa LRT, Yerevan (Metro) Gaziantep CNG Buses Macedonia Kyrgyzstan Skopje ITS Bishkek (Trolleybuses) 9 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

10 Typical Arrangement for Public Transport Companies prior to EBRD involvement

Downward spiral effect Revenue from fares (cash-based) collected and distributed Loss of accountability

Maintenance relaxed, Chronic financial gaps New investment wanes Annual, ad hoc subsidy Asset quality Passengers Dependent on declines payment ( budget availability, other priorities)

Service standards slip, poor operational focus

Passenger numbers drop

Car congestion increases Municipality

11 The EBRD Approach to financing urban transport projects

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

12 EBRD promotes broad trend in urban transport finance

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

Sovereign-backed Municipality loans Utility loans Utility corporate PPP/concessionaire loans Self-financing supported by cities loans or bonds loans to privatisation Cheap but can independence for cities Off-balance sheet Self-financing Private sector become politicised Higher cost and borrowing for the city independence for indebtedness burden on city debt Need to be backed by utilities book Public Service Entirely based on Contract + Municipal company Support Agreements creditworthiness / PSC

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

13 The Public Service Contract: the lynchpin of EBRD urban transport financing 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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What is a PSC?

 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)

16 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

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

Revenue from e-ticket Loan fares collected and distributed Agreement

PSC (Payments per km for services rendered ) based on pre-defined Passengers performance standards

Municipal Support Agreement to Sign and Maintain PSC for duration of loan

Municipality

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

Revenue from e-ticket Loan fares collected and distributed Agreement

PSC (Payments per km for services rendered ) based on pre-defined Passengers performance standards

Support Agreement to Sign and Maintain PSC for duration of loan

Governorate and TRA

19 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.

20 Advantages of PSC for City

 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

21 Advantages of PSC for Public Transport Operator

 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

22 Basic Content of a typical PSC

. 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)

23 Basic Content of a typical PSC (cont.)

• 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

24 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)

25 Project Examples based on PSC 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 -NEWAG) TC - The Bank provided technical assistance, funded by , 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

27 TURKEY: Bursa LRT (Phase II) : clean and modern 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

28 …to serve the mobility needs for the continued 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

29 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

30 KAZAHKSTAN: 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

31 Almaty 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

32 Contacts

Matthew Jordan-Tank Senior Transport Specialist tel: +44 20 7338 7498 email: [email protected]

Abbas Ofarinov Principal Banker tel: +7 727 332 0019 email: [email protected]

European Bank for Reconstruction and Development One Exchange Square, London EC2A 2JN www.ebrd.com/mei

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