Experience from EBRD's urban transport sector financing

1. Experience from EBRD's urban transport sector financing Abbas Ofarinov, Principal Banker 27 September 2013

2. Partnering for urban development 15 years of municipal finance at EBRD

3. EBRD and municipal finance • Activity started in 1994 • 300 projects signed • €5bn invested by EBRD • 2011 a record year with €600m invested

4. Appetite for private and non-sovereign risk for municipal infrastructure

5. Diversified across municipal sectors

6. Diversified across EBRD sub-regions New EU member states: Romania & Bulgaria New EU member states: Central Europe Western Balkans Other CIS

7. What attracts EBRD to the urban transport sector?

8. 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

9. 50+ urban transport projects and €1000 million invested thus far since mid-90s • Kazakhstan • CNG Buses, Trolleybuses • Serbia • Belgrade Sava Bridge, trams, buses, ITS • Ukraine • Kiev (Metro, Trolleybus, Bus, ITS); Lviv Trams and ITS • Armenia • Yerevan (Metro) • Macedonia • Skopje ITS • Project examples: • Poland • Warsaw (Metro & Tram), Krakow, Gdansk; Lodz; Sopot • Romania • Bucharest (Multisector); Iasi Tram; Arad Tram • Bulgaria • Sofia (Tram), Plovdiv, Burgas • Turkey • Istanbul Ferries, Bursa LRT, Gaziantep CNG Buses • Kyrgyzstan • Bishkek (Trolleybuses)

10. 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

11. Operator Passengers Municipality • Typical Arrangement for Public Transport Companies • prior to EBRD involvement • Downward • spiral effect • Revenue from fares (cash-based) collected and distributed • Chronic financial gaps Annual, ad hoc subsidy payment (Dependent on budget availability, other priorities)

12. The EBRD Approach to financing urban transport projects • The EBRD promotes decentralised decision-making and financing to both public and private clients

13. EBRD promotes broad trend in urban transport finance • EBRD’s ‘bread and butter’ How is this done? DECENTRALISATION 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

14. The Public Service Contract: the lynchpin of EBRD urban transport financing

15. 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)

16. 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)

17. 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

18. Operator Passengers Municipality • Lending structure: EBRD corporate loan • to Muni Operator backed by PSC, off-balance for City • Revenue from e-ticket fares collected and distributed • Loan Agreement PSC (Payments per km for services rendered ) based on pre-defined performance standards • Municipal Support Agreement to Sign and Maintain PSC for duration of loan

19. Central Bank to beneficiary Operator Governorate and TRA Passengers • Possible Lending structure: EBRD sovereign loan • (Central Bank), beneficiary agreement with CTA, • backed by PSC • Revenue from e-ticket fares collected and distributed • Loan Agreement PSC (Payments per km for services rendered ) based on pre-defined performance standards • Support Agreement to Sign and Maintain PSC for duration of loan

20. 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.

21. 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

22. 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

23. 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)

24. 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 • 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

25. 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)

26. Project Examplesbased on PSC

27. 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 Siemens-NEWAG) TC- The Bank provided technical assistance, funded by Austria, 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 POLAND: Warsaw Metro Wagons

28. 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

29. …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

30. 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

31. 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

32. 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

33. Contacts • Matthew Jordan-Tank • Senior Transport Specialist • tel: +44 20 7338 7498 • email: jordantm@ebrd.com • Abbas Ofarinov • Principal Banker • tel: +7 727 332 0019 • email: ofarinoa@ebrd.com • European Bank for Reconstruction and Development • One Exchange Square, London EC2A 2JN • www.ebrd.com/mei