Vietnam

Asian Development Bank
Public Private Infrastructure Advisory Facility

TA 4862-VIE:
Preparing the Ho Chi Minh
City Metro Rail System -
PPIAF Study -
Completion Report
August 2008

Preparing the HCMC Metro Rail System Completion Report
Asian Development Bank and PPIAF

TableofContents
Synopsis ..................................................................................................................................................... i
1. Introduction .................................................................................................................................. 1
1.1 Background ........................................................................................................................ 1
1.2 Objectives of PPIAF Technical Assistance ................................................................... 2
1.3 This Completion Report ................................................................................................... 2
1.4 Study Team ......................................................................................................................... 3
2. Activity 1: Framework for Considering Private Sector Participation (PSP) Options
Development ................................................................................................................................ 4
3. Activities 2 and 3: Financial Modeling Including Risk ........................................................... 8
3.1 Financial Model ................................................................................................................. 8
3.2 Financing and Delivery Options ..................................................................................... 8
3.3 Value for Money (VFM) Test .......................................................................................... 8
3.3.1. Assumptions and contingencies ......................................................................... 9
4. Activity 4: Stakeholder Feedback and Implementation Arrangements .............................. 11
4.1 Key Tasks ......................................................................................................................... 11
4.2 Key Stakeholders ............................................................................................................. 11
4.3 Transport Agencies and Functions in HCMC ............................................................ 13
4.4 Key Laws .......................................................................................................................... 13
4.5 Institutional Options ....................................................................................................... 14
4.6 Fares and Ticketing ......................................................................................................... 17
4.7 Building Technical and Managerial Capacity ............................................................... 20
Appendix A: Issues and Options for Private Sector Participation and Concession Template
Working Paper ............................................................................................................................ 22
Appendix B: Financial Modeling Working Paper ............................................................................ 23
Appendix C: Stakeholder Feedback and Implementation Arrangements: Institutional Options
Working Paper ............................................................................................................................ 24
Appendix D: Fares and Ticketing Working Paper .......................................................................... 25
References and Bibliography ............................................................................................................... 26

i


ii

Abbreviations

ADB Asian Development Bank
BOT Build-Operate-Transfer
DOPI Department of Planning & Investment, HCMC
PC
DNRE Department of Natural Resources &
Environment, HCMC PC
DOF Department of Finance, HCMC PC
DTUPWS Department of Transport & Urban Public
Works & Services, HCMC PC
DUPA Department of Urban Planning & Architecture,
HCMC PC
GVN Government of Viet Nam
HCMC Ho Chi Minh City
HIFU Ho Chi Minh City Infrastructure Fund for
Urban Development
IFI International Financial Institution
ODA Official Development Assistance
PC Peoples Committee
PPI Private Participation in Infrastructure
PPIAF Public Private Infrastructure Advisory Facility
PPP Public-Private Partnership
PSP Private Sector Participation
SOE State Owned Enterprise
TA Technical Assistance
ToR Terms of Reference
MAUR Management Authority for Urban Railways,
HCMC PC

Synopsis
Rail based Mass Rapid Transit (MRT) is a key component of Ho Chi Minh Citys urban
transport strategy. But MRT is expensive. MRT therefore requires good integration with bus
services and other modes, convenient access for pedestrians and coordinated land use
intensification to optimize MRTs potential.
Development of MRT of most benefit to the community requires a focus on the development
of integrated network of services that are well integrated with bus, and that provide the fastest,
most convenient and affordable journey possible between home and work and all the other
origins and destinations in the city.
A focus on how to secure the operation of efficient, high quality, and responsive MRT
services, and integrated ticketing and fares, is therefore very important and is a necessary
complement to the implementation of high quality MRT infrastructure.
Recognizing the importance of efficient MRT operations and services ADB mobilized a grant
from the Public Private Infrastructure Advisory Facility (PPIAF) to develop appropriate short
term and longer term implementation and management arrangements for MRT in the context
of wider urban transport, including options for how best to optimize private sector
participation in MRT.
The objectives of the PPIAF technical assistance (TA) therefore included developing (i) a
framework for considering private sector participation in implementation and operation of the
Project; (ii) a value-for-money analysis for implementation approaches that involve varying
degrees of private sector participation, (iii) a detailed financial model reflecting the preferred
approach and measuring the performance of the project from the points of view of the
government and private sector participants; and (iv) a stakeholder feedback and a description
of necessary institutional and contractual arrangements given the preferred implementation
approach.
A summary of the work undertaken is contained in the attached report along with copies of
the key working papers produced by the TA.

Si


1. Introduction
1.1 Background
With a population of approximately 6.1 million in 2004, HCMC is the largest city in Viet Nam
and its economic hub. HCMC has a total administrative area of 2,095 km2 covering 19 urban
and five suburban/rural districts. The average population density is about 2,900 inhabitants
per square km with a central area density of around 45,000 inhabitants per square km (JICA
2004). Approximately 2.3 million people were estimated to live in the three adjoining
provinces of Dong Nai, Binh Duong, and Long An which make up the Greater HCMC
region. Population for the region was forecast to reach 13.5 million by 2020 with 10 million in
HCMC by HOUTRANS (JICA 2004).
Current trends are for continuing rapid growth in incomes and motorization, increased
urbanization, and associated traffic congestion, and related pollution (local and global) and
crashes, which will to some extent reduce the productivity of regions, and therefore, Viet
Nams economy. Addressing this considerable challenge requires as its foundation appropriate
institutional and regulatory arrangements to coordinate land use and transport development
management, formulation and implementation of transport policies and infrastructure, and the
delivery of efficient integrated, multi-modal transport services.
The Peoples Committee (PC) of Ho Chi Minh City (HCMC), Viet Nam has initiated studies
to develop a rail mass rapid transit (MRT) system for the City based on the current MRT
Master Plan (as approved in January 2007). Prior to early 2008, tTwo lines (MRT2 and MRT3)
had been proposed for Asian Development Bank (ADB) funding with another line (MRT1) to
be financed by the Government of Japan
1
. The Government of China, is a developing a
proposal for an MRT line, there are other proposals including one from China for MRT,
Malaysian interests to develop a monorail, and for a French consortium to develop a tram
route.
ADB has mobilized a PPTA and selected a firm for the following components of the project
preparation for MRT Lines 2 and 3. The PPTA study, which commenced in May 2007 and is
to be completed in May 2008, is responsible for providing:
An optimized MRT Master Plan which integrates the currently proposed MRT lines into
a cohesive network with other modes, identifies required supporting policies, and
develops design parameters for the two project lines.
A feasibility assessment and preliminary engineering design for the two project lines.
The PPTA must confirm the engineering feasibility, and identify social and
environmental impacts for accurate cost estimation and financial appraisal.
A plan to support project implementation, including institutional and staffing
arrangements, capacity building, financing/funding options, and implementation
program.
In parallel, ADB mobilized a grant from the Public Private Infrastructure Advisory Facility
(PPIAF) to optimize private sector participation in MRT 2 and 3, and to assist the HCMC PC
to develop appropriate short term and longer term implementation and management
arrangements for MRT in the context of wider urban transport

1
During 2007, the JBICs role in funding increased with principal or sole involvement in the first three MRT
lines.
1


1.2 Objectives of PPIAF Technical Assistance
The objectives of the PPIAF technical assistance (TA) therefore included developing (i) a
framework for considering private sector participation in implementation and operation of the
Project; (ii) a value-for-money analysis for implementation approaches that involve varying
degrees of private sector participation, (iii) a detailed financial model reflecting the preferred
approach and measuring the performance of the project from the points of view of the
government and private sector participants; and (iv) a stakeholder feedback and a description
of necessary institutional and contractual arrangements given the preferred implementation
approach.
This PPIAF TA draws on detailed information on project costs, patronage and revenue
prepared by consultants undertaking the PPTA. The results of its work were presented in
conjunction with the work of the PPTA to ensure an integrated and complete business case
that the HCMC PC and ADB can use to direct implementation and ongoing operations.
1.3 This Completion Report
This Completion Report summarizes the key findings and recommendations of the TA. In
doing so, it draws upon the following reports, working papers or other outputs prepared by
the TA:
Table 1.1: Activities and Outputs
Activity Principal Outputs
1. Framework for Considering Private
Sector Participation (PSP) Options
Development

Issues and Options for Private Sector Participation
& Concession Template Working Paper
Vietnamese and English language versions (April 2008).
Refer Appendix A for English Version.
2. Risk and Value-for-Money Analysis

Financial Modeling Working Paper & Model
Vietnamese and English language versions (June 2008).
Refer Appendix B for English Version.
3. Financial Analysis: Financing Plan &
Financial Model
Financial Modeling as above
4. Stakeholder Feedback and
Implementation Arrangements
Inception Report English language version only
(March 2008)
Stakeholder Feedback and Implementation
Arrangements: Institutional Options Working
Paper Vietnamese and English language versions
(March 2008). Refer Appendix C for English Version.
Stakeholder Engagement Plan English language
version only (March 2008) Informal document.
Fares and Ticketing Working Paper Vietnamese
and English language versions (June 2008). Refer
Appendix D for English Version.
The PPIAF TA mobilized on March 3, 2008. Work proceeded intermittently in HCMC and
the consultants home offices over the period to July 2008. Subsequent sections of the report
discuss identified key issues and priorities and the work program formulated to meet the
2


requirements of the TA. Several meetings with key agencies were held including the
Management Authority for Urban Railways (MAUR) of the HCMC PC, other agencies of the
PC, financial institutions, the PPTA team and the visiting supervising mission from ADB.
1.4 Study Team
The PIAF consultant team responsible for preparing this report were greatly assisted by staff
from the HCMC PCs:
Management Authority for Urban Railways;
Department of Planning and Investment; and
Ho Chi Minh City Infrastructure Fund for Urban Development.
Important guidance was also provided by several ADB staff who visited HCMC during the
inception mission including: Dr Hubert Jenny, Senior Urban Development Specialist,
Southeast Asia Department, Infrastructure Division; Dr Antoine Kunth, Infrastructure
Specialist, Southeast Asia Infrastructure Division; Mr Le Dinh Thang, Program/Project
Implementation Officer, Viet Nam Resident Mission; Mr Jamie Leather, Senior Transport
Specialist, Energy, Transport and Water Division, Regional and Sustainable Development
Department, and Yuji Tsujiki Financial Analysis Specialist Infrastructure Division, Southeast
Asia Department.
David Margonstern, PADDI (Centres de prospective etetudes urbaines of the Rhone Alpes
Region, France), who worked closely with many departments in the HCMC PC provided
valuable inputs. Close cooperation with the PPTA team was also facilitated by the PPIAF
team making use of the PPTA teams office and day to day interaction.
The consultant study team consisted of:
Philip Sayeg, the Urban Transport Planning Specialist /Team Leader;
David Bray, Urban Transport Institutional Specialist; and
Dr Sudhisakdi Manibhandu, Private Sector Financing Specialist (Public Private
Partnerships).
3


2. Activity 1: Framework for Considering Private Sector
Participation (PSP) Options Development
Under this Activity, in accordance with the ToR for the TA, various opportunities to use the
private sector for implementing and operating rail mass rapid transit (MRT) in HCMC had to
be considered. The English language version of the Working Paper prepared for the TA
which is entitled Issues and Options for Private Sector Participation and Concession
Template (contained in Appendix A) provides full details of the work carried out which is
summarized below.
Options for private sector participation were considered with a broader view than any
individual MRT line in HCMC because the ultimate objective of the government is a
substantial increase in the use of public transport in the city, which in turn requires an
integrated public transport system. The use of the private sector is not addressed from an
ideological perspective, but rather as a means for securing the delivery of high quality MRT at
the lowest possible cost to the community.
The Working Paper notes that the private sector has been involved in MRT in nearby
countries in recent years: always for implementation of infrastructure; often for the operation
of services; and to a lesser extent for investment in MRT assets. It also notes general
experience that the cost of public sector operation of public transport is higher than with
private sector operation, and that there is a general worldwide trend to make greater use of the
private sector for the operation of public transport.
Consideration was given to the range of factors that affect the manner in which the private
sector could be involved. These factors have two broad influences. The first is the extent to
which the private sector could provide finance for implementation of the MRT. In this
respect, it appears that the current approach to MRT in HCMC is likely to result in fare and
related revenue that will, at best, cover operating costs and make a small contribution to
capital costs. Accordingly, the government will need to eventually pay the private sector for
most of the cost of any capital that the private sector might provide in the first instance to
implement the project. While the cost of capital to the private sector is generally more
expensive than the cost of capital for the government, the report notes that this may be offset
by lower costs that result from the transfer of manageable risk to the private sector and the
incentive for the private sector to better integrate assets and operations to reduce life-cycle
costs.
The second influence is on the form of the agreement between the government and the
organization that is to operate the MRT system (called the concessionaire). It is essential that
such an agreement be in place, irrespective of whether the concessionaire is a government or a
private organization. It is common for such agreements to have a term of around 30 years or
so, especially where the concessionaire contributes capital investment. There is also a need for
the agreement to include conditions that provide the operator with the incentive to undertake
their tasks in a manner that meets the governments objectives for MRT in HCMC.
There has been a tendency in the past to use a form of agreement wherein the concessionaire
keeps fare and other revenue for the MRT line to which the contract pertains and uses the
revenue to cover its costs. The government may need to provide supplementary financing if
the revenue available to the concessionaire is insufficient to met the costs. This approach,
called a Net Cost form of concession, has major limitations. In particular it does not facilitate
operation of an integrated public transport system and reduces the flexibility of the
government to develop the transport system and modify its urban transport policies over the
term of the concession. An alternative approach, called a Gross Cost form of concession, is
4


strongly recommended. Under it, revenue from fares accrues to the government, which in
turn pays the concessionaire for the services that the concessionaire provides. Refer Table 2.1
for a summary of the features of each approach.
Table 2.1: Summary of Net Cost and Gross Cost Concession Models
Net Cost Gross Cost
Infrastructure Government provides civil infrastructure. Concessionaire provides trains and related items such as
train control & communications systems and depot equipment.
Risk sharing Concessionaire assumes all patronage risk,
and shares extra profits (if any) with the
Authority.
Risk is shared between the Authority and
concessionaire. Optimum sharing of risk will minimise
the concession cost.
Revenue Concessionaire keeps revenue Fare revenue is given to the Authority
Services Concessionaire determines services to be
provided on the basis of profitability.
Authority sets service standards and the
concessionaire determines services based on these
standards.
Payments Concessionaire meets costs from its own
revenue. Additional payments may be
needed from the government if
concessionaires revenue is too low.
Authority pays the concessionaire for services
provided according to rates set on the basis of
competitive tendering and quantity/quality of service
provided.
Authority role Authority invites tenders & establishes a
concession; has only a small role
thereafter; difficult to vary contract
conditions.
Authority invites tenders and establishes a
concession; has a continuing major role in managing
the concession agreement; can vary conditions when
needed.
Source: Consultant
The Working Paper describes how this form of concession can be implemented to give the
concessionaire (or any other operator) the incentive to provide good quality services that meet
the needs of passengers at the lowest possible cost and with the least need for detailed
management of the concession contract by the government.
Four possible implementation options were considered. All four were subject to value-for-
money analysis as described in Section 3 of this report, to indicate the potential cost to the
government of delivering Line 2 of the MRT system and the provision of services on the line
over the long term. The results of this analysis will be presented in a separate report. The
options are:
Government financing, implementation and operation of the MRT.
Government financing and implementation of all MRT assets, and engagement of a
concessionaire to operate MRT services.
Government financing and implementation of MRT civil infrastructure, and
engagement of a concessionaire to finance and provide trains and related electrical and
mechanical equipment and systems, and to operate MRT services.
Private sector financing, implementation and operation of the MRT.
Key features of each of these four options are shown in Table 2.2.

5


Table 2.2: Features of Delivery and Financing Models
Public
Enterprise
Public
Implementation
with Operating
Concession (PI OC)
Train Supply and
Operating
Concession (TSOC)
Build, Operate &
Transfer
(BOT)
Delivery of:
Civil Infrastructure
and Fixed Equipment
Delivered through competitively tendered contracts to the
government.
Delivered through
competitively
tendered Net Cost
contract to the
government.
Trains, train control
and communications,
and depot equipment
Delivered through competitively tendered
contracts to the government.
Delivered through a
competitive tendered
Gross Cost concession.
Train services and
infrastructure
maintenance
Contract negotiated
with an SOE.
Competitively
tendered Gross Cost
contract.
Risk Transfer
Transfer of risk from
the government is
limited to the extent
allowed in
construction and
equipment supply
contracts. The
government retains
risk associated with
operations through
its ownership of the
operator.
As for the Public
Enterprise option but
can transfer operating
risk to the
concessionaire. Some
patronage risk can be
transferred through
the Gross Cost
concession. The
government retains
operating risk related
to mismatch between
trains it provides and
concessionaire needs.
The government
transfers more risk to
the concessionaire
than in the PIOC
option because the
concessionaire
purchases trains and
can therefore bear
more risk for
operations because
they have more control
over service quality.
Transfers the greatest
amount of risk from
the government, but
the government loses
flexibility for change
in policy and for
public transport
network integration.
Finance
and Fixed Equipment
Capital provided by the government. Capital provided by the
government.
Capital provided by
the concessionaire.
The government will
need to pay for costs
as specified in the
contract (to cover
both capital and O&M
costs net of fare
revenue, where fare
revenue will be much
less than the costs).
and communications,
and depot equipment
concessionaire. The
government pays for
costs as specified in the
contract (to cover both
capital and O&M costs).
Train services and
infrastructure
maintenance
The government
pays all costs
incurred by the SOE,
including working
capital
The government
pays for operating
and maintenance
costs as specified in
the contract.
Fare revenue The government
retains fare and
other revenue (or
pays SOE the
difference between
costs and revenue if
the SOE retains the
revenue).
Fare revenue accrues to the government. Concessionaire retains
fare and other
revenue.
Source: Consultant
The Gross Cost form of concession is recommended for the first three options. A Net Cost
form of concession is appropriate for the last option to allow the concessionaire to manage its
greater financial exposure in a way that minimizes its risks. In all four cases, the government
will eventually pay for the total cost of implementing and operating MRT. However, the total
cost to the government will vary. This occurs because the four options involve different ways
of allocating and managing MRT responsibilities, and hence the incentive and capacity for
those involved to manage the associated financial, engineering, operational and patronage
risks.
6


The report draws general conclusions about the relative merits of the four implementation/-
financing options, but does not unequivocally recommend any particular approach. Rather,
the intention of developing and assessing the options is to provide understanding that can
help the government with its consideration of an arrangement that is appropriate for HCMC.
Two other key recommendations are made. The first is that there should eventually be at least
two companies involved in the operation of MRT in HCMC. This puts competitive pressure
on each operator to improve its performance so that they are not seen to be inferior to the
other operator(s). It also provides data that the government can use to benchmark the
performance of the operators so that it can provide feedback to the operators on
opportunities for improved performance. Finally, it provides the government with flexibility in
the event that one operator fails to perform, with the capacity for another of the operators to
take over in the short term if that should become necessary. The second recommendation is
that international competitive tendering should be used to select the concessionaire, with the
likelihood that a foreign party will form a consortium with a local enterprise. This will bring
international experience and expertise to support the development of world class MRT in
HCMC and provide a sound basis for developing domestic skills in MRT.
Finally, the report presents an outline of a concession agreement and discusses the actions
needed to select a concessionaire and establish and manage a contract.
7


3. Activities 2 and 3: Financial Modeling Including Risk
There were several strands to the financial modeling work that are summarized below. The
English language version of the Working Paper prepared for the TA on this Activity is
contained in Appendix B.
3.1 Financial Model
Part of the PPIAF assignment has involved the development of a financial model capable of
being used in MRT network planning and in project preparation of the HCMC Line 2. The
model is used to perform two tasks: (i) a value-for-money (VfM) analysis of MRT project
development options identified in the assignment issues and options analysis for private
participation in the development of Line 2; and (ii) financial analysis of the HCMC Line 2.
The second task, ie financial analysis of Line 2, is reported in the PPTA study documentation.
A technical paper responding to the PPIAF terms of reference describes the financial model
and the VfM analysis carried out of development options for Line 2. The VfM analysis is
summarized in the following paragraphs.
3.2 Financing and Delivery Options
The Issues and Options study identifies for detailed examination four alternative
approachesincluding private sector participation and public private partnerships (PPP)to
project development of Line 2: (i) the project is developed by a state-owned enterprise (SOE),
with government taking maximum responsibility in project management, financing and service
delivery; (ii) the service delivery is by a private sector concessionaire, with government
retaining the remaining project responsibility; (iii) the operating concessionaire supplies (ie also
finances) the required trains and signaling and communications, and government retains all
other responsibility; and (iv) the project is developed as a build-operate-transfer (BOT)
concession, where the private sector take the maximum project responsibility, allowing
government to play only a monitoring and evaluation role, at least in theory.
3.3 Value for Money (VFM) Test
The potential cost to the community of the four options is evaluated and compared in a
quantitative value-for-money (VfM) test. It is common experience that government generally
faces a lower financing cost compared to the private sector. At the same time, statistical
analyses
1
of international transport projects provide well-founded evidence of substantial
public sector optimism bias (a propensity for actual cost to exceed forecast or for actual
revenue to fall short of forecast) in project capital cost estimates. Now, common experience
suggests that, much more than the bureaucratic organization, a private sector enterprise is
generally under strong motivation to manage uncertainly in project planning and
implementation. Meanwhile, studies of privatized public transport
2
, especially bus, indicate
that the private sector can be expected to deliver service at a cost significantly lower than the
public sector. Thus, in theory, an MRT project development with an appropriate assignment
of responsibility and risk between government and the private sector concessionaire could
yield a lower expected cost, risk taken into account, compared to a eg a pure government
effort.

1
See references in Financial Model paper.
2
See Issues and Options paper, Section 2.9.
8


A VfM test carried out for the four options indicates that option (iii), private sector trains and
train-related systems supply and service operation, incurs the lowest expected cost to the
community; with option (ii) the next lowest. The BOT option shows a lower optimism bias
than all the other options, but, since it uses the concessionaires private sector financing for
the full project investment, it incurs a maximum premium on the governments financing cost;
this option turns out to have the highest expected cost to the community, the SOE option
included. Evidently the BOT option is a doubly inappropriate approach to MRT project
development. Details of the VfM test methodology, input data and parameters, as well as
results can be found in the Financial Model paper.
3.3.1. Assumptions and contingencies
It is important to understand what assumptions are necessary for, and what contingencies
would invalidate, the VfM test results. These are summarized below.

Market competition. VfM requires a competitive tender market for the concession and for
related sub-contracting of the technology (eg design, construction, systems integration and
installation, operation and maintenance in MRT service provision) and financing services to
ensure that payment of concessionaires and sub-contractors is not in excess of a normal risk-
weighted remuneration for effort. This means that an option which has cleared a VfM test
could at the procurement stage be facing a market failure (eg only one bidder), threatening its
ability to deliver the anticipated VfM
1
. Thus, transition and emerging countries in particular
often cannot count on a reliable international supply of private sector financing. The threat of
market failure in a specialized field such as MRT concessioning and sub-contracting should
not be dismissed lightly.

Financial and services market distortions. Here are some examples of distortions that can
threaten or dilute VfM:
Limited recourse financing of a PPP concession promotes VfM because the senior
lenders, usually financial institutions regulated by a central bank, will for as long as the
debt is outstanding have an interest in the project which is aligned with the authority
granting the concession and bring professional skill to the monitoring of the
concessionaires performance. The lenders incentive to monitor the concessionaire
performance is diluted with the lenders use of credit risk transfer (CRT) products. This
practice dilutes the concession authoritys effort to share an exposure to the
concessionaires performance level with the senior lenders, minimizing the monitoring
cost in the process.
Bilateral ODA financing can also introduce distortions in the sub-contracting markets.
The tying of an ODA loan to supply of goods and services of a national origin restricts
the competitive tendering for the procurement of MRT consulting and construction
services and systems supply. An opportunity can be created for vendors to use the
concessionary pricing of a loan to build in an additional margin on goods and services.
In the long term, the practice can create a situation where, in a narrow field, the
potential suppliers tacitly agree to live and let live instead of competing, with adverse
effect on supply prices and therefore VfM.
Partnering developed over time among financiers and sub-contractors while having a
potential to be an effective project risk management tool for a concessionaire can be

1
The UK Treasurys answer to this problem, to give an illustration, is to require any candidate for a PPP
development to have a back-up public sector option to be activated in the event of a market failure.
9


abused if allowed to develop into a collusive arrangement, which in the end threatens
VfM.
PPP procurement capability. Ability to procure well is important for realizing VfM. The
balance of opinion, if not of evidence, is that a greater capability is required of the public
sector in the procurement of a PPP concessionaire than in a conventional public works
procurement. Ad hoc outsourcing for the required skills leads to limited results. For example,
legal firms skilled in PPP contracting, forced to make a choice through conflict of interest
rules, can tend to opt for working for the concessionaire side rather than government.
Institutional capability building is required.

10


4. Activity 4: Stakeholder Feedback and Implementation
Arrangements
4.1 Key Tasks
Key tasks carried out under this Activity were:
Stakeholder analysis;
Concession Template;
Analysis of institutional options; and
Fares and ticketing analysis and options.
The outputs of these tasks are
Stakeholder Feedback and Implementation Arrangements: Institutional Options
Working Paper Vietnamese and English language versions (March 2008). Refer
Appendix C for English Version.
Stakeholder Engagement Plan English language version only (March 2008)
Informal document;
Concession Template refer Section 2 and Appendix A;
Fares and Ticketing Working Paper Vietnamese and English language versions (June
2008). Refer Appendix D for English Version.
Other capacity, likely legal and procurement requirements recognizing the PPIAF team
did not have any legal resources available to them (covered variously in all outputs).
4.2 Key Stakeholders
A list of identified core stakeholders
1
within HCMC is shown in Table 4.1. This list is based
on the information contained in the Working Paper entitled Stakeholder Feedback and
Implementation Arrangements: Institutional Options. While several stakeholders at national
and HCMC levels have been identified the most important are shown in bold text in Table
4.1. IFIs or other bilateral donors have been excluded from the Table.
Table 4.1: Identified Key Stakeholders
Stakeholder Responsibility
National Level
Ministry of Transport (MOT) Through its different modal administrations and departments (a) plans,
manages and maintains national infrastructure through its different
departments and administrations; (b) assists local governments in
developing transport plans and selecting transport projects; and (c)
manages public bus transport plans by approving cities master plans

1
From now on in this paper core stakeholders will be referred to only as stakeholders.
11


Stakeholder Responsibility
Vietnam Railways
Administration (VNRA)
under MOT
Plans and manages the development of the sub sector
Regulates the sub-sector including national and other rail systems including
metro or MRT in cities and provinces. Provides oversight of City and
Provincial rail and MRT Master Plans and is charged with approval of
technical standards and safety of rail and MRT systems. Main functions of
relevance to project:
Informal MRT Master Plan approval
MRT technical standards
MRT safety standards & compliance
Ministry of Finance (MOF) Arranging of finance from external agencies including IFIs and provision of
finance to local governments. Currently, financial planning aspects of
future MRT development in Vietnam.
Transport Development Strategy
Institute (TDSI)-under MOT
Develops long and medium term transport sector strategies and plans (in
collaboration with modal administrations)
Department of Planning and
Investment (DPI)-under MOT
Integrates investment plans prepared by modal administrations for
submission to MPI for inclusion in the PIP and to MOF for inclusion in the
State Budget.
The Ministry of Natural
Resources and the Environment
(MNRE)
Reviews and approves environmental impact assessments for transport
projects.
HCMC PC level
Peoples Committee Approves key issues such as fares, opening and closing of routes,
schedules and subsidies.
Transport and Urban Public
Works Services (TUPWS)
Transport and Industry
Management Department
(TIMD); and the
Management and Operations
Centre for Public Transport
(MOCPT).
Develops cities transport strategies; Plans and manages construction;
Maintains urban transport infrastructure; Manages bus transport;
Coordinates planning and implementation of traffic management with
Police. Main functions of relevance to project:
Transport Strategy
Traffic management and parking
Bus route planning & franchising incl bus-MRT integration
Bus system ticketing
HCMC Management
Authority for Urban Railways
Plans / implements rail-based mass transit plans and has responsibility for
managing and arranging for operations and maintenance. Main functions
of relevance to project:
MRT civil infrastructure development incl land acquisition
MRT rolling stock & E&M supply
MRT ticketing
MRT operations procurement and/or operations directly
HCMC Investment Fund
(HI FU)
Arrangement of finance through bond issue for counterpart funds,
coordination with private sector incl private financial institutions, possible
shareholding role in a J V operating entity
Department of Finance
(DOF)
Treasury functions such as processing of project-related local expenditures
including counterpart payments
District Level and Commune
Governments
Relevant district governments through which a project passes will have a
role in land acquisition & other facilitation
Urban Planning and
Architecture Department
(DUPA)
Land Use Master Plan preparation and approval of developments. Land
approvals are separately made by the Department of Natural Resources
and Environment (DNRE) with little linkage to the Master Plan.
Investment (DPI)
Investment programming including one year annual budget and five year
Public Investment Program (PIP)
Traffic Police under the
Public Security Department
Enforces traffic management including the operation of traffic signals in
coordination with TUPWS

12


4.3 Transport Agencies and Functions in HCMC
The HCMC PC is the key agency responsible for planning and delivery (ie here referring to
regulation, purchasing of services and oversight, and construction of infrastructure) of public
transport, such as bus, mass rapid transit and supporting land use and transport management
functions. Within the PC the following agencies have key roles for urban transport:
Transport and Urban Public Works Services (TUPWS) which is responsible for
preparation of city transport strategies, the planning and management of construction,
maintaining urban transport infrastructure, planning and managing bus transport; and
coordinating planning and implementation of traffic management with Police. For
planning and regulation of urban public transport (bus/ other) the Management and
Operations Centre for Public Transport (MOCPT) of TUPWS is the most important
agency;
Management Authority for Urban Railways (MAUR)
1
plans and implements rail
based mass transit infrastructure and responsible for operations;
Urban Planning and Architecture Department (DUPA) Land Use Master Plan
preparation and approval of developments. The process of planning is normative and
appears not to reflect market preferences nor what is optimal in terms of infrastructure
and social services provision. Land approvals are separately made by the Department of
Natural Resources and Environment (DNRE) with little linkage to the Master Plan.
Similarly infrastructure planning is made with little reference to the Master Plan. In
addition, even for individual building and more major developments there are no
specific standards or guidelines providing certainty to developers on how much Gross
Floor Area (GFA) they can build or other conditions such as building set back and
building form;
Department of Planning and Investment investment promotion, coordination of
investment including development of development assistance from IFIs and bilateral
sources; and
Department of Finance treasury, budget, investment planning and arrangement of
sources of finance.
4.4 Key Laws
National and city legislation governs the present provision of public transport services,
currently mainly bus, in HCMC. The laws of most relevance to urban rail or urban MRT are:
Railway Law 2005 (NA Order No. 35/2005/QH11); and
HC PC Decree 119/ 2007/QD-UBND establishing the Management Authority for
Urban Railways.
Railway Law
Within cities the Railway Law 2005 defines relevant types of urban railway as including metro
or MRT using a wide variety of technologies. Authority for planning urban railway networks is
given to Peoples Committees (Articles 14 and 15). Master Plans shall be prepared covering a
detailed period of 10 years and less definitive further 10 year period. Fare setting is the
responsibility of the PC.

1
Until September 2007, it was known as the Urban Railway Management Unit and was under TUPWS.
13


Decree 119/ 2007/QD-UBND establishing Management Authority for Urban
Railways, HCMC
The Urban Railway Management Unit (known as the Management Authority for Urban
Railways) was established in September 2007 by Decree 119. The Authority replaced the
previous Urban Railway Management Division under TUPWS. MAUR is also under the
guidance of Central Ministries branches and Departments branches of the city.
The current MAUR structure is shown in Figure 4.1. With new responsibilities for
management of operations and maintenance, the number of staff in MAUR is increasing. It is
also understood that it is proposed to revise the current structure of MAUR in the near future
to better reflect the management and operational functions.
Figure 4.1: Current Structure of MAUR

HCMC PC
Director
Nguyen Do Luong
PMU Line 1
Vice Director
Nguyen Van Quoc
Vice Director
Tran Thi Anh Nguyet
Vice Director
Le Hong Ha
Planning and
Investment
Technical Quality
Procurement
Administration
Finance and
Accounting
Organization and
Training
PMU Lines 2 & 3

Source: MAUR
4.5 Institutional Options
Given the previous discussion, the alternative arrangements for an Authority relate primarily
to the scope of its functions rather than to the underlying functions themselves. On this basis,
four options for improved institutional arrangements for HCMC are identified:
Option 1: Strengthen the Management Authority for Urban Railways (MAUR);
Option 2: Interim Public Transport Authority using increased PC level
coordination between bus and MRT;
Option 3: Integrated Public Transport Authority. Refer Figure 4.2. In this option
the proposed Integrated Public Transport Authority would be solely responsible for
ensuring the delivery and operation of a fully integrated public transport system
(MRT and bus) for HCMC; and
Option 4: Integrated Transport Authority. In this option, a wholly integrated
Authority would plan the multi-modal network, specify the services, program the
investment (including roads, MRT and bus).
14


The options are capable of progressive implementation and a summary of their features is
shown in Table 4.1. A worthwhile and practical option is Option 3 which is illustrated in
Figure 4.2. In addition to developing integrated bus and MRT services this option would
enable all public transport ticketing and fares to be integrated as long as MRT and bus
operating arrangements are consistent.
Table 4.1: Improvement Options
Feature Option 1:
Strengthen MAUR
Option 2:
Interim PT Authority
Option 3:
Integrated PT
Authority
Option 4:
Integrated
Transport Authority
Integration of
public transport
in HCMC
(1)

I nc easing I nc easing
Increasing integration
I ntroduction
Transport
outcome
Fairly good MRT
integration possible
Fairly good MRT
integration more likely
Fully integrated PT
system more probable
Fully integrated public
transport system
Description Minimum change to
current institutional
responsibilities.
As for Option 1 but
improved direction &
coordination
Strong direction and
purpose for PT
purpose for transport &
land use
Examples from
other places
Hong Kong &
Singapore in the 1980s
Bangkok in 1990s Melbourne and
Brisbane, Australia
Hong Kong, Singapore
Benefits for
customers
Ease of use of MRT
with integrated
ticketing and easy
interchanging where
MRT lines intersect
possible
Ease of use of MRT
with integrated
ticketing and easy
interchanging where
MRT lines intersect.
Integration with buses
likely.
Passengers able to use
the PT system as
though it was a single
system, with fares,
tickets, marketing and
presentation
integrated. Physical
integration good.
As for Option 3 but
better integration with
land use and road
network.
Agency responsibilities
Transport policy & planning
(2)

Urban planning DUPA DUPA DUPA DUPA
Transport policy TUPWS TUPWS TUPWS Integrated Transport
Authority
Strategic trans-
port planning
TUPWS TUPWS TUPWS Integrated Transport
Authority
Financing
policies
DPI & DOF DPI & DOF DPI, DOF with advice
of Integrated PT
Authority
DPI, DOF with advice
of Integrated Transport
Authority
Fares policy and
service
standards
MAUR for MRT;
TUPWS/ MOCPT for
bus
MAUR for rail; TUPWS/
MOCPT for bus
Integrated PT Authority
for MRT and bus
Integrated Transport
Authority for MRT and
bus
Regulation
(3)
Safety
standards
Independent regulator;
TUPWS for bus
TUPWS for bus
for bus
Authority for bus
Environmental
standards
DNRE DNRE DNRE DNRE
Economic
regulation
(5)
MAUR MAUR/ Interim PT
Authority
Integrated PT Authority Integrated Transport
Authority
15


Feature Option 1: Option 2: Option 3: Option 4:
Strengthen MAUR Interim PT Authority Integrated PT Integrated
Authority Transport Authority
Public transport program management
(4)
Program
coordination &
direction
MAUR MAUR Integrated PT
Authority
Authority
Project planning
& feasibility
studies
Authority
Authority
Investment
programming &
financing
approval
MAUR/ DPI/DOF/ PC MAUR/ DPI/DOF/ PC Integrated PT
Authority / DPI/DOF/
PC
Authority / DPI/DOF/ PC
Project design MAUR MAUR Integrated PT
Authority
Authority
Environmental &
other approvals
MAUR/ DNRE MAUR/ DNRE Integrated PT
Authority/ DNRE
Authority/ DNRE
Tendering MAUR MAUR Integrated PT
Authority
Authority
Contract
management
Authority
Authority
Infrastructure
maintenance
MRT operators/
concessionaires (for
operations)
MRT operators/
operations)
MRT operators/
operations)
MRT operators/
operations)
MRT service
design
Authority
Authority
Concession
preparation and
management
Authority
Authority
Service delivery
Rail services Operators/
Concessionaires
Operators/
Concessionaires
Operators/
Concessionaires
Operators/
Concessionaires
Bus services Operators Operators Operators Operators
Ticketing and
fare collection
Single contract under
PC
PC
Authority
Marketing Operators Operators Integrated PT Authority
and operators
Authority and
operators
(1) All options cover the provision of formal public transport in Greater HCMC. (2) Covers setting of policies within which
agencies do detailed project planning & implementation & provision of services. (3) In the case of public transport,
regulation relates primarily to safety. Vehicle registration and driver licensing, which are applicable for bus services, are not
addressed because they are the same for all options. Economic regulation needs to be treated as an integral part of the
Transport Policy and Planning function, though some aspects such as anti-monopoly regulation will be managed by other
government agencies. (4) Includes activities to put strategies into practice strategies, including development and
implementation of projects and arranging for the delivery of public transport and ancillary services. (5) Includes control over
entry to the market (eg how many buses and companies are allowed) and control of fares.
Source: Consultant
16


Figure 4.2: Key lines of responsibility for Option 3 Integrated Public Transport Authority

Source: Study Team
4.6 Fares and Ticketing
An objective for rail mass rapid transit (MRT) in HCMC is that it be convenient to use and
free of artificial barriers that could be imposed if MRT lines and their method of operations
were to be done on a standalone basis.
The Working Paper contained in Appendix D presents a discussion of the policy issues
regarding fares and ticketing systems and recommends an approach to secure both integrated
fares and an integrated ticketing system primarily for MRT, but also for other public transport,
as MRT will rely on an integrated public transport system to maximize its performance.
Fare policy and an associated ticketing system are essential to the success of MRT and the
broader public transport system. Fare policy is vital because:
financially, it affects the number of people who will use MRT, which in turn influences
fare revenue, MRT operating costs and, ultimately, the viability of MRT lines;
socially, the absolute level affects the affordability of public transport to people, while
alternative fare structures have differential, and thus distributional, effects on the
community;
technically, it influences the form of operating concessions, and the design of the MRT
system in general and the ticket system in particular; and
for the remainder of transport system, the level and structure of MRT fares affects the
use made of other public transport and the amount of private travel, with consequences
for the transport system and community as a whole.
A policy objective for HCMC, as it is in most cities that seek to provide an attractive public
transport system, should be:
17


an integrated ticket and fare system for MRT and, ultimately, the bus system also; and
uniform fares for modes of similar quality.
Fare policy is therefore a matter that needs to be addressed at the outset, because it
affects passenger demand, design of stations and interchanges, the financial viability
of public transport, and the form and content of operating concessions.
Table 4.2 shows that achievement of uniform fares and integrated ticketing is best suited to a
Gross Cost form of operating contract and that both need an MRT or Public Transport
Authority with ability to manage more complex concession agreements with more intricate
financial arrangements.
Table 4.2: Requirements for Uniform and Integrated fares
Fare
(1)
Ticket Concession MRT Authority
Uniform & integrated Must be integrated All concessions on same basis. Need
revenue settlement system, perhaps with
fares collected by third party. Gross
cost
(2)
form of concession is better.
Needs an Authority with
ability to manage more
complex concession
agreements with more
intricate financial
arrangements
(1)Uniform fare = same Fare VND/km on all lines; Integrated fare = no second or subsequent flagfall
Link to cost recovery: (i) how will loss of second flagfall with integrated fares be recovered?; and (ii)
how will concessionaires be compensated for different level of cost recovery for each line with
uniform and integrated fares?
(2) Gross cost concession all fare revenue is paid to the government with bids made for the amount
the government should pay for provision of the tasks set out in the concession. Can involve some
transfer of patronage risk to the concessionaire. Source: Consultant
It will be exceptionally difficult, perhaps impracticable, to implement an integrated ticketing
system with each public transport operator supplying their own equipment without a common
approach. Accordingly, there is a universal movement towards integrated ticketing and fare
systems that are managed centrally rather than by individual service providers. It is
recommended that such an approach is essential for HCMC.
Figure 4.3: Integrated Ticketing - Preferred Technical Option
Line 1 Line 2 Bus BRT Other
Smartcard
Reader/Device
Operator System
Central System
Central
Clearinghouse
Phase II
Open Standard Clearinghouse Interface
Open Standard Card/Reader Interface
Non-Transit
Applications

Source: Study Team
18


Moving towards implementation of such an integrated fares and ticketing system requires an
appropriate framework in which all necessary studies and activities can be undertaken. While it
is not essential that the fare structure and level be confirmed before commencing the process
of planning an integrated ticketing system, an early decision will provide clarity and direction
to future work. In any event, establishing the fare structure and level is essential to the
development of future MRT lines in HCMC, and is thus a matter than needs urgent attention.
Accordingly, it is recommended that work commence as soon as possible to examine a range
of fare structures and levels, and identify the option that best balances MRT financial viability
and social obligations.
Experience elsewhere suggests that a practical way forward to implementation of an integrated
ticket system is to commence with a high level working group that should:
recommend a preferred fare structure and level;
prepare a functional specification for the ticketing system, identify a preferred
technology, and estimate likely capital and ongoing operating and maintenance costs;
recommend arrangements for an integrated procurement contract that covers both
implementation and ongoing operation and maintenance of the ticket system, and which
also considers possible private sector financing of capital costs;
recommend institutional arrangements for the management of fares and ticketing for
MRT in HCMC following implementation of a new integrated ticket system; and
present a program for implementation of the recommendations that describes activities,
costs, schedules and agency responsibilities for government consideration and approval.
It is recommended that this working group should comprise representatives of the PCs
Management Authority for Urban Rail (MAUR), Transport and Urban Public Works Services
(TUPWS), Department of Planning and Investment (DPI) and Department of Finance or
could be an embryonic form of the Integrated Public Transport Authority.
Representatives of organizations and the community who will be affected by the proposals
should be invited to participate, either as members of a steering committee or an advisory
panel. A period of about 12 months will be required for the working group to undertake the
above tasks to the necessary level of detail. The key steps are shown in Figure 4.4.
Following a positive decision on the working groups report, it is recommended that the
government organization that is to be responsible for managing the ticket and fare system
should be established (at least in the form of a project office), and required to prepare:
bidding documents;
plans to implement the procurement process, including tender assessment, award and
management procedures; and
plans for operation of integrated ticketing across the entire MRT system, including
current lines, bus and other modes.
This work is likely to take a further six to twelve months, and will permit the government to
proceed to formalization of institutional arrangements, implementation of the ticketing system
and its ongoing operation. Based on experience in other cities, it is expected that it will then
take about three to four years to tender, contract, deliver, install and commission the ticketing
system, including establishing arrangements for delivery, sale and use of new smartcard-type
tickets and management of fare revenue.
19


Figure 4.4: Steps to Implement Integrated Ticketing & Fares

Source: Study Team
Finally, responsibility for developing a suitable integrated ticketing and fare policy to support
an integrated MRT and public transport system for HCMC rests with the Management
Authority for Urban Rail (MAUR) in the first instance. The thinking needed to develop an
appropriate ticketing system and fare policy cannot be outsourced to others.
4.7 Building Technical and Managerial Capacity
Depending on the option eventually chosen, with the exception of Option 4 (Integrated
Transit Authority) the proposed agency will have a key role in working to efficiently and
effectively connect high level transport policy and plan making done by TUPWS to detailed
implementation.
DPI will continue to have an important role in overseeing the performance of the transport
sector in terms of fiscal monitoring, but would also benefit from having a stronger MAUR or
Integrated Public Transport Authority to provide economic regulation and technical
management of MRT (and/or bus) investment programming and management of annual
MRT operating budgets, and desirably for other public transport.
Economic regulation and oversight involves issues of pricing including fares, subsidies (and
community service obligations), competition, concessioning including compliance supervision
and requires skills in economics and to associated legal and financial impacts.
Technical supervision of rail MRT and public transport investments and their integrated
operation including ticketing requires high level knowledge and skills in:
20


21

interpreting transport policy and master plans prepared by TUPWS and central
governments MOT and providing appropriate feedback and advice;
translating these policies and plans into appropriate forward work programs that can
result in timely and efficient implementation of MRT, other public transport
improvements and reforms, and integrative systems;
providing appropriate advice to TUPWS/ DPI/ DOF/ DUPA and other agencies as
required; and
appropriate coordination with the Department of Natural Resources and Environment.
While the PC is acting to strengthen MAUR (under Options 1 and 2) or if it intends to create
an Integrated Public Transport Authority (Option 3) or an Integrated Transport Authority
(Option 4) it should be careful to match the skills and capabilities of the people to be engaged
and /or transferred to the desired new organization and its structure taking full account of the
needed capabilities in high level economic and technical supervision and oversight.

Appendix A: Issues and Options for Private Sector Participation
and Concession Template Working Paper
22


RSC-C71557 (VIE),
TA4862-VIE
Ho Chi Minh City
Metro Rail System:
Issues and Options
for Private Sector
Participation, and
Concession Template
April 2008

TableofContents
Executive Summary ................................................................................................................................ 1
1. Introduction .................................................................................................................................. 3
1.1 Background ........................................................................................................................ 3
1.2 Role of the current report ................................................................................................ 4
1.3 Terminology ....................................................................................................................... 4
2. Factors Influencing the Structure of MRT Delivery ............................................................... 7
2.1 Structuring management in the transport sector .......................................................... 7
2.2 Network integration .......................................................................................................... 9
2.3 Policy control ..................................................................................................................... 9
2.4 Implications of low financial cost recovery for the MRT system .............................. 9
2.5 MRT system components .............................................................................................. 10
2.6 Participants in MRT provision ...................................................................................... 11
2.7 Bundling MRT components .......................................................................................... 11
2.8 Risk transfer ..................................................................................................................... 14
2.9 Forms of MRT concession Gross Cost and Net Cost ................................................ 14
2.10 Using the private sector to minimize the cost of MRT operations .......................... 16
2.11 Potential roles for the private sector............................................................................. 16
2.12 Assessing the value of private sector involvement - Value for Money analysis ..... 17
3. Identification and Assessment of Potential Concession Models ........................................ 19
3.1 Introduction ..................................................................................................................... 19
3.2 Recent examples in other cities ..................................................................................... 20
3.3 Potential implementation models for HCMC ............................................................. 20
3.4 Next steps ......................................................................................................................... 26
4. Risk Allocation for Concessioning and Financing Options ................................................ 27
5. Concession Template ................................................................................................................ 32
5.1 Key Factors Affecting the Concession Agreement .................................................... 32
5.1.1. Form of Concession .......................................................................................... 32
5.1.2. Allocation of Risk .............................................................................................. 32
5.1.3. Value for Money ................................................................................................ 32
5.1.4. Structure of Payments to the Concessionaire ................................................ 33
5.2 Content of the Template ................................................................................................ 35
5.3 Next Steps to Implement the Template ....................................................................... 37

6. Implementing Competitive Tendering and Concessioning ................................................. 39
6.1 Probity ............................................................................................................................... 39
6.2 Market Testing ................................................................................................................. 39
6.3 Preparation of a Request for Proposals ....................................................................... 39
6.4 Tendering and Tender Assessment ............................................................................... 41
6.5 Concession Contract and Implementation .................................................................. 42
6.6 Concession Management ................................................................................................ 42
6.7 Schedule ............................................................................................................................ 43
Appendix A: Bibliography ................................................................................................................ 44
Appendix B: Summary of Some MRT Concession Arrangements in Other Cities ................ 45
Appendix C: Additional Issues Related to Use of Net Cost and Gross Cost Concessions ... 47
Appendix D: Concession Template ................................................................................................ 56
Appendix E: Presentation and Report Summary ......................................................................... 81

Executive Summary
This report considers opportunities to use the private sector in implement and operate rail
mass rapid transit (MRT) in Ho Chi Minh City (HCMC). This matter is considered with a
broader view than any individual MRT line in HCMC because the ultimate objective of the
government is a substantial increase in the use of public transport in the city, which in turn
requires an integrated public transport system. The use of the private sector is not addressed
from an ideological perspective, but rather as a means for securing the delivery of high quality
MRT at the lowest possible cost to the community.
The report notes that the private sector has been involved in MRT in nearby countries in
recent years: always for implementation of infrastructure; often for the operation of services;
and to a lesser extent for investment in MRT assets. It also notes general experience that the
cost of public sector operation of public transport is higher than with private sector operation,
and that there is a general worldwide trend to make greater use of the private sector for the
operation of public transport.
Consideration is given in the report to the range of factors that affect the manner in which the
private sector could be involved. These factors have two broad influences.
The first is the extent to which the private sector could provide finance for implementation of
the MRT. In this respect, it appears that the current approach to MRT in HCMC is likely to
result in fare and related revenue that will, at best, cover operating costs and make a small
contribution to capital costs. Accordingly, the government will need to eventually pay the
private sector for most of the cost of any capital that the private sector might provide in the
first instance to implement the project. While the cost of capital to the private sector is
generally more expensive than the cost of capital for the government, the report notes that
this may be offset by lower costs that result from the transfer of manageable risk to the private
sector and the incentive for the private sector to better integrate assets and operations to
reduce life-cycle costs.
The second influence is on the form of the agreement between the government and the
organization that is to operate the MRT system (called the concessionaire). It is essential that
such an agreement be in place, irrespective of whether the concessionaire is a government or a
private organization. It is common for such agreements to have a term of around 30 years or
so, especially where the concessionaire contributes capital investment. There is also a need for
the agreement to include conditions that provide the operator with the incentive to undertake
their tasks in a manner that meets the governments objectives for MRT in HCMC.
There has been a tendency in the past to use a form of agreement wherein the concessionaire
keeps fare and other revenue for the MRT line to which the contract pertains and uses the
revenue to cover its costs. The government may need to provide supplementary financing if
the revenue available to the concessionaire is insufficient to met the costs. This approach,
called a Net Cost form of concession, has major limitations. In particular it does not facilitate
operation of an integrated public transport system and reduces the flexibility of the
government to develop the transport system and modify its urban transport policies over the
term of the concession. An alternative approach, called a Gross Cost form of concession, is
strongly recommended. Under it, revenue from fares accrues to the government, which in
turn pays the concessionaire for the services that the concessionaire provides. The report
describes how this form of concession can be implemented to give the concessionaire the
incentive to provide good quality services that meet the needs of passengers at the lowest
possible cost and with the least need for detailed management of the concession contract by
the government.
1
Four possible implementation options are considered in the report. All four will be subject to
value-for-money analysis under the current study to indicate the potential cost to the
government of delivering Line 2 of the MRT system and the provision of services on the line
over the long term. The results of this analysis will be presented in a separate report. The
options are:
Government financing, implementation and operation of the MRT.
Government financing and implementation of all MRT assets, and engagement of a
concessionaire to operate MRT services.
Government financing and implementation of MRT civil infrastructure, and
engagement of a concessionaire to finance and provide trains and related electrical and
mechanical equipment and systems, and to operate MRT services.
Private sector financing, implementation and operation of the MRT.
The Gross Cost form of concession is recommended for the first three options. A Net Cost
form of concession is appropriate for the last option to allow the concessionaire to manage its
greater financial exposure in a way that minimizes its risks. In all four cases, the government
will eventually pay for the total cost of implementing and operating MRT. However, the total
cost to the government will vary. This occurs because the four options involve different ways
of allocating and managing MRT responsibilities, and hence the incentive and capacity for
those involved to manage the associated financial, engineering, operational and patronage
risks.
The report draws general conclusions about the relative merits of the four implementation/-
financing options, but does not unequivocally recommend any particular approach. Rather,
the intention of developing and assessing the options is to provide understanding that can
help the government with its consideration of an arrangement that is appropriate for HCMC.
Two other key recommendations are made. The first is that there should eventually be at least
two companies involved in the operation of MRT in HCMC. This puts competitive pressure
on each operator to improve its performance so that they are not seen to be inferior to the
other operator(s). It also provides data that the government can use to benchmark the
performance of the operators so that it can provide feedback to the operators on
opportunities for improved performance. Finally, it provides the government with flexibility in
the event that one operator fails to perform, with the capacity for another of the operators to
take over in the short term if that should become necessary. The second recommendation is
that international competitive tendering should be used to select the concessionaire, with the
likelihood that a foreign party will form a consortium with a local enterprise. This will bring
international experience and expertise to support the development of world class MRT in
HCMC and provide a sound basis for developing domestic skills in MRT.
Finally, the report presents an outline of a concession agreement and discusses the actions
needed to select a concessionaire and establish and manage a contract.
A detailed presentation of issues addressed in the report is presented in Appendix E.
2
1. Introduction
1.1 Background
The Peoples Committee (PC) of Ho Chi Minh City (HCMC) has initiated studies to develop a
rail mass rapid transit (MRT) system for the City. An MRT Master Plan was prepared as part
of a Japanese funded urban transport study, HOUTRANS. An updated Master Plan with six
MRT lines was approved in December 2006. A proposal for two monorail lines is also under
consideration, as is the use of bus rapid transit (BRT). These systems would complement an
evolving on-street bus system.
Two lines (UMRT2 and UMRT3) have been proposed for Asian Development Bank (ADB)
funding with another line (UMRT1) to be financed by the Government of Japan and one line
by the Government of China. ADB has mobilized a Project Preparatory Technical Assistance
(PPTA) to assist the government to develop UMRT2 and UMRT3 (or variations on those
lines if that should be recommended termed the Project hereafter). The PPTA, which
commenced in May 2007 and is to be completed in May 2008, is responsible for providing:
an optimized MRT Master Plan which integrates the currently proposed MRT lines into
develops design parameters for the two project lines;
a feasibility assessment and preliminary engineering design for the Project lines - the
PPTA will confirm the engineering feasibility, and identify social and environmental
impacts for accurate cost estimation and financial appraisal; and
a plan to support project implementation, including institutional and staffing
program.
In addition, ADB has mobilized a grant from the Public Private Infrastructure Advisory
Facility (PPIAF)
1
to assist the government to consider the appropriate role for the private
sector in implementing and operating the Project, with a view to minimizing the cost of the
project to the government on a risk adjusted basis and taking advantage of a market oriented
approach to maximizing the benefits of the Project. The study will provide the following
outputs:
a framework for considering private sector participation in implementation and
operation of the Project;
a value-for-money analysis for implementation approaches that involve varying degrees
of private sector participation;
a more detailed financial model reflecting the preferred approach and measuring the
performance of the project from the points of view of the government and private
sector participants; and
a stakeholder feedback and a description of necessary institutional and contractual
arrangements given the preferred implementation approach.

1
The Public-Private Infrastructure Advisory Facility (PPIAF) is a multi-donor technical assistance facility
aimed at helping developing countries improve the quality of their infrastructure through private sector
involvement. For more information on the facility see the website: www.ppiaf.org.
3
1.2 Role of the current report
The current report addresses the first of these subjects under the PPIAF study. It is noted that
the objective for arrangements that are to be adopted for implementation and operation of the
Project are to:
minimize overall costs to the government on a risk-adjusted basis, covering
initial capital costs for infrastructure;
ongoing operating and maintenance costs for infrastructure and train operations; and
costs incurred by the government to manage implementation and operation of the
Project; and
maximize the benefits of the Project, including maximizing MRT patronage.
The form of construction contracts is generally well understood, and is not addressed in the
current report. Rather, the focus is on:
the operation and maintenance of infrastructure and provision of train services,
including the role of the private sector in undertaking and financing these activities;
the extent to which infrastructure provision and financing can be undertaken by the
private sector; and
the extent to which provision of infrastructure and its financing should be linked with
subsequent operations and maintenance of the Project.
Following sections of this report therefore:
address some terminological matters to clarify subsequent discussion;
present an overview of issues that will affect the role of the private sector with regard to
the Project, including features of the Project, its potential financial performance and the
structuring of government responsibilities in the transport sector; and
identify a range of private sector roles and screen these to identify four models that will
be subject to a value-for-money analysis (i.e. the second component of the PPIAF
study).
1.3 Terminology
A range of terminology can be used to describe participants in, and arrangements for, the
financing, implementation and operation of an MRT line. To avoid confusion, the following
terms are used in this report:
The Authority is the government agency that is responsible for ensuring the delivery and
operation of the MRT system.
The term infrastructure contractor is used to describe the entity (or entities) that constructs
infrastructure, including the supply of directly associated equipment, under a contract to
the Authority. As will be described in Section 2.1, the infrastructure contractor should
be entirely independent of the Authority, i.e. the Authority owns no shares in it.
Equipment suppliers may provide electrical and mechanical equipment (e.g. any or all of
trains, signaling and communications equipment, power supply systems, train control
systems, escalators, etc.) under contract either directly to the Authority or to an
infrastructure contractor or a concessionaire.
4
Financier who provides or arranges the provision of capital to finance the construction of
infrastructure or the provision of electrical and mechanical equipment. The financier
may provide the capital as a grant or loan to the Authority or a concessionaire (who
would then use it to pay infrastructure contractors and equipment suppliers); the
Authority or concessionaire would repay the financier on the basis of agreed terms in
the case of grants, no repayment would be necessary. It is likely that a number of
financiers may be involved in the Project.
An operator is the organization that delivers train services. It could be part of the
Authority but, as will be described in Section 2.1, it is strongly recommended that this
should not be the case. The operator need not necessarily provide the civil infrastructure
on which the trains operate or even the trains themselves. The operator could be a
public or a private organization.
A concession is a contract between the Authority and a concessionaire, where the latter is the
organization that delivers train services (i.e. it includes the operator) and any other
agreed activities. The additional activities could include the construction and ongoing
operation and maintenance of infrastructure, the provision of trains and the provision
of finance used to purchase assets. The concession should specify all conditions relating
to the activities for which the concessionaire is responsible.
The operator or concessionaire could be a government entity (preferably a corporatized
one, i.e. owned by the government but with its own accounts and with its own board)
but, as will be discussed later in this report it is recommended that it should be a
substantially or wholly private company.
A Net Cost concession involves a concessionaire providing train services and any assets that
may be agreed, and covering the cost of these from revenue that it is able to collect
from passengers and other agreed non-government sources.
A Gross Cost concession involves the concessionaire providing train services and any assets
that may be agreed, with the Authority paying the concessionaire the full cost of doing
so and with the Authority retaining revenue that it is able to collect from passengers.
Three forms of agency that undertake commercial operations (i.e. it provides goods or
services and charges users for them) and in which the government has an interest are:
a public enterprise is used as a general term to cover government departments that
undertake commercial operations;
a state-owned enterprise (SOE) is used more specifically for a commercial business that is
fully owned by government and which has been corporatized, i.e. it has its own
board of directors, its own set of financial accounts (with profit and loss, cash flow
and balance sheet statements) and is intended to operate on a profitable basis; and
a joint venture enterprise is used for a commercial business that is like a private
company but in which the government has some shareholding.
Public private partnership (PPP) which is a general arrangement whereby, in the case of the
Project:
a private sector concessionaire could provide finance, infrastructure and/or services,
and would be paid for the cost of doing so either through revenue they collect from
users of the infrastructure or services, from the government, or from other agreed
sources;
the PPP is governed by a contract between the Authority and the concessionaire;
5
the PPP involves the transfer of as much risk to the concessionaire as the
concessionaire can manage with the objective that the concessionaire will have the
incentive to avoid the risk coming to fruition and resulting in them incurring higher
costs and/or lower revenue than could be the case; and
with the extent of private sector participation being determined by a value-for-money
analysis that assesses the extent to which the transfer of risk from the government
(where it is generally less well managed) is sufficient to offset the generally higher
cost of capital to the private sector.
A number of other terms are used with regard to contracts. However, they are usually
variations on the terms described above. Examples are:
A Build Operate Transfer (BOT) contract is a form of PPP. It is generally used where
the revenue from the project is sufficient to cover the cost incurred by the private sector
in providing the assets and services involved, but it is possible to use it in other cases
also. It is generally in the form of a net cost contract.
Performance Based Contract (PBC) is to make clear that payments under a contract,
and its continuation, are subject to performance meeting specified criteria. In practice,
all contracts can be considered to be performance based.
Leases are not unique arrangements that are different to those described above, but
rather are specific arrangements relating to the financing and provision of assets.

6
2. Factors Influencing the Structure of MRT Delivery
This chapter discussed factors that affect the way in which the implementation and operation
of the Project can be arranged. The lessons from these issues are used in Chapter 3 to describe
options for HCMC.
2.1 Structuring management in the transport sector
The potential role of the private sector in MRT in HCMC needs to be considered in a broader
context of how government should structure its activities in the transport sector. The activities
undertaken by transport agencies can be categorized as:
policy and planning, which involves identifying future strategic needs and developing
the policies and plans required to achieve government objectives. It also includes
monitoring and evaluating the performance of outcomes against government objectives,
using this information to refine strategies, and identifying strategic resource needs;
regulation, which involves establishing and applying technical standards for safety,
security and environmental performance of public transport, and economic regulation
needed in response to market failure;
program development and management, which involves translating policies,
strategies and regulatory requirements into specific actions such as programs and
projects and providing oversight and monitoring of their delivery; and
service delivery, which involves delivering, or ensuring the delivery, of transport
infrastructure and services.
Figure 2.1 Categorizing the Government Transport Functions
Policy &
Strategy
Policy framework
Strategic planning
Regulatory policy
Financing &
pricing policies
Performance
monitoring
Informs
Regulation
Setting standards
Registration &
licensing
Enforcement
Program
management
Project planning
Investment
programming
Project, financing
& other approvals
Design, tendering,
& contracting
Contract/concession
management
Monitoring & quality
assurance
Effectiveness doing the right thing
Program
delivery
Infrastructure
Services
Marketing
Finance
Reports
Efficiency doing the thing right
7
These categories of activity serve two broad objectives:
effectiveness, which is related to ensuring that choices are directed to achieving the
things that the community values, with clear linkages from the desired outcomes to the
outputs of government activities that are needed to achieve the outcomes to, in turn, the
controls, services or other outputs that need to be delivered to achieve these outcomes;
and
efficiency, which is to provide the controls, services and other outputs that have been
decided on at the lowest possible cost.
This approach has a number of implications for institutional management, for example, it:
identifies the need to establish clear policies and implementing strategies so that those
involved in delivering transport infrastructure and services have an explicit
understanding of what is expected of them;
ensures a productive tension between those responsible for strategic planning, project
development and delivery;
reinforces the need for clear allocation of tasks to agencies to avoid ambiguity about
which agency is responsible for each of them;
indicates the need for performance management systems that are transparent and hold
managers accountable for delivery of agreed outputs;
shows a need to separate conflicting functions, in particular;
to separate regulatory from operational activities to avoid the conflict of interest that
arises from an agency regulating itself;
more generally, to separate decisions on effectiveness from those regarding efficiency
so that each area of activity is undertaken with a clear focus; and
to separate commercial activities from non-commercial activities so that the former
are undertaken in a businesslike way with a unmistakable commercial imperative; and
with regard to the potential role of the private sector, it indicates that:
the role for the private sector is program delivery, which can include a range of
infrastructure, services, promotion and even finance;
use of the private sector must occur within a clear framework of policy and strategic
guidance, regulation and program management, with the government alone being
responsible for these activities; and
the choice of whether to use government agencies or the private sector for program
delivery is a decision that should be based on the approach that has the lowest cost.
The key consequences of this review of functions for the Project are:
the need for a high level group in government that determines the strategic direction for
public transport in HCMC and sets the framework within which agencies responsible
for individual components of the public transport system undertake their own specialist
activities as part of an integrated approach to public transport;
the need to separate management and the undertaking of operational activities, with
government (i.e. the Authority) responsible for arranging for the delivery of
infrastructure and services and separate entities to deliver these through contracts, in
particular:
8
the use of contractors to construct infrastructure; and
the use of concessionaires to operate services (though, as will be described in later
sections in this chapter, it is possible to have some infrastructure delivered by a
concessionaire).
As a general rule, the all contracts between the Authority and contractors and concessionaires
should be based on competitive tendering to ensure that the best provider is selected (taking
account of both quality and price aspects of tenders).
2.2 Network integration
The MRT system will ideally be operated as an integrated system from the perspective of
passengers, irrespective of which agencies develop and/or operate individual lines or parts of
the system. This will require:
integration of physical infrastructure, with passengers able to easily transfer between
MRT lines, between bus and MRT and by walk access to MRT lines;
integrated ticketing for the MRT system so that passengers can use a single ticket such
as a stored value card to access any part of the MRT system and, ideally, buses and
water transport also; and
ideally, integrated fares so that passengers are not required to pay a second or
subsequent flagfall component when transferring between MRT lines and also with
other public transport modes.
It is also expected that the Project will generally involve the use of trains only on lines
developed under the project, but that the potential will exist for inter-operability with possible
future lines, i.e. the use of trains that travel on different lines in the MRT system.
None of these measures requires a single agency to construct and operate the MRT system as
the desired outcome can be achieved by the Authority setting appropriate technical standards
and structuring contracts appropriately to ensure the necessary level of integration.
2.3 Policy control
The MRT system will have a long life, with for example some infrastructure having a life (if
adequately maintained) of over 100 years and trains having a practical life of around 35 years.
Over such periods, demographic and socio-economic conditions in HCMC can be expected
to change substantially. Government policy priorities may also need to change. It is therefore
inappropriate for the government to set up arrangements for train operations that prevent it
from making essential changes, for example to add new lines or to change bus or MRT
services, the quality of the MRT system, and the structure and level of fares. Equally, the
government should compensate other parties if the changes in policy should adversely affect
them.
2.4 Implications of low financial cost recovery for the MRT system
Previous analysis of the original proposal for lines UMRT2 and UMRT3 (ADB 2007a)
suggested that, after taking account of likely revenue (including fares and the limited non-fare
revenue that could be collected by the operator), there will be a definite need for the
government to finance the fixed infrastructure for the lines from its own sources, an almost
certain need to finance rollingstock, and a 35% probability that it would also need to subsidize
MRT operations on an on-going basis. While it is likely that forecasts of costs and revenue will
9
change in the course of ongoing work, it seems improbable that the level of cost recovery for
any proposed line will change so dramatically as to change this overall picture.
This general conclusion is similar to the situation in other cities in a similar situation to
HCMC. For example the second MRT line in Bangkok appears to be able to generate
sufficient revenue to meet its operating costs but not sufficient to also meet the cost of
rollingstock. In Singapore, the government provided fixed infrastructure and an initial set of
rollingstock with the concessionaire not expected to meet the full cost of replacing
rollingstock when this becomes due. In both of these cities, fares are much higher relative to
the cost of implementing and operating MRT than seems likely to be the case for HCMC.
It will therefore not be possible for a private sector concessionaire to finance, implement and
operate the Project and to meet the costs incurred from potential revenue available to the
concessionaire. Any private sector participation will therefore need to occur on the basis that
the government will need to make some payment to the concessionaire in addition to the fare
and other revenue that may be obtained from the Project.
2.5 MRT system components
The Project will involve the provision of
2
:
fixed infrastructure, which includes civil works and fixed electrical and mechanical
(E&M) infrastructure
rollingstock, i.e. trains;
train control and communications systems;
a ticket system and associated fare collection and revenue management;
operations and maintenance (O&M) of all infrastructure and provision of train services;
and
capital to finance implementation of the Project, including the supply of fixed
infrastructure, fixed E&M equipment and rollingstock.
These components are important in two respects:
the suppliers of the components will generally be different and will have differing
interests; and
the components can be procured in different combinations.
The arrangements for implementing and operating the Project need to take account of these
differences to avoid conflicts that will reduce the effectiveness of the Project and to take

2
Drawing on ADB (2007), indicative cost components for the Project are:
with regard to the initial capital costs, fixed infrastructure, E&M infrastructure, trains and ticketing
systems could account for about 75%, 10%, 10% and 5% respectively of the total cost of the Project;
the initial capital expenditure will be about 90% of total capital expenditure over the implementation
period and 35 years of operation after allowing for expected re-investment and capacity expansion (on a
present value basis using a real discount rate of 5%) and 75% of actual real expenditure (i.e. without
discounting), and
allowing for likely re-investment and capacity expansion over a period covering 35 years of operation,
capital and O&M costs could respectively account for around 70% and 30% of the total cost of
providing infrastructure and services (on a present value basis using a discount rate of 5%) and 55% and
45% in actual real expenditure (i.e. without discounting).
10
advantage of mutual interests that can enhance the prospects for success. These matters are
discussed in the next two sections.
2.6 Participants in MRT provision
Implementing an MRT system and providing services on it will require the Authority to take
account of four parties whose interests many not necessarily coincide:
infrastructure contractors, which are interested only in building the project at a cost
ongoing maintenance needs are generally small and will generally be undertaken by
smaller specialist companies;
equipment suppliers for rollingstock and electrical and mechanical equipment (e.g.
signaling, power supply, escalators, etc.), who will be interested in both supplying and, if
possible, maintaining the equipment this recognizes the specialist nature of, for
example, train maintenance and has the merit of minimizing lifecycle costs by, for
example, avoiding the delivery of lower quality trains that require expensive ongoing
maintenance;
the operator, who with an operating concession having the correct incentives will wish
to ensure that the project design will be attractive to customers and will minimize
operating costs over the life of the operating concession; and
financiers of fixed infrastructure and rollingstock, who may be the government if tax
revenue or public debt is used, or private companies if a public private partnership
(PPP) approach is taken.
Developing MRT infrastructure and services requires recognition that these groups need to
work together for the project to be delivered successfully, but that they have different
individual interests including different time horizons and risk sensitivities. In particular, the
infrastructure contractors generally have a short term perspective that covers little more than
the construction period while financiers and operators have a longer term perspective
covering the term over which debt is outstanding in the case of the former and the operating
concession for the latter.
Contracts can include any one or a mix of the four parties. If a concession encompassed the
financing, implementation and operation of the entire Project, it would necessarily involve all
four interests, though to different degrees at different times through the concession. This has
the merit of internalizing the tensions between the four parties, including allowing them to
appropriately share project risks, and potentially minimizing overall costs. However, there is a
risk that the winning concessionaire may not comprise the optimal mix of four parties (i.e. the
infrastructure contractor, equipment supplier, operator and financiers who are each able to
offer the lowest cost) and could involve suboptimal compromises between the parties.
2.7 Bundling MRT components
The activities described in Section 2.5 can be procured in different combinations to achieve
the objectives for an efficient and effective Project. Some key issues that affect this bundling
are:
Integrating design and operations: Project design and implementation need to take
account of operating and maintenance costs if the overall life-cycle cost of the MRT
system is to be minimized. A single entity could be selected to develop and operate the
system (i.e. the first four of the above components) and even to provide finance as well.
There are no such entities in Vietnam with the skills and experience in all aspects of
11
MRT systems, and few in the world. The range of expertise needed to develop and
operate an MRT system is so broad that they will require that the entity be a consortium
that includes a number of companies with skills in various specific areas. However,
when tendering a consortium may not necessarily secure the best outcome because: (i)
the large size of the contract would limit the number of integrated consortia that could
bid; (ii) the winning consortium will not necessarily include the best combination of
individual companies with specific implementation, operation and financing skills; and
(iii) the consortium may not fully separate the cost of initial development and ongoing
operations in a way that provides sufficient transparency to enable the government to
adequately manage the contract. These limitations are not insurmountable, and can be
managed with sound tendering, tender evaluation and project management processes.
Integrating rollingstock provision and associated systems with MRT operations
and maintenance: It is possible to arrange for the rollingstock to be provided either: (i)
as part of the infrastructure contract; (ii) as a standalone contract; or (iii) as part of the
operations contract. There is merit in the last of these approaches, i.e. with operating
concessionaire financing, providing and maintaining trains and related items such as
train control & communications systems and depot equipment because:
it ensures that the concessionaire has equipment and systems that they judge will
allow them to provide services that meet their passengers needs, with this ability to
hold the concessionaire more closely accountable for the quality of their services
allowing the transfer of some patronage risk to the concessionaire;
it allows the concessionaire to optimize the closely inter-related costs of rollingstock
and train control and operations, together with other operating and maintenance
costs and hence to operate efficiently; and
the financier of the trains (which is likely to be a third party) will place additional
pressure the operator to perform well and meet the requirements of the concession
to protect the financiers investment
3
.
Nevertheless, it remains important that the government specify key features of the
equipment (e.g. power supply) if it wishes to allow for inter-operability of trains between
lines in the MRT system and to avoid excessive mixes of technology in the MRT system.
A concession agreement would also need to include a clause that provides the
government with the option to buy the trains in the event the operator failed (or was
dismissed by the government due to inadequate performance) to ensure that it could
install another operator who could continue to use the rollingstock. This approach
would avoid a financier adding a risk premium to allow for the possibility that the trains
could be returned to them in the event the operator failed or was dismissed. Still, some
risk needs to remain with the financier if they are to be in a position to pressure the
operator to perform well. Finally, linking rollingstock supply with the operating
concession will require that the concession be for a period equal to the life of
rollingstock (approximately 30-35 years) or provide clear rules for government purchase

3
In this arrangement, the concessionaire would be a consortium that included a financier as well as an
operator. The presence of a clause in the operating concession contract that allowed the financier to replace an
operator that was performing inadequately would be a way to reinforce the mechanism. Notably, the use of
export credit to finance the procurement of trains and other assets would not result in the desired internal
pressure on the operator because this finance is based on an agreement between the export credit agency and
government in Vietnam, i.e. it does not directly link the financier with the operator. If export credit is used, it is
therefore necessary that the credit is not the sole source of finance for the concessionaire, i.e. the concession
needs to involve the use of significant other private sector finance to bring a financier into the concessionaire
consortium who is motivated to monitor and pressure the operator.
12
or the transfer of the rollingstock to another operator if a shorter concession period is
used.
Packaging infrastructure maintenance: Two practical options for the maintenance of
fixed infrastructure on an ongoing basis (i.e. after the initial warranty period covered by
the construction contract) are to: (i) make it the responsibility of the group who operate
train services; or (ii) package it as a separate contract. The former is preferred because it
avoids potential boundary disputes between the maintenance and operations contracts
(e.g. with the operator claiming that limitations in their performance are due to
deficiencies in infrastructure maintenance). It also draws on the self-interest of the
operator to ensure that the infrastructure is sound condition so that the system is
attractive to passengers and that train operations are not impeded by inadequate
infrastructure maintenance.
Separating the ticket system and fare collection from other MRT activities: To
meet the needs of passengers, the MRT system must be seen by actual and potential
customers as a seamless system that is easy to use. As an essential element of an MRT
system is that people transfer between lines to reach a greater range of locations, this
cannot be achieved if ticketing is undertaken on a line by line basis. The needed
outcome of an integrated ticketing system can be achieved by either: (i) establishing
standards for an integrated ticket system that the developer of each MRT line is required
to adopt; or (ii) removing ticketing from activities undertaken for individual lines and
implementing it as a separate contract that covers the entire MRT system (potentially
covering ticketing and also fare revenue collection and management). The latter has the
advantage that it:
makes it easier to implement and operate an integrated fare and ticketing system and
provides greater flexibility for future policy changes (e.g. regarding fare price levels
and fare structure);
allows specialization and scale economies in the ticketing and fare revenue
management systems, which should reduce unit costs;
facilitates introduction of ticketing products that are part of more general payment
schemes (e.g. smart cards), with benefits for consumers and possibly also lower costs
it requires the ticketing organization to be able to enter into commercial
arrangements with financial institutions and other entities and make rapid and
frequent payments to settle accounts as part of its revenue clearing operations; and
permits establishment of an independent contractor (i.e. the supplier and operator/-
maintainer of the ticketing system) who would amongst their other duties monitor
patronage
4
.
Financing: The government can procure private sector capital to develop MRT
infrastructure. Preliminary analysis for HCMC (see Section 2.4), and evidence from
other places, indicates that MRT revenue is unlikely to make a significant contribution
towards the financing of infrastructure. Hence, there are two ways in which
infrastructure can be financed: (i) the government uses its own funds (including general
public debt) to finance the project; or (ii) engage the private sector to both develop and
finance the project in the first instance and repay them over time for the costs the

4
It is recommended later in this report that the payment to concessionaires who provide train services should
be related, in part, to the patronage of their line. Having an independent organisation (i.e. the operator of the
ticket system) as the source of patronage data avoids the conflict of interest associated with concessionaires
providing data on patronage that in turn is used to determine the payments made to the concessionaires.
13
private sector incur. The logic for the latter is that government borrowing capacity may
be limited, and/or the cost of private sector finance may be less than use of public
sector funds when account is take for the transfer of risk to the private sector. This use
of private sector capital together with risk transfer is the essential feature of what are
commonly called a public-private partnership (PPP) or a private finance initiative (PFI).
Means for determining if there is merit in using a PPP arrangement is considered further
in Section 2.12.
2.8 Risk transfer
An essential aspect of contracts is the specification of the responsibilities of the Authority and
concessionaire. Inherent to these responsibilities is the allocation of risk, i.e. the responsibility
for each party to deal with uncertainty regarding matters related to the activities (such as the
precise quantity and cost of materials needed in a construction contract, likely MRT patronage
and MRT operating costs). The Authority will gain the lowest price for a tender by
transferring to the concessionaire) the risk that the concessionaire can manage. The
consequences of transferring a different level of risk are:
if the Authority transfers less risk, the concessionaire will have less incentive to manage
the risk this will increase the chance that the risks will occur and will lead to higher
costs, which will be passed on to the Authority; and
if the Authority transfers more risk than the concessionaire can control, the
concessionaire can be expected to add some allowance in their tender to allow for the
possibility that events beyond their control will occur and will result in them incurring
higher costs this allowance is sometimes called a risk premium.
Assigning the optimal amount of risk between the Authority and the contractor/-
concessionaire (and also between the various groups in a contract/concession consortium)
leaves each in a position to use risk management techniques to minimize the probability that
the risks will be realized and result in financial loss. Establishing the appropriate transfer of
risk to contractors and concessionaires is an essential activity for the Authority, and will
determine the cost that the government will eventually incur for implementation of the Project
and its ongoing operations. Dealing with the latter (i.e. ongoing operations) can be difficult
because it needs to consider matters that can change over time, but is also very important
because the cost consequences of an unsound allocation of risk can be considerable.
2.9 Forms of MRT concession Gross Cost and Net Cost
As indicated in the definition of terms in Section 1.3, there are two principal forms of contract
for the provision of MRT infrastructure and services; a Net Cost concession and a Gross Cost
concession. The features of these approaches are summarised in Figure 2.2 (see also Appendix
C). Assessment of the options indicates that:
A Net Cost form of concession has substantial limitations because the need to give the
concessionaire certainty over the circumstances of their system commensurate with the
revenue risk transferred to them either restricts government flexibility with regard to
future MRT development and policy change or requires government to renegotiate
concession agreements to take account of changes that may need to occur in the future.
A Gross Cost form of concession will almost certainly be the best approach for MRT in
HCMC to give the government the capacity to deliver fully integrated public transport
(including integrated ticketing and a common fare system) that can also adapt to
14
changing circumstances over time, acknowledging that it is not possible to identify in
advance all such changes that could occur over a potential 35 year concession.
With a Gross Cost concession there should still be an appropriate transfer of risk to
concessionaires to minimize costs, encourage good performance by concessionaires and
minimize concession supervision requirements.
Concession supervision needs to focus on key factors that will ensure the government
achieves value-for-money.
The government will gain the lowest overall cost by transferring to the concessionaire the risks
that the concessionaire can manage. As an example, it is evident that an MRT operator can
have some influence over MRT patronage, for example by providing good service, but that
other factors beyond the control of the operator also have a substantial influence, for example
the state of the economy, government policy on other transport modes, government land use
policy and patronage on other lines in the MRT system.
Transferring full patronage risk to an operator would result in operators, when bidding for a
contract to operate the MRT, including higher costs in their tender to protect them against the
uncertainty of the risks that are beyond their control. It is judged that the concessionaire may
be able to influence only say 10-20% of their patronage, i.e. a concessionaire providing a poor
quality of service would have patronage around 80-90% of the patronage of a concessionaire
providing a high quality of service. This occurs because (a) many passengers will judge that
they have no choice than to continue to use MRT because road traffic conditions are poor, (b)
patronage is affected by more general social and economic conditions over which
concessionaires have no influence, and (c) patronage on any individual MRT line will depend
on what is happening on the other lines. Transferring this extent of risk to the concessionaire
will encourage them to provide good services to customers without exposing them to
excessive financial risk. This can be achieved by linking part of the payment to the
concessionaire to the number of passengers that they carry on their MRT line.
Figure 2.2: Summary of Net Cost and Gross Cost Concession Models
Net Cost Gross Cost
Infrastructure Government provides civil infrastructure. Concessionaire provides trains and related items such as
train control & communications systems and depot equipment.
Risk sharing Concessionaire assumes all patronage risk,
and shares extra profits (if any) with the
Authority.
Risk is shared between the Authority and
concessionaire. Optimum sharing of risk will minimise
the concession cost.
Revenue Concessionaire keeps revenue Fare revenue is given to the Authority
Services Concessionaire determines services to be
provided on the basis of profitability.
Authority sets service standards and the
concessionaire determines services based on these
standards.
Payments Concessionaire meets costs from its own
revenue. Additional payments may be
needed from the government if
concessionaires revenue is too low.
Authority pays the concessionaire for services
provided according to rates set on the basis of
competitive tendering and quantity/quality of service
provided.
Authority role Authority invites tenders & establishes a
concession; has only a small role
thereafter; difficult to vary contract
conditions.
Authority invites tenders and establishes a
concession; has a continuing major role in managing
the concession agreement; can vary conditions when
needed.
Source: Consultant
15
2.10 Using the private sector to minimize the cost of MRT operations
There has been a general tendency for subsidized publicly provided public transport services
to become inefficient, with around half of increased subsidies for public transport being
delivered to passengers through improved services and the remainder resulting in less efficient
service provision, i.e. wasted (Bly et al 1980, 1985). This waste is also evidenced by
international experience in recent years with the contracting out of operation of bus services
that were previously operated by a government agency, with the general literature indicating
that private sector operations achieved savings in recurrent costs (i.e. operating and
maintenance costs) have generally been in the range of 20% to 50%, with some reports of
higher savings, for example (Hensher and Wallis 2005), for example:
Great Britain: 50%-55%
Scandinavia: considerable spread of results (5%-34%), but most in range 20%-30%
USA: 30%-46%
Australia: 22% (Perth), 38% (Adelaide)
New Zealand: about 40% (ex-public operators) and about 5% (private operators).
Recent work on the cost of operating buses in Bangkok indicates that private sector operation
would be at least 30% less than with government operation (University of Queensland 2006).
That is the cost government operation of public transport services is likely to be,
conservatively, around one-third to one-half more expensive than with private sector
operation based on competitive tendering. There is, accordingly, a strong case to consider use
of the private sector for service provision. Given that there is no agency in Vietnam with any
experience in MRT operations, this has the added advantage that it avoids the high cost and
complexity of attempting to establish such an organization in the first instance.
2.11 Potential roles for the private sector
An essential task for the government is policy, planning and specification of an integrated
public transport system. Failure to do this, either by neglecting the issues or by assigning
excessive flexibility to concessionaires and contractors, will almost certainly lead to a sub-
optimal situation in which the cost of MRT and other public transport will be higher and the
quality and integration poorer than need be the case. It also needs to establish the appropriate
operating regime that will be implemented through operating concessions.
To deliver effective and efficient MRT, the government therefore needs to:
ensure adequate planning and feasibility has been carried out and that the economic and
financial business case for proposed new MRT lines or other system components is
understood;
clearly understand the relative merits of alternative approaches to procurement (e.g.
single or multiple contract, and how equipment and services should best be bundled
see the discussion in Section 3.3) when embarking on procurement for construction and
supply of equipment and be able to clearly specify the key functional requirements for
the infrastructure and services that will apply irrespective of the procurement method
used to arrange delivery of them;
ensure integrated operations and policy flexibility by keeping control of:
policy on fare structure and level and the instruments (including ticketing) to
implement it;
16
key design features to ensure the system facilitates integrated public transport
services, for example train specification, power supply, common train control
systems to permit inter-operability, ease of transfer between stations where lines
intersect, disability standards so that a disabled person who boards at one station is
able alight or transfer at another, etc.);
key operating parameters that govern the services to be provided, for example to
allow the government to require concessionaires to provide community service
obligations and to ensure MRT services integrate with other public transport
services;
marketing and branding of the MRT system as a whole, while also encouraging
individual operators to be innovative and promote their own services within the
desired framework; and
provision of passenger information through published material (e.g. web sites,
timetables etc.) and call centers.
It is essential that government perform these functions because no other group can do them -
the governments priority must therefore be with respect to these functions rather than other
functions (i.e. delivering infrastructure and services) that can be undertaken by the private
sector.
Government in Vietnam has considerable experience using the private sector for the delivery
of civil infrastructure, but much less experience using them for delivery of services.
Experience in other cities in Asia (e.g. Bangkok, Singapore, Kuala Lumpur, Manila and
Hongkong) shows that the private sector can implement and operate high quality and effective
MRT systems. Experience also shows that the private sector can mobilize capital to finance
infrastructure, even if this has not always been successful in terms of providing the private
sector with an acceptable rate of return on their capital. The causes for the financial under-
performance are complex, but can generally be linked to: (a) substantial optimism bias (i.e. a
tendency by both government and the private sector to under-estimate the cost of projects
and, even more importantly, the tendency to over-estimate passenger demand for the
projects); and (b) a failure by government to adequately plan and execute projects and to
implement the complementary land use and transport developments needed for the best use
to be made of the MRT projects.
2.12 Assessing the value of private sector involvement - Value for Money
analysis
The decision on whether to use the private sector to undertake an activity can be based on a
value-for-money (VFM) analysis that takes account of:
the cost of establishing a public sector agency to undertake the task if such an agency
does not already exist;
differences in the cost of capital and operating efficiency of the private sector compared
with the government; and
the extent to which responsibility for uncertainty about future conditions is transferred
to the private sector and the private sector is able to manage the uncertainty so that
higher costs do not result.
The cost of capital for government borrowing will generally be less than private finance
because of the low risk assigned to government (i.e. sovereign) debt and the higher return on
equity capital sought by the private sector. If all other matters were equal, it would therefore
17
be better to use government capital in association with private sector implementation of MRT
infrastructure and private sector option of MRT services to minimize the overall cost of MRT.
However, other matters are not equal because it is possible that the private sector can, with
the appropriate transfer of capital risk to them and with a soundly based and managed
contract, manage the risks to avoid them occurring and incurring financial losses that would
result as may more readily occur with government financing of the assets. The private sector
could also be expected to more firmly resist requests for changes in the scope of the project
than would occur if a government agency was implementing the project.
Hence, it may be possible to transfer sufficient risk to the private sector that offsets the higher
cost of private finance and hence makes a PPP approach the lower cost option. This can be
established using a value for money analysis that compares the cost to the government of
implementing an MRT project using its own capital. This will be tested in financial modeling
to be undertaken through the current study.
18
3. Identification and Assessment of Potential Concession Models
3.1 Introduction
The Peoples Committee of HCMC, and government more generally in Vietnam, has
considerable experience in the procurement of civil works through contracts. This experience
has covered situations where contractors involve some form of government ownership (i.e.
they are a public enterprise, a SOE or a joint venture) as well as contractors who are fully
privately owned. The HCMC PC also has experience with contracting the provision of bus
services to SOEs, joint ventures and private companies.
Implementing MRT in HCMC will be more complex than this experience to date because of
issues such as the size of the civil works involved, the cost of operations, the inter-
relationships between fixed infrastructure, trains and operations, and the lack of any
experience with MRT infrastructure and, in particular, operations.
Some of the issues that affect arrangements for the implementation and operation of the
Project were discussed in the previous chapter. This chapter draws on that discussion and
experience elsewhere to identify several distinct options or models that could be applied in
HCMC. Several conclusions arising from the discussion in Chapter 2 help to identify some key
features that need to be considered:
there is a central role for government in specifying key design and operating parameters
for the MRT system an example of this is where government sets the standards and
specifications for signaling and communications equipment which ideally should be the
same for all lines;
there is a need to coordinate design and operations while this does not necessarily
require that they be integrated within a single supply contract, it is likely to be more
easily achieved if this is done;
the provision and operation of the ticketing system should be contracted separately
from other infrastructure and services to ensure integrated ticketing and fares;
a Gross Cost form of operating concession allows a better integrated system with policy
flexibility for government and greater certainty for concessionaires;
the sustainability of the MRT system will be facilitated if the capital cost of trains,
reinvestment in life-expired assets over time and MRT operating and maintenance costs
can be recovered from fare and other MRT-related revenue; and
the use of government or private sector financing of capital expenditure in the first
instance can be assessed on its own merits, i.e. it can be addressed as a separate issue to
other matters related to MRT development and operations.
It also demonstrates how the use of private sector capital can be assessed to determine if it
provides the government with value for money compared with use of government funds to
provide the necessary capital.
Firstly, though, brief consideration is given to approaches used in other cities that have
implemented MRT in recent years.
19
3.2 Recent examples in other cities
MRT lines that have been implemented in recent years and which provide insights that are
applicable to HCMC include those in Bangkok, Manila, Kuala Lumpur and Singapore. While
somewhat older, Hong Kong is also briefly discussed.
Three models have been used to implement MRT in Bangkok to date (see also Appendix B):
The first two lines, which are elevated and 23.5 km in length, was a design, build,
transfer, operate and maintain concession in which a private sector consortium financed
and implemented the system and have the right to operate it over a period of 30 years.
The private sector gains its revenue from fares and a few other small sources, and
receives no subsidy. The system has not been able to generate sufficient revenue to meet
all of its costs, and investors have incurred substantial financial losses.
The second line (the Blue Line subway) was implemented by the government as a design
and build contract for most of the fixed infrastructure using public funds with a separate
concession for the supply of trains and E&M equipment and for operation of the line
for 25 years. The concessionaire gains its revenue from fares and a few other small
sources, and meets its costs from this revenue, i.e. it does not receive any ongoing
subsidy. Patronage for the line is much lower than forecast, and it seems unlikely that
the concessionaire will be able to meet its financial obligations in the longer term.
A third line (to the new Suvarnabhumi Airport) is currently under construction. The
government is using a design and build contract to develop all fixed infrastructure and
to supply an initial set of nine trains using public funds. The form of the concession is
not yet determined, but it is notable that the provision of some trains will reduce the
costs that the concessionaire will be expected to cover.
Work examining the development of future MRT lines in Bangkok (ADB 2007b) has
recommended that implementation and operational arrangements for future lines should be:
government financing of fixed infrastructure through use of public funds with
implementation of fixed infrastructure through conventional construction contracts;
engagement (through competitive tendering) of a private sector concessionaire to
finance and provide trains and train control and communications equipment, to
maintain fixed infrastructure and to operate train services over a 35 year period under a
Gross Cost form of concession with the appropriate transfer of risk; and
the government to implement an integrated ticketing system using the private sector to
the greatest extent and with the government retaining all fare revenue.
3.3 Potential implementation models for HCMC
Models for the implementation and operation of the Project in HCMC need to address: (i)
implementation of the infrastructure; (ii) operation and maintenance of the system; and (iii)
financing of the system. Four integrated models for these activities, which illustrate the range
of possible options and their implications, are identified. In all cases it is assumed that the
government agency which is responsible for delivering the project (called the Authority)
engages other entities on a contractual basis to undertake the three tasks, though the other
entities could be a mix of public and private enterprises. The four models are:
Public Enterprise. In this approach the Authority would use government finance to
implement the Project using capital that it arranges (using government tax revenue,
grants from other levels of government, and sovereign debt), would use competitive
20
tendering to arrange for construction of fixed infrastructure and the supply of trains and
associated systems, and would establish a SOE that would operate and maintain the
system under contract. As the operator would be an SOE, there is no effective risk
transfer from government (i.e. it can only be transferred between different parts of
government) and the concession contract would need to be based on payments to cover
the costs incurred by the SOE. In this arrangement there is no role for the private sector
other than as civil works contractors and suppliers of equipment. This is the broadly
model recommended for UMRT1 (though it was proposed for this line that
maintenance of the line would be undertaken through a separate contract see Parsons
Brinckerhoff et al 2006).
Public Implementation with Operating Concession (PIOC). In this approach the
Authority would finance and implement project infrastructure in the same manner as
the Public Enterprise model, but would engage, through competitive tendering, a private
company that would provide services. A Gross Cost approach is adopted for the
operating concession because of the reasons discussed in Section 2.9. (A Net Cost
concession could be used, but this would reduce the integration of the network and the
policy flexibility of the government.) In the PIOC approach, the Authority needs to play
a firmer role in ensuring that the design of the Project takes account of ongoing O&M
costs so that life-cycle costs are minimized and tries to ensure that trains meet the needs
of operators.
Train Supply and Operating Concession (TSOC). This model uses government
funds to finance fixed infrastructure that is implemented by contractors through
competitive tendering, with a separate operating concession that also involves the
financing and supply of trains and related items such as train control & communications
systems and depot equipment. As with the PIOC model, a Gross Cost concession is
adopted. As in the PIOC approach, the Authority needs to play a role in ensuring that
the design of the Project takes account of ongoing O&M costs so that life-cycle costs
are minimized, but leaves responsibility for the choice of trains to the operating
concessionaire. The approach draws on the potential to bundle train supply with
operations so that more patronage risk can be transferred to the concessionaire. It is the
approach recommended for future MRT lines in Bangkok (see Section 3.2).
Build Operate Transfer (BOT). This model involves the Authority engages a
consortium to finance, implement and operate the Project through a competitive
tendering process. In keeping with the greater extent of risk transferred to the
consortium in this approach, it is likely that a Net Cost approach would be more
appropriate than a Gross Cost approach, with the tendering process involving the bidding
consortia indicating the amount that the government would need to pay them to
finance, implement and operate the Project over the concession period.
Inherent to these options are: (i) the last two options involve some provision of finance from
non-government sources, which necessarily requires that the group undertaking the task must
be either wholly private or a joint venture; and (ii) options that require private sector finance
for capital investment must transfer related risk to the private sector and allow the private
sector to manage the risk so that they can be held accountable for outcomes. Features of the
four procurement models are described in Figure 3.1.
21
Figure 3.1: Features of Delivery and Financing Models
Public
Enterprise
Public
Implementation
with Operating
Concession (PI OC)
Train Supply and
Operating
Concession (TSOC)
Build, Operate &
Transfer
(BOT)
Delivery of:
and Fixed Equipment
government.
Delivered through
competitively
tendered Net Cost
contract to the
government.
and communications,
and depot equipment
Delivered through competitively tendered
contracts to the government.
Delivered through a
competitive tendered
Gross Cost concession.
Train services and
infrastructure
maintenance
Contract negotiated
with an SOE.
Competitively
tendered Gross Cost
contract.
Risk Transfer
Transfer of risk from
the government is
limited to the extent
allowed in
construction and
equipment supply
contracts. The
government retains
operations through
its ownership of the
operator.
As for the Public
Enterprise option but
can transfer operating
risk to the
concessionaire. Some
patronage risk can be
transferred through
the Gross Cost
concession. The
government retains
operating risk related
to mismatch between
trains it provides and
concessionaire needs.
The government
transfers more risk to
the concessionaire
than in the PIOC
option because the
concessionaire
purchases trains and
can therefore bear
more risk for
operations because
they have more control
over service quality.
Transfers the greatest
amount of risk from
the government, but
the government loses
flexibility for change
in policy and for
public transport
network integration.
Finance
and Fixed Equipment
government.
Capital provided by
the concessionaire.
The government will
need to pay for costs
as specified in the
contract (to cover
costs net of fare
revenue, where fare
revenue will be much
less than the costs).
and communications,
and depot equipment
concessionaire. The
government pays for
costs as specified in
the contract (to cover
costs).
Train services and
infrastructure
maintenance
The government
pays all costs
incurred by the SOE,
including working
capital
The government pays
for operating and
maintenance costs as
specified in the
contract.
Fare revenue The government
retains fare and
other revenue (or
pays SOE the
difference between
costs and revenue if
the SOE retains the
revenue).
Fare revenue accrues to the government. Concessionaire retains
fare and other
revenue.
Source: Consultant
It would be possible in all of the models for ticketing to be part of the operating concession
for the Project or for ticketing to be implemented separately for the entire MRT system. It
would be a little more complex to separate ticketing from the concession in the case of the
BOT approach or with net cost approaches to concessions because the concessionaires in these
cases will wish to control all aspects of operation of their line.
22
An initial indicative assessment of the models is summarized in Figure 3.2 using a system
whereby three ticks is the highest possible score and a cross means that the model does not
allow the criterion to be met
5
. Features of the assessment are:
Minimizing overall costs. None of the options is a perfect means for minimizing
overall costs. The BOT model may be best placed to minimize costs, but is scored only
two ticks because tenderers are likely include risk premiums to allow for risks (e.g. full
patronage risk) that they cannot manage but which they would be required to assume
under the model. While the Public Enterprise model might in theory allow costs to be
minimized, the lesser level of financial discipline that occurs in public enterprises and
the difficulty in imposing sanctions on a government agency are likely to diminish the
potential benefit in practice. The PIOC model will perform less well than the TSOC
model because train supply and financing is separated from operations, which increases
the chance that the trains will not be as well suited to operations (thus leaving more
operating risk with the government) and it does not include the added discipline
resulting from the presence of train financiers in the TSOC model.
Provide integrated MRT system for passengers. The BOT approach cannot meet
this criterion because the line is operated on a stand-alone basis. In contrast, the TSOC
model transfers patronage risk to the concessionaire to the extent that they can manage
it and provides incentives for the concessionaire to meet the needs of passengers that
cannot be provided to the same extent in the remaining options. It is likely that the
PIOC model will result in slightly less integrated services because of the potential for a
mismatch between trains selected by the government and the needs of the operating
concession. The Public Enterprise model should allow a high level of MRT integration
because all aspects of MRT are under the control of the government. Use of a Net Cost
concession for the Public Enterprise, PIOC and TSOC approaches would result in
these options performing poorly against this criterion because the concessionaire would
be focused on the performance of their line alone and would resist attempts to provide
a more integrated system that did not provide them with some benefit.
Policy flexibility for the Authority. The BOT approach requires that the
concessionaire be given protection against changes that may affect their revenue, and
hence considerably limits the changes that government can make over the life of the
concession in response to changes in circumstances. Conversely, the Public Enterprise
model gives the government the greatest level of flexibility, with the other options
giving a high level of flexibility. Use of Net Cost concessions for the Public Enterprise,
PIOC and TSOC approaches would result in a similar outcome to the BOT approach,
with the Authority being in the weak position of negotiating with an incumbent
operator over the duration of the concession for any changes they wanted to make to
the system.
Transfer of civil infrastructure supply risk from the government. The BOT
approach allows most infrastructure risk to be transferred from the Authority. The
extent of transfer is a less with the PIOC and TSOC approaches because the Authority
must coordinate contract management for the supply of fixed infrastructure and other
aspects of MRT though the government can transfer most maintenance risk to the

5
Ongoing work under the current study will examine the financial performance of all four models using a
value-for-money analysis. The role of the current assessment is to indicate the general strengths and limitations of
the four approaches to guide ongoing development of the most appropriate model for the Project.
23
concessionaire
6
. The transfer of risk with the Public Enterprise approach is least
because it remains within government.
Transfer of operating risk from the government. The Public Enterprise model
merely shifts risk within government rather than transferring it from the government.
The transfer of risk from the government in the other models is linked to the
concessionaires incentive to provide the best level of service (which is in turn related to
the extent of patronage risk and the capacity to influence the quality and quantity of
service). Amongst these, the extent of risk transfer is least with the PIOC approach
because the concessionaire can blame inadequate operating performance on the trains
and other M&E assets provided by the government. They would be unable to do this in
the TSOC option because they would be responsible for purchasing the assets. The
BOT model transfers the greatest level of operating risk to the concessionaire.
Transfer of patronage risk from the government. The BOT model allows the
greatest level of patronage risk to be transferred to the concessionaire because the
approach gives the concessionaire most control over their system and involves a
financier who would place considerable pressure on the MRT operator in the
concessionaires consortium to perform well
7
. A lesser level of risk can be transferred to
the concessionaire in the TSOC approach because the financiers interest is limited to
train supply. The risk transfer is much less with the PIOC approach because of the
absence of this pressure from a financier and because of potential mismatch between
the trains selected by the government and the concessionaires needs. There is no
effective transfer of patronage risk in the Public Enterprise model because the
concessionaire (an SOE) is simply another arm of government.
Firm contractual basis for operations. The PIOC, TSOC and BOT approaches all
involve clear and enforceable contracts. It is judged that enforcing contracts under the
Public Enterprise approach will be less effective because the Authority and the SOE
concessionaire are both parts of government.
Ease of concession management. It is judged that the resources and skills needed by
the Authority to manage concessions will be least in the case of the Public Enterprise
approach because it will be the weakest in terms of contractual strictness, but will be
similar for the other three models. In general, a BOT approach requires a lower level of
supervision because risks and responsibilities lie primarily with the concessionaire, but
the need in the Project for a considerable subsidy to be paid to the concessionaire in the
BOT case would require the Authority to take a more substantial role to ensure that the
subsidy was being used appropriately.

6
In the PIOC and TSOC options, the concessionaire who is to operate services could be engaged early in the
project implementation process so that they can provide input on operating issue to the project design that may
help reduce life cycle costs. In practice, it will be impractical to do this in sufficient time for the concessionaire to
be able to substantially influence the engineering design, which will be one of the earliest activities to occur for
implementation of project infrastructure (see Section 6.7 for more information on the potential time needed to
engage a concessionaire). Moreover, engaging a concessionaire when the design is incomplete requires additional
care because: (a) the competitive tendering process (including submission of prices for the cost of providing
services) that is used to select the concessionaire must be based on a project design that is not fully specified,
which is likely to result in less optimal bid prices; and (b) to ensure that the concessionaire did not use the
process to vary the contract prices in their contract in their favour. On balance, it is concluded that it will be
relatively better for the government to secure advice on operating needs from other sources to optimise the
engineering design and to independently secure a sound concession contract.
7
In the extreme, the financier could have step-in rights to replace the operator in the event that the operator
persistently fails to meet their obligations (see the concession template in Appendix D for more information on
this and similar issues).
24
Figure 3.2: Indicative Assessment of Delivery and Financing Models
Criteria Public
Enterprise
Public
Implementation
with Operating
Concession (PI OC)
Train Supply and
Operating
Concession
(TSOC)
Build, Operate &
Transfer
(BOT)
System Integration
Minimize capital and
operating costs

Provide integrated MRT
system for passengers

Policy Flexibility for the Government
Ability for the Authority to
modify MRT system

Risk Transfer from the Government
Civil infrastructure risk
Operating risk
Patronage risk
Management of Operating Concession by the Government
Firm contractual basis for
operations

Ease of concession
management

Incentive for contractor/-
concessionaire to do the
thing right

Potential Value-for-Money
Allowing for risk transfer,
associated risk premiums
and the cost of capital

(1) Using a scale of up to 3 ticks, where 3 ticks indicates the best performance. A cross indicates the model cannot meet
the criterion.
Source: Consultants
Incentive for contractor and concessionaire to meet the governments needs in
the most efficient way. The TSOC approach is judged more likely to encourage the
contractor and, more especially, the concessionaire to provide the most attractive and
efficient service to passengers because they have reasonable control over the
infrastructure and the extent of risk transfer and payment structure under a Gross Cost
form of concession provides the right incentives for this outcome. The incentive is a
little less in the BOT case because the concessionaire will be more focused on
controlling costs and, with the transfer of patronage risk beyond their capacity to
manage it, may become risk averse and hence less innovative. Similarly, the provision of
trains to the concessionaire in the PIOC approach and the absence of a financier reduce
the pressure and opportunity for the concessionaire to be as responsive as in the TSOC
model. The incentive is even less in the Public Enterprise approach because the
government will incur any costs that result from a lack of performance by the SOE
concessionaire.
Potential Value-for-Money (VFM). The VFM analysis has not been completed at the
time of preparation of the current report. However, the judgment is made that of the
TSOC approach is likely to be best because it transfers an optimum amount of control
and risk to the concessionaire. The VFM for the BOT approach is reduced by the likely
allowance for risk premiums by the concessionaire and the higher cost of private sector
capital. The PIOC option is also likely to perform less well than the TSOC approach
25
because it places less pressure on concessionaires to perform well. The Public
Enterprise approach is judged to perform less well again because there is little transfer
of risk from government, there are considerable risks and costs associated with
establishing an SOE to operate MRT services, and it is likely to be more difficult to
enforce contracts between government agencies.
On balance, the TSOC approach appears to perform better across all criteria than the other
options, with the Public Enterprise and BOT approaches having some particular weaknesses.
Placing a greater weight on MRT system integration and policy flexibility reduces the relative
merit of the BOT approach. As indicated previously, the approaches will be reassessed in the
course of ongoing financial modeling.
3.4 Next steps
The assessment undertaken in this chapter suggests that there is potential for a private sector
role in the Project. It seems that this is unlikely to involve a major role in providing finance
for the Project (as occurs in the BOT approach). However, there appears to be merit in the
involvement of private sector financing for acquisition of trains and related mechanical and
electrical equipment. Similarly, there is a very strong case for use of a Gross Cost form of
concession agreement because it allows the government greater capacity to modify MRT
operation in response to future changed circumstance, more easily permits integrated ticketing
and common fares, and allows the ideal extent of risk transfer to the concessionaire.
The intention of developing and assessing the four options is to provide understanding that
can help the government with its consideration of an arrangement that is appropriate for
HCMC. Other arrangements are possible, and the results of the analysis provide guidance for
establishing the features of such variations and for the approach that is eventually adopted by
the government. An essential element of the structuring of the options is the appropriate
allocation of risk and the use of incentives and penalties so that the concessionaire is
incentivized to undertake the responsibilities allocated to them by the government at the
lowest possible cost.
26
4. Risk Allocation for Concessioning and Financing Options
Responsibility for managing risk (i.e. uncertainty or the chance that things could occur that
result in a variety of problems including higher costs) needs to be allocated in a way that
makes those involved in implementing and operating MRT in Ho Chi Minh City fully aware of
them and able to manage them to minimize the chance of the problems occurring. Ways in
which risks could be allocated for the four procurement options described in the previous
chapter are described in Table 4.1. The allocation of risk is described in contracts between the
government and other entities that are responsible for various MRT activities.
Table 4.1: Recommended allocation of risk for each concession option
Risk Concession Option
(1)
Public
Enterprise
Public
Implementation
with Operating
Concession
(PI OC)
Train Supply and
Operating
Concession
(TSOC)
Build, Operate &
Transfer
(BOT)
Project design
Changes in project
scope
These changes can occur only under the direction of and with the approval of the
government and should therefore remain the responsibility of the government.
Unexpected
infrastructure
design issues
Civil works procurement
Unexpected land
acquisition &
resettlement issues
These risks are generally beyond the control of contractors and the private sector and
so the government should bear the financial consequences of them
Unexpected
changes in
construction
activities and costs
for original scope of
works
The government can allocate most of these risks to contractors,
but may need to be responsible for large unexpected changes.
Most of these risks
can be allocated to
the concessionaire.
Changes in scope of
works
The government should bear the consequences of any changes in the scope of works
that it proposes.
Latent condition for
civil infrastructure
The government should be responsible for such uncertainty.
Effect of delayed
construction on
concession
commencement
This risk is under the direction of the government and so the
government should compensate the concessionaire for
additional costs that the latter incurs as a result of the delay.
The concessionaire
is wholly responsible
for managing
implementation and
should bear the
consequences of
delays.
E&M and train procurement
Changes in
technology
The risks remains with the government. These risks can be transferred to the
concessionaire.
Changes in unit
costs
Delay in E&M and
train delivery
Changes to
ticketing system
that are initiated by
the government
The ticket system is under the control of the government in
these options.
The Net Cost
concession makes
risk transfer difficult.
27
Concession Option
(1)
Risk
Public Public Train Supply and Build, Operate &
Enterprise Implementation
with Operating
Concession
(PI OC)
Operating Transfer
Concession (BOT)
(TSOC)
Maintenance of assets
Changes in
infrastructure
maintenance needs
The risk remains with
the government.
Most risk can be transferred to the
concessionaire.
Full risk can be
transferred to the
concessionaire.
Changes in unit
costs for
maintenance of
infrastructure
Inadequate
maintenance of civil
assets
Full risk can be transferred to the concessionaire.
Inadequate
maintenance of
trains and M&E
assets
Difficult to transfer
full risk to the
concessionaire
because they did
not chose the
assets.
Full risk can be transferred to the
concessionaire.
Service provision
Service standards The government specifies safety and security standards, but
seeks to use the transfer of some patronage risk to the
concessionaire to minimize the need for detailed specification of
service standards.
The government
specifies only safety
and security
standards, with the
fully transfer of
patronage risk to
the concessionaire
avoiding the need
for specification of
other service
standards.
Train service
schedules
Subject to the transfer of some patronage risk to the
concessionaire, responsibility for service planning can be
transferred to the concessionaire, with the concessionaire
seeking approval from the government for changes.
Full responsibility is
transferred to the
concessionaire.
Changes in unit
labor costs
Even though the risks
could be transferred
to the
concessionaire, the
concessionaire is a
public company and
so the risk remains
with the government.
Can either (a) transfer the risk to the
concessionaire by using only a single
escalation factor for future payments, or
(b) use separate escalation factors for
each item to avoid the transfer of
difficult-to-manage uncertainty to the
concessionaire.
Risk transferred to
the concessionaire
through use of a
simple cost inflation
index.
Changes in unit
power costs
Changes in unit
costs of other
inputs
E&M and train
maintenance,
rehabilitation and
replacement
Government
purchase of the
assets means that
maintenance of
them should remain
with the
government
The risk can be transferred to the
concessionaire.
Industrial, security
or emergency event
off the system
The risk needs to be shared between the government and the
concessionaire.
28
Concession Option
(1)
Risk
with Operating
Concession
(PI OC)
Operating Transfer
Concession (BOT)
(TSOC)
Patronage and revenue
Changes in
patronage due to
poor service quality
Even though the risks
can be transferred to
the concessionaire,
the concessionaire is
a public company
and so the risk
remains with the
government.
Concessionaire bears some risk because
part of their payment is related to
patronage.
All patronage risk is
transferred to the
concessionaire
through a Net Cost
approach
Exogenous changes
affecting patronage,
e.g. changes to the
public transport
system in HCMC,
very substantial
changes in fuel
prices and other
changes in socio-
economic conditions
The changes are beyond the control of a
concessionaire, but for practical reasons
need to be shared. Three cases apply:
(a) can transfer risk of small negative
consequences to the concessionaire, (b)
government should bear the negative
consequences of significant changes, and
(c) concessionaire gains from changes
that are beneficial to them may be
partially recouped though a profit cap.
Can expect concessionaire to seek to
protect themselves from downside risk.
The risk is
transferred to the
concessionaire.
Change in fare
policy
The government retains all fare revenue
and hence bears the revenue
consequences of any changes in fares
policy that it initiates.
The government
has limited capacity
to change fare
policy
Fare collection
security
The government can transfer this
responsibility to a separate fare collection
concession.
The risk is
transferred to the
concessionaire.
Change in other
revenue
The risk can be transferred to the concessionaire.
29
Concession Option
(1)
Risk
with Operating
Concession
(PI OC)
Operating Transfer
Concession (BOT)
(TSOC)
Payments to/ from the concessionaire
Incentives to
encourage
concessionaire to
provide good
services
Limited capacity to
transfer risk because
government operator
cannot be held to
same contractual
standard as a private
company.
Transfer of risk is
limited because
operators can
blame poor
performance on
M&E assets and
trains that are
provided by the
government.
Substantial transfer
can occur with
concessionaire
control over
operating assets
and patronage
incentive payment.
Greatest level of
transfer.
Improper record-
keeping of services
provided
The risk remains with
the government
because the
concessionaire is
publicly owned.
Government needs independent means
for confirming services provided to
provide the basis for contract payments.
Government has a
limited need
because payments
to the
concessionaire are
not linked to
specific service
provision.
Cost inflation Risk can be transferred to the
concessionaire to the optimal extent by
using appropriate price indices to adjust
concession payments over time.
Risk is transferred
to the
concessionaire by
using an average
price index.
Concessionaire may
not be able to
manage all of the
risk, e.g. changes in
energy prices.
Potential for
windfall gains to the
concessionaire
Government will
capture any gains.
Potential for windfall gains from operations is very limited. Risk
of windfall gains is limited by sharing profits from specific
financing and development activities.
Procurement model
Model is
unattractive to
potential tenderers
Not relevant because
operator is publicly
owned.
May be attractive
because tenderers
do not need to
arrange finance and
they will seek to
assign asset risk to
the government.
May be less
attractive to
tenderers because
they need to
arrange finance.
May be less
attractive to
tenderers because
they need to
arrange finance and
bear considerable
risk.
Model results in
productive tension
between concession
partners
Not relevant
because
concessionaire
involves an
operator only.
Deliberate tension introduced by
involvement of financier partner who will
monitor operator performance.
30
Concession Option
(1)
Risk
with Operating
Concession
(PI OC)
Operating Transfer
Concession (BOT)
(TSOC)
Inadequate
performance by
concessionaire
Risk remains with the
government because
the concessionaire is
publicly owned.
Some risk transfer
through a
patronage-related
payment, but the
concessionaire can
blame poor assets
provided by the
government for
inadequate
performance.
More risk transfer
because of the
patronage-related
payment and
concessionaire
selection of E&M
assets and trains.
Greatest transfer of
risk, though there is
the potential for the
transfer of risk that
the concessionaire
cannot manage
this would result in
the added costs
through risk
premiums and risk
averse behavior by
the concessionaire.
Termination of
concessionaire
Government can
terminate the
concession, though
political lobbying may
make this difficult to
achieve.
Government can establish conditions to terminate the
concession in the case of persistent sub-standard performance
by the concessionaire.
Other financial matters
Exchange rate
movements
Risk remains with the
government.
Primary risk should be transferred to the concessionaire, which
can use various instruments to mitigate the risk. Government
bears some indirect risk through indexation of future payments
to concessionaires.
Interest rate
changes
Changes to tax
legislation affecting
E&M and train
assets
While the concessionaire has no influence over these risks,
simplicity of management indicates that the risk for non-
discriminatory changes to tax should be transferred to the
concessionaire, noting also that indexation will include some
effect of tax changes. Government should bear the risk of tax
changes that primarily affect only concessionaires because the
consequences of the changes can be more easily identified.
Changes to tax
legislation affecting
operations

31
5. Concession Template
The provision of MRT services and any associated provision of assets and finance for the
assets should be undertaken on the basis of a sound contract. A legal agreement for a
concession can be expected to be perhaps a thousand pages or more in length. The purpose of
the current chapter is to provide an outline (or template) for such an agreement to provide a
broad understanding of the issues that need to be addressed.
The template, and discussion in this chapter, is based on a model in which:
the government makes available fixed MRT infrastructure to the concessionaire who has
a duty of care with regard to the infrastructure over the terms of the concession; and
the concessionaire finances and supplies certain assets (taken to include trains, train
control and communications, and depot equipment), operate train services for a given
period (taken to be 30-35 years), and turn over all assets to the government at the end of
the concession.
The template can accommodate variations so that it can be adapted to any of the other three
concession models discussed in the previous chapter or variations on these models.
Taken with other discussion in this report, there is sufficient information in the template to
allow a specialist legal advisors to develop the template into a complete legal agreement. This
is discussed in the final section of this chapter.
The template presented in this report is based on a template first prepared for use in Bangkok
(ADB 2007c).
5.1 Key Factors Affecting the Concession Agreement
5.1.1. Form of Concession
The form of concession (i.e. a Net Cost or Gross Cost form of concession, and variations of
each of these) will significantly alter the content of a concession agreement. As indicated in
the previous section, the details of the concession agreement that vary according to the
concession option are primarily related to the allocation of responsibilities and risk, and
consequences of these allocations including revenue collection, payment structure and
concession supervision. The template indicates where the form of concession will alter the
content of the concession. Notably, the form of concession does not change the structure of
the template.
5.1.2. Allocation of Risk
Allocating risk to the concessionaire to the extent that they can manage it is essential to
minimizing the cost of the concession. It also affects other aspects of the concession. This
was addressed in Chapter 4.
5.1.3. Value for Money
The objective of using private sector participation through a concession is to achieve cost-
effective provision of MRT services. Where there are choices regarding matters considered in
this report, for example the form of concession, the allocation of risk or the extent of
concession supervision, value-for-money (VfM) analysis can be used to determine the option
that will be most beneficial to the government.
32
5.1.4. Structure of Payments to the Concessionaire
The structure of payments to the concessionaire depends on whether a gross cost or net cost
approach is adopted. The level of payments to the concessionaire will depend on the costs
that the concessionaire incurs and, in a net cost concession, the extent to which fares and
other MRT revenue covers the costs incurred by the concessionaire. Some general issues
related to payments under net cost and gross cost concessions are considered in the remainder
of this section. While this report recommends the use of a gross cost form of concession for
the Train Supply and Operating Concession model identified in Chapter 3, a comparison of
use of a net cost approach and the recommended gross cost approach is presented in Table
C.1 in Appendix C to provide a better understanding of the differences. The table also
provides a detailed description of the payment structure.
Net Cost Concession
If an MRT project was able to generate revenue that exceeded the costs incurred by the
concessionaire, a competitive tendering process would result in a willingness by
concessionaires to make payments to be government. However, current work indicates that
revenue from fares and other sources in HCMC will not be sufficient to meet these costs. As a
result, it will be necessary for the government to make payments to the concessionaire to
supplement the revenue the concessionaire would collect from fares and other sources. It is
then necessary to establish how the payments should be made. With a net cost concession,
possible options are:
Make a monthly payment subject to the simple criterion that the concessionaire
provided services during the month. This is not recommended because it would be
generally judged that the government had insufficient control over ensuring that its
funds were used appropriately.
Another option is to link payments to the provision of specific services. However, as
full patronage risk is transferred to the concessionaire under a net cost concession, it is
necessary to give the concessionaire considerable discretion to provide services that they
judge appropriate subject to meeting safety and security guidelines. This means that the
payment cannot be directly related to the provision of specific services because such
services cannot be specified in advance.
A third option is to link the payment to patronage, with the government paying the
concessionaire an amount per passenger carried on the system. It may be necessary for
the government to engage an independent patronage auditor to verify the
concessionaires estimate of patronage.
An escalation factor would be needed to adjust the payment made to the concessionaire over
time. It is likely that the consumer price index (CPI) or an index related to the CPI could be
used.
Gross Cost Concession with No Transfer of Patronage Risk
A gross cost concession automatically transfers much cost management risk to the
concessionaire, for example by making them responsible for keeping costs within their
tendered price.
However, a gross cost concession with no transfer of patronage risk differs substantially from
a net cost concession. In the latter, the concessionaire needs to manage risks associated with
demand so that they can secure the revenue on which their profitability depends. By contrast,
a gross cost concession with no transfer of patronage risk eliminates this incentive for the
concessionaire to meet the needs of passengers. In its place, it is necessary to use other means
to ensure that the concessionaire provides services of appropriate quality. This can be done by
33
setting a central payment level to the concessionaire and using financial penalties and
incentives for, respectively, substandard and superior levels of performance. Service quality
criteria could include the cleanliness of stations and trains, the temperature inside trains,
schedule adherence, ride quality, over-crowding, and the number of customer complaints. It is
likely that this arrangement will place considerable demands on the government to monitor
the criteria and to apply the appropriate penalties and incentives. It will not be effective if the
incentive and penalty payments are not optimal and if it presents the temptation for inspectors
to act inappropriately.
The appropriate means for escalating payments over time to reflect the effect of inflation
could be the same as with a gross cost concession with some transfer of risk, as discussed in
the next sub-section.
Gross Cost Concession with Some Transfer of Patronage Risk
The alternative to using administrative controls in a gross cost concession to get the
concessionaire to act in the interests of passengers is to transfer some patronage risk to the
concessionaire. This can be achieved by linking part of the payment from the government to
the concessionaire to the number of passengers carried on the MRT line. This considerably
reduces the need for the government to monitor service quality because the concessionaire
has a financial incentive to provide good quality services. It is not necessary to transfer all
patronage risk to the concessionaire (as occurs in a net cost contract) as the desired outcome
of high quality services that meet passenger needs can be achieved with the transfer of only
some patronage risk. In particular it is noted that:
The effect of even a modest transfer of risk can be substantial because the marginal
passengers attracted to MRT (or lost from MRT) will be those most sensitive to its cost
and quality of service. The concessionaire must therefore maintain a higher level of
service than might otherwise be necessary to gain or protect those users who might
otherwise choose some other option.
It is only necessary that sufficient risk be transferred to ensure that the concessionaire
will face financial difficulty if they were to lose the patronage-related payment. Ensuring
that concessionaires gained say part of their revenue through the patronage-related
component achieves this objective
8
. A failure by the concessionaire to carry the
potential patronage for their line would substantially, if not completely, cut their profits.
The transfer of too much patronage risk can result in a perverse outcome if it makes the
concessionaire risk-averse, wherein the concessionaire does not implement improved
and innovative practices because they do not wish to take the chance the changes may
not generate increased revenue that exceeds additional costs associated with the
changes.
With regard to escalation of costs over time, it is noted that concessionaires face two major
cost components that are beyond their control and which will not rise in line with general
price inflation:
The cost of energy, which can vary substantially over time and which may be
substantially affected in the future by actions directed to reducing greenhouse gas
emissions.

8
For example, if it is judged that the concessionaire can influence 15% of their patronage, the remuneration
structure could be set so that the total payment to them from the government was, say, 10% less if patronage was
15% less than expected. This variation can be modified as judged appropriate for HCMC, and can include
bonuses for higher than expected patronage as well as penalties for lower patronage.
34
The cost of labor, which can be expected to rise faster than general price inflation and
which cannot always be offset by productivity gains.
As a result, there is merit in using a weighted price escalator that takes account of changes in
energy costs, labor costs and general price inflation and the relative share of costs that can be
related to each of these factors.
5.2 Content of the Template
A review of available concession agreements for the contract provision of public transport in a
number of other places was been examined for previous work undertaken in Thailand (and
reported in ADB 2007c). There is considerable variation in the general form of the
agreements, both in a general structure (e.g. should the provision of government assets to a
concessionaire be presented in a separate asset lease agreement or treated as a section of a
single agreement) and the manner in which the content is structured. It is also noted that
many agreements are subject to copyright.
The previous work in Bangkok judged that it was simpler to have a single legal agreement
covering all aspects of the concession. Following examination of various arrangements of the
content of concession agreements, it recommends the following general structure:
Part I: Introduction
This part addresses general issues, describes the context for the concession, and defines the
parties to the contract and other terms through the following sub-sections:
Name of the Agreement
Date of the Agreement
Parties to the Agreement
Preamble to the Agreement
Definitions
The Concession
MRT Network and Links
Coordination Committee, Representatives and Related Parties
Part II: Pre-Service Activities
This part addresses issues that are to occur prior to the operation of MRT services by the
concessionaire, using the following sub-sections:
Conditions Precedent
Company Systems
Pre-Service Implementation
Protection Against Late Service Commencement
Part III: Services to be Provided
This part describes the train and related services that the concessionaire is to provide, through
the following sub-sections:
Initial Services
Standard of Services
35
Changes in the MRT System
Changes in MRT Services
Part IV: Finance and Insurance
This part addresses financial matters related to the concession, including payments to be made
by the authority and the concessionaire, management of fare revenue, and other matters,
through the following sub-sections:
Payment and Payment Mechanisms
Payment Escalation
Fare Policy and Revenue
Routine Non-fare Revenue
Special Non-fare Revenue
Refinancing
Taxes and Duties
Insurance
Part V: Early Termination
This part addresses issues that could result in early termination of the concession and
treatment of the consequences of such early termination, through the following sub-sections:
Conditions for Early Termination
Process of Termination
Consequences of Termination
Part VI: Special Events
This part addresses special events that could affect the concession, through the following sub-
sections:
Force Majeure and Exceptional Events
Consequences of Force Majeure and Exceptional Events
Power of Authority
Part VII: Assets
This part addresses issues related to assets provided by the government and the concessionaire
through the following sub-sections:
Assets of the Concessionaire
Asset Titles and Transfers
Lenders Direct Agreement
Asset Transfer Values
36
Part VIII: Miscellaneous
This part addresses remaining general contractual issues through the following sub-sections:
Rights and Duties Transfer
Change of Ownership
Dispute Settlement and Resolution
Confidentiality
Change in Law
Authority Step-In
Due Diligence Over Contracts and Financing Documents
Alternatives and Variants of Project Finance
Other Standard Provisions
The template is presented in Annex D. Each of the above sub-sections is elaborated on to
provide information that can guide the preparation of a detailed legal contract. Completion of
the template will need to draw on other information presented in this report, in particular
Annex 1 and Table 4.1.
5.3 Next Steps to Implement the Template
While some sections of the agreement are unaffected by the form of the concession, it is
recommended that the agreement needs to be developed in an integrated form. Accordingly, it
is recommended that work to detail the agreement should await a decision on the form of
concession and the financial performance of the line(s) for which it is to be used. Sufficient
information will then be available to allow detailed text to be prepared for each of the
identified sub-sections.
Five matters need to be considered with regard to the preparation of the concession
agreement:
The agreement is a legal document that requires specialist legal drafting expertise for its
preparation. It is inappropriate for the concessionaire or anyone associated with the
concessionaire to undertake any drafting of the document. This will require the
government to engage the necessary legal experts to draft the agreement.
The agreement will contain considerable detail on financial and other technical matters.
It will therefore be necessary for the government to engage specialist financial,
engineering, transport operations and similar advisors to support the legal drafters.
The agreement will be a substantial document. It is expected that it could take 6-12
months to prepare the full concession agreement.
The agreement is to support the implementation of MRT that meets the communitys
interests as identified by the government. There will be a need for continuing
involvement by a senior person who can drive and take responsibility for ensuring the
preparation of the concession agreement does not, albeit with the best of intentions,
alter the concessioning approach in a way that compromises it.
Tendering requires that potential bidders clearly understand what they will be obliged to
provide and the conditions of their engagement. This necessitates that the concession
37
agreement be drafted prior to commencement of tendering so that a draft form of the
concession can be issued as part of the tender documents.
The last two of these matters are addressed further in the next section in the context of an
examination of matters related to seeking, engaging and managing concessionaires.
38
6. Implementing Competitive Tendering and Concessioning
This chapter gives brief consideration to the steps needed to implement MRT concessioning,
covering the steps of ensuring a sound probity system, market testing, preparing tenders,
calling tenders, assessing tenders and negotiating contracts, and managing concessions. It is
not intended to provide a comprehensive program of activities, but rather to note issues that
will be critical to the successful implementation of projects.
An essential element of seeking and engaging concessionaires is to have a person with
sufficient authority and motivation to drive and take responsibility for ensuring the process
achieves the objectives for the MRT project.
This chapter also draws substantially on ADB (2007c).
6.1 Probity
An independent Probity Adviser should be engaged to ensure fairness and equal opportunity
for all parties involved in tendering, tender assessment and contract negotiation activities. The
person is likely to be a lawyer, and would be present at all meetings with potential bidders and
6.2 Market Testing
The ultimate objective of competitive tendering and concessioning (CTC) is to obtain the
services of the consortium best able to undertake the task at the lowest practicable cost. This
will be facilitated by maximizing the level of competition, which in turn requires concessions
that will be attractive to potential bidders. A high level of competition will ensure that the
government has the largest possible choice of tenders to consider. This will also increase price
competition.
The role of market testing is to identify factors that may make a significant difference in
attracting market interest in tendering for concessions. It involves informal discussions with
potential bidders to outline the general features of the intended tender to identify: (i) their
general interest in tendering; and (ii) the factors that they consider will most affect their
inclination to bid and the quality of their bid. It is a task that needs to be undertaken with care
to avoid implications that the tender is being adjusted to favor any particular potential bidder.
Discussions with at least several potential bidders can alleviate this risk, and should allow
those undertaking the market testing to identify changes suggested by potential bidders that
are in their self-interest and those that could serve the governments interest.
The outcome of market testing is identification of changes to the proposed concession and
tendering arrangements that could attract more bidders and result in improved value-for-
money outcomes for the government. It should be unlikely that major changes to the
concession and tendering arrangements should be necessary for this to occur would suggest
that preparation for concessioning had been severely deficient. However, small changes that
could reduce bid prices even marginally without compromising the services to be delivered
can provide financial savings to the government.
6.3 Preparation of a Request for Proposals
An invitation to tender for a concession would describe all matters that will eventually be
included in a concession agreement. The Request for Proposals (RFP) should include a draft
concession agreement to provide potential bidders with certainty regarding the conditions that
they would need to meet and to indicate that the government has clarity over what it seeks and
39
is well prepared to follow through. It is essential that the government indicates in the RFP its
resoluteness to enforce the conditions of the concession agreement to reduce the risk that a
tenderer submits an unsustainably low bid price in an attempt to win the contract with the
intention of subsequently reducing the services they offer or of seeking additional payments
from the government.
Some key issues to be addressed in a RFP are:
The context to the concession:
Objectives. The tender would indicate the desired effect on the transport system,
quality of life outcomes, social objectives and domestic capacity building.
Urban and transport development plans. The tender would need to describe the
development context for the project, including forecasts of population, land use, and
economic activity, and proposed transport infrastructure development plans,
including giving particular attention to those features that could affect the
performance of the proposed project.
Public transport network context. Describe the current and anticipated operational
context for the proposal, including strategic roles of various public transport modes,
routes and service schedules, fares policy, the level of fares and ticketing
arrangements, integration of public transport services, and facilitation of transfers
between MRT lines and with other modes of public transport.
Facilities to be provided to the concessionaire. The tender would need to explain
matters such as the access to land, the scope and quality of physical MRT
infrastructure that would be provided to the operating concessionaire, the ticketing
system if it is to be provided by under a separate concession, and the schedule for
provision of this infrastructure.
Other. Any other matters that provide the context to the operating concession,
including special privileges, taxation, law, and other such matters.
Services to be provided by the concessionaire:
MRT assets. Description of any assets that are to be provided by the
concessionaire.
MRT services. Relevant matters include the train services that are to be provided
and the responsibility of the concessionaire for service planning and the manner in
which this would be implemented.
MRT infrastructure. Description of the responsibility of the concessionaire for
providing assets, ownership of assets provided by the concessionaire, maintaining
assets it provides and those that are provided by the government, replacing aged
assets at the end of their economic lives and returning assets to the government at
the end of concessions.
Duration of the concession. The period over which the concession will apply and
any milestones during the concession such as concession reviews and renewal.
Performance measures. Describe all indicators of performance that will apply to
the concession. Ideally, performance indicators should relate to contract payments
and contract renewal.
Other. A range of other issues will need to be addressed, including insurance,
security, safety, substitution, MRT industry development, etc.
40
Financial and performance arrangements:
Payment basis. The tender needs to specify the payment structure. It also needs to
indicate the amounts that the government will specify and those for which tenderers
need to submit bids. The structure of the financial arrangements and ease of
assessing bids will be facilitated if the government specifies as many of the variables,
leaving the tenderer to indicate a minimum number of variables and preferably only a
single variable. For example, with a gross cost concession with some transfer of risk,
the tender should specify the patronage related component and the level of bonus
and penalty payments, with tenderers indicating how much they need to be paid for
the fixed monthly payment component. Payments would be linked to key
performance indicators.
Performance bonds. The role, size, timing and reimbursement of performance
bonds need to be specified.
Failure to perform. Describe procedures for advising concessionaires of inadequate
performance, allowing them to improve performance and sanctions in the event of
continued non-performance.
Information to be provided by the tenderer:
General competence. General corporate and financial competence.
Demand and service planning. Expected demand and train services to be
provided under the concession, and plans for working with various stakeholders on
an ongoing basis to further develop services.
Customer and community care. Customer service, safety and security plans.
Infrastructure. Plans for infrastructure maintenance and reinvestment in life-expired
assets
Finance. Financial proposal.
Implementation. Plans for initiating the concession, including staff recruitment and
training, trialing and commencement of services, etc.
Most of these matters mirror issues addressed in the concession agreement.
It is also common to require:
a conforming tender (i.e. a tender that is consistent with the terms and conditions set
out in the request for tender) from bidders to allow a straightforward comparison
between the tenders; and
to allow tenderers to also submit a non-conforming bid where they believe they can
offer better value-for-money by varying some aspects of the request for tender.
6.4 Tendering and Tender Assessment
The government has well established processes for public tendering that are appropriate to
tendering of MRT services. The tenders will be more complex than in common for most
government contracts because it involves a complex and inter-related mix of finance, asset and
service provision with both the quality and quantity of service being important. Consideration
could be given to innovative ways of assessing such a multi-dimensional project. One such
way is a silo approach in which specialists in various pertinent areas (e.g. passenger demand,
infrastructure provision, service provision, finance, etc.) assess the performance of each tender
41
only with respect to their area of expertise, with a higher level of people drawing together the
various components to determine the tender that offers the best value-for-money. There is
also a need to ensure that there are reasonable prospects that the preferred tenderer can
deliver the promised outputs at the nominated amount to avoid the potential for a tenderer to
underbid in order to secure the contract.

Table 1: Example of an Organization Chart for Proposal Assessment
Approving Authority
Tender Evaluation Committee
(representing interests in law,
finance and passenger
transport interests)
Probity Advisor
Proposal
Opening
Committee
Evaluation Teams one for each evaluation area
Service Design
Customer Service & Safety
Infrastructure
Implementation & Management
Finance & Corporate Capability
Competitive Tendering
and Contacting Project
Management Team
Project Advisory
Group (from
various agencies)
Technical Support
(Staff in the Tendering
Authority etc)
Tendering Authority
Reporting
Advice

6.5 Concession Contract and Implementation
The government has considerable experience with contract negotiations and initiating
contracts. For an MRT concession, it may be expected that, in the course of contract
negotiation, the contracting party will seek to re-allocate as much risk as possible back to the
government to improve their own financial situation. The government will need to be vigilant
in this regard.
6.6 Concession Management
The agency responsible for concession management needs to blend two approaches to
concession management. The first is to enforce a performance-based contract that has
conditions for payments between the government and the concessionaire. The second
approach is to recognize that the government and the concessionaire need to work in a
partnership so that MRT can adapt to various changes metropolitan land use and transport
that can be expected to occur over the duration of the concession.
42
6.7 Schedule
A considerable period is needed to arrange for the contracting and implementation of
operations. Indicatively, allowance needs to be made for the following:
a) 12 months to draft and approve a concession Agreement;
b) 12 months to prepare for, invite and assess tenders for a concession contract and to
negotiate and initiate the contract;
c) 12 months to draft bidding documents for the purchase of trains and electrical and
mechanical assets and services, to prepare for, invite and assess tenders for their
delivery and to negotiate and initiate the contract;
d) Around 24-30 months for the supply of trains and electrical and mechanical assets and
services;
e) 6 months for a concessionaire to prepare for operations; and
f) 6 more months following receipt of trains and electrical and mechanical assets and
services for the concessionaire to trial operations.
Hence, arranging for operations could require:
For the Public Implementation with Operating Concession approach (see Section 3.3), a
total of 3 years, i.e. a) + b) + e) + f).
Train Supply and Operating Concession approach, the process would need to
commence 5.5 to 6 years before the commencement of operations, i.e. a) + b) + c) + d)
+ f).
In either case the process to purchase trains and associated assets needs to commence around
3.5 to 4 years before the commencement of services.
43
Appendix A: Bibliography
Asian Development Bank (2006) Integrating Mass Rapid Transit in Bangkok: Options
Report, ADB TA 4676-THA. February
Asian Development Bank (2007a) HCMC MRT: Strategic Financial Model Update TA
RSC-C61011 (VIE): Ho Chi Minh City Metro Rail System Project, Viet Nam, March
Asian Development Bank (2007b) Integrating Mass Rapid Transit in Bangkok Phase II:
Final Report, ADB TA 4904-THA. July
Asian Development Bank (2007c) Integrating Mass Rapid Transit in Bangkok - Phase II:
Concession Template Working Paper, ADB TA 4904-THA, May
Bly, P. H., Webster, F. V. and Pounds, S. (1980) Subsidisation of Urban Public Transport,
Supplementary Report 541, Transport and Road Research Laboratory, United Kingdom
Bly, P. H. and Oldfield, R. H. (1985) Relationship Between Public Transport Subsidies and
Fares Service Costs and Productivity, Research Report 24, Transport and Road Research
Laboratory, United Kingdom
Hensher, D. A., & Wallis, I. P. (2005). Competitive Tendering as a Contracting Mechanism
for Subsidising Transport: The Bus Experience, Journal of Transport Economics and Policy,
39(3), 295-322.
Parsons Brinckerhoff International and Japan Railway Technical Services (2006) SAPROF:
Special Assistance for Project Formulation for Ho Chi Minh City Urban Transportation
Improvement Project Urban Mass Rapid Transit (UMRT) Line 1, Eastern Section,
September
University of Queensland (2006) Bus Contracting Reform in Thailand: A Bus Cost Model for
Bangkok, May.

44
Appendix B: Summary of Some MRT Concession Arrangements in
Other Cities

Table B.1: Summary of features of existing MRT concessions in Bangkok
Feature Bangkok Transit System
(BTS Green Line)
MRTA Initial System Project
(Blue Line subway)
Total project capital cost
(Baht bn)
52 116
Year opened December 1999 August 2003
Type of concession BTO for civil works
BOT for the electrical and mechanical
works
BOT for operating equipment and
rollingstock
MRTA invested in the civil works
Concessionaire Bangkok Mass Transit System Public
Company Limited (BTSC)
Bangkok Metro Company Limited (BMCL)
Concession description BMA was responsible for: land acquisition
& utility diversions; BTSC for financing &
constructing all other project components
including operations. Civil works
transferred to the BMA on a build-transfer-
operate (BTO) basis after construction &
the electrical & mechanical works to be
transferred to BMA at the end of the
concession. Little land incl. in concession
except Right-of-Way.
BMCL was awarded a 25-year BOT con-
cession in 2000 to furnish and install this
equipment and operate the system. The
concession agreement requires BMCL to
make payments to MRTA from fare
revenue: a lump sum payment of Baht
43.567 billion to be paid in annual
installments from years 11 to 25 of
revenue service & a % of fare revenues
annually over the 25 year concession as
follows, 1% years 1-14, 2% year 15, 5%
years 16-18, and 15% from years 19-25.
In addition, a lump sum of Baht 930
million is due for revenues derived from
commercial development to be paid in
annual installments plus an annual 7% of
revenues from commercial development.
In addition, an (access charge) to the
MRTA for use of the route is required to
be paid to hold the overall concessionaires
rate of return on equity to not more than
14.75% pa.
Land for commercial
development
- Lat Phrao park & ride site
Public / Private Ownership 100% private investment. Government paid for civil works (78% of
cost). BMCL owns operating infrastructure
and rollingstock (22%). Government has
option to purchase 25% of the shares in
BMCL at par value.
Length of Concession 30 years including construction period. 25 years after construction period.
As reported ADB (2006)
45
Table B.2: Comparison of Melbourne & Singapore concession models
Melbourne Net Cost approach Singapore Gross Cost approach
Public transport demand mature & revenue largely
known
Operators accept risk of change in government.
transport & land use policy
Operators take some revenue risk & keep revenue
Revenues only cover some costs (remainder of income
from fixed payments set at the bid stage plus incentive
payments)
Franchisees required to invest to maintain the
infrastructure
Some major investment decisions locked in at franchise
bid stage (e.g. new rollingstock)
Others made during the franchise term as State Funded
Works (no-net gain, no-net-loss)
Investment decisions subject to normal budget process
Franchises short (5-7 years)
All standards/deliverables made explicit
Partnership approach as well as contractual
Demand mature & revenue largely known.
Government takes revenue risk which is low
Operators paid on passenger-km basis
Government supplies rail infrastructure & first time
rollingstock at own cost including ticketing equipment
& may give grants for subsequent rollingstock
replacement
Operators carry operations, maintenance &
administration risks & the difference in financing cost
for asset replacement, between actual and historic
costs
All revenues centrally collected & then service fee
paid to operators
Quality & safety criteria part of bidding
Investment decisions subject to normal budget
process
Franchises 10 up to 30 years
All standards/deliverables made explicit
Partnership approach as well as contractual
Source: Consultant

46
Appendix C: Additional Issues Related to Use of Net Cost and
Gross Cost Concessions
C.1 A comparison of the features of Net Cost and Gross Cost Concessions
Table C.1 illustrates how the Train Supply and Operating Concession model discussed in the
main part of this report could be implemented using net cost and gross cost forms of
concession. The gross cost concession is strongly recommended by the current study, but the
comparison is provided in the table to more clearly illustrate the differences between the two
approaches and to provide more information on the gross cost approach.
Table C.1: Features of Net and Gross Cost Forms of Concession with the Train Supply
and Operating Concession Model
TSOC approach with a
Gross Cost concession
TSOC approach with a
Net Cost concession
OVERVIEW
Brief
description of
concession
arrangements
Government finances and implements civil
infrastructure delivery using private sector
contractors.
Government engages the private sector to
provide trains and E&M (electrical and
mechanical equipment and systems) and to
undertake O&M (operations and
maintenance, including operation of train
services and maintenance of all MRT
infrastructure) through a concession.
Government leases civil infrastructure to
the concessionaire.
Government sets safety & service standards,
service levels, and fare structure & level.
The government pays the concessionaire an
amount that covers the costs the
concessionaire incurs in providing agreed
services as established through a
competitive tender, and with part of the
payment to the concessionaire is linked to
the number of passengers carried.
The government retains all fare revenue.
Government finances and implements civil
infrastructure delivery using private sector
contractors.
Government engages the private sector to
provide train and E&M, and to undertake
O&M through a concession.
Government leases civil infrastructure to
the concessionaire.
Government sets safety standards & fare
structure.
The concessionaire determines services to
be provided & retains fare and other
revenue.
Additional payments may need to be made
by the government to the concessionaire to
cover revenue shortfall, or the reverse if
revenue exceeds costs.
Risk transfer Concessionaire bears some risk related to its
investment in E&M and trains, patronage
risk that is within its control, and the risk
that agreed price escalators do not
accurately reflect changes in future costs.
Government bears remaining patronage risk
and the risk that risk that it does not
increases fares over time.
The government bears the risk of poor
public transport integration.
Concessionaire bears all risks associated
with their investment and O&M costs and
future patronage, and is vulnerable to the
risk that government does not approve fare
increases.
In the event that the concessionaire fails, the
government bears the cost of securing a re-
placement concessionaire and incurs
reputation risk associated with allegation of
a poorly conceived concession.
Community bears risk and consequences of
poor MRT integration.
47
TSOC approach with a TSOC approach with a
Gross Cost concession Net Cost concession
Concession
management
Assignment of some patronage risk to the
concessionaire encourages them to provide
good service and reduces the need for
government administrative control of
concessionaire performance.
Need to monitor concessionaire service
supply & performance as the basis for
making contract payments.
Limited need to manage concessionaires
performance given their collection &
retention of fare revenue and exposure to
risk.
Simple payment arrangements between
government & concessionaire, but limited
capacity for government to influence the
performance of the concessionaire.
Key issues No need for concessionaire to include a
significant risk premium into bid price,
which will reduce costs to the government.
Assigning manageable patronage risk to the
concessionaire encourages them to
maximize patronage.
Government has full control over future
transport policy & systems.
Concessionaire likely to build premium into
contract to protect against exposure to risk
that is beyond their control.
Limited ability for government to change
transport policy & systems during the
concession except that to the extent condi-
tions are anticipated and specified in the
concession.
Comment Reasonably simple to manage provided
some patronage risk is transferred to the
concessionaire.
Stronger incentive for good performance by
concessionaire.
Will ensure good MRT integration.
Allows government policy flexibility over
time.
Simple to manage.
A need to make a payment to a
concessionaire so that they achieve cost-
recovery may be seen to conflict with a
model that requires only limited gov-
ernment involvement in concession
management.
Results in poor MRT integration.
Government cannot make further changes
to MRT delivery & operations over time in
response to policy or other needs not an-
ticipated in the concession agreement
without re-negotiating the agreement.
DETAILED FEATURES
Concession Term
Term The concession must be for a sufficient
period to allow the concessionaire to make
best use of their investment and trained
staff.
A period of 30-35 years, which is similar to
the life of trains, is appropriate.
The term could be for a series of
automatically renewable periods subject to
adequate performance by the concessionaire
though this would require complex
arrangements to address the
concessionaires financing of assets.
The concession must be for a sufficient
period to allow the concessionaire to
recover the cost of their investment.
A period of 30-35 years, which is similar to
the life of trains, is appropriate.
Termination
arrangements
Concessionaire provides all system assets to
the government at the end of the concession
with appropriate government compensation
for them.
Need arrangement to transfer
concessionaires assets to the government if
the concessionaire should fail or their
contract not renewed (with appropriate
compensation).
The concession can be terminated in the
event of inadequate performance by the
concessionaire.
Concessionaire provides all system assets to
the government at the end of the concession
with appropriate government compensation
for them.
Need arrangement to transfer
concessionaires assets to the government if
the concessionaire should fail or their
contract not renewed (with appropriate
compensation).
48
Notes An obligation for the concessionaire to hand
over viable assets without compensation
will encourage the concessionaire to avoid
investment in life-expired assets and system
expansion and improvement in later years
of the concession.
Indicates a need for the government to pay
compensation for assets on the basis of pre-
determined depreciation schedule.
Renewable concession terms would each be
a division of the total contract term of 30
years, e.g. say 10 years each.
Technical complexity of MRT operations
suggests it is preferable to encourage an in-
cumbent concessionaire to improve their
performance, with replacement a last resort.
An obligation for the concessionaire to hand
over viable assets without compensation
will encourage the concessionaire to avoid
investment in life-expired assets and system
expansion and improvement in later years
of the concession.
Indicates a need for the government to pay
compensation for assets on the basis of pre-
determined depreciation schedule.
Asset Financing, Implementation and Management
Fixed infra-
structure
provision
Government prepares design, calls tenders,
finances and supervises project
implementation.
As for Gross Cost concession.
Initial fixed
civil works
assets
The Government:
Leases fixed infrastructure to the
concessionaire, at zero rent.
Establishes conditions for any necessary
replacement of life-expired fixed assets
during the concession term.
Monitors infrastructure in accordance with
the lease and ensures hand-back conditions
are met.
The concessionaire:
Maintains the infrastructure.
Replaces life-expired assets.
Hands back infrastructure in good condition
at the end of the concession.
Network
expansion
The government finances expansion of
fixed infrastructure.
The concessionaire maintains infrastructure
and provides additional services with
payment made on the basis of unit cost rates
and inflation indices set in the original
tender.
Government is in a poor position to
negotiate network and service extensions
with the concessionaire except to the extent
that unit rates were agreed in the original
tendering and the variations are in the form
of a gross cost arrangement.
An existing concessionaire has the
advantage of incumbency.
Electrical &
mechanical
assets and
trains
The concessionaire:
Finances, purchases, operates and maintains
the assets and any additional assets
procured during the concession.
Hands over all assets in good condition and
at the end of the concession with
appropriate compensate(set in accordance
with pre-established contract conditions)
The Government:
Monitors the condition of assets and ensures
hand-back conditions are met.
As for Gross Cost concession, though
compensation might not be paid, depending
on financial arrangements.
49
Notes Concessionaire provision of trains gives
them more control over service quality and
brings the financier of the trains into the
concession to provide another source of
pressure on the concessionaire to perform
adequately.
Concessionaire provision of fixed M&E
assets should encourage them to optimize
life-cycle costs.
Transfer of some patronage risk will further
encourage the concessionaire to provide
services to meet customer needs.
There is a risk that a concessionaire will
avoid making investments towards the end
of the concession if the assets must be
handed over without compensation.
Government payment for assets at the end
of the concession would remove this
disincentive.
Need would arrangements to set
compensation value for concessionaire
assets in the event of termination of a con-
cession during its term.
As for the Gross Cost approach.
Service Specification and Development
Initial service
specification
for tender bids
Government specifies expected conditions
at the time of opening of the MRT line.
Bidders indicate initial service plan and
conditions for responding to changes in
demand over time, e.g. when additional
services would be added.
Bidder is responsible for assessing potential
demand and establishing appropriate
services as the basis for their tender.
Government needs to provide precise
guidance on factors within its influence that
could affect future demand, e.g. other MRT
lines, other public transport services, and
road development.
Service
planning
Concessionaire primarily responsible for
service planning for their MRT line, under
the guidance of the government.
Concessionaire is responsible for service
planning for their MRT line.
Other concessionaires are independently
responsible for service planning for other
MRT lines.
Government is responsible for service
planning for other public transport services
that may affect MRT, possibly constrained
by conditions in the concession that prevent
them from doing anything that may
adversely affect the concessionaire.
Service
approval
Government must approve all service
changes because they will affect payments
to the concessionaire.
Concessionaire does not need approval for
changes in services.
Fares, Ticketing System and Non-Fare Revenue
Initial fares Set by the government. Determined by the concessionaire at the
time of tendering and written into the
concession agreement (or could be specified
by the government, with additional
payments made to the concessionaire if the
fares do not generate sufficient revenue, or
the reverse if applicable).
50
Fare escalation Determined by the government periodically. Determined by the concessionaire at the
time of tendering and written into the
concession agreement.
Ticketing
system
Determined by the government at the time
of tendering.
Determined by the concessionaire at the
time of tendering.
Fare revenue
management
Determined by the government periodically. The responsibility of the concessionaire,
who collects and retains all revenue.
Commercial
development
Could be the responsibility of the
concessionaire, with a revenue sharing
arrangement with the government.
Likely to be very limited opportunities.
As for the Gross Cost approach.
Contract Payment
Concession
payments
Government pays on a periodic basis (say
monthly):
A fixed amount that is related to assets
provided by the concessionaire; plus
A fixed amount that is related to the
quantity of train service provided; plus
An amount that is related to the number of
passengers carried would be paid.
Penalties or incentives as appropriate to
ensure the concessionaire provides a
satisfactory level of service.
Exposure to patronage risk considerably
reduces the need for penalties or incentives to
ensure service quality.
An alternative is to provide a single unitary
charge related to the quantity of service
provided (e.g. per passenger place-km)
subject to agreed quality of service
conditions though this may incur risk
premium because service quantity is not
entirely under the control of the
concessionaire.
Fixed periodic (say monthly) amount paid by
the government to the concessionaire (or
from the concessionaire to the government)
as determined by competitive tender.
Base payment
formula
(Note:
illustrative
option
described
other options
exist)
Payment from the government to the
concessionaire could be:
VND b /month for initial assets provided
by concessionaire; plus
VND c
1
, c
2
, c
3
, etc., for any additional
assets to be provided by the concessionaire
during the concession; plus
VND d /train-km of service provided;
plus
VND e /passenger; plus
VND f
1
, f
2
, f
3
, etc., for incentives or
penalties (i.e. which could be negative or
positive).
In the case of a unitary payment, b, c and d
would not apply and d would be related to
the quantity of service provided.
Payment from the government to the
concessionaire could be:
VND a /month.
a could be positive (i.e. a payment from the
government to the concessionaire) or
negative (a payment from the concessionaire
to the government) depending on the extent
to which the concessionaire expects to be
able to cover their capital and operating costs
from fare and other revenue they collect over
the life of the concession.
An alternative is to link the payment to the
number of passengers, i.e. VND
a/passenger boarding.
51
Financial
amounts
specified by
the govern-
ment at the
time of ten-
dering
(for the
payment
structure
described
above)
The government would specify:
Basis for sharing property development
profits.
Fare structure and level.
Unit value for e, i.e. the patronage
incentive payment.
Unit values for f
1
, f
2
, f
3
, etc. for each
incentive or penalty to be included in a
concession agreement.
The basis for values to change over time
due to inflation, i.e. there is a need for the
government to specify indexation formulae.
The government would specify:
Basis for sharing property development
profits.
Maximum rate of return on equity.
Basis for sharing profits in excess of
maximum specified rate.
Amounts to be
indicated by
bidders in their
tender
(for the
payment
structure
described
above)
Bidder would indicate:
Amounts for b, c
1
, c
2
, etc., and d.
An amount expected to be paid to the
government from development profits.
The bidder will need to ensure that the
combination of c, d and e, with
appropriate inflation indexation, reflect the
cost of providing additional assets and
services as might be required by the gov-
ernment in the course of the concession
Alternatively with a unitary payment, the
government would specify penalties and
incentives and bidders would indicate the
unitary payment they seek to be paid.
Bidder would indicate:
An amount for a.
Initial fare.
Fare escalation formula.
An amount expected to be paid to the
government from development profits.
Issues Need to anticipate variables that could
change over the term of the concession (e.g.
length of line, number and quality of
stations, quantity of service, number of
trains, etc.).
Shifting patronage risk that is within the
control of the concessionaire to them
removes the need for substantial monitoring
of concessionaire performance.
Government needs less emphasis on
penalties and incentives to ensure the
concessionaire meets desired performance
standards.
Little need for bidders to include risk
premium because they bear little
uncertainty.
Concessionaire likely to include some
buffer in their tender to allow for risks they
must carry that are beyond their control.
52
Concession Management
Government
role
Major role because:
Government has considerable freedom to
change the scope of the concessionaires
activities, with clear information available
on the financial cost to the government of
any proposed changes.
Shifting patronage risk that is within the
control of the concessionaire to them
substantially reduces the need for
substantial monitoring of concessionaire
performance standard.
Government needs to consider, approve and
alter concession payments for necessary
changes in level of service, e.g. additional
services.
Minimal role because virtually all investment
and operational decisions after signing the
concession agreement are internal to the
concessionaire.
Routine data
needed for
contract
management
(say monthly)
Evidence of maintenance of assets leased
Evidence of performance with regard a
minimal number of incentive or penalty
attributes.
Evidence of the number of passengers
carried.
Evidence of maintenance of assets leased
Periodic data
(say bi-
annually)
Information to indicate the need for
additional services, trains and other assets.
Evidence that maximum rate of return has
not been exceeded.
Other data as
needed
Evidence of profits from property
development.

C.2 Concession Supervision
Net Cost concessions involve relatively little supervision by government because: (i) most risk
is transferred to the concessionaire and they need to be given the ability to manage that risk;
and (ii) they are primarily intended for use where the concessionaire uses the revenue that they
collect to cover their costs, i.e. without recourse to additional financial payments from the
government. Typical supervision needs with a net cost concession are to:
ensure that any civil infrastructure provided by the government to the concessionaire is
maintained in good condition;
approve fare increases, though these should occur automatically in accordance with
inflation and other provisions in the concession agreement and there should be limited
technical grounds for government modification to them;
monitor safety and security aspects of MRT service; and
ensure that the concessionaire makes payments to the government if these are specified
in the concession agreement.
It would also be usual for the concessionaire to provide data on their operations for the
general interest of government, e.g. the quantity of service provided and the number of
passengers carried.
53
This form of concession can be useful where government capacity to manage complex
contracts is limited and where the government is prepared to accept the limitations of net cost
concessions for flexibility in urban public transport operations and policy.
Consideration of five factors can help guide consideration of the ideal level of supervision of a
concession agreement:
Capacity to undertake the supervision. There is a need to determine that the
supervising authority has the capacity to undertake the designated level of supervision or
can engage and adequately supervise a private company to undertake the task for it.
Using a form of concession that requires considerable government supervision capacity
could be counter-productive if the capacity is not present and the concessionaire realizes
that they can avoid meeting performance criteria set out in the concession agreement.
On balance, there is a general risk that government supervision capacity is over-
estimated.
Criteria to be monitored. There is a considerable range of performance criteria that
could be monitored as part of a contract management system. However, data collection
can be expensive and distracting. A means for reducing the need for contract
management is to transfer risk to the concessionaire so that there is a self-enforcing
mechanism for good performance (as occurs with a net cost concession). There is also a
need for a clear link between each criterion that is monitored and the payment made to
concessionaires.
Safety and security regulation. It is essential that safety and security regulations
appropriate for MRT be established and monitored. These standards do not relate to
the quality of MRT service, but rather to specific needs to ensure public safety and
security. Examples of standards include maximum loading standards to prevent crush
loadings in which people might be injured and to ensure that trains can be safely
evacuated in the event of an incident.
Implications of a net cost concession that requires subsidy payments. As
indicated above, there is limited need for monitoring a net cost concession in which fare
and other such revenue is sufficient to meet the concessionaires costs. However, a
dilemma arises if the concessionaire needs a subsidy from the government because the
government must make the payment while still giving the concessionaire reasonable
certainty about their operating environment (e.g. by not changing government policy or
taking other actions that could adversely affect the concessionaire) and leaving them
free to manage risk. Thus the government must make payments to the concessionaire
with limited capacity to link the payments to specific services that are provided.
Other data collection. There may also be a desire or need to monitor other aspects of
concessionaire performance, even though it may not directly affect payments made to
the concessionaire. However, it is necessary to ensure that the role of the criteria is clear
and that data is not simply collected and stored un-used in the supervising agency.
C.3 Trade-offs Between Risk Transfer, Payments and Concession Supervision
As shown in Figure C.1, the considerable transfer of risk to a concessionaire in a Net Cost
concession reduces the need for concession management because the concessionaire has a
strong self-interest in providing good service. In contrast, a Gross Cost concession with no
transfer of risk requires considerable supervision to ensure that the concessionaire performs
adequately. Key conclusions that emerge from this review are:
Increased supervision requirements associated with Gross Cost concessions are a
necessary condition for gaining the network integration benefits that they allow.
54
The amount of risk to be transferred to a concessionaire needs to take account of the
extent that the concessionaire can manage the risk (so that the cost of the concession is
minimized), a desire to use self-enforcing mechanisms that encourage the concessionaire
to perform well (rather than do so because of pressure from the government), and a
desire to simplify concession management (by minimizing the governments supervision
obligations).
Concession supervision should focus on those factors that affect payments made to
concessionaires, their use of government-owned infrastructure, and more general factors
(if any) that could influence a decision to terminate a concession due to inadequate
performance.
Concession supervision should recognize the potential for government supervision to
be implemented less effectively than may be envisaged.
Figure C.1: Supervision Requirements for Concession Models
Form of Concession
Net cost Gross cost
(with some transfer
of risk)
Gross cost
(with no transfer of
risk)
Extent of
risk transfer
Need for concession
management
Supervision needed as a condition of payment
(1)
Quantity of service
(e.g. car-km of service)
Not needed Essential Essential
Quality of services
(e.g. maximum load, comfort)
Not needed Limited need Essential
Number of passengers Not needed Essential Not needed
Additional supervision needed for general contractual oversight
Quantity of service Not needed Not needed Limited need
Quality of services Limited need Limited need Limited need
Number of passengers Limited need Not needed Limited need
(1) Assumes no subsidy payment needed with a Net Cost concession. If a subsidy is needed, then some
monitoring of, most probably, the number of passengers would be needed.
Source: Consultant
55
Appendix D: Concession Template
This concession template should be read in conjunction with the remainder of this report, and
in particular Annex C.
PART I - INTRODUCTION
1. NAME OF THE AGREEMENT
The specific name of the agreement needs to be indicated, e.g. Agreement for [name of the
project] between [Authority] and [the private sector party]
2. DATE OF AGREEMENT
The date of the Agreement (signing date) should be specified and the effective date should be
the same date and without the condition precedents to the extent possible.
3. PARTIES TO THE AGREEMENT
a. The State Party - full and correct Name/Address/ name and title of the authorized
person who signed the agreement for the procurement of infrastructure and services
on behalf of the State/Government according to the documents attached
(Authority).
b. The Private Party - full and correct Name/Address/ name and title of the authorized
person who signed the agreement for the provision of infrastructure and services
according to the documents attached (Company).
Provisions relating to the Company:
The Company must be a Special Purpose Company whose objects are limited to the
business (and any non-business) activities of the concession under the Agreement.
Reason: Government has an interest in the financial health of the Company as
concessionaire (and bears certain costs in the event the concessionaire fails). It goes
against this interest to have the Company exposed to any non-concession risk as could
occur if the Company was involved in other activities in addition to the concession.
Due diligence over the Companys relevant project contracts e.g. the Companys various
agreements concerning the concession project funding (including its agreement with the
senior lenders), insurance, design, construction, supply and installation, system
integration, operation and maintenance, consulting and other services used in the
project.
Reason: The Authority, while not intending to interfere with the Companys conduct of
the concession business (as that would be taking back risk already allocated to the
Company), needs to assess and have a good understanding of how the Company
proposes to deliver the concession output. The essential reasons for this include the
following:
a. Compensation to the Company for early termination in most cases is a
function of its outstanding debt under the terms of the financing agreements.
b. The interests of the Authority and the senior lenders are often common and in such
cases the Authority can rely on provisions of the loan documents as protection
against certain risk (e.g. the sinking fund requirement of the lenders also protects the
Authority against the risk that inadequate funding may be provided for of ongoing
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asset maintenance and renewal). The Authority therefore needs to see that the
financing terms reflect its proposed reliance.
c. The Authority may need to consider taking over the Companys contracts with
its project contractors and service providers or transferring them to another party in
the event of early termination. Therefore the Authority needs to see that the terms of
the relevant contracts are consistent with the Agreement in this respect.
4. PREAMBLE
The preamble should provide for the clear intention of the state party and the private party. It
should refer to related documents such as the Terms of Reference and Bidding documents,
and indicate that acceptance of the intent is required as part of contract acceptance.
Recitals incorporating the statement of the Authoritys intention should include reference to
the following basic concepts and principles which underlie this Agreement:
The objectives of the concession project.
How the concession project fits within the MRT network, and the broader public
transport system, that is being implemented to provide high quality public transport
services to the public, and government desire to ensure that, in implementing the
project, optimal network benefits are maintained.
The assets and systems that are needed to provide MRT services, which include Civil
Infrastructure (i.e. civil works, train tracks and stations), Ticket System (i.e. ticket
equipment and media, and operation of the system including revenue management) and
electrical and mechanical assets (E&M Assets, i.e. trains, power supply,
communications and train control systems).
The role of:
the Authority for implementing Civil Infrastructure and Ticket System and making
them available to the Company, with the Authority to directly implement Civil
Infrastructure and the Authority to arrange for the Ticket System through a separate
contract; and
the Company for providing E&M Assets, maintaining Civil Infrastructure, using the
Ticket System, and providing train services.
The Authoritys desire that the project be implemented and service be provided based
on an approach that has been assessed as offering value-for-money, protecting
consumer interest and exercising due care in preventing private monopoly of a basic
infrastructure, all in accordance with fundamental state policy.
That project risk be allocated between the Authority and the Company in such a way
that that a risk is managed by the party able to do so most efficiently and effectively.
That the determination of the respective Authority and Company roles in delivering of
MRT services (including any associated delivery of assets) under the contract is based on
the intention reflected in the forgoing recitals.
5. DEFINITION
Definitions of a full list of terms pertinent to the concession are required. They should be in
alphabetical order, and be consistent with terms used in international bidding documents.
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6. CONCESSION
Key features of the concession to which the agreement is to apply should be summarized and
cross-referenced to relevant sections of the Agreement where they are addressed in detail.
Provisions to be addressed should include:
general description of the concession model;
the term of the concession
issues to be addressed prior to commencement of train services (Part II)
services to be provided (Part III);
payment and other financial arrangements (Part IV);
termination conditions and arrangements (Part V);
responses to special events (Part VI);
provision, ownership, use and maintenance of assets (Part VII); and
other general provisions (Part VIII).
The term of the concession agreement will normally be fixed, as a number of years from the
agreed contract commencement date. Delay in commencement of train services should
generally not lead to an extension of the Agreement duration. Keeping the concession expiry
date fixed increases the incentives for the Company to ensure train services commence on
time, including placing pressure on the Authority to fulfill its obligations such as providing
civil infrastructure. A requirement that the Authority pay compensation to the Company in
the event that the Authority is responsible for the delay (see Section II) is an incentive on the
Authority not to cause delay.
7. MRT NETWORK AND LINKS
It should be noted that the project under the Agreement is part of an MRT network, which is
itself part of the public transport system of Ho Chi Minh City, and has been designed and is to
be operated as part of the network to optimize network benefits in the public interest. The
Companys rights in the Agreement should be circumscribed by this network objective. It will
be necessary to establish the rights and obligations of the parties in the case that government
seeks changes that are in the larger public interest. Such changes could include:
issues specific to the MRT network, including changes in the network, changes in
service patterns, the right of access to depots, inter-operability (third party sharing the
line), and the ability (or restricted obligation) to coordinate inter-connection with the
network; and
changes to other public transport services, the structure and level of public transport
fares and fare collection, changes in land use policy and patterns, changes in public
service obligations, etc.
The need to so circumscribe the concessionaires rights and obligations will have value-for-
money implications for the government. Concession forms play a part in this issue of value-
for-money. Thus it is generally expected that a Gross Cost form of concession, in which
concessionaires bear at most patronage risk that is within their control, will more easily allow
such changes to be implemented than the Net Cost form of concession. As a result, the cost
to government of retaining the system flexibility under the Gross Cost form of concession is
expected to be less than in a Net Cost form of concession in which renegotiation of the
concession is needed when such changes are desired.
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8. COORDINATION COMMITTEE, REPRESENTATIVES AND RELATED
PARTIES
Management committees will be required for oversight of the concession and coordination of
the concession with other public transport. There will also be representation by parties on
other committees or organizations. These committees and representations, their roles and
representation of Authority and Company interests need to be addressed. The committees
could include:
1. Coordination Committee.
There may be a need for a co-ordination committee with a public sector membership for the
purpose of monitoring and supervising the concession, making periodic progress reports, and
to bring any problems and their possible solution to the committees attention. The Company
is required to co-operate with the committee in order that the work of the committee can be
carried out.
2. Authority/Company Joint Committee.
The Company may request the setting up of a joint committee with Authority and Company
membership to assist in co-ordination and interaction with third parties (such as authorities
for permits, licenses etc.) in the conduct of the concession business. With such a request, care
must be taken that in responding the Authority is not taking back any risk allocated to the
Company (e.g. the risk of timely installation of E&M Assets). The Authoritys role on the joint
committee should be to help facilitate, with the responsibility for the outcome clearly resting
with the Company.
3. Authority representation on Company board of directors or other management boards.
This practice is sometimes proposed but is strongly discouraged. For the Authority to have
such representative in the Companys management blurs the line between the parties, exposes
the Authority to a potential conflict of interest in the management of the Agreement and at
the very least can lead to a dilution the risk transfer to the Company. A reason sometimes
cited for the practice is that it provides a channel for information about the Companys
operation of the concession. But this is an undesirable way to achieve the objective. Any
information necessary for the Authority to properly manage the concession should be
addressed in the Agreement and made an obligation of the Company to provide.
Similarly, the government or the Authority taking a direct equity interest in the Company is
discouraged because as it means that the Authority cannot act as an independent supervisor of
the concession. It is possible that a fully constituted state-owned company could be an equity
partner in the Company.
4. Other Relevant Parties.
The provision also should identify other interested parties relevant to the management of the
MRT project. The relevant parties may include:
a certified independent engineer (possibly pre-service phase only); and
an independent monitor of the Companys performance against service standards.
PART II PRE-SERVICE
9. CONDITIONS PRECEDENT
Conditions precedent are matters that are central to the ability of the Company to undertake
the contract but which cannot be delivered on or prior to signing the agreement.
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An example of a circumstance where a condition precedent may be needed relates to the
financing of the project. Lenders providing senior debt financing, which would normally be
on limited recourse terms (i.e. with no collateral external to the project, particularly
guarantees), may not be prepared to undergo the expense of conducting due diligence before
the Company has secured the concession, which would mean the Agreement could only be
signed without firmly committed financing in place. The need for such due dligence increases
with the project risk as perceived by the senior lenders, with a corresponding need to conduct
a more thorough due diligence investigation using costly technical advice. In this respect, the
probability of conditions precedent will be higher with a Net Cost than a Gross Cost
concession because of factors such as the difficulty of estimating future patronage. Working
with a concession model in which risk allocation is clear and easy to assess lessens the need
for this type of condition precedent.
Where it is necessary for there to be conditions precedent for the contract, the Agreement
must ensure that the Authority is not under its concession obligations (or the Company
granted its concession rights) until the conditions have been met. The Agreement must also
stipulate a date after which failure to meet the conditions means the Agreement automatically
lapses.
10. COMPANY SYSTEMS
Clauses under this item relate to assets that the Company is to provide that, together with
assets to be provided by the Authority (addressed in Clause 31), are needed for the provision
of MRT services by the Company. The following points should be reflected in this clause:
1. The Authoritys request for proposals (RFP) (or TOR) should stipulate that the
Company will be fully responsible for the design, financing, construction, procurement,
installation, testing, commissioning and maintenance of E&M Assets, which are to be
integrated with the civil works that are to be supplied by the Authority and which are
needed to deliver the MRT service to the level and standards specified by the Authority
in the RFP (and any related documents).
2. Under a carefully drawn up risk allocation plan, the following risks inherent in the
management and operation of the concession is assigned to the Company:
a. the risk of budget cost and time over-runs in putting the E&M Assets in place
and making them ready for the provision of MRT services;
b. the risk of not meeting the specified quantity and quality of service through a failure
in the design, whether because of the underlying technology or because of any special
design feature of the E&M Assets;
c. the risk of not meeting the specified quantity and quality of service through a
failure in the maintenance of E&M Assets and their replacement at the end of their
effective lives; and
d. the risk of not meeting the specified quantity and quality of service through a failure
of the Companys management and operation of the MRT infrastructure provided by
the government.
3. To ensure the integrity of this risk allocation, the Company must be allowed to design,
deliver and maintain the E&M Assets and operate the line using its own inputs,
processes and methods without any intervention from the Authority other than with
regard to matters affecting safety, security, common ticketing and fare systems, and
interoperability standards for technology and operations determined by the government.
The extent of interoperability should be determined on the basis of economic evaluation
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and value-for-money assessment by the government and specified before the issuance
of the RFP).
4. In the process of tender evaluation the Authority (and its advisors) should conduct due
diligence on a preferred candidates detailed proposal to evaluate in detail how, in terms
of approach and methods, resource inputs, time schedules, management, organization
and design, maintenance and operations procedures, the candidate proposes to deliver
the required service outputs.
5. The winning proposal should be incorporated in the Agreement, and included say in a
schedule called Project Documents, so that the Company is bound to deliver on its
proposal. The Agreement should ensure that the service output specification takes
precedence over the proposed service inputs described in the Companys proposal to
ensure that the Agreement does not imply approval or acceptance by the Authority that
the Companys submission will deliver the outputs (and the risk transfer to the
Company thereby diluted or negated).
6. In implementing the concession, the Company will not be able to depart from what is
set out in the Project Documents without the prior consent of the Authority, which
should be given only after the Authority is satisfied that the Companys prospects of
delivery against specified service standards will not be worsened thereby. Again, this is
part of the Authoritys responsibility to ensure that the agreed risk transfer to the
Company is not diluted or negated.
7. As a general rule it is important to be aware that if the Authority becomes involved in
activities that have been contracted to the Company for the Company to carry out, the
Authority will resume risk that had been transferred to the Company and will therefore
assume actual and potential costs that are the obligation of the Company.
11. PRE-SERVICE IMPLEMENTATION
The Company will have a considerable program of activities in the period between contract
signing and the commencement of services (Service Commencement), including completion
of any conditions precedent, purchase, delivery, installation and testing of M&E Assets it is to
provide, establishment of an organization and recruitment and training of necessary staff. The
Authority will want to know that the Company is going to deliver the service on time and
meet the Authoritys contract requirement. The Company will want to be assured that what it
is developing will meet the Authoritys requirements and that it will have the necessary access
to the project site and civil works assets.
It is necessary to consider to what extent the Authority should be involved during this phase
and what rights the Authority should have to approve or monitor the Companys progress
prior to and on Service Commencement. The Authoritys participation should not involve
over-stepping a limit beyond which it will both be taking back the project management risk it
had transferred to the Company. In particular, it would not be appropriate for the Authority
to adopt the supervisory role it would expect to have with regard to the design and
procurement of civil works infrastructure.
This clause should articulate the following matters:
1. Activities and Access
Activities should be listed, and linkages with activities of the Authority identified.
2. Critical dates
The payment mechanism is designed to encourage Service Commencement to occur as
planned to avoid the loss of revenue to the Authority and a shortened operational period for
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the Company. However where the consequences of a delay beyond a critical date becomes
more serious, the Authority will need to have some contingency measures, though termination
should be the last resort (see clause 12).
3. Permitted design changes
A mechanism should be specified for the Company to submit design changes that do not
affect cost or services and which are within permitted parameters of design development that
the Authority can accept.
4. Quality management systems
The Company should have a quality management system to ensure the delivery of its
contracted responsibilities. The Authority should retain the right to audit the Companys
quality management system, including the right to inspect works or activities on or off site to
test the accuracy and adequacy of the system documentation. The Agreement should provide
for an appropriate enabling mechanism including provision for the Company and any relevant
Company party (e.g. contractor etc.) to respond to recommendations arising from an audit but
no right of termination should result from it. The audit is to be a due diligence tool only, since
the risk of a poor quality system is part of what is being transferred to the Company.
5. Acceptance of readiness for service commencement
There should be an obligation for the Company to demonstrate prior to Service
Commencement (and where significant service changes occur, e.g. upon the introduction of a
new asset or procedure) that the Company has procedures (including tests) in place to ensure
that service specifications in the Agreement will be met. In order not to dilute risk transfer,
the Authority should not accept stages of work before the Service Commencement date and
full service delivery.
12. PROTECTION AGAINST LATE SERVICE COMMENCEMENT
The objective of this provision is to address the consequences of late commencement of
services, which may occur because:
the Authority has not provided Civil Infrastructure and the Ticket System to the
Company on the agreed schedule; or
the Company has not undertaken pre-service activities in accordance with the agreed
schedule.
The clause needs to set out the financial compensation that would be paid to the Company in
the case of the former situation, but excluding the situation where the delay is sufficient to
result in termination of the Agreement (which is addressed in Clause 25).
In the case of the Company being the cause of the delay, it is necessary to ensure that the
Authority is protected against late service commencement in a way that gives value-for-money,
taking into account the loss the Authority may suffer from the delay and the necessity and
cost of contingency measures needed to deal with it. It is important to consider the matter in
its proper context, i.e. taking account of:
the payment mechanism, whereby the Company receives no revenue from the Authority
until service commencement, means that the Company has a financial incentive not to
delay;
the Companys senior debt financing, which generally on limited recourse terms (i.e.
there is no collateral external to the project), which means that the interest of the senior
lenders is the same as the Authoritys;
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the Company will be using Authority assets (Civil Infrastructure and Ticket System), for
which the Authority incurs an opportunity cost and hence specific protection beyond
the regular payment mechanism could be needed; and
the Company will include financial allowances in its tender for excessively onerous
obligations, and which thus will accrue to the Authority, i.e. the Authority will pay for
such excessive transfer of risk to the Company.
The usual mechanisms for protection against late service commencement are liquidated
damages, performance bonds and parent company guarantees. When there are grounds for the
Authority to look for specific protection, value-for-money should be considered taking into
account the costs and benefits of the protections required by the Authority. The following
specific points need to be deal with in the Agreement.
1. Liquidated damages
If, as is usual with limited recourse debt financing, senior lenders require contractors to the
Company who are involved in the pre-service phase to cover debt service for the duration of a
delay through liquidated damages, the contractors may price this into their contracts with the
Company but are more likely to be conservative in estimating time to complete their work.
The Company will pass the cost of such delay to the Authority through their bid price and a
longer project implementation schedule. For the Authority to require liquidated damages that
would be paid to itself, when the senior lenders are already applying the same mechanism,
would result in additional costs being passed on to the Authority via the payment mechanism.
In general terms this would be like the Authority paying twice for the same specific protection,
and hence should be avoided.
2. Performance bonds
It is usual in a construction project for the Company and the senior lenders to require
performance bonds from contractors as a guarantee of satisfactory completion of the
contractors work. Contractors will pass on the cost of these bonds though their contracts
with the Company, which will in turn pass on the cost to the Authority. An Authority
requirement for an additional performance bond from the Company will lead to extra cost.
The Authoritys need for performance bonds from the Company needs to be considered in a
similar manner to liquidated damages.
3. Parent company guarantees
Parent company guarantees are not a recommended method of protection against late service
commencement. Fundamental to the risk transfer mechanism of the Agreement is the careful
separation of the Companys financial risk from those of its shareholders arising out of any
other business activities in which they are involved. The key benefit is that every party
involved is careful in the analysis and management of project risks. In doing so the action of
each of them benefits others. For example the senior lenders careful evaluation and
management of their project risk exposure under limited recourse financing also automatically
benefits the Authority. By contrast, for example, if the lenders relied on the guarantee of a
substantial shareholder, they could easily pay less attention to the project risk. (There is also a
value-for-money issue if, for example, the Company already requires its contractors to provide
parent company guarantees.)
4. Conclusion
The forgoing discussion under this Clause highlights the importance for the Authority of
having a clear understanding of the contractual relationships among the various Company
parties in order to make a sound value-for-money based decision on specific protection
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against late service commencement that it might seek against the Company. This underlines
the importance of the Authoritys due diligence review of the Project Documents.
PART III SERVICES
13. INITIAL SERVICES
This clause should specify the obligations and rights of the parties with respect to:
MRT services to be provided by the Company, covering train services, marketing, safety
and security systems, complaints management, etc.;
use of the Ticket System that is implemented by the Authority; and
maintenance of Civil Infrastructure that the Authority makes available to the Company.
Risk associated with the provision of MRT services and management of life-cycle costs is to
be borne by the Company using a system specified by the Company. This requires that the
concession be in the form of a performance-based contract. The system, its operation and
services should be described in the RFP in output terms (e.g. train capacity to carry X number
of passengers per hour during a peak hour). The RFP will require that tenders submit a
detailed description of planned operations, resource inputs and delivery methods to be used.
The Authority and its technical advisors need to a conduct a careful due diligence review of a
submission to assure themselves that the resource inputs, designs and methods are capable of
delivering the required services.
The selected bidders submission should be attached to the Agreement as one of the Project
Documents.
14. STANDARD OF SERVICES
This clause needs to describe the standard of services to which the Company must adhere. A
key issue is the extent to which responsibility (i.e. acceptance of risk) for service standards is
shared between the Authority and the Company. The balance will depend on the approach
taken to the concession. There is a need to address:
Service standards that are set by the Authority, which will include, at a minimum,
standards to ensure public safety and security (which will include maximum loading
standards of trains). They can also include more detailed measures that affect the quality
of service provided (e.g. schedule adherence, passenger comfort, etc.). The transfer of
patronage risk to the Company reduces the need for more detailed specification of
service standards because the Company will have the incentive to provide the quality of
service needed to meet passenger needs.
How and by whom the service standards will be monitored and how the Company will
be formally advised by the Authority of any failure to meet the standards.
The consequences of a failure by the Company to comply with the standards need to be
specified, which may in turn comprise:
Financial penalties (as described in Part IV)
Non-financial consequences, e.g. termination of the Agreement if there is an
accumulation of failures to meet specified threshold service quality standards.
The Authority will need technical advice from professional advisors with experience in
designing output MRT service standards. The concession agreement should seek to transfer
the optimal extent of risk to the Company so that the Company has the incentive to provide
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the appropriate quantity and quality of service without excessive intervention and
management of standards by the Authority.
15. CHANGES IN THE MRT SYSTEM
This clause needs to describe how changes in the initial MRT system under this Agreement
initiated by or through the Authority would be accommodated. Changes could include
extensions to the MRT network, through-running of trains between different concessions,
changes in other aspects of public transport that have an effect on MRT, changes in MRT
ticketing systems, etc. The clause needs to focus on:
processes such as how the Company would be informed and how the Company would
be expected to respond and
how financial implications of the changes would be addressed, with reference to Part
IV.
The clause would need to be sufficiently broad to be able to accommodate both anticipated
and unanticipated changes. The clause could vary substantially between a Net Cost and Gross
Cost form of concession. With a Net Cost concession, there is a need to provide a more
certain environment for the Company because it bears full patronage risk, and so much more
detailed consideration needs to be given to identifying how changes that are beyond the
control of the Company but which affect the Company would be dealt with, acknowledging
that this is likely to be exceptionally difficult to cover all possible eventualities and that the
Authority will be in a weak position to negotiate financial compensation to the Company for
events that are not fully specified.
16. CHANGE IN MRT SERVICES
The following issues need to be addressed in this clause:
indicate the factors that could require a change in train services (e.g. meeting specified
service standards given a change in demand or other circumstance, government policy
objectives, technological change, changes in the extent of the MRT network under the
Agreement, etc.);
who is responsible for initiating and planning service changes, noting that this could
vary between Gross Cost and Net Cost forms of concession and the cause of the
change;
in what circumstances the Authority must either approve or simply note proposed
services changes; and
who will be responsible for the financial consequences of service changes and, if it is the
Authority, the basis for estimating the change in payments that must be made (with
reference to Part IV).
In doing this, consideration needs to be given to two potential causes of a need to change
services:
1. Change due to patronage growth
Patronage growth is expected to occur during the term of the concession due to population
growth and changes in economic, social and government policy circumstances. In the Net
Cost concession, where patronage risk is fully allocated to the concessionaire, the
concessionaire is responsible for making adequate additional capacity available in response to
service growth, and would at most simply advise the Authority of planned changes in service.
In a Gross Cost concession with the appropriate transfer of patronage risk, the Company will
have the incentive to undertake planning service changes to accommodate patronage growth.
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However, as the provision of additional services would result in increased payments from the
Authority to the Company (see Part IV of this template), the Company should submit plans
for service changes to the Authority for its review and approval. In the Gross Cost
concession, service changes will be largely driven by the need to comply with service standards
(in particular a specified maximum vehicle load capacity which requires that more train service
be provided as patronage rises). More drafting will be needed in a Gross Cost concession than
a Net Cost concession to address change in volume of service.
2. Changes due to other reasons
Both parties could have other reasons to propose a change in service. The Authority may seek
a change in service requirement that is not foreseeable at the time the Agreement is made (e.g.
resulting from a change in MRT or public health and safety policy or a change in law). Where
the Company wishes to implement changes that involve use of new methods and technology
and do not have implications for concession payments, the Company should have the right to
simply advise the Authority prior to implementing the changes. The exception would be in
with a Gross Cost concession where no patronage risk was transferred to the Company
because in this case there is no automatic incentive for the Company to consider the effect of
the changes on their passengers.
Changes in payments from the Authority to the Company resulting from changes in services
arising from either Authority or Company initiated changes will be clear in the case of a Gross
Cost concession, but will need to be established in detail for a Net Cost concession (or the
uncertain financial consequences to the Authority accepted where this is not possible).
PART IV FINANCE AND INSURANCE
17. PAYMENT AND PAYMENT MECHANISMS
The essence of this Agreement is the procurement of a service and so payment is made for
delivery of the service. How payment is made for service constitutes an important part of the
structuring of risk allocation and hence the incentives for the Company to provide efficient
and effective services. The clause needs to address:
the structure and level of payments to be made by the Authority to the Company (or
vice versa if appropriate), including:
the principle payment components, including any patronage related components and
any incentives and penalties for, respectively, superior or sub-standard service;
the frequency and timing of payments;
the source and verification of data on service quantity and quality and patronage that
is needed to support the payments;
payments to be made in the event of changes in the quantity of service to be
provided to accommodate changes in patronage; and
payments to be made for other identified potential changes e.g. in the extent of the
MRT network under the Agreement, etc.;
any payments that might be made between the Company and other companies
providing MRT services, for example for use of track or depots; and
reference the next clause regarding payment escalation to take account of cost inflation
over the term of the Agreement.
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The nature of payments will vary substantially between Net Cost and Gross Cost concession
models. This is briefly discussed below and is described elsewhere in this report. For reasons
implicit to the discussion below and elsewhere in this report, the Gross Cost concession with
some transfer of patronage risk is strongly recommended.
1. Net Cost Concession
Within a specified limit on the financial rate of return to the Company, this concession type
can have the simplest approach to the basic structure of the payment and payment method,
with the Company collecting and keeping fares and any other agreed sources of revenue
initiated by the Company and either making a payment to the Authority or receiving a
payment from the Authority depending on whether the Company expected the revenue to
exceed or be less than its costs. The simplicity comes with serious drawbacks (in particular the
loss of policy flexibility by government and the possible need for the Authority to negotiate
financial changes to the Agreement from a position of weakness - see the main part of this
report for a discussion of these matters).
As there is a strong possibility that the expenses incurred by the Company will be greater than
the revenue it can collect, a potentially substantial payment to the Company will be required.
This payment would be a general subsidy and not be related to any particular quantity or
quality of service (responsibility for which is under the control of the Company other than
with regard to safety and security standards). It would hence be paid as a fixed amount on a
monthly or similar basis, which presents problems for public accountability as it would need
to be made simply on the basis that the Company provided MRT services. More complex
arrangements are also needed to address the financial implications of changes in public
transport or public policy that could affect the Company, with unidentifiable or speculative
changes being exceptionally difficult to accommodate. As a result, the apparent simplicity of
payments under a Net Cost approach may not be achievable.
2. Gross Cost concession with no transfer of risk
This arrangement contrasts with the Net Cost concession by having no transfer of patronage
(and hence revenue risk) to the Company other than the possible exception of revenue from
advertising and commercial development. The payment structure would require that the
Authority pay for MRT services to be available irrespective of the number of passengers using
the services. The Company would simply carry the risk for delivering the specified quantity
and quality of service. To make the Companys payment risk clear to the concessionaire and
its financiers and other concessionaire parties, the following issues need to be addressed:
the criteria for the quantity and quality of service to be provided;
unit rates to be paid for the service provided, e.g. an amount per rail-car kilometer of
service operated per month; and
variations in the payment to take account of a failure to provide the specified quantity
and quality of service delivered by the Company.
The payment mechanism has to achieve a balance in order to achieve value-for-money. If the
mechanism imposes risk that the Company is not able to manage, this is likely to result in a
higher cost in terms of require payment service to the authority, reflecting financiers and
contractors reaction alike. Similar to the case of service standards, the government will need
technical advice based on experience of urban transit Gross Cost or similar concessions (e.g.
in the United Kingdom) to draft the payment mechanism.
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3. Gross Cost concession with some transfer of risk
The payment mechanism in this case is similar to that for the previous option except that part
of the payment would be related to patronage. This provides the incentive for the Company to
provide high quality services that meet the needs of passengers without the need for the
detailed monitoring of service quality that would be needed in the case above. The extent of
incentive and penalty payments would be substantially reduced.
18. PAYMENT ESCALATION
This clause would describe how payments to the Company would change over time due to
changes cost inflation. Indexation should be with reference to a public domain, long-duration
price index or indices. It may be appropriate to use a single index such as the Consumer Price
Index, or to use several price indices that are applied to different elements of the Companys
cost structure (e.g. with separate indexation of labor, energy and other items given the
substantially different rates of cost inflation that can apply to these components) to more
transparently adjust for changes in costs that are beyond the capacity for the Company to
manage. Care is needed to avoid blurring risk transfer to the Company to manage its costs.
19. FARE POLICY AND REVENUE
This clause needs to describe the basis for setting fares and managing fare revenue to the
extent necessary for the adopted form of concession (i.e. Net Cost or Gross Cost), including:
fare and ticketing policy and systems with regard to public transport in Ho Chi Minh
City, the MRT system in general, and the MRT line relevant to this Agreement;
policy regarding concessional fares for special social groups or special events;
policy regarding the right to set special permanent or temporary fares to promote MRT
use;
the initial structure and level of fares;
the basis, timing and frequency of changes in the level of fares over time to take account
of cost inflation;
whether the Authority or the Company is responsible for initiating changes in fares;
any requirement for the Authority to approve changes in the structure or level of fares
initiated by the Company, and the criteria on which approval will be based;
responsibility for advertising changes in fares; and
who will collect fare revenue, and whether fare revenue will be credited to the Authority
or the Company (noting that it is recommended elsewhere in this report that the
Ticketing System should be implemented as a separate contract covering the entire
MRT system at a minimum in the first instance and preferably the entire public
transport system).
Some of the contents of this clause will depend on the concession model that is adopted, as
follows:
1. Net Cost concession
Under this concession model, the Company collects and keeps the fare. The Company would
need to be given automatic (generally annual) indexation of fares to take account of inflation.
Where integrated ticketing and fares are to be used for the MRT system, a more complex set
of conditions would need to be specified to address situations where the fare revenue accruing
to the Company was affected by the interests of the integrated system, for example where a
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second flagfall change did not apply or where fares where not indexed in the same manner as
would have applied if the Company has a single ticket system for its own line. The method of
allocating revenue to the Company from an integrated ticket system would need to specified.
2. Gross Cost concession
In this case, fare setting is not the responsibility of the Company and so is not part of the
Agreement. However the collection is likely to require interfacing with the Company (which
may be required for example to facilitate implementation of the Ticket System at stations on
its MRT line). The Authority would need to set out its long term fare policy in the Agreement
so that the Company could take the account of the effect of fares on patronage for long term
decisions such as the procurement of trains. It will also be necessary to specify the process
whereby the Authority would advise the Company of intended changes in fares and the
Company would need to allow for services changes in response to changes or the lack of
change in fares.
20. ROUTINE NON-FARE REVENUE
This clause prescribes the rights and obligations of the parties with respect to the activities
forming part of the concession that generate regular revenue from sources other than fares.
The principal sources of such revenue are rental of commercial retail space at stations and
advertising. The clause needs to establish who will arrange such activities and to whom the
revenue will accrue taking account of who has the strongest commercial incentive to generate
this revenue.
21. SPECIAL NON-FARE REVENUE
This clause would address any other potential sources of revenue. The most likely such source
would be profits from the development of any property that may be deemed integral to the
project. Where this could occur, the Agreement should indicate the rights of the Authority
and the Company to initiate and implement such projects and to share resulting profits
between them.
22. REFINANCING
During the initial implementation phase, there are considerable uncertainties such as events
that can delay completion or have cost implications. These uncertainties cease to exist
following successful completion of the initial implementation phase. This change affects the
financing of the Companys activities.
The financial structure and other terms agreed with the financiers at the commencement of
the Agreement will take account of risk during the initial implementation period, for example
through factors such as the leverage ratio, cash reserve arrangements and interest margins.
When these risks are superseded at the end of the initial implementation phase, the Company
can arrange a refinancing of its affairs in recognition that it now faces less uncertainty. This
produces a benefit by reducing the funding cost for the Company through a combination of:
reducing interest margins;
reducing or releasing cash reserve accounts;
releasing or returning contingent junior capital (i.e. subordinated debt or equity);
extending debt maturity; and/or
increasing the amount of debt and reducing the need for equity.
It is important to recognize also that refinancing may not necessary be undertaken with the
direct involvement of the Company but can occur in another legal entity, relying on rights
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being granted in respect of cash flows, assets or contracts of the Company. Accordingly in any
adequate treatment of refinancing, account must be taken of such indirect arrangements.
Established international practice recognizes the need to address refinancing in the Agreement
and key principles in how refinancing should be treated. These are:
Given that a refinancing will normally constitute a material change in the project
financial structure as original agreed between the parties, the Authority should have the
right to approve any refinancing unless it is agreed as part of the original financing plan
set out in the Agreement or does not lead to a gain to the investors compared to the
original base case plan.
The commitment made by the Authority to provide Civil Infrastructure and the Ticket
System, make payments to the Company and provide certainty for financiers (e.g. with
the Lenders Direct Agreement (see clause 34) forms the underlying basis for refinancing
and consequent financial gains that result from refinancing. Without such contract
terms it is unlikely that the Company could obtain the improved financing term
especially in regard to leverage and pricing. Therefore the Authority has a right to a
share in any benefits from refinancing. An equal sharing of the refinancing gain between
the Authority and the Company is accepted in the UK as standard for Private Finance
Initiative contracts.
In the case where a project performs below the level projected in the Companys
proposal and incorporated in the Agreement at the end of the implementation phase,
refinancing benefits are first applied to restore the expected base case performance
before the sharing of the benefits.
The government will need financial specialist technical advice in the drafting of the
Refinancing clause, particularly with regard to:
the coverage of the clause;
methods for calculating, sharing and paying benefits; and
detection of financial structuring designed to bypass refinancing provisions.
23. TAXES AND DUTIES
There is financial risk due to possible changes in general taxes and duties over the duration of
the Agreement. In normal private sector businesses the financial consequence of such changes
are passed on to consumers. The indexation of rises in concession payments for inflation
(clause 18) provides an indirect means for passing on general rises in taxes and duties. This is
reinforced by indexation of fares (clause 19) in the case of a Net Cost concession. This
indexation provides a risk mitigation mechanism for the Company and hence allows the risk
of changes in general taxes and duties to be transferred to the Company. Discriminatory
change (i.e. any change that specifically affects the business of the Company) would be a risk
retained by the Authority that would require compensation to be paid to the Company in
respect of the change.
24. INSURANCE
The provision should specify the obligations of the Authority and the Company with respect
to insurance necessary under the Agreement. The following matters should be taken into
account in the drafting:
significant risk transfer to the Company is built into the Agreement;
financing arrangements and the need for the Company to ensure a continuity of service
means that the Company needs extensive insurance coverage;
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while the lenders will placed extensive insurance requirements on the Company, these
are for lenders exclusive protection and the Authority cannot rely on the lenders action;
and
the Authority should seek profession insurance advice on key issues, such as:
what insurance requirements it should impose on the Company as a means of
managing certain risk;
what should happen if certain risk becomes uninsurable; and
insuring that proceeds of claims are correctly applied by the Company.
In general, it is expected that the Company should be responsible for ensuring it has extensive
insurance with regard to matters affecting its activities and those affected by its activities.
More detailed consideration is needed to determine the extent of insurance cover required
with regard to civil infrastructure for matters that are beyond the control of the Company,
recognizing that the Company would have claims against the Authority if Civil Infrastructure
and the Ticket System were not available (e.g. due to some engineering or natural failure).
PART V EARLY TERMINATION
25. CONDITIONS FOR EARLY TERMINATION
The clause should prescribe how early termination can be caused. Five possible causes of
termination should be addressed:
termination on Authority default;
termination on Company default;
termination on Force Majeure;
termination at Authority initiative; and
termination for fraud and corruption.
Termination of the Agreement is an event with substantial consequences. Therefore two
general principles should underlie the clauses relating to termination:
termination should be used as a last resort with remedial measures including mediation
used to avoid the need for it to occur; and
the act and process of termination should be structured to cause the least impact on the
continuity of MRT services to the public.
Following subsections address each of the five conditions for termination:
1. Termination on Authority default
The basic principle is that the Company should have the right to terminate the Agreement
where the Authority acts in a way that makes the agreed relationship impossible or completely
frustrates the Companys ability to perform the services specified in the Agreement. In
specifying the events constituting Authority default giving the Company the right to terminate
the Agreement, it should be noted that:
The Authoritys and the Companys principal obligations in the Agreement are not
symmetrical. The Authority makes payments and exercises approval rights with few
detailed performance and financing related obligations, whereas the Company has
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substantial obligations. Accordingly, there are fewer issues that can trigger an Authority
default.
Authority failure to comply with the Agreement provisions before service
commencement in most cases can be handled as a Compensation Event and any failure
to make payment when due can be handled in other ways (e.g. late payment interest).
The Authority should have an opportunity to rectify any defaults in its performance
within a reasonable period.
2. Termination on Company default
The over-riding principle here is to find a balance between the Authoritys desire to be able to
change a contractor when service provision is inadequate regardless of the degree of
seriousness and the Companys and its financiers interest in restricting termination to severe
defaults and then after all reasonable alternatives have been tried, including Lenders Step-in
rights and a rectification period mechanism. From a value-for-money perspective termination
should be the Authoritys last resort.
The specification of the events of Company default should include treatment of the following
situations:
Company breach of any obligations materially and adversely affecting the services
provided;
the Company being placed in statutory insolvency process;
failure to provide the agree services and cumulative poor performance in service
provision according to an agreed measurement regime when incentives provided
through the transfer of risk and payment mechanism fail to produce the desired
services;
non-permitted replacement of Company contractors; and
non-permitted refinancing.
3. Termination on Force Majeure
The Agreement should specify a time period (i.e. x months) under a force majeure event
beyond which failure to agree to a solution allows either party to terminate the Agreement.
The Authority should have the right (for a fixed period indicted by the Authority in the RFP)
to prevent termination of the Agreement under a force majeure event by paying the Company
as if the services specified in the Agreement were being fully provided.
4. Termination at Authority Initiative
The Authority may wish to terminate an Agreement when circumstances (e.g. a policy change)
render the contracted relationship untenable and should have the right to do so. The
conditions for such termination should be specified, including the obligation of the Authority
to pay compensation to the Company if termination should occur.
5. Termination for fraud and corruption
Fraud and corrupt acts involving of the Company, any contractor and the Authority or
government personnel in respect of the Agreement should constitute grounds for termination
of the Agreement. However the treatment of this clause needs also to address the financiers
understandable concern regarding the security of their financing for reasons beyond their
control due to the actions of the Company or third parties and their employees. Consideration
needs to be give to situations where the fraud or corrupt act has been perpetrated by a
contractor or a contractors employee or even a Company employee without the Companys
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knowledge. In this case, the Company should be allowed to prevent termination by replacing
that offending party within a specified period (e.g. 30 days).
26. PROCESS OF TERMINATION
This cause should describe the process whereby the Agreement would be terminated and
associated actions. It may involve the financier or lender step-in (to avoid the need for the
Authority to pay compensation to the Company). The clauses should clearly identify
processes, notices and time schedules for actions associated with the process of termination.
Two key issues need to be addressed:
1. Process of termination
In the case of termination due to Authority default, there should be a mechanism for the issue
of a notice of default and rectification period leading to automation termination upon failure
to rectify and a following short grace period. The Authoritys desire to avoid having to pay
compensation to the Company is an incentive for the Authority to meet its obligations.
In the case of termination due to Company default, there should be a mechanism for the
Authority to serve a notice of termination that allows a reasonable rectification period (if
rectification is appropriate) for the Company to propose and implement a program of
remedial measures.
2. Continuity of service
The continuity of MRT services during any termination process should be protected, i.e. users
of the MRT system should be protected from actions of the Authority and the Company to
the greatest extent possible. This requires that the Authority and Company make the necessary
arrangements for the continuing provision of services while they seek to resolve the cause of
the initiation of the process of termination and undertake the process of termination if
necessary. This may require the Authority to require that the Company continue to operate
services throughout the termination period or at least until the Authority can arrange an
alternative service provider to take over from the Company.
27. CONSEQUENCES OF TERMINATION
The drafting of this provision should observe the following principles in determining the
consequences of termination under different conditions.
The principles address the issues of a) the rationale for making compensation and b) the
approach and method to calculate the compensation amount.
1. Rationale for compensation
a) On Termination on Authority Default
Where the Authority defaults, the Company should be compensated in full for losses that it
incurs.
b) On Termination on Company Default
In general compensation is not generally paid by the Authority where termination is due to
Company default. However, compensation should be paid for Companys assets that are
required by the Authority for continuing provision of services (e.g. M&E Assets). However,
the trouble associated with determining and paying such compensation serves to encourage
financiers to exercise step-in rights that they would have negotiated with the Company to try
to make the concession work in preference to allowing termination of the Agreement.
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c) On Termination for Force Majeure events
A Force Majeure event is the fault of neither the Company nor the Authority. It is generally
considered that the parties share in the financial consequences of such an event. However the
concern of the Companys financiers not to lose their financial arrangements and right to
assets following a Force Majeure event is reasonable and should be addressed by the
Authority.
d) On Termination by Authority Initiative
The reasoning is similar to the case of termination on Authority default and should lead to the
same approach to compensation.
e) On Termination for Fraud and Corrupt Acts
The Companys senior lenders should be protected from losing their financing due to an act
beyond their control. However the providers of junior capital (i.e. subordinated debt or
equity) should acknowledge that its relationship to the Company confers a responsibility for
the Companys acts and their margin of equity return in principle covers the risk involved.
f) On Termination for Breach of the Refinancing Provisions
The Agreement needs to cover breach of refinancing provisions and the recommended
approach is that the consequences of termination for this cause should have a similar
treatment as that for Fraud and Corrupt Acts.
2. Determining the compensation amount
The approach for each cause for termination should reflect the reasons for termination as
summarized under 1. above. The calculation of the proper compensation amount in each case
and the care that needs to be taken to ensure that no more than proper compensation is
identified is complex because of the need to allow for events such as possible refinancing and
other causes whereby senior debt and the Authoritys termination liability is increased, or again
the need to establish a market value or other methods for agreeing the compensation to be
paid on termination for Company default. The government will need to obtain specialist
financial and legal technical advice to draft the calculation of compensation on termination.
PART VI SPECIAL EVENTS
28. FORCE MAJEURE AND EXCEPTIONAL EVENTS
This clause should specify the scope of events that are considered as Force Majeure or
exceptional where the parties cannot carry out their obligations set forth in the agreement.
The approach to Special Event should take into account the following considerations:
risk should be borne by the party best able to mitigate it, however the risk event occurs;
termination is not always the solution to a Special Event (e.g. a replacement
concessionaire will still not be able to provide a full operation in the event of say
inadequate service from an electricity authority) and should be a last resort measure; and
where termination may be an appropriate measure is in the rare case in which a Special
Event has a severe effect on the ability of the Authority or the Company to fulfill their
obligations, neither party is better able than the other to mitigate or manage it and the
event is likely to be prolonged.
In particular Special Events should be distinguished in a manner similar to the following.
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1. Compensation Events
Such events are those that occur as a result of an action by the Authority, its representatives or
the government. In these events, compensation should be paid to the Company. It covers
situations that differ from an Authority Default. Compensation Events for which the
Authority should provide compensation are:
Authority breach of an obligation (including any breach by a third party for which the
Authority is responsible) an example is where agreed actions during the pre-service
stage that are the Authoritys responsibility and which prevent the Company from
meeting its service commencement obligation and/or increase the Companys costs do
not occur;
Authority-initiated changes in service requirement or constraints on inputs; and
discriminatory or specific changes in law.
2. Relief Events
They are events that prevent the Company from performing its obligations at any time and for
which it is agreed that the Company bears the financial risk of an increased cost or reduced
revenue but is given relief from termination for providing the full service required. The risk is
to be borne by the Company not necessarily because it is within the Companys control but
because the Company is in a better position than the Authority to mitigate and manage the
consequences, for example through a combination of insurance and careful planning.
Examples of Relief Events are fire, explosion, lightning, earthquakes, riots, strikes and similar
action, power or other utility failure or shortage, accidental damage or loss to the work being
carried out. Termination is not an appropriate remedy because any replacement for the
Company upon termination would be similarly affected and the Authority would not be better
off. Relief Events are distinguished from Force Majeure Events by being less severe in their
effect.
3. Force Majeure Events
These are events likely to have a catastrophic effect on either partys ability to perform its
obligation (and hence are rare), neither party is in a better position than the other to mitigate
either the occurrence or effect of the events, and the events could be prolonged. Examples
include war, civil war, terrorism, nuclear or biological or chemical contamination.
29. CONSEQUENCES OF FORCE MAJEURE AND EXCEPTIONAL EVENTS
The drafting of this provision should consider the consequences of each type of Special Event
separately, such as.
1. Compensation Events
Since the Authority bears the risk, it should compensate the Company. Termination is not
appropriate because compensation is an acceptable solution for the Company but is not for
the Authority (as occurs with a Compensation Event that occurs in the pre-service stage). In
the case of a commencement of service delay resulting from a Compensation Event, the
recommended approach is not to compensate the Company by extending the Agreement
period but rather to keep to the original term and to compensate for the losses (such as
additional finance charges). An appropriate method of calculating the compensation needs to
be specified.
2. Relief Events
No compensation is paid in this case because the Company bears the risk by agreement but
there is relief from termination. To qualify for this relief requires the Company to pass a test
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of reasonable endeavors to rectify and mitigate the consequences, and failing this test could
lead to termination. The Authority should not therefore expect to exercises step-in rights.
Extension of the Agreement owing to a Relief Event is discouraged as this is likely to dilute
the incentive for the Company to manage the events and restore normalcy. At the same time
the extension of the Agreement expiry exposes the Authority to any risk it bears under the
Agreement.
3. Force Majeure Events
See Termination on Force Majeure in Part III - Early Termination
30. POWER OF AUTHORITY
As the consequences of the Termination and Special event provisions both involve Authority
Step-In, this provision should specify the scope of power of the Authority regarding the step-
in process.
PART VII - ASSETS
31. CIVIL INFRASTRUCUTRE
The provision should specify that title to Civil Infrastructure remains with the Authority but
that rights of use of the assets are assigned to the Company for the term of the Agreement
(unless early termination occurs) and that the Company has a duty of care with regard to the
assets but is not responsible for any latent conditions associated with the assets (such as
design, construction or similar faults). The Companys obligations to maintain Civil
Infrastructure are covered under Part III - Services.
Other matters to be addressed in this clause include the Authoritys rights to inspect Civil
Infrastructure during the Agreement, a monitoring program to be implemented by the
Company and to be monitored by the Authority, refurbishment, rehabilitation and re-
investment in life-expired Civil Infrastructure during the term of the Agreement and matters
related to the return of Civil Infrastructure at the end of the Agreement.
32. ASSETS OF THE CONCESSIONAIRE
The provision should specify the assets that the concessionaire is providing for the project,
distinguishing those which remain its property, which may removed from the project site at
the Companys convenience, and those to be transferred to the Authority. The time at which
ownership of assets that are purchased by the Company and which are to become the
property of the Authority should be specified, e.g. whether ownership transfers to the
Authority at the time of purchase of the asset by the Company or at the end of the Agreement
(the former is recommended). The provision should also specify the Companys rights of use
of the assets, maintenance obligations, any obligations with regard to refurbishment,
rehabilitation and re-investment in life-expired assets, and the transfer of assets to the
Authority at the end of the Agreement. The clause should also specify compensation to be
paid to the Company for assets that are to be transferred to the Authority at the end of the
Agreement, covering both assets purchased prior to service commencement and those
purchased over the term of the Agreement. Such compensation is needed so that the
Company does not need to meet, over the duration of the concession, the full cost of assets
that have economic lives that extend beyond the end of the concession. A failure to do this
would discourage the Company from investing in such assets, which will include trains to
meet continuing growth in MRT patronage.
The clause should also provide for survey by the Authority of all project assets except the
Companys property on expiration and termination.
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33. ASSETS TITLES AND TRANSFER
The provision should detail the ownership or title of the project assets and user rights during
and on expiration of the Agreement. It should specify the time when the transfer of the assets
titles would occur and the procedure for such transfer.
The clause should also provide for co-operation by the Company with regard to the project
assets in the event of a lenders or Authority step-in to operate to provide service in place of
the Company and the need of a step-in party to find the required assets present and in a fit
state for operation.
34. LENDERS DIRECT AGREEMENT
A Lenders Direct Agreement is an agreement between the financier of the Companys assets
and the Authority with regard to assets purchased and financed by the Company under the
Agreement. Provision should be made for such an Agreement because:
The Authority needs to have the right to the assets provided by the Company in the
event of a termination of the Companys activities.
The senior lenders will have financed the project on the basis of the project cash flows.
If the Agreement is terminated the lenders will only have the rights against the
contractors and to cash amounts in accounts of the Company, and have no rights to sell
the assets.
In many projects financed under such debt security arrangement, the cash in the
Company accounts and the amounts recoverable by senior lenders making claims
against the contractors will not be sufficient to allow full repayment of the claims.
Hence, the senior lenders have an interest in an opportunity to step-in to rescue the
project in the event a termination is brought about or even threatened by Company
default of the Agreement.
For the public sector, a senior lenders step-in can be of benefit as it means there is the
potential for the project to be restored with minimum disruption to the service, which is
in line with the principle of continuity of service, and without the Authority needing to
become involved in the rescue operation.
This mutuality of interest between the senior lenders and the Authority forms the basis
of the Lenders Direct Agreement providing for parties rights and obligations in a
Lenders Step-in.
The step-in process is to be initiated by a Lenders proposal to the Authority for the
latters approval.
The key issues to be considered in drafting a Lenders Direct Agreement are:
the time when the Lenders should be permitted to step-in;
the extent to which they should be obliged to assume liabilities that have been or being
incurred by the Company;
the extent to which they are given the opportunity to rectify a breach on behalf of the
Company; and
the ability for the Lenders to substitute a new concessionaire.
The drafting should take into account the following considerations:
The Company always remains liable under the Agreement, and if a new breach occurs
during step-in, termination can still occur.
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A balance must be stuck between giving the opportunity to the Lenders to step-in and
for the Lenders to have seriously considered the likelihood of their mounting a
successful rescue of the project (to avoid unnecessarily postponing an inevitable
termination). Accordingly:
The opportunity to step in should have a time limit (e.g. 30 days from notice of
termination of the Company, which should be copied to the Lenders).
Requiring that the Lenders pay the Authority for any existing liability under the
Agreement of the Company at the time of step-in provides this necessary test of the
Lenders seriously.
However requiring as a pre-condition for step-in that the Lenders duplicate the
Companies Agreement liabilities has a disincentive effect and would be priced into the
Lenders and ultimately the concessionaires pricing, and is not recommended.
During step-in the Lenders should not have any liability for losses to the Authority.
The justification for the approach in the last two points is that if termination occurs due
to the action of the stepped-in Lenders any damage or claim will be reflected in the
compensation amount for Termination on Company default.
35. ASSET TRANSFER VALUES
In the event that a concession is terminated, the Authority needs to ensure that train services
can continue. If the Authority needs to pay compensation for these assets, there is a need to
have a pre-established means for valuing the assets given that there is no ready market for
most of the assets. Such a value will also be needed to determine the compensation to be paid
for the remaining value of assets transferred from the Company to the Authority at the end of
the concession. This clause would set out the basis for setting the value of assets at any time
during the Agreement.
PART VIII MISCELLANEOUS
36. RIGHTS AND DUTIES TRANSFER
The provision should specify the period when the rights and duties of each parties would be
transfer during and on expiration of the Agreement.
37. CHANGE OF OWNERSHIP
An Authority may be concerned about changes in the Companys shareholders, particularly
where such changes lead to a change in ownership which gives cause for concern for
particular, agreed reasons. If this is the case then it may seek to impose restrictions on the
ability of shareholders to transfer their shareholdings in the Company. Shareholders will
usually object to such restrictions other than restrictions on transfers of equity prior to the
date of Service Commencement. As a general rule, it should not be necessary for the
Company to contain other restrictions on the transferability of equity other than a need to
inform the Authority.
The provision should specify that in case there is change of ownership of the Company, the
Company must notify the Authority within a specific timeframe.
38. DISPUTE SETTLEMENT AND RESOLUTION
In the event where there is a dispute between parties in any circumstances, this provision
should specify the method of dispute settlement and resolution.
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39. CONFIDENTIALITY
The Company will be concerned to protect its confidential business information and the
Authority should allow for that.
At the same time, as a public project, it is necessary that public auditing can be undertaken.
The provision should specify that the Company must disclose any information regarding the
project for financial auditing and an indication that any trade secrets accessed in this manner
remain confidential. Any other matters related to confidentiality and public release of
information should be specified.
40. CHANGE IN LAW
This clause need to address the types of change in law that can have a specific impact on the
Companys cost that are not foreseeable prior to Agreement signing. Principles to be observed
in the drafting of this clause, which deals with potential changes in law during the concession,
are:
The cost impact of the change in law in not of a nature that can be passed on through
automatic changes in payments from the Authority to the Company (e.g. through cost
indexation).
The Company may not be able to manage efficiently a particular change in law impact
on its cost, in which circumstance transferring the risk to the Company may not provide
value-for-money to the government.
A distinction between a discriminatory change in law (i.e. one specifically affecting the
project, or the Company or the type of concession) and a general change, which can be
used to guide how the risk of the consequences of a change in law should be allocated.
Value-for-money remains the ultimate test in how the change in law risk is allocated
between the Company and the Authority, with no more risk transferred to the Company
than the Company can reasonably manage.
41. AUTHORITY STEP-IN
The provision should prescribe the conditions and process for an Authority step-in, which in
principle should occur under the following circumstances:
at the Authority initiative under a (rare) circumstance in which state power is more
effective than ordinary business operation (e.g. a civil war or another Force Majeure
event); and
during the process of termination of the Company for a cause under the which the
Authority would prefer not to have the Company continuing to operate (such as e.g.
under termination for fraud or corrupt acts or breach of the Refinancing provisions).
42. DUE DILIGENCE OVER CONTRACTS AND FINANCING DOCUMENTS
Due diligence of the Project Documents is less of a provision in the Agreement than a
requirement in the pre-Agreement stage. The Authority should stipulate the nature and form
of documents to be submitted with proposals to aid the due diligence process. The need for
the Authority and its MRT technical, financial and legal specialist advisors to conduct a
thorough due diligence of the preferred bidders proposal is explained in earlier parts e.g. Part
II Pre-Service.
43. ALTERNATIVE AND VARIANTS OF PROJECT FINANCE
Alternatives and innovations in financing are a legitimate business means for a Company in
carrying out a project. This is a specialist subject and it is recommended that the government
79
obtain financial specialist and also legal specialist technical advice in the drafting of this
provision, which should be made standard across the MRT concession contracts.
44. OTHER STANDARD PROVISIONS
The concession contract also needs to include appropriate clauses that deal with general issues
such as the following:
Intellectual Property Rights
Amending the agreement (terms)
Governing Law
Governing language
Land interests
Third party rights and obligations (if any)

80
81
Appendix E: Presentation and Report Summary

HCMCMetroRailSystem
I SSUES FOR
PRI VATE SECTOR PARTI CI PATI ON
1
6March2008
Structureofthispresentation
Focus
Assumesthatthegovernmentwilluseprivatesector(includingjointventure)contractorsto
construct works.
2
constructworks.
Focusisthereforeonuseoftheprivatesectorforprovisionoffinance&forMRToperations.
PartA
IntroductiontoPPIAFtechnicalassistance
PartB
Experienceinotherplaces
PartC
KeyissuesforMRTinstitutionalarrangements
PartD
PrincipaltechnicalissuesrelatedtoprivatesectorparticipationinMRTinHCMC
PartE
MoredetailedfeaturesofaconcessionagreementfortheoperationofMRTinHCMC
PartF
Outlinetemplateforaconcessionagreement
6March2008
PartA
PUBLI C PRI VATE I NFRASTRUCTURE
ADVI SORY FACI LI TY ( PPI AF)
TECHNI CAL ASSI STANCE
3
6March2008
Role&ScopeofPPIAFTechnicalAssistance
4
PPTA:engineering
design & feasibility design&feasibility
PPIAF:optionsfor
privateinvolvement
TheProject
Uses detailed information on costs patronage &revenue
6March2008
Uses detailed information on costs, patronage & revenue
prepared by PPTA
Integrates with PPTA to ensure complete business case to
manage implementation and operations
FourobjectivesforPPIAFTechnicalAssistance
1. IdentifyoptionsforprivatesectorparticipationinMRT
5
2. Assessbenefitsofeachoption
3. Financialanalysis&financialmodel
4. Recommendimplementationapproach
contractual & institutional contractual&institutional
forwholeMRTnetwork
6March2008
1.FrameworkforConsideringPrivateSectorParticipation
(PSP) OptionsDevelopment
PSPoptionswillbeidentifiedafterconsideringfactorsthatinfluence
MRTdelivery:
6
Transportsystemmanagementprinciples
Policycontrol:fares,ticketing,MRT&busnetworkintegrationetc
Lowfinancialcostrecovery
ParticipantsinMRTprovision includingcontractors,equipmentsuppliers,
concessionaires/operators,&financiers
BundlingMRTcomponents achieveinternalsynergies(e.g.operations&
maintenance)&productivetensions(financierinterestinefficientops.) ) p ( p )
Risktransfer identifyingwhatriskanoperatorcancontrolandwhatitcannotto
ensurecostsareminimized
FormsofMRToperatingconcession
Potentialrolesfortheprivatesector
Output:WorkingPaper
6March2008
2.RiskandValueforMoney(VfM)Analysis
FinancialanalysiswillbeundertakentoestimatetheVfMofeachprivate
sectorparticipationoption:
f f
7
Todetermineiftheprivatesectorcandeliverinfrastructureandservicesatlower
costthanthepublicsector
Tohelpthegovernmenttochoosefromamongstarangeofpossibleprocurement
optionsbalancingcost,benefitsandrisks
Identificationofariskmatrixbystakeholderforeffectiverisk
management:
Projectdesign
Project implementation and capital assets Projectimplementationandcapitalassets
Maintenanceandoperations
Revenue
Procurementmodel
Otherfinancial
Output:WorkingPaper
6March2008
3.FinancialAnalysis:FinancingPlan&FinancialModel
Afinancialmodelwillbedevelopedto:
Presentthefinancialprojectionsfromtheperspectivesof:(a)theMRT
8
operator/concessionaire;and(b)thegovernment
Coveraperiodofabout30years(tobedefined)
Allowforeasyentryofinputdata
Includeclearanddetailedassumptions
Totheextentpossiblewithavailabledata,indicatetheperformanceofindividual
linesandcombinationsoflines
Presentprojectedfinancialstatements(i.e.income&expenditure,cashflowand
balancesheet)fortheHCMCMAUR&forpotentialprivatesectororcorporatized
governmentparticipants
Output:WorkingPaper&financialmodel(spreadsheet)
6March2008
4.StakeholderFeedback&Implementation
Thisactivitycentersontheinterestsandneedsofstakeholdersduring
implementation&operation:
9
Capacityofrelevantgovernmentagenciestoadministerpublic&private
partnershipsinurbantransport
Institutionalarrangements proposeoptionsforfuture
Stepsneededtointroduceintegratedfaresandticketing
Institutional&financingresponsibilityimplications
Tenderprocedures(broad)
Ticketingsystemsupplyarrangement
Outlinecontentofpossibleoperatingconcessionagreement
Responsibilitiesrelatedtomanagementofprivatesector
Commentonlegalissuesthatmustbeconsidered
Otherprocurementissues
Output:Various
6March2008
FinancingMRTinHCMC
Initialcapitalcost
Lines1,2and3couldbearoundUS$34billion
Th f ll MRT li ill b h
10
ThecostforallMRTlineswillbemuchmore
Sourcesofinitialcapital
Governmentgrants
Loans
Governmentdomesticborrowing
Governmentinternationalborrowing,e.g.AsianDevelopmentBank&exportcreditagencies
Privatesectorcapital
Need to make effective use of all sources if full MRT system is to be built NeedtomakeeffectiveuseofallsourcesiffullMRTsystemistobebuilt
Sourcesoffundstorepaygovernmentborrowing&privatesectorcapital
Farerevenue
NonfareMRTrevenue
Propertydevelopment
OthernonMRTsources,e.g.existinggovt.revenueandnew(hypothecated)taxes
6March2008
IndicativedistributionofMRTcosts
11
(values do not include
discounting of future costs)
10%
10%
5%
ShareofInitialCapitalExpenditure
75%
10%
Fixedinfrastructure
E&Minfrastructure
Trains
Ticketing
ShareofInitialCapitalandOngoing
Capitalover35Years
55%
45%
ShareofCapitalandO&MCosts
over35Years
Capitalcost(excl.
Interest)
O&M
6March2008
75%
25%
CapitalExpenditure
forinitialproject
implementation
Capitalexpenditure
forreinvestment
andcapacity
expansionover35
years
PartB
EXPERI ENCE I N OTHER PLACES
12
6March2008
ExamplesofMRTexperienceinotherAsiancities
13
Sourcesoffinanceforinitialinvestment
Governmentonly(Singapore,HongKong,Manila)
Private sector only (Bangkok Kuala Lumpur Manila) Privatesectoronly(Bangkok,KualaLumpur,Manila)
Mix(Bangkok)
Provisionofservicesandinfrastructuremaintenance
Governmentcorporation(HongKong,Manila,Singapore)
Privatesector(Bangkok,KualaLumpur,Manila,Singapore)
Someinsights
Generalshiftovertimefrompublicsectoroperatorstoprivatesectoroperators
Fare revenue generally meets O&M costs, sometimes train costs, but rarely other capital costs
6March2008
FarerevenuegenerallymeetsO&Mcosts,sometimestraincosts,butrarelyothercapitalcosts
NonfareMRTrevenueisverysmall(inrangeof28%offarerevenue)
IncomefrompropertydevelopmentsignificantonlyinHongKong aspecialcase
Canusetheprivatesectortooperateservicesandmaintaininfrastructure(O&M) andalso
tofinancesomeassets
Useoftheprivatesectorneednotbelimitedtoactivitieswherecostrecoveryispossible
theycanundertakeactivitiesthroughconventionalpaymentforservicecontracts
FourlessonsfromBangkok 1
Patronageandrevenuehavebeenwellbelowexpectations
Resultsfromoptimismbias,i.e.basingplansonidealandhopefuloutcomes
14
Greenline(elevated)
Concessionairepaysforallcapitalandoperatingcostsandexpectedtorecoverthese
costsfromfaresandothersourcesofrevenue
Revenueappearstomeetoperatingcosts,costoftrains,butnotallfixed
infrastructurecosts
Blueline(underground)
Government paid for fixed infrastructure and concessionaire for trains and other Governmentpaidforfixedinfrastructure,andconcessionairefortrainsandother
electricalandmechanicalequipment
Appearsthatrevenueisinsufficienttomeettheconcessionairescosts
Potentialcostrecoveryforfuturelineslikelytobelessthanforthefirst
twolines
6March2008
15
LessonsfromBangkok 2
Poor physical integration:
- of MRT lines
- with bus
- with urban environment
6March2008
Inconvenient & unsafe travel
500 metres transfer between MRT
lines
LessonsfromBangkok3
16
Separateticketsystemandfarestructureforeachline
Confusingforpassengers
Must buy separate tickets for each line
Bht 25 on BTS
Bht 22 on Blue
Line
Mustbuyseparateticketsforeachline
Moreexpensiveforpassengerswhotransfer(seeexamplebelow)
6March2008
Bht 32 for BTS
& Blue Line
Bht 30 for Blue
Line & BTS
LessonsfromBangkok4
17
2 smart card ticketing systems are NOT compatible 2 smart card ticketing systems are NOT compatible
Card A Card B Not compatible
6March2008
GenerallessonsfromMRTinothercities
Integration
Integrationisessentialforthesystemtobeattractivetopassengers.
Achieving physical integration of infrastructure should be simple but is surprisingly difficult
18
Achievingphysicalintegrationofinfrastructureshouldbesimple,butissurprisinglydifficult.
Fare,ticketandserviceintegrationisnotgivensufficientimportance.
IntegrationproblemsincreaseasnewMRTlinesareadded.
Optimismbias
Generalexperienceisthatcostsareunderestimatedandpatronageisoverestimated.
Canleadtoconcessioncontractsthatareunrealisticandunsustainablebecauserevenuefrom
faresandothersourcesislessthanexpected.
Financialviability
Substantialgovernmentfinancialsubsidyisneeded.
Governmentmanagement
GovernmentshouldretainpolicycontrolovertheMRTsystem thisdoesnotrequirethe
governmenttooperateservices.
UsetheprivatesectorforoperationsO&Mandcapitalwherethisprovidesvalueformoney
Poordecisionsinthepastaredifficulttochange.
6March2008
PartC
KEY I SSUES FOR MRT I NSTI TUTI ONAL
ARRANGEMENTS
19
6March2008
Generalevolutioninpublictransport
managementinotherplaces
20
Centralized public transport operator
- Government agency.
- Integrated service planning and provision.
S i d i f t t id d b th
Dispersed public transport service
provision
- Limited role by government for
service planning & integration.
H
i
s
t
Typical develop-
ment approach in
the past
- Services and infrastructure provided by the
government agency.
- Increasing costs & decreasing service
quality.
p g g
- Services provided by the private
sector, and sometimes infrastructure
also.
- Limited or no government subsidy.
o
r
i
c
Objective:
improve and
integrate public
transport
Objective: better services
and reduced unit costs
through effective use of the
private sector
Trend in 1990s,
e.g. Europe,
S. America,
NZ & Australia
Alternative,
direct route
for change
Objective:
6March2008
Public transport management government
- Integrated fares, ticketing and services.
- Services provided by private operators under contract to the
government.
- Government pays contractors for services using performance
based contracts with appropriate incentives and penalties.
Objective:
avoid poor
service and
high cost of
centralized
approach
Idealstructureformanagementinthetransportsector
Needseparate
highlevel
strategic direction
21
Informs
Policy &
Strategy
Policy framework
strategicdirection
Separate
management
fromtheactual
undertakingof
operational
activities
Government
Effectiveness doing the right thing
y
Strategic planning
Regulatory policy
Financing &
pricing policies
Performance
monitoring
Regulation
Setting standards
Registration &
licensing
Enforcement Program
management
Project planning
Investment
programming
Project, financing
& other approvals
Design tendering
Program
d li
Government
toarrangeforthedelivery
ofinfrastructureandservices
Separateentitiestodeliver
infrastructureandservices
throughcontracts
6March2008
Reports
Design, tendering,
& contracting
Contract/concession
management
Monitoring & quality
assurance
delivery
Infrastructure
Services
Marketing
Finance
Keyissuesforgovernmentpolicydirectionandcontrol
Issuesrelatedtothestructureofaconcessiontoprovideservices
Samegeneralissuesapplywhetheroperatorisgovernmentorprivate
P ibl i i d lik l b d 35
22
Possibleconcessionperiodlikelytobearound35years
Equaltothelifeoftrains
Overthisperiod
Demographicandsocioeconomicconditionswillchangesubstantially
Governmentpolicyprioritiesmayalsochange
Cannotforeseeallchangesthatmightoccur
Governmentthereforeneedstoestablishconcessionssothatitcanmakeessential
changes in the future for example to changesinthefuture,forexampleto
Addnewlines
ChangebusorMRTservicesorthequalityoftheMRTsystem
Changethestructureandleveloffares
Accommodateothereconomicandsocialchangesthatmightoccur
6March2008
KeyissuesforMRTintegration
AneffectiveMRTsystemrequires
Integrationofpublictransportservices
23
WithbusroutesandotherpublictransportservicessupportingtheMRTsystem
Integrationandgooddesignofphysicalinfrastructure
WithpassengersabletoeasilytransferbetweenMRTlines,andbetweenbus&MRT
WithpassengersabletoeasilywalktoandfromMRTstations
withpassengersabletoparkmotorcyclesandtransfertoMRT
IntegratedticketingfortheMRTsystem
Sothatpassengerscanuseasingleticketsuchasastoredvaluecardtoaccessanypartof
h MRT d id ll b d l theMRTsystemand,ideally,busesandwatertransportalso
Ideally,integratedfares
Sothatpassengersarenotrequiredtopayasecondorsubsequentflagfallcomponent
whentransferringbetweenMRTlinesandalsowithotherpublictransportmodes
Operationoftrainsbetweenlinesisnotessentialbutcanbeuseful
6March2008
PartD
PRI NCI PAL TECHNI CAL I SSUES RELATED
TO PRI VATE SECTOR PARTI CI PATI ON
I N MRT I N HCMC
24
6March2008
GeneralarrangementforimplementingandoperatingMRT
Fullprivatesectorinvolvement
Possiblearrangement
25
PrivatesectorfinancesandimplementstheMRTline
OperatestheMRTlineandretainsrevenuefromitforaterm(say3040years)
TransferstheMRTsystembacktothegovernmentattheendoftheterm
LowcostrecoveryforMRTlinesinHCMCwouldrequirethegovernmenttoalso
makepaymentstotheprivatesectorsothattheprivatesectorcanmeetitscosts
AsdiscussedinPartE,thisarrangementisnotfavoured
Betterapproachwillbeforthegovernmentto
Financeandimplementmostinfrastructure
Itisassumedthatimplementationwilluseprivatecompaniesselectedthroughcompetitive
tenderingandundertakingworksthroughsoundcontracts
UseaseparateentitytooperateMRTservices(andpossiblyprovidesomeassets)
RequiresacontracttomanagetheprovisionofMRTservicesoneachline thisisthefocus
oftherestofthispresentation
6March2008
Acontract(aconcession)tooperateMRTservices
Featuresofthecontract:
Thecontractiscommonlycalledaconcessionandtheholderofthecontractiscalledthe
concessionaire
26
concessionaire.
Itwouldbebetweenthegovernment(e.g.representedbytheManagementAuthorityfor
UrbanRailwaysorasimilaragency)andtheoperatingcompany.
Thecompanycouldbeagovernmentagencyoraprivatecompany,wherethelattercould
includejointventuresbetweenafullyprivatecompanyandagovernmententerprise.
Itdescribestheresponsibilitiesofthegovernmentandtheconcessionairewithregardtothe
provisionofservices,managementofinfrastructureandfinancialmatters.
Theconcessionairecouldbeinvolvedininfrastructuredesignandprovision.
It ld b f i d f ti Itwouldbeforaperiodoftime.
Itwouldtransferfromthegovernmentfinancialrisk(i.e.uncertainty)thatcanbebetter
managedbytheconcessionaire.
Issuesrelatedtoticketingandmanagementoffarerevenuealsoneedtobeconsidered.
Issuesrelatedtopaymentarrangementstotheconcessionaireandothercontractual
conditionsareaddressedinPartsEandFofthispresentation
6March2008
Fifteenquestionsthatcanhelpestablishthe
generalfeaturesofaconcessionagreement
1. Isitpossibletodealwithinfrastructuredeliverynowandaddressoperationslater?
2. ShouldasingleagencydevelopandoperatetheMRT,orshouldtheseactivitiesbeseparated?
3 Should there be only one operator for all lines in the MRT system a separate operator for each line
27
3. ShouldtherebeonlyoneoperatorforalllinesintheMRTsystem,aseparateoperatorforeachline,
orsomethingelse?
4. Iftheconcessionaireisagovernmentagency,shoulditbeadepartmentorastateownedenterprise?
5. Isitbetterthattheconcessionairebeagovernmentownedenterpriseoraprivatecompany
(includingajointventurebetweenaprivatecompanywithagovernmententerprise)?
6. Shouldtheconcessionairebeselectedonthebasisofdomesticorinternationalcompetitivebidding?
7. Shouldtheconcessionairebeinvolvedinthedesign&implementationoffixedinfrastructure?
8. Shouldtheconcessionaireselecttrainsandrelatedequipment&systems?
9. Should the concessionaire select and finance trains and related equipment & systems? 9. Shouldtheconcessionaireselectandfinancetrainsandrelatedequipment&systems?
10. Shouldtheconcessionairefinancefixedinfrastructure?
11. Shouldtheconcessionairemaintainfixedinfrastructure?
12. ShouldaMRToperatingconcessionbeforalongorshortperiod?
13. Howmuchfinancialriskcanbetransferredfromthegovernmenttotheconcessionaire?
14. ShouldticketingbeimplementedasasinglecontractfortheentireMRTsystem?
15. Shouldconcessionaireskeepfarerevenueorgiveittothegovernment?
Thequestionsareaddressedonfollowingslides 6March2008
Somereasonsinfavour
Infrastructureisalargeandcomplexmatter Needtoconsideroperationalissuestogether
1.Isitpossibletodealwithinfrastructuredeliverynow
andaddressoperationslater?
28
Someagainst
ast uctu e s a a ge a d co p e atte
thatwillabsorballgovernmentresourcesfor
theimmediatefuture
Itwilltakelongertoarrangeandimplement
infrastructurethantodothesamefor
operations
eed to co s de ope at o a ssues toget e
withinfrastructuresothattheprojectdesign
ensurestotalMRTcostsareminimized
Needtoconsiderifanyassetsandtheir
financingshouldbecombinedwithoperations
todetermineinfrastructureworkspackages
Willtakelongertoarrangeoperationsifsome
assetsareinvolvedintheconcession
Project preparation for the ADB loan needs to ProjectpreparationfortheADBloanneedsto
coverbothinfrastructuredeliveryand
operations
6March2008
Conclusion:Operatingarrangementsneedtobedeterminedatthesametimeasinfrastructure
planning.
2.ShouldasingleagencydevelopandoperateMRT,
orshouldtheseactivitiesbeseparated?
AsingleagencythatbothdevelopsandoperatesMRTmightallowbetterintegration
Butthisdoesnotoccurinpractice
Slide21showsbestpracticeistoseparatefunctions
29
p p
Separationensuresdecisionmakingismoretransparent,andavoidsconflictofinterestandinefficiency
thatoccurswithinasingleagency
Concludethatshouldseparateservicemanagementfromserviceoperations
Establishacontractualrelationship
Sometimescalledpurchaserproviderorregulatoroperatorapproach
Needangovernmentto
Settechnicalstandards
Structurethecontractfortrainoperationsandinfrastructuremaintenancesoitachievesintegration,servicequality
and other desired outcomes andotherdesiredoutcomes
Alsoneedanagencytoenforcesafetystandards
Itisusualforthistobeaseparaterailsafetygovernment
FutureslidesassumeMRToperationsareprovidedthroughaconcession
Theconcessionaireisthebusinessthatisresponsibleformeetingtheconditionsoftheconcession
Theconcessionaireincludestheentitythatoperatesservices
6March2008
Somereasonsinfavour
Easiertoexpandoperationstonewlinesby Attractingexistingoperatorsfromotherplaces
3.Shouldtherebeonlyoneoperatorfor
alllinesintheMRTsystem?
30
Someagainst
as e to e pa d ope at o s to e es by
drawingonskillsandresourcesintheexisting
agency
Economiesofscale(i.e.unitcostsdeclineas
theorganisationgetsbigger)willresultinlower
costs
g g p p
willbringmorediverseandbetterskills
Limitedevidenceforeconomiesofscalein
publictransport
Singleoperator(i.e.amonopolyoperator)will
becomeinefficient
Verydifficultforthegovernmenttoreplace
theoperatorifitperformsinadequately
Severaloperators(say23)
Allowscomparisonstobemade
Allowsflexibilityandprotectionincaseproblems
emerge
Canonlyhaveoneoperatoronanyindividual
line
6March2008
Conclusion:Having23operatorsforthesystemprovidesflexibilityandassistsmanagementofthe
system.
Somereasonsinfavourofadepartment
Adepartmentcanbemoreeasilycontrolledby Adepartmentdoesnothavestrongincentives
4.Iftheconcessionaireisagovernmentagency,shoulditbea
departmentorastateownedenterprise?
31
Someagainst
depa t e t ca be o e eas y co t o ed by
thegovernment
Adepartmentmighthavelowercostsbecause
governmentsalariesarelow
depa t e t does ot a e st o g ce t es
tobehaveinacommercialmanner
Thecloselinkbetweengovernmentanda
department
Reducestransparencyindecisionmaking
Introducesconflictsofinterest
Astateownedenterprisehasanincentiveto
minimizeoverallcosts
Astateownedenterprisecanbemoreeasily p y
equitizedatsomefuturetime
6March2008
Conclusion:Ifpubliclyoperated,theoperatorshouldbeanarmslengthcommercialenterprise.
Somereasonsinfavourofagovernment
operator
Agovernmentoperatorcanbemoreeasily
Controlisexercisedthroughacontractinboth
5.Isitbetterthattheconcessionairebeagovernmentownedenterprise
oraprivatecompany(includingajointventurewithagovt.enterprise)?
32
Someagainst
go e e t ope ato ca be o e eas y
controlledbythegovernment
Agovernmentoperatormayhavelowercosts
becausegovernmentsalariesarelower
g
cases,sodirectcontrolisnotanissue
Lowergovernmentsalariesarelikelytobe
offsetbylargernumbersofemployeesand
otherhighercosts
Internationalexperienceshowsthat
governmentoperatorsaretypically30%50%
moreexpensivethanprivatesectoroperators
Theprivatesectorisbetteratmanagingrisk
and controlling costs andcontrollingcosts
Candrawonprivatesectorspecialistskillsand
experience
Modernpracticeistouseaprivatesector
operator
6March2008
Conclusion:Useofaprivatesectorcompanytooperateserviceswillalmostcertainlybebetterthan
useofagovernmentoperator.
Somereasonsinfavourofdomestic
competitivebidding
Agovernmentmayfeelithasmorecontrol
Thereisnocurrentdomesticenterprisewith
6.Shouldtheconcessionairebeselectedonthebasisofdomesticor
internationalcompetitivebidding?
33
Somereasonsinfavourofinternational
competitivebidding
go e e t ay ee t as o e co t o
overtheconcessionaire
Aconcessionairemayhavelowercostsbecause
itdoesnothavetopayinternationalcosts
p
skillsinMRToperations
Aforeigncompanyislikelytoforma
consortiumwithlocalcompaniestoreduce
costsandmeetgovernmentobjectives
Aconsortiumwillbeamoreeffectivemeans
fordevelopingdomesticskillsinMRT
operationsthanexternaltrainingbecauseit
willoccurinamoreprogrammedand
sustainedmanner
Aconsortiumisespeciallyimportantiftrains
andrelatedequipmentandservicesaretobe
providedbytheconcessionaire
6March2008
Conclusion:Theconcessionaireshouldbeselectedonthebasisofinternationalcompetitivebidding
toobtainthebestcombinationofskillsandlowestcost.
Somereasonsinfavour
Itismorelikelytoresultinlowerlifelongcosts Itisdifficulttoarrangebecausetheoperator
7.ShouldtheMRTconcessionairebeinvolvedinthedesignand
implementationoffixedinfrastructure?
34
Someagainst
t s o e e y to esu t o e e o g costs
becausebothinitialcapitalcostsandongoing
costsaretakenintoaccount
t s d cu t to a a ge because t e ope ato
mustbeselectedatthesametimeasthe
infrastructuredesignengineers
Itismoredifficulttogetsoundfinancial
tendersfrompotentialoperatorswhenthe
projectdesignisnotfinalised
6March2008
Conclusion:Itisnotessentialsubjecttouseofinternationalstandardsforinfrastructuredesignand
takingaccountofoperationalissuesinthedesignoffixedinfrastructure.
Somereasonsinfavour
Itgivestheoperatorbettercontroloverthe Theoperatormayselectthemostexpensive
8.ShouldtheMRTconcessionaireselect trainsandrelateditemssuchas
traincontrol&communicationssystemsanddepotequipment?
35
Someagainst
t g es t e ope ato bette co t o o e t e
qualityofservicethattheyprovide
Itallowstheoperatortominimizetraincapital
costsandotherO&Mcosts
Itpreventstheoperatorblamingthe
equipmentprovidedtothembythe
governmentforpoorserviceprovidedbythe
operator
It allows some patronage risk to be transferred
e ope ato ay se ect t e ost e pe s e
trainsratherthanthetrainsthatofferthebest
value
Note: It is usual for there to be a
separate depot for each MRT line
Itallowssomepatronagerisktobetransferred
totheconcessionaire thisreducestheneed
foruseofadministrativemeasuresincontract
managementandhencesimplifiescontract
management
6March2008
Conclusion:Trains&relatedinfrastructureareessentialtooperatorperformance.Operatorsshouldberesponsible
forchoicesregardingthemsothatoperatingriskandsomepatronageriskcanbetransferredtotheoperators.
separate depot for each MRT line.
This reduces dead running and
increases the accountability of the
operators.
Somereasonsinfavour
Fourreasonspresentedonthepreviousslide Itmayreducethenumberofpotential
9.ShouldtheMRTconcessionaireselectandfinance trainsandrelateditems
suchastraincontrol&communicationssystemsanddepotequipment?
36
Someagainst
ou easo s p ese ted o t e p e ous s de
Italsointroducesanewpotentialsourceof
capitalforinvestmentintheproject
Itbringsafinancierintotheconcession,with
thefinancierabletoputpressureonthe
operatortoperformwelloverthelifeofthe
concessiontoprotectthefinanciersinterest
Itensuresthattheconcessionairewillseekthe
trains that will enable it to minimize it overall
t ay educe t e u be o pote t a
operatorsiftheyhavetroubleraisingcapital
trainsthatwillenableittominimizeitoverall
costs
Theconcessionairewillseektoreducethehigh
costoftrainsprovidedthroughexportcredit
finance
6March2008
Conclusion:Bestfortheconcessionairetobothselectandfinancetrainssothatcostscanbe
minimisedandthetransferofrisktotheconcessionairecanbemaximised.
Somereasonsinfavour
Theconcessionairecantakegreater Itmaylimitthepoolofpossible
10.Shouldtheconcessionairefinancefixedinfrastructure?
37
Someagainst
e co cess o a e ca ta e g eate
responsibilityforensuringthesuccessofthe
entireproject
Itcouldprovideanetfinancialbenefittothe
governmentifthehighercostofprivatesector
capitalcanbeoffsetbythetransferofmore
financialrisktotheconcessionaire
t ay t t e poo o poss b e
concessionairesbyeliminatingthosewho
cannotraisethenecessarycapital
Thegovernmentmaynotgetthebest
consortiumofinfrastructureandfinance
providersandMRToperator
Theconcessionairemayseekgreatercertainty
toprotecttheirinvestment,whichwill
compromisethetransferofriskand/orreduce p /
networkintegrationandpolicyflexibilityfor
thegovernment
6March2008
Conclusion:Itisunlikelythatprivatesectorcapitalwillprovidealowercostoutcome,butthiscanbe
testedwithavalueformoneyanalysis.
Somereasonsinfavour
Theconcessionairewillcontainthepeoplewho Theconcessionaireonlyhasaninterestinthe
11.Shouldtheconcessionairemaintainfixedinfrastructure?
38
Someagainst
e co cess o a e co ta t e peop e o
willbemostawareofproblemswith
infrastructurebecausetheyuseiteveryday
Theconcessionairehasaninterestinfixing
infrastructureproblemssothattheirservices
arenotdisruptedortheircostsincreased
e co cess o a e o y as a te est t e
infrastructureforthetermoftheconcession,
andmaynottakealongtermview
6March2008
Conclusion:Theconcessionaireshouldmaintainfixedinfrastructure.
Reasonsforashortperiod
(sayupto10years)
Aconcessionairecanbemorecertainofcostsover Theconcessionairecantakealongtermview,e.g.
12.ShouldanMRToperatingconcessionbeforalongorshortperiod?
39
Reasonsforalongperiod
(say35years)
ashorterratherthanalongerterm,andsoneed
notincluderiskpremiumstoallowforuncertainty
overfuturecosts
Aconcessionairecanbereplacedsoonerifthey
donotperformwell
Theconcessioncanmakearrangementsto
compensatetheconcessionaireforassetsthey
havepurchasedthathaveaneconomiclifethatis
l th th i t
g , g
theycandevelopstaffskillsandinvestin
worthwhileequipmentandservicesthathavea
paybackperiodthatislongerthantheconcession
term
Acombinationofsuitablecontractconditionsand
useofpriceindiceswillallowcoststobeadjusted
overthetermofalongerconcession
Aconcessioncanincludetermsforearlydismissal
f i i if th d t f ll longerthantheconcessionterm ofaconcessionaireiftheydonotperformwell
Alongertermconcessionavoidsthecostof
selectinganewconcessionairemorefrequently
Alongertermismoreconsistentwithprovision
andfinancingoftrainsbytheconcessionaire
6March2008
Conclusion:Alongertermconcessionispreferred,especiallyiftrainsareprovidedandfinancedby
theconcessionaire.A35yearconcessionwouldbesimilartothelifeofthefirstsetoftrains.
13.Howmuchfinancialriskcanbetransferred
fromthegovernmenttotheconcessionaire?
Meaningoffinancialrisktransfer
Financialriskistheuncertaintyabouthowcostsmightturnoutinpractice
Transferoffinancialriskmeansmakingtheconcessionaireresponsibleforthecosts,i.e.theycannotaskthe
40
governmentformoremoneyifcoststurnouthigherthanexpected
OverallcostsofMRTwillbehigheriftoomuchortoolittleriskistransferredtotheconcessionaire
Iftransfertoomuchrisk
Theconcessionairewillbecomeriskaverse(i.e.verycautious),whichwillreduceinnovationandresponsivenessby
themtomarketneeds
Biddersforaconcessionwillincluderiskpremiums(i.e.extraallowances)intheirbidstoprotectthemagainsthigher
coststhatresultfromrisksthattheycannotmanage
Iftransferinsufficientrisk
Theconcessionairewillnotmanagetheuncertaintyaswellastheymightbecausetheycanpassoncostincreasesto
thegovernment
Obj i i f h i i i k h h d h id i Objectiveistotransfertotheconcessionaireriskthattheycanmanageandhenceavoidoccurring
examples
Transferoperatingcostrisk,butprotecttheconcessionairefromlongertermuncertaintybyusingindicesto
adjustcontractpaymentsforchangesinunitcosts(e.g.energyprices,labourcosts,etc)
Transfersomepatronagerisktomakeconcessionaireresponsetoconsumerneeds.Butrecognisethatthe
concessionairemaybeabletoinfluenceonlyabout10%orsooftheirpatronage(theremainderis
attributabletofactorssuchaswhathappenselsewhereinthenetworkandsocioeconomicconditions)
Addressedinmoredetailinaseparatepaper
6March2008
Somereasonsinfavour
Asinglesystemavoidsinterfaceproblems Givesconsiderableresponsibilitytoasingle
14.Shouldticketingbeimplementedasasinglecontract
fortheentireMRTsystem?
41
Someagainst
s g e syste a o ds te ace p ob e s
betweenlines
Allowsthebesttechnologytobeusedforthe
entireMRTsystemratherthanthetechnology
selectedbythosebiddingforeachline
Makesiteasiertoexpandthesystemtoinclude
morelines,thebussystemandferrieswhen
appropriate
Allows the technology to be more easily
G es co s de ab e espo s b ty to a s g e
contractor,withgreaterriskifthesystemis
notoptimal
Anadditionalcontractthatneedstobe
managed
Couldbemanagedbycoordinationbetween
variouspublictransportoperators
Notessentialifgovernmentdoesnotwishto
have an integrated public transport system Allowsthetechnologytobemoreeasily
updated
Establishesanindependentcontractthat
makesrevenuemanagement&patronagedata
moretransparent
haveanintegratedpublictransportsystem
6March2008
Conclusion:Integratedfaresandticketingisessentialforasuccessfulpublictransport.Asingleticket
systemimplementedthroughasinglecontractislikelytoprovidethebestoutcome.
Somereasonsforconcessionaires
keepingfarerevenue
Theconcessionairecanusethefarerevenueto Itislikelythatthefarerevenuewillbe
15.Shouldconcessionaireskeepfarerevenue
orgiveittothegovernment?
42
Somereasonsforthefarerevenuetobe
paidtothegovernment
e co cess o a e ca use t e a e e e ue to
meettheircosts
Requiresanaccountingsystemtotransfer
fundsbetweenconcessionaireswhere
passengerstransferbetweenMRTlines
Bestsuitedtosituationswherefarerevenueis
sufficienttomeetthecostsincurredbya
concessionaireandwhereagrosscostform
ofconcessionisused(seeslide30)
t s e y t at t e a e e e ue be
insufficienttomeetconcessionairecosts,so
therewillstillbeaneedforameansforthe
governmenttopayadditionalfundstothe
concessionaire
Theratiooffarerevenuetocostwillvary
betweenlines,requiringdifferentlevelsof
governmentpaymenttoconcessionaires
Workswellwhereanintegratedticketing ( ) g g
systemisused,andrevenueiscollectedbythe
enterprisethatoperatestheticketsystem
Bestsuitedtoanetcostformofconcession
(seeslide30)
6March2008
Conclusion:Seelaterdiscussionofformsofconcession.
Conclusionstothesefifteenquestions
43
Question Conclusion
1. Isitpossibletodealwithinfrastructuredeliverynowandaddressoperations
later?
Operatingarrangementsneedtobedeterminedatthesametimeasinfrastructureplanning.
2. ShouldasingleagencydevelopandoperatetheMRT,orshouldthese
activitiesbeseparated?
These activitiesshouldbeseparated,withoperationsundertakenthroughaconcessioncontract.
3. ShouldtherebeonlyoneoperatorforalllinesoftheMRTsystem? Having23operatorsforthesystemprovidesflexibilityandassistsmanagementofthesystem.
4. Iftheoperatorisagovernmentagency,shoulditbeadepartmentorastate
d t i ?
Ifpubliclyoperated,theoperatorshouldbeanarmslengthcommercialenterprise.
ownedenterprise?
5. Isitbetterthattheconcessionairebeagovernmentownedenterpriseora
privatecompany(includingajointventurewithagovernmententerprise)?
Useofaprivatesectorcompanytooperateserviceswillalmostcertainlybebetterthanuseofa
governmentoperator.
6. Shouldtheconcessionairebeselectedonthebasisofdomesticor
internationalcompetitivebidding?
Theconcessionaireshouldbeselectedonthebasisofinternationalcompetitivebiddingto
obtainthebestcombinationofskillsandlowestcost.
7. ShouldtheMRToperatorbeinvolvedinthedesignandimplementationof
fixedinfrastructure?
Itisnotessentialsubjecttouseofinternationalstandardsforinfrastructuredesignandtaking
accountofoperationalissuesinthedesignoffixedinfrastructure.
8. ShouldtheMRTconcessionaireselecttrainsandrelatedequipment&
systems?
Trainsandrelatedinfrastructureareessentialtooperatorperformance.Operatorsshouldbe
responsibleforchoicesregardingthemsothatoperatingriskandsomepatronageriskcanbe
transferredtotheoperators.
9. ShouldtheMRTconcessionaireselectandfinancetrainsandrelated
equipment&systems?
Bestfortheconcessionairetobothselectandfinancetrainssothatcostscanbeminimisedand
thetransferofrisktotheconcessionairecanbemaximised.
10 Should the MRT operator finance fixed infrastructure? It is unlikely that private sector capital will provide a lower cost outcome but this can be tested
6March2008
10. ShouldtheMRToperatorfinancefixedinfrastructure? Itisunlikelythatprivatesectorcapitalwillprovidealowercostoutcome,butthiscanbetested
withavalueformoneyanalysis.
11.ShouldtheMRToperatormaintainfixedinfrastructure? Theconcessionaireshouldmaintainfixedinfrastructure.
12. ShouldtheMRToperatingconcessionbeforalongorshortperiod? Alongertermconcessionispreferred,especiallyiftrainsareprovidedandfinancedbythe
concessionaire.A35yearconcessionwouldbesimilartothelifeofthefirstsetoftrains.
13. Howmuchfinancialriskcanbetransferredfromthegovernmenttothe
concessionaire?
Transferanoptimalamount ofrisksothatconcessionairesdonotincluderiskpremiumsinbids
andeffectivelymanagecostsandrevenuetheycancontrol.
14. ShouldticketingbeimplementedasasinglecontractfortheentireMRT
system?
Integratedfaresandticketingisessentialforasuccessfulpublictransport.Asingleticketsystem
implementedthroughasinglecontractislikelytoprovidethebestoutcome.
15. Shouldconcessionaireskeepfarerevenueorgiveittothegovernment? Willbelinkedtotheidealformofaconcession consideredinmoredetailinPartE.
Implicationsoftheseconclusions
Seemslikelythatagoodarrangementwillbethat
Theconcessionaireshouldbeaprivatecompanyselectedthroughinternational
44
competitivebidding
Theconcessionaireshouldprovideandfinancetrainsandrelatedequipmentand
systems,aswellasoperatingtrainservicesandmaintainingfixedinfrastructure
Theconcessionshouldbeforareasonablylongperiod
Operatingriskandsomepatronageriskshouldbetransferredtotheconcessionaire
AsingleticketingsystemshouldbeusedforthewholeMRTsystem,anditshouldbe
implementedasaseparatecontract
But
Thereisaneedtoconfirmthesemattersthroughavalueformoneyanalysis
Thereareanumberofmoredetailedmattersthatneedtobeconsideredin
designingaconcessionfortheprovisionofMRTservices
thisisaddressedinthenextpartofthepresentation
6March2008
PartE
MORE DETAI LED FEATURES OF A
CONCESSI ON AGREEMENT FOR THE
OPERATI ON OF MRT I N HCMC
45
6March2008
Introducingtwoformsofconcessionagreement
46
NetCostconcession GrossCostconcession
Infra
structure
Governmentprovidescivilinfrastructure.Concessionaireprovidestrainsandrelateditemssuchas
train control & communications systems and depot equipment structure traincontrol&communicationssystemsanddepotequipment.
Risksharing Concessionaire assumesallpatronage
risk,butsharesextraprofits(ifany)with
thegovernment.
Risk issharedbetweenthegovernmentand
concessionaire.Optimumsharingofriskwillminimise
theconcessioncost.
Revenue Concessionairekeepsrevenue Fare revenueisgiventothegovernment
Services Concessionaire determinesservicesto
beprovidedonthebasisofprofitability.
Government setsservicestandardsandtheconcession
airedeterminesservicesbasedonthesestandards.
Payments Concessionairemeetscostsfromits Government paystheconcessionaireforservices
6March2008
ownrevenue.Additional paymentsmay
beneededfromthegovernmentif
concessionairesrevenueistoolow.
providedaccordingtoratessetonthebasisof
competitivetenderingandquantity/qualityofservice
provided.
Government
role
Governmentinvitestenders&
establishesaconcession;hasonlya
smallrolethereafter;difficulttovary
contractconditions.
Governmentinvitestendersandestablishesa
concession; hasacontinuingmajorroleinmanagingthe
concessionagreement;canvaryconditionswhen
needed.
Netcostconcession
Bestsuitedwhere Bestsuitedwhere
Assessmentofnetcostandgrosscostconcessions
Grosscostconcession
47
est su ted e e
Concessionairecanrecovertheircostsfromfares
andothersuchsources
Theconcessionairehasahighlevelofcontrolover
theircostsandrevenue
Wheretheretheconcessionairehasthepotential
formajorpropertydevelopment
Thegovernmentcanacceptlimitedpolicycontrol
overtheMRTlineforthedurationofthe
concession
est su ted e e
Concessionairecannotrecovercostsfromtheir
ownrevenuesources
Theconcessionairehasonlyalimitedlevelof
controlovertheircostsandrevenue,suchasa
singlelineinanMRTsystem
Thegovernmentwishestoretainpolicycontrol
overtheMRTsystem
Thegovernmenthasthecapacitytomanagea
performancebasedcontract
Thegovernmentwishesaformofcontractthat
requiresonlylimitedoversight
Conclusion:Togivethegovernmentpolicycontrolandtotakeaccountoflowcostrecoveryandlimited
propertydevelopmentopportunitiesinHCMC,agrosscostformofconcessionisstronglyrecommended.
6March2008
Puttingittogether fourpossibleconcessionapproaches
48
Public
Enterprise
Public Implementation with
Operating Concession (PIOC)
Train Supply and Operating
Concession (TSOC)
Build, Operate & Transfer
(BOT)
Delivery of:
Civil Infrastructure and Fixed
Equipment
Delivered through competitively tendered contracts to the government.
Delivered through competitively
tendered Net Cost contract to the
government.
Trains, train control and
communications and depot
equipment
government.
Delivered through a competitive
tendered Gross Cost concession.
d d h l d d
tendered Gross Cost concession.
Train services and
infrastructure maintenance
Contract negotiated with an SOE. Competitively tendered Gross
Cost contract.
Risk Transfer
Transfer of risk fromthe
government is limited to the
extent allowed in construction
and equipment supply contracts.
The government retains risk
associated with operations
through its ownership of the
operator.
As for the Public Enterprise
option but can transfer operating
risk to the concessionaire. Some
patronage risk can be transferred
through the Gross Cost
concession. The government
retains operating risk related to
mismatch between trains it
provides and concessionaire
needs.
The government transfers more
risk to the concessionaire than in
the PIOC option because the
concessionaire purchases trains
and can therefore bear more risk
for operations because they have
more control over service quality.
Transfers the greatest amount of
risk fromthe government, but
the government loses flexibility
for change in policy and for
public transport network
integration.
Finance
Civil Infrastructure and Fixed Capital provided by the government Capital provided by the Capital provided by the
6March2008
Civil Infrastructure and Fixed
Equipment
government.
Capital provided by the
concessionaire. The government
will need to pay for costs as
specified in the contract (to cover
both capital and O&M costs net
of fare revenue, where fare
revenue will be much less than
the costs).
Trains and Train Control and
Communications Equipment
Capital provided by the government.
Capital provided by the
concessionaire. The government
pays for costs as specified in the
contract (to cover both capital
and O&M costs).
Train services and
infrastructure maintenance
The government pays all costs
incurred by the SOE, including
working capital
The government pays for
operating and maintenance costs
as specified in the contract.
Fare revenue The government retains fare and
other revenue (or pays SOE the
difference between costs and
revenue if the SOE retains the
revenue).
Fare revenue accrues to the government. Concessionaire retains fare and
other revenue.
Indicativeassessmentofconcessionoptions*
49
Criteria Public
Enterprise
Public Implementation
with Operating
Concession (PIOC)
Train Supply and
Operating Concession
(TSOC)
Build, Operate &
Transfer
(BOT)**
System Integration
Minimize capital and operating costs
Provide integrated MRT system for
passengers

Policy Flexibility for the Government
Ability for the government to
modify MRT system

Risk Transfer from the Government
Infrastructure supply risk
Operating risk
Patronage risk
Management of Operating Concession by the Government
Firm contractual basis for

6March2008
operations

Ease of concession management
Incentive for contractor/-
concessionaire to do the thing right

Potential Value-for-Money
Allowing for risk transfer, associated
risk premiums and the cost of
capital
*
* It is currently planned to subject all options to a full financial value-for-money analysis. The present analysis is intendedto be indicative.
** The BOT option may allowmoderate value-for-money, but does not provide the government with the flexibility to meet other public interests.
Furtherinformationontwokeyapproachesto
Projectimplementation
Public Enterprise Model Private Sector Participation Model (TSOC)
Implementation of:
Civil infrastructure &
fixed equipment
D li d th h titi l
tendered contracts with the government
50
fixed equipment
tendered contracts to the government.
tendered contracts with the government.
Trains and train
control equipment
Delivered through a competitively
tendered concession contract between
a concessionaire and the government.
Train services &
infrastructure maint.
A state owned enterprise is established and a
concession negotiated with it.
Risk transfer
Transfer of risk from the government is limited
to the extent allowed in construction and
equipment supply contracts.
The government can transfer some project
integration risk, most operating risk and some
patronage risk to the concessionaire.
S f fi f j t i l t ti Source of finance for project implementation
Civil infrastructure &
fixed equipment
Capital provided by government
through grants and loans.
Capital provided by government
through grants and loans.
Trains and train
control equipment
Capital provided by the concessionaire.
The government makes payments to the
concessionaire to cover both capital
and O&M costs.
Train services &
infrastructure maint.
The government pays for O&M costs
as specified in the contract.
Fare revenue Fare revenue accrues to the government.
6March2008
Recommendedfeaturesofaprivatesector
participationmodel paymentarrangements
Paymentfromthegovernmenttotheconcessionaire
Primarilyrelatedtothequantityofserviceandassetsprovidedbytheconcessionaire,butalso
linked to the quality of service and to patronage
51
linkedtothequalityofserviceandtopatronage
Patronageandservicequalityrelatedpaymentshouldtransfermanageablerisktothe
concessionaireandincentivizethemtoprovidehighqualityservices
Allowsforcostescalation
Mayneedseparateescalationforenergy,laborandotheritems
Allowsforanticipatedandunexpectedtransportdevelopments
Unitcoststopayforvariationsthatmightoccur,e.g.lineextensionsandchangesinMRT
servicesandotherpublictransportservices p p
Concessionmanagement
Inadditiontoprovidingtheincentiveforconcessionairestominimizecostsandmeet
passengerneeds,transferringappropriateriskhasthebenefitof
Reducingsupervisionneedsbyincentivizingtheconcessionairetoperformwellwithouttheneedfor
directgovernmentsupervision
6March2008
52
Paymentstructureforagrosscostoperatingconcession
Contractpaymentcouldbeequaltothesumofthefollowing
twocomponentsthatcoverthecostofprovidingagreedservices:
a fixed payment (F) for a given quantity of service (which could include a payment to cover the cost of afixedpayment(F)foragivenquantityofservice(whichcouldincludeapaymenttocoverthecostof
assetsprovidedbytheconcessionairesuchastrains,orthesecouldbepaidasaseparateitem);plus
ademand,i.e.patronagerelated,payment(D);plus
aservicevariablecomponent(S)toallowforchangesinthequantityofservicethatmightbe
requiredovertime;plus
abonuspayment(B)iftorewardperformanceinexcessofanagreedlevel;less
apenalty(P)forinadequateperformanceagainstagreedcriteria;less
additionalrevenue(O)thattheconcessionairemightbeabletogeneratefromnon
operational activities e g from property development advertising etc
6March2008
operationalactivities,e.g.frompropertydevelopment,advertising,etc.
Totalpayment=F+D+S+B P O
Forbidding
thegovernmentwouldspecifyD,BandP
tendererswouldindicateF,SandO
**March2008
Roleofgovernment Roleoftheprivatesector
Ensures design of infrastructure takes Private sector consortiums bid for
Summaryofrecommendedapproach
withaprivatesectorparticipationmodel
53
Ensuresdesignofinfrastructuretakes
accountofoperations
Financeandmanageimplementationof
fixedinfrastructure
Selectoperatingconcessionaireandticket
supplyandfaremanagementconcession
Manageconcessionairesandmake
payments according to their respective
Privatesectorconsortiumsbidfor
operatingconcessions(includingsupply
oftrainsetc.)andaticket/farecollection
concession
Concessionairescoordinatewithfixed
infrastructurecontractorstoinstalltheir
respectiveassets
Ticket/fare concessionaire pays fare
paymentsaccordingtotheirrespective
contracts
Ticket/fareconcessionairepaysfare
revenuetothegovernment
Concessionairesprovideservicesin
accordancewiththeircontractsandare
paidaccordinglybythegovernment
6March2008
PartF
TEMPLATE OF A CONCESSI ON AGREEMENT
AND STEPS TO I MPLEMENT A CONCESSI ON
54
6March2008
ContentsofaConcessionAgreement 1
PartI:Introduction
Addressesgeneralissuesandthepartiestothecontract:
55
NameoftheAgreement;DateoftheAgreement;PartiestotheAgreement;Preambleto
theAgreement;Definitions;TheConcession;MRTNetworkandLinks;Coordination
Committee;RepresentativesandRelatedParties
PartII:PreServiceActivities
Addressesissuesthataretooccurpriortotheoperationoftrainservices:
ConditionsPrecedent;CompanySystems;PreServiceImplementation;ProtectionAgainst
Late Service Commencement; LateServiceCommencement;
PartIII:ServicestobeProvided
Addressesthetrainandrelatedservicesthattheconcessionaireistoprovide:
InitialServices;StandardofServices;ChangesintheMRTSystem;ChangesinMRTServices
6March2008
PartIV:FinanceandInsurance
Addressesgeneralissuesandthepartiestothecontract:
56
PaymentandPaymentMechanisms;PaymentEscalation;FarePolicyandRevenue;Routine
NonfareRevenue;SpecialNonfareRevenue;Refinancing;TaxesandDuties;Insurance;
PartV:EarlyTermination
Addressesissuesthatcouldresultinearlyterminationoftheconcessionand
treatmentoftheconsequencesofsuchearlytermination:
ConditionsforEarlyTermination;ProcessofTermination;ConsequencesofTermination;
PartVI:SpecialEvents
Addressesspecialeventsthatcouldaffecttheconcession:
ForceMajeureandExceptionalEvents;ConsequencesofForceMajeureandExceptional
Events;Powerofgovernment;
6March2008
PartVII:Assets
Addressesissuesrelatedtoassetsprovidedbythegovernmentandconcessionaires:
57
CivilInfrastructure;AssetsoftheConcessionaire;AssetTitlesandTransfers;LendersDirect
Agreement;AssetTransferValues;
PartVIII:Miscellaneous
Addressesremaininggeneralcontractualissues,e.g.:
RightsandDutiesTransfer;ChangeofOwnership;DisputeSettlementandResolution;
Confidentiality;ChangeinLaw;governmentStepIn;DueDiligenceOverContractsand
Financing Documents; Alternatives and Variants of Project Finance; Other Standard FinancingDocuments;AlternativesandVariantsofProjectFinance;OtherStandard
Provisions.
6March2008
Implementingaconcession
Establishaprobityprocess
Toensuretransparencyinthepreparationandconductoftendering,assessmentoftenders,
and contract negotiation
58
andcontractnegotiation
Usemarkettestingtoidentifymodificationsthatwillincreasemarketinterest
Ensurethatchangesdonotcompromisepublicinterest
Objectiveistogetgoodcompetitionthatshouldresultinlowertenderprices
PrepareRequestforTender
ClearlysetoutrolesandresponsibilitiesoftheAuthorityandtheconcessionaire
Setoutpaymentarrangements
Indicate information to be provided by bidders Indicateinformationtobeprovidedbybidders
Requireconsistentinformationforaconformingtender
Encouragebidderstosubmitinnovationsasvariationsoralternativestotheconforming
tender
Designtenderevaluationprocess
Invitetenders
6March2008

Appendix B: Financial Modeling Working Paper
23

ASIAN DEVELOPMENT BANK AND PUBLIC PRIVATE INFRASTRUCTURE ADVISORY FACILITY

RSC-C71557 (VIE),
TA4862-VIE:
Ho Chi Minh City Metro Rail System

MRT FINANCIAL MODEL and VALUE FOR
MONEY ANALYSIS
Technical Paper

July 2008

1. INTRODUCTION

1.1 The PPIAF Technical Assistance

1. ADB has mobilized a grant from the Public Private Infrastructure Advisory Facility
(PPIAF) to review the options for private sector participation and public-private partnerships for
the Ho Chi Minh City (HCMC) Metro Rail System Project. The assignment is with a view to
minimizing the costs on a risk-adjusted basis, optimizing institutional arrangements, and taking
advantage of a market oriented approach to maximizing the benefits of the Project. This work
supplements an ADB Project Preparatory Technical Assistance (PPTA) to advise HCMC
Peoples Committee on the integrated development of the first two MRT lines in HCMC.

2. The objectives of the PPIAF study, which has been implemented in co-ordination with
the PPTA work, are addressed in the following key study outputs: (i) a framework for
considering private sector participation in implementation and operation of the Project; (ii) a
value-for-money analysis for implementation approaches that involve varying degrees of private
sector participation, (iii) a detailed financial model reflecting the preferred approach and
measuring the performance of the project from the points of view of the government and
private sector participants; and (iv) a stakeholder feedback and a description of necessary
institutional and contractual arrangements given the preferred implementation approach.

1.2 The present report

3. Outputs (i) and (iv) are described in three companion working papers: Issues and
Options for Private Sector Participation and Concession Template (Issue and Options paper);
Stakeholder Feedback and Implementation ArrangementsInstitutional Options; and Fares and
Ticketing. The present report, the final of the series, describes study outputs (ii) a value-for-
money analysis for implementation approaches that involve varying degrees of private sector
participation, and (iii) a detailed financial model reflecting the preferred approach and measuring
the performance of the project from the points of view of the government and private sector
participants.

4. A financial model for the HCMC MRT is provided along with the present report. The
model has been developed keeping in view the following requirements. The financial model will:
(i) present the financial projections from the perspectives of (a) the unit operating the HCMC
project assets in a ring-fenced manner and (b) the government and potential private sector
participants, international financing institutions (IFIs) or corporatized government participants
involved in sponsoring the project; (ii) cover a period of about 30 years, the approximate life-
cycle of rolling stock, a key operating asset; (iii) allow for easy entry of input data and include
clear and detailed assumptions worksheets which may be modified easily to allow for data
updating and the sensitivity testing of implementation schedule, capital and operating and
maintenance cost, fare tariff and patronage; (iv) present projected financial statements (balance
sheet, income and cash flow statements) for the HCMC operating unit and for potential private
sector or corporatized government participants; and (v) to the extent possible, comment should
be provided on the total cost and revenue, the bankability of the proposed MRT project and
possible subsidy requirements, with necessary sensitivity analysis.

5. The present working paper describes the model and its use in MRT network planning
and project preparation. Using the model, a detailed analysis was made of the performance of
the HCMC MRT project selected and planned under the PPTA. A report of the analysis appears

4

in the PPTA feasibility study final report. Again with the use of the model, section 3 of the
present report presents a value-for-money analysis to determine the potential for the lowest cost
among four major alternative approaches to project delivery and financing. The alternatives are:
(i) a state owned enterprise or conventional public sector model where government takes all the
responsibility and risk; (ii) government provides all the infrastructure and equipment, with a
concession for operation and maintenance by the private sector; (iii) government provides fixed
infrastructure but a private sector operator provides trains and train related equipment such as
train control, signalling etc; and (iv) the private sector provides all the project assets in addition
to providing operation and maintenance. The rationale for the alternatives is discussed in detail
in the Issues and Options paper.

1.3 Glossary

6. In this paper certain words are used with a defined meaning indicated below.

External supportpayment by government towards the cost of an undertaking in which the
compensation from direct beneficiaries is insufficient. This term is preferred to subsidy.
External support a) highlights the interventional nature of the payment, and so raises the
question of the goal and purpose of a public sector intervention, and b) is free of the popular
connotation of inefficiency that surrounds the word subsidy.

Financeto finance an undertaking means to provide resources for use during a period of an
earnings shortfall (or in the extreme case nil earnings), in the expectation and against a promise
of repayment out of surplus cash earnings. Debt financing means a loan or a similar
arrangement, involving a principal sum to be paid back with interest. Equity financing refers
to money invested against expected compensation in the form of a dividend or capital
appreciation.

Financiera party engaged in financing an undertaking for a risk-weighted compensation. The
term financier can refer either to a creditor or an equity investor.

Fundto fund an undertaking means to pay for the cost of carrying it out. A private sector
undertaking (eg a restaurant business) usually has its cost paid for by its direct beneficiaries (the
diners). MRT is an example of an undertaking where, with very few exceptions, direct
beneficiaries (principally the travellers) cannot afford to carry the whole of the funding.
However the external or indirect social benefits are seen to be such that they are considered
sufficient justification for external support.

Private sector participation (PSP)see under public-private partnership.

Projectthis word may be used in context to refer specifically to a line or a collection of lines in
an MRT network.

Public-private partnership (PPP)an arrangement formalised in a legal agreement between
government and a private sector entity for sharing the responsibility and risk in implementation
and operation in a specific project. The private sector enters into the arrangement expecting to
be compensated for its effort and risk; the government should do so in order to incur the least
cost, risk taken into account, in comparison with alternative approaches to the undertaking (see
value-for-money). The term PPP usually implies that a significant share of the project risk is
borne by the private partner: it will be used in this sense throughout this report. In MRT, this
level of risk sharing is usually demonstrated by the private sector operator financing eg the trains

5

and related equipment, and being exposed to the project risk in doing so. In this paper an
arrangement whereby the public sector provides financing for all infrastructure and equipment
and the privates sector plays a pure operating role is not considered a PPP but is referred to by
the more general term private sector participation (PSP).

Value-for-money (VfM) analysisan analysis to identify and compare from the perspective of
the government on behalf of the community, the net cost, risk taken into account, of alternative
ways of carrying out the key activities of design, construction and procurement, financing and
operation. The alternative ways are distinguished by how the public and private sector share the
responsibility and with that the risk in each key activity. The conventional public sector
financing and delivery option is the one in which the public sector is wholly responsible and
carries all the risk in the project. This alternative is sometimes called the Public Sector
Comparator. The alternative indicated by the analysis to incur the least cost is said to be value-
for-money or VfM. Considerations relating to achieving VfM in MRT projects are also looked
at in its qualitative aspects in the Issues and Options paper.

2. FINANCIAL MODEL

2.1 The aims of MRT financial modelling

7. In the logical framework of MRT programme development and project design, two main
aims in financial modelling can be distinguished.

8. For MRT network development. The goal here is an effective and efficient MRT
service network, among other qualities meeting the required net social benefits criteria
1
. The
outcome is a strategic plan to develop an MRT network of this description, with indications of
lines to be implemented, investment and operation phasing, and prospective requirement for
external support.

9. For MRT project preparation. The goal is an effective and efficient project, ie a line or
a collection of lines in an optimised MRT service network, where preferably the project itself
meets the required net social benefit criteria used to evaluate the whole network. The outcome
is (i) a funding plan for an effective and efficient project, with identification for any prospective
requirement for external support and its delivery; and (ii) a basic financing plan for the same
project. Proceeding from this, the outcome of a value-for money (VfM) analysis is a
combination of government and private sector involvement in project financing and delivery
expected to incur the least cost to government. Where more than one level of government is
involved in the project, the plans identify the role of each government in the financing and
delivery and in sourcing the external support.

2.2 The model

10. The financial model developed under the present assignment is contained in two
spreadsheets, each of which can be operated independently of the other. The first (the strategy
model) is designed for use in HCMC MRT network development planning. The second (the
project model) is designed for use in Line 2 project preparation. They differ in detailed features
reflecting the different intended impact and outcome as described in 2.1, but share the same
basic logical structure.

1
This evaluation is the subject of an economic analysis, which is addressed in the PPTA report.

6

2.3 Model logical structure

Figure 2.1. MRT financial model logical structure

MRT network development plan; or
Outcome project plans for investment, financing & funding
(including external support)
Performance indicators: eg FIRR, external support needs,
Outputs operating/fare box ratio, credit ratios, investment yield rates etc
Projected financial statements (balance sheet, income & cash flow )
Calculations Revenue O&M Investment Financing
model cost model model model
Patronage Strategy Rolling stock Capital
model inputs* capital cost structure
Fare tariff
Inputs Project Infrastructure Finance cost
Non-fare model inputs* capital cost & other terms
revenue
Investment Financiers'
External schedule roles
support
*Data vary depending on different method of O&M cost modelling used.

Source: this Study

11. The financial model has four core elements, namely a revenue model, an operating and
maintenance (O&M) cost model, an investment model and a financing model. These four core
elements receive input data and calculated outputs, such as pro forma financial statements and
quantitative indicators of financial viability and operating performance for individual lines or
collection lines in an MRT network option, or for a project scenario. The input data can vary
according to the scenario being considered.

12. For transparency and amenability to model audit, the model has been developed on a
spreadsheet programme. The model makes use of the organizational and management tools
available in the programme for greater user convenience. Among other things the model
employs a system of colour-coding of cells and contents: (i) a data input cell is signalled by red
font and yellow highlight; (ii) blue font signals active linkage to other places in the spreadsheet in
one of two ways: through cell-naming, and under a book-marking hyperlink function (to enable a
jump to the cell being bookmarked); (iii) the remaining cells are in the default font and cell
colours. A guide to the model page in the strategy model is shown in Table 2.1.

2.4 Strategy model

a. Strategy model input

13. Overview. The Strategy model has to facilitate evaluation of strategy options (or
scenarios) for MRT network development. This type of analysis can involve many different
alternative sets of input data and assumptions, corresponding to the options being examined.
The input sets comprise data on patronage, fare and non-fare revenue, operation and

7

Table 2.1 Guide to the strategy model

HCMC MRT Project
Guide to Financial Model
Notes: 11/06/08
(1) Contents
Worksheet Name: Description Function and/or contents:
1_Control Control page To select required Scenario (segment combination) or line segment.
2_Capital_cost_input Project Capital Cost: Input Page Project base capital cost input in year 2008 prices; by line segment, with break-up into
land acquisition, depots, civil works, fixed electrical and mechanical systems,
rollingstock.
3_Scen_input Scenario: Input Page To define Scenarios and other segment combinations and input construction start and
finish dates.
4_Passenger_input Passenger Demand: Input Page Passenger demand input by segment and by Scenario/other segment combination, for
the years 2011 and 2021. This includes daily passenger boarding, daily passenger
kilometres, and peak passenger per hour per direction (pphd).
5_Train_op_input Train Operation Parameters: Input
Page
Input train operation parameters (e.g. line length, number of stations, capacity per car,
spare rollingstock, peak, off-peak operating hours, headway etc).
6_Other _input Other Financial Model Assumptions:
Input Page
Assumptions for the financial model other than those covered by the above input pages.
This includes a selection of concessioning options.
7_ INTENTIONALLY LEFT BLANK INTENTIONALLY LEFT BLANK
8_Schedule Construction Schedule and Cost
Distribution Worksheet
Worksheet outputting annual distribution of project capital cost
9_Rollingstock_plan Rollingstock Capacity Plan Rollingstock capacity plan
10_OM_cost Annual O&M Cost Calculation of annual O&M cost
11_OM_unit_cost O&M Cost Model Model of O&M unit cost by MRT resource
12_Financials Main Financial Model Work sheet Proforma financial statements (income statement, statement of cash flow, and balance
sheet) with supporting schedules, return on investment calculations and other analytical
results.
13_Results Summary of Results Summary of investment and financial plans and return on investment and other key
results.
14_Sensitivity Sensitivity Analysis Worksheet This worksheet collects the results of sensitivity tests. Note (4) of this Guide explains
how to carry out a sensitivity test.
15_Tables Summary of Tables Tables containing highlights of the financial analysis
16_Index Index Aid to spreadsheet search. Index gives name box reference(s).
Source: this Study

maintenance (O&M) cost, investment cost for infrastructure (ie civil works and related electrical
and mechanical (E&M) equipment and fixtures) and for trains and train-related E&M. The
model has separate data input page(s) organised with this need in mind. Furthermore, an O&M
cost model which derives annual cost from quanta of parameters recognised as having influence
on O&M cost, and a standard cost rate per unit of parameter quantum, is sued to generate the
O&M cost data for the strategy model. The model structure accommodates and accepts
alternative project implementation schedules and disbursement plans; downstream incremental
investment in the rolling stock fleet and other equipment; and renewal capital spending (ie
refurbishment and other major periodic maintenance, and replacement of life-expired
equipment). The model has a study time horizon beyond the construction period of 25 years
during which an individual segment of the MRT network is serving passengers. The strategy
model is also designed, given appropriate input data, to generate output for the VfM analysis.
Taking all into account, other required parameters include cost of capital, economic life cycles
and depreciation periods by category of assets, price escalation factor, parameters relating to
concession payment structure etc.

14. Specific input information.

Scenarios. Scenarios are defined in the worksheet 3. Scen_input in terms of MRT line
segments they contain, by the presence of the digit 1 against the selected segments. The same

8

page also contains input data for line lengths and date of start and completion of the
construction period. See Table 2.2 for illustration.

Table 2.2 Scenarios samples

HCMC MRT Project

Scenario: Input Page

Line/Segments
Scenario 9 Scenario 10 HCMC MRT Trend Case
Selected Construction Selected Construction Selected Construction
Segments Length
(km)
Start End Segments Length
(km)
Start End Segments Length
(km)
Start End
MRT1 : Ben Thanh - Suoi Tien 1 MRT1 19.7 2008 2013 1 MRT1 19.7 2008 2013 1 MRT1 19.7 2008 2013
MRT2 : Ben Thanh - Thamluang 1 MRT2 10.2 2010 2015 1 MRT2 10.2 2010 2015 1 MRT2 10.2 2010 2015
MRT3 : Highway13 - Tan Kien 1 MRT3 24.0 2010 2015 1 MRT3 24.0 2010 2015 1 MRT3 24.0 2010 2015
MRT4 : Sai Gon Bridge - Can Giuoc 1 MRT4 17.0 2010 2015 1 MRT4 17.0 2010 2015 1 MRT4 17.0 2010 2015
MRT5 : Ben Cat - Nguyen Van Linh 1 MRT5 24.0 2010 2015 1 MRT5 24.0 2021 2024
MRT6 : Ba Queo - Phu Lam 1 MRT6 6.0 2021 2024
Source: this Study

Capital cost and implementation schedulesinitial capital investment. The input data on
estimated base capital cost are in five categories: land acquisition and resettlement, civil works,
depot, E&M systems, and rolling stock. These are input into the worksheet 2.
Capital_cost_input. See Table 2.3. The capital cost estimate for rollingstock investment is
dependent on a rollingstock capacity plan, which is aimed at meeting the requirement of the
anticipated peak-hour demand, when passenger traffic is at a maximum. The capacity plan is
worked out in the worksheet named 9_Rollingstock_plan using train operation parameters
from the page 5_Train_op_input.

Table 2.3 Base capital cost estimate

HCMC MRT Project
Project Capital Cost: Input Page
(USD million, at year 2008 prices) (excluding rollingstock)
Segment
Code
Line/Segment
Total Capital
Costs
Local Foreign
Land acquisition Depots Civil works E&M systems
Local Foreign Local Foreign Local Foreign Local Foreign
MRT1 Ben Thanh - Suoi Tien 1,115 680 435 111 - 45 67 507 273 17 95
MRT2 Ben Thanh - Thamluang 871 515 356 125 - 25 35 351 251 14 70
MRT3 Highway13 - Tan Kien 1,876 1,097 779 188 - - - 854 460 56 319
MRT4 Sai Gon Bridge - Can
Giuoc
813 496 317 81 - 33 49 370 199 12 69
MRT5 Ben Cat - Nguyen Van Linh 1,148 701 448 115 - 46 69 523 281 17 98
MRT6 Ba Queo - Phu Lam 287 175 112 29 - 11 17 131 70 4 24
Source: this Study

Using construction dates data from the worksheet 3_Scen_input, the allocation of initial base
capital cost to estimated annual disbursements appears in the worksheet 8_Schedule, as shown
in Table 2.4.

Capital cost and implementation schedulesubsequent capital investment. The model
calculates from the initial capital cost data the required subsequent investment, such as additions
to the rolling stock fleet, and replacement or major refurbishment of exhausted assets.

Capital cost and implementation scheduledownstream capital cost. The downstream
costs, including project management consulting and project development cost, price escalation

9

and interest during construction, are calculated in the model using data and parameters in the
worksheet 6_Other_input.

Table 2.4 Base capital cost estimate

HCMC MRT Project
(USD million, at year 2008 prices)
Construction Schedule and Cost Distribution Worksheet
(excluding rollingstock)

Case: 11 HCMC MRT Trend Case

Sub-case: 0 All line segments in HCMC MRT Trend Case

Segment
Code
Line/Segment
Length Construction Year
(km) Start End 2007 2008 2009 2010 2011 2012 2013 2014 2015
MRT1 Ben Thanh - Suoi Tien 19.7 2008 2013 - 111 167 334 334 111 56 - -
MRT2 Ben Thanh - Thamluang 10.2 2010 2015 - - - 87 131 261 261 87 44
MRT3 Highway13 - Tan Kien 24.0 2010 2015 - - - 188 281 563 563 188 94
MRT4 Sai Gon Bridge - Can Giuoc 17.0 2010 2015 - - - 81 122 244 244 81 41
MRT5 Ben Cat - Nguyen Van Linh 24.0 2021 2024 - - - - - - - - -
MRT6 Ba Queo - Phu Lam 6.0 2021 2024 - - - - - - - - -
Source: this Study

Patronage. Data are input at the page 4.Passenger_input. The current data on this page
come from the Trend Case of the Master Plan Study
2
, except for Line 2, which uses the most
recent update for the PPTA study.

Table 2.5 Train operation parameters

HCMC MRT Project Case: 11 HCMC MRT Trend Case
Train Operation Parameters: Input Page
Sub-
case:
0
All line segments in HCMC MRT Trend
Case
Train system resources Train operation
Line Length (km)
% of UG
to total
line
length
(%)
No. of Stations
Avg.
speed
(km/h)
2015

Total
Under
ground
Elevated
& at-
Grade
Under
ground
Elevated
& at-
Grade
Total
Headway
(min)
Car/train
(cars/train)
MRT1 : Ben Thanh - Suoi Tien
19.70 2.60 17.10 13% 3 11 14 30 3.0 6
MRT2 : Ben Thanh - Thamluang
10.24 8.46 1.78 83% 8 - 8 30 5.0 3
MRT3 : Highway13 - Tan Kien
24.00 11.00 13.00 46% 11 7 18 30 3.0 3
MRT4 : Sai Gon Bridge - Can Giuoc
17.00 - 17.00 0% - 14 14 30 3.0 3
MRT5 : Ben Cat - Nguyen Van Linh
24.00 - 24.00 0% - 26 26 30 3.0 3
MRT6 : Ba Queo - Phu Lam
6.00 - 6.00 0% - 7 7 30 3.0 3
Spare 1 : n/a - n/a
- - 0.00 0% - - 0 0 - 3
Spare 2 : n/a - n/a
- - 0.00 0% - - 0 0 - 3
Total
100.94 22.06 78.88 22 65 87
Off-peak-hour headway 1.49 times peak headway
Total week-day operating hours (05:00 -
24:00)
19.00 hours / day
Operation hours (peak) 4.50 hours / day
Operation hours (off-peak) 14.50 hours / day
Week-end & holiday operating hours 19.00 hours / day (assuming service on week-end & holiday will be as all day off-peak, with no peak
hours)
Source: this Study

Train operation parameters. Parameter inputs in worksheet 5_Train_op_input, together
with the patronage data, influence the rolling stock capacity plan and the operating and
infrastructure resources required for delivery of an MRT service. These in turn generate the

2
See PPTA technical paper HCMC Master Plan Ridership and Revenue Forecast Study, January 2008, by MVA-
Systra.

10

additional rolling stock investment and the ultimately the operating and maintenance recurrent
cost. A section of the worksheet 5_Train_op_input appears in Table 2.5.

Unit operation and maintenance cost, by MRT service resource. For the strategy model, in
order to project O&M cost for projects while dispensing with the need for detailed estimates of
energy consumption, manpower planning etc, a model of the unit O&M cost for each of six
MRT service resources is used. The O&M cost model
3
is shown in Table 2.6. The model unit
costs are given for each of two limiting cases, namely: a) a pure underground line and b) a line
with an all elevated or at grade vertical alignment. The higher average cost per train-hour for an
underground line is largely accounted for by a need for greater security-related spending on
manpower and insurance. At the same time air-conditioning (a non-tractive power requirement)
is largely responsible for the greater unit cost per underground station. For lines with a mix of
vertical alignments, the two unit costs are modelled as a weighted average of the two limiting
cases. The model unit costs reflect the best judgement of current operating costs for the
Bangkok operating MRT systems
4
, adjusted for the lower Vietnamese labour cost for station

Table 2.6 O&M cost model

HCMC MRT Project

O&M Cost Model

Description of cost Distribution of cost
Resource Train- hours Car- hours Car- km Peak cars Station Line Length Total
Unit (m hrs./year) (m hrs./year) (m km./year) (traincars) (stations) (km.)
Manpower - Train drivers 100% 100%
Manpower - Other operatives 100% 100%
Manpower - Station staff (incl. security) 100% 100%
Energy - Traction power 67% 33% 100%
Energy - Other power (Depot, stations, and others) 10% 10% 80% 100%
Other service operations - Control room staff 100% 100%
Other service operations - Coin handling 50% 50% 100%
Other service operations - Shuttle bus service 100% 100%
Repair and maintenance - Management staff 50% 20% 30% 100%
Repair and maintenance - Maintenance contract 50% 50% 100%
Admin. and general - Divisional HO staff 25% 75% 100%
Admin. and general - Utilities and others (incl. Marketing) 25% 75% 100%
Admin. and general - Insurance 25% 25% 25% 25% 100%

Train-
hours
Car- hours Car- km Peak cars Station Line Length
(X1) (X2) (X3) (X4) (X5) (X6)

Y(O&M cost) = a1X1 + a2X2 + a3X3 + a4X4 + a5X5 + a6X6

Coefficient values (2008 USD ')

a1 a2 a3 a4 a5 a6

Elevated and at-grade (EL & G) 37.9 44.8 1.4 0.1 m 0.3 m 0.003 m
Underground (UG) 48.2 44.8 1.4 0.1 m 0.9 m 0.003 m
Source: this Study

security staff and other position not requiring specific MRT skills. The annual O&M cost is
obtained by summing the six products a
i
X
i
(i=1,..,6) of unit cost and annual MRT service
resource quantity.

3
The idea of the O&M unit cost model comes from ADB 2006
4
Bangkok Mass Rapid Transit Public Company (BTS) operates a wholly elevated system, Bangkok Metro Public
Company (BMCL) a wholly underground transit. Both are private sector organizations.

11

Other parameters. Model parameters beside the MRT-specific information input such as
patronage and capital and O&M costs are located in worksheet 6_Other_input. These
parameters include an annual price escalation factor of 5%, and parameters relating to alternative
concession forms, costs of different types of capital (eg loan and equity), for both public and
private sector. The parameters determining the concessionaires remuneration are intended to
simplify its modelling. With the Gross Cost Concession, for example, in which the
concessionaires charge to the government may be structured to remunerate delivered service
quality, which bears on patronage levels, as well to provide available quanta of MRT operating
resources, and perform maintenance, the contract fee may be designed to vary eg with both the
quanta of passenger-kms and car-kms. For simplicity of treatment this is done in the model by
specifying a unit charge generator as a single number. This in conjunction with an input
percentage split generates one unit charge to be applied to passenger-kms and another one to
car-kms to calculate the concessionaires annual charge revenue. In actual practice design of
concession payment schemes in MRT and generally in public transport is a complex subject in
which governments should seek specialist technical advice.

b. Strategy model output

Table 2.7 Public sector project entity projected financial statements

HCMC MRT Project

Financial Projections
Case:
11
HCMC MRT Trend
Case

11/06/08 Sub-
case:
0 All line segments in HCMC MRT
Trend Case

(In USD million unless
otherwise indicated)
Gross
Cost
Con.0 Con.1 Con.2 Con.3 Con.4 Con.5 Con.6 Y1 Y2 Y3 Y4 Y5 Y6 Y7
Public sector
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
FINANCIAL STATEMENTS

INCOME STATEMENT
Revenue
Fare revenue 1 - - - - - - - 24 28 92 106 124 143 166
Non-fare revenue - - - - - - - 1 1 5 5 6 7 8
Concession fee - - - - - - - - - - - - - -
Total revenue - - - - - - - 25 30 96 112 130 151 175
Expense
Unit charge generator
expense
1 - - - - - - - 90 173 207 227 250 276 305
Pure O&M cost 0 - - - - - - - - - - - - - -
Revenue-related cost 1 - - - - - - - 3 3 8 8 9 10 10
Total expense - - - - - - - 93 177 214 236 259 286 315
Gross earnings - - - - - - - (68) (147) (118) (124) (130) (135) (140)
Less: Depreciation and
amortization
- - - - - - - 151 180 211 211 213 215 216
Earnings before interest and
tax
- - - - - - - (219) (327) (329) (335) (342) (350) (357)
Less: Interest expenses - - - - - - - 136 136 131 125 120 114 109
Less: Installment paid by Gov.(interest
portion)
- - - - - - - - - - - - - -
Profit before tax - - - - - - - (355) (463) (460) (460) (462) (464) (465)
Less: Corporate tax 0% - - - - - - - - - - - - - -
Net profit after tax - - - - - - - (355) (463) (460) (460) (462) (464) (465)
Earning before interest, tax,
depreciation (EBITDA)

-

-

-

-

-

-

-

(68)

(147)

(118)

(124)

(130)

(135)

(140)

12

Table 2.7 (Contd)

HCMC MRT Project

Case:
11
HCMC MRT Trend Case
11/06/08 Sub-
case:
0 All line segments in HCMC MRT Trend Case
Gross
Cost
Public sector
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

BALANCE SHEET
Assets
Current assets
Cash and short-term
investments

- - - - - - - (204) (679) (1,124) (1,575) (2,032) (2,495) (2,963)
Accounts receivable
- - - - - - - - - - - - - -
Total current assets
- - - - - - - (204) (679) (1,124) (1,575) (2,032) (2,495) (2,963)
Operating assets
- 117 301 1,101 2,156 3,662 5,556 6,558 7,551 7,551 7,602 7,656 7,712 7,712
Less : Accumulated
depreciation

- - - - - - - (141) (311) (513) (714) (917) (1,121) (1,328)
Net operating assets
- 117 301 1,101 2,156 3,662 5,556 6,416 7,240 7,038 6,888 6,739 6,591 6,384
Net capitalized expenses
- 1 7 24 64 135 248 238 228 218 208 198 188 178
Total Assets
- 118 308 1,124 2,220 3,797 5,803 6,450 6,789 6,132 5,521 4,905 4,284 3,600
0 0 0 0 0 0 0 0 0 0 0 0 0 0
Liabilities & Equity

Liabilities

Current liabilities

A/C payable and current
liabilities

- - - - - - - - - - - - - -
Long-term debts

Long-term loans
- 105 271 991 1,941 3,296 5,000 5,000 4,809 4,612 4,410 4,202 3,989 3,770
Government Bonds
- - - - - - - - - - - - - -
Total long-term debts
- 105 271 991 1,941 3,296 5,000 5,000 4,809 4,612 4,410 4,202 3,989 3,770
Other liabilities - Installment - payables
- - - - - - - - - - - - - -
Total liabilities
- 105 271 991 1,941 3,296 5,000 5,000 4,809 4,612 4,410 4,202 3,989 3,770
Equity

Government equity
- 13 37 134 279 501 803 1,805 2,799 2,799 2,850 2,904 2,960 2,960
Retained earnings
- - - - - - - (355) (818) (1,278) (1,739) (2,201) (2,665) (3,130)
Total equity
- 13 37 134 279 501 803 1,450 1,980 1,520 1,111 703 295 (170)
Total liabilities & equity
- 118 308 1,124 2,220 3,797 5,803 6,450 6,789 6,132 5,521 4,905 4,284 3,600

13

Table 2.7 (Contd)

HCMC MRT Project

Financial
Projections
Case:
11
HCMC MRT Trend Case
11/06/08 Sub-
case:
Gross
Cost
Public sector
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

STATEMENT OF
CASH FLOW
NPV Total
Earnings before
interest and tax
- - - - - - - (219) (327) (329) (335) (342) (350) (357)
Less: corporate tax - - - - - - - - - - - - - -
Add: depreciation and
amortization
- - - - - - - 151 180 211 211 213 215 216
Cash flow before
capital requirements
(2,204) - - - - - - - (68) (147) (118) (124) (130) (135) (140)
Less: Installment -
principal portion
0 0 - - - - - - - - - - - - - -
Movement in working
capital
- - - - - - - - - - - - - -
Capital expenditures NPV Total
Rollingstock 289 387 - - - - - - 387 - - - - - - -
Civil works 2,893 3,610 - 82 129 558 737 1,052 1,052 - - - - - - -
E&M systems 539 673 - 15 24 104 137 196 196 - - - - - - -
Land acquisition 440 549 - 12 20 85 112 160 160 - - - - - - -
Depots 269 335 - 8 12 52 69 98 98 - - - - - - -
Total initial capital
expenditure
4,430 5,556 - 117 184 799 1,056 1,506 1,894 - - - - - - -
Interest during
construction
194 248 - 1 5 17 40 71 113 - - - - - - -
Additional rollingstock 3,191 6,763 - - - - - - - 501 730 - 51 54 56 -
Refurbishment of
rollingstock
238 756 - - - - - - - - - - - - - -
Replacement of E&M
equipment
777 2,350 - - - - - - - - - - - - - -
Additional land
acquisition
209 408 - - - - - - - 53 28 - - - - -
Additional depots 128 249 - - - - - - - 33 17 - - - - -
Additional civil works 1,376 2,682 - - - - - - - 350 184 - - - - -
Additional E&M
equipment
257 500 - - - - - - - 65 34 - - - - -
Total capital
expenditures
10,800 19,511 - 118 189 816 1,096 1,577 2,006 1,002 994 - 51 54 56 -
Free cash flow (13,004) (25,743) - (118) (189) (816) (1,096) (1,577) (2,006) (1,070) (1,140) (118) (175) (183) (192) (140)
Debt service:
Interest paid - - - - - - - 136 136 131 125 120 114 109
Debt principal
repayment
- - - - - - - - 191 197 202 207 213 219
Total debt service - - - - - - - 136 327 327 327 327 327 327
Less: Installment -
interest portion
- - - - - - - - - - - - - -
Cash flow after debt
service
- (118) (189) (816) (1,096) (1,577) (2,006) (1,206) (1,468) (445) (503) (511) (519) (468)
Cash shortfall
funded by:
Initial Total
Long-term loans 5,000 5,000 - 105 166 719 950 1,355 1,704 - - - - - - -
Government Bonds 0 0 - - - - - - - - - - - - - -
Government cash
support
803 14,511 - 13 24 97 145 222 302 1,002 994 - 51 54 56 -
Total funding 19,511 - 118 189 816 1,096 1,577 2,006 1,002 994 - 51 54 56 -

Net cash flow - - - - - - - (204) (474) (445) (451) (457) (463) (468)
Cash balance - - - - - - - (204) (679) (1,124) (1,575) (2,032) (2,495) (2,963)
Source: this Study

14

Table 2.8 Private sector project entity projected financial statements

HCMC MRT Project

Case:
11
HCMC MRT Trend Case
11/06/08 Sub-
case:
Gross
Cost
Private Sector
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

INCOME STATEMENT
Revenue
Fare revenue - - - - - - - - - - - - - -
Non-fare revenue - - - - - - - - - - - - - -
Unit charge generator
revenue
- - - - - - - 90 173 207 227 250 276 305
Total revenue - - - - - - - 90 173 207 227 250 276 305
Less: Concession fee - - - - - - - - - - - - - -
Operating revenue after
concession fee
- - - - - - - 90 173 207 227 250 276 305
Operating and Maintenance
cost
- - 101 126 235 255 276 300 325
Pure O&M cost 1 - - - - - - - 101 126 235 255 276 300 325
Revenue-related cost 0 - - - - - - - - - - - - - -
Gross earnings - - - - - - - (11) 47 (28) (27) (25) (24) (21)
Less: Depreciation and
amortization
- - - - - - - - - - - - - -
tax
- - - - - - - (11) 47 (28) (27) (25) (24) (21)
Less: Interest expenses - - - - - - - - - - - - - -
Add: Installment paid by Gov.(interest
portion)
- - - - - - - - - - - - - -
Profit before tax - - - - - - - (11) 47 (28) (27) (25) (24) (21)
Less: Corporate tax 28% - - - - - - - - 10 - - - - -
Add: Subsidy - - - - - - - - - - - - - -
Net profit after tax - - - - - - - (11) 37 (28) (27) (25) (24) (21)
Earning before interest, tax,
depreciation (EBITDA)
- - - - - - - (11) 47 (28) (27) (25) (24) (21)

15

Table 2.8 (Contd)

HCMC MRT Project

Case:
11
HCMC MRT Trend Case
11/06/08 Sub-
case:
Gross
Cost
Private Sector
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

BALANCE SHEET
Assets
Current assets
Cash and short-term
investments
- - - - - - 62 51 116 115 113 111 108 104
Accounts receivable 0.00% - - - - - - - - - - - - - -
Inventory 0.00% - - - - - - - - - - - - - -
Total current assets - - - - - - 62 51 116 115 113 111 108 104
Other assets - Installment - Receivables (net) - - - - - - - - - - - - - -
Operating assets - - - - - - - - - - - - - -
Less : Accumulated
depreciation
- - - - - - - - - - - - - -
Net operating assets - - - - - - - - - - - - - -
Net capitalized expenses - - - - - - - - - - - - - -
Total Assets - - - - - - 62 51 116 115 113 111 108 104
0 0 0 0 0 0 0 0 0 0 0 0 0 0
Liabilities & Equity
Liabilities
Current liabilities
A/C payable and current
liabilities
0.00% - - - - - - - - - - - - - -
Long-term debts
Long-term loans - - - - - - - - - - - - - -
Total long-term debts - - - - - - - - - - - - - -
Total liabilities - - - - - - - - - - - - - -
Equity
Paid-in capital - - - - - - 51 51 51 51 51 51 51 51
Cash deficit support - - - - - - 11 11 39 67 92 116 137 153
Legal reserves - - - - - - - - 2 2 2 2 2 2
Retained earnings - - - - - - - (11) 24 (4) (32) (57) (81) (101)
Total equity - - - - - - 62 51 116 115 113 111 108 104
Total liabilities & equity - - - - - - 62 51 116 115 113 111 108 104

16

Table 2.8 (Contd)

HCMC MRT Project

Case:
11
HCMC MRT Trend Case
11/06/08 Sub-
case:
Gross
Cost
Private Sector
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

STATEMENT OF CASH
FLOW
NPV Total
tax
- - - - - - - (11) 47 (28) (27) (25) (24) (21)
Less: corporate tax - - - - - - - - (10) - - - - -
Add: depreciation and
amortization
- - - - - - - - - - - - - -
Cash flow before capital
requirements
253 - - - - - - - (11) 37 (28) (27) (25) (24) (21)
Add: Installment 0 0 - - - - - - - - - - - - - -
Movement in working capital - - - - - - - - - - - - - -
Capital expenditures NPV Total
Rollingstock 0 0 - - - - - - - - - - - - - -
Civil works 0 0 - - - - - - - - - - - - - -
E&M systems 0 0 - - - - - - - - - - - - - -
Land acquisition 0 0 - - - - - - - - - - - - - -
Depots 0 0 - - - - - - - - - - - - - -
Total initial capital
expenditure
0 0 - - - - - - - - - - - - - -
Interest during construction 0 0 - - - - - - - - - - - - - -
Additional rollingstock 0 0 - - - - - - - - - - - - - -
Refurbishment of rollingstock 0 0 - - - - - - - - - - - - - -
Replacement of E&M
equipment
0 0 - - - - - - - - - - - - - -
Additional land acquisition 0 0 - - - - - - - - - - - - - -
Additional depots 0 0 - - - - - - - - - - - - - -
Additional civil works 0 0 - - - - - - - - - - - - - -
Additional E&M equipment 0 0 - - - - - - - - - - - - - -
Total capital expenditures 0 0 - - - - - - - - - - - - - -
Free cash flow 253 972 - - - - - - - (11) 37 (28) (27) (25) (24) (21)
Debt service:
Interest paid 0 - - - - - - - - - - - - - -
Debt principal repayment 0 - - - - - - - - - - - - - -
Total debt service - - - - - - - - - - - - - -
Cash flow available for
dividend
- - - - - - - (11) 37 (28) (27) (25) (24) (21)
Dividends - - - - - - - - - - - - - -
Cash flow after debt service
and dividends
- - - - - - - (11) 37 (28) (27) (25) (24) (21)
Cash shortfall funded by: Initial Total
Long-term loans 0 0 - - - - - - - - - - - - - -
Paid-in equity 51 51 - - - - - - 51 - - - - - - -
Total funding 51 - - - - - - 51 - - - - - - -
NPV Total
Add: Subsidy 0 0 - - - - - - - - - - - - - -
Cash deficit support 103 170 - - - - - - 11 - 28 27 25 24 21 16
Net cash flow - - - - - - 62 (11) 65 (1) (2) (2) (3) (5)
Cash balance - - - - - - 62 51 116 115 113 111 108 104
Source: this Study

15. Table 2.7 shows a sample of the strategy model output of public sector project entity
projected balance sheet, income and cash flow statements. Table 2.8 shows a sample of

17

projected private sector project entity financial statements. These are not necessarily
generated under the same concession payment assumptions as for Table 2.7.

16. Testing project performance. Using the strategy model, five of the six HCMC MRT
lines identified in the Master Plan Study 2008, but not studied in detail under the PPTA, have
been tested for indicative performance. Line 2, being the subject of detailed study and
evaluation under the PPTA, is not included in this initial test of performance. The patronage
forecast for the five lines tested is sourced from the Master Plan Study 2008, as described in
paragraph 14, which assumes a fare of VND 4,000 per boarding. The capital cost estimates for
the lines have been sourced from an ADB March 2007 review
5
of the HCMC MRT network
plan; the review provides the unit project cost by main category shown in Table 2.9. The O&M
costs have been generated using the O&M cost model. The line lengths are as indicated in Table
2.10
6
, with Line 1 assumed to have a 2.6 km total underground section (or sections), Line 3 to
have 11 km underground, while lines 4,5 and 6 are assumed to be all elevated.

17. Table 2.10 show the five lines indicative performance. Their negative net present value
(NPV) of free cash flow confirms the need for external support, in line with common
international experience of MRT. The fact that adding Lines 5 and 6 in 2025 is consistent with a
subsequent improvement of the farebox ratio for all the lines indicates that the lines are mutually
supportive, or are (for example) at least without overlaps between lines so as to cause new lines
to take away passengers from existing lines. The results shown in Table 2.1 should be
recognised as outputs of an initial analysis making use of readily available data; their value lies
rather more in the suggestions they make for examination in a more refined study and analysis.

Table 2.9 Estimate of unit capital cost for testing HCMC MRT lines performance
(Year 2006 constant prices)

Land acquisition cost

Fixed infrastructure
-elevated
Fixed infrastructure-
underground
Rolling stock
Per line km Per line km Per line km Per train car
US$2.34 million US$40 million US$ 100 million US$ 2 million
Source: ADB 2007

Table 2.10 Indicative HCMC 5 MRT lines performance

MRT Line NPV(5%) of free cash flow
(US$ million)
Estimated farebox ratio
2016 2026 2036
1: Ben Thanh - Suoi Tien (19.7 km) (3,484) 0.24 0.53 0.55
3: Highway13 - Tan Kien (24 km) (3,861) 0.24 0.37 0.40
4: Sai Gon Bridge - Can Giuoc (17 km) (2,041) 0.27 0.41 0.45
5: Ben Cat - Nguyen Van Linh (24 km)
1
(1,929) - 0.60 0.68
6: Ba Queo - Phu Lam (6 km)
1
(682) - 0.26 0.33
Source: This Study
1
Assumed roll-out date 2025

2.5 Project model

18. Overview. The project model has been developed for the financial evaluation of HCMC
MRT Line 2. As planned in the feasibility study and preliminary engineering design under the

5
ADB TA RSC-C61011 (VIE): Ho Chi Minh City Metro Rail System Project, HCMC MRT Strategic Financial
Model Update, March 2007, by Bray D and Sayeg P.
6
Source: Vietnam News Agency 2008, press releases.

18

PPTA
7
, this is an MRT service with a 10.24 km long service track, including 8.46 km
underground, with 11 station stops between Ben Thanh and Tham Luong. The model input
data from the study include the passenger demand forecast, fare assumption, investment cost,
operating and maintenance cost, financial structure, pricing and other terms of the financing,
financiers roles, project delivery (eg concessioning) approach, applicable tax and duty rates,
physical and price contingency factors, construction term, analysis period slightly over 30 years in
the present study), economic life-cycles of project assets and depreciation rates. Unlike the
strategy model, the Line 2 project model O&M cost data are from engineers estimates. These
are built up from detailed calculations of, for instance, traction and non-traction consumption
rates and prices of energy, work force requirement and payroll rates, material and consumable
usage and prices

19. The project model is specifically constructed to distinguish and analyse the possible
difference of roles between the Government of Vietnam (GOVN) and HCMC in project
financing and funding , as provided in the Railway Law and the Law and Decree on the State
Budget
8
.

20. The Line 2 financial model input data, outputs, and outcome in terms of the project
plans for investment, financing and funding (including the sourcing of external support), are
described in Chapter 8 of the PPTA Study report.

2.6 Model operation and management

21. Generally, an MRT financial model may be found useful in three areas: financial
evaluation, financial budgeting, and in procurement and concessionning. Appendix 1 touches on
practical aspects in operation and management of the model in each of these three applications.

3. PROJECT VALUE-FOR-MONEY (VFM) ASSESSMENT
9

3.1 Introduction

22. Doing what the community rationally considers to be desirable at the least cost to is
acting in the public interest and is therefore an imperative for governments. In the present
context a VfM assessment addresses the question of choosing, from among identified
alternatives, one likely to be the least cost method of delivering an MRT project in HCMC.

23. The VfM assessment was introduced into the international practice of PPP for the
purpose of making an informed decision between a conventional public sector and a PPP
undertaking of an infrastructure project. However, once clearly understood its methods can be
seen to have broader application in choosing among many kinds of options involving different
risk characteristics. The key objective is simple: to select from several project development
options the most efficient, ie one incurring the lowest cost to the public. However,
complications arise because of uncertainty in the cost and revenue or benefit streams of an
infrastructure project, which has characteristically long gestation (usually more than 10 years).
Additionally, in land transport, studies have found a tendency for pronounced negative variance

7
See ADB TA 4862-VIE: Ho Chi Minh City Metro Rail Study, Final Report 2008 (PPTA Study)
8
Railway Law 2005 No. 35/2005/QH11, Chapter V (on urban railways), and Law on the State Budget 2002 No
01/2002/QH1 and Decree No 60/2003/ND-CP especially Article 5.
9
This section draws on ADB 2007a and ADB 2007b.

19

between forecast and outturn. The objective then has to be restated as finding from among
alternative modes of project delivery one that offers the least cost, risk taken into account.

Table 3.1 Alternative approaches for VfM testing: summary of approach features

Responsibility and
risk
State owned
enterprise (1)
Private sector
operating concession
(2)
Private trains E&M
supply w/operating
concession (3)
Build-operate-
transfer (BOT)
(4)
Financing
Civil works and fixed
equipment
Government sourced capital
Government sourced
capital Concessionaire
sourced capital Trains with related
systems & equipment
Concessionaire
sourced capital
Passenger service
with maintenance of
civil works &
equipment
Government sourced
working capital
Concessionaire
sourced working
capital
Concessionaire
sourced working
capital
Concessionaire
sourced working
capital
Delivery
Civil works and fixed
equipment
Government procures by competitive tender
Government procures
by competitive tender
Through Net Cost

contract by
competitive tender
Trains with related
systems & equipment
Through Gross Cost
contract by
competitive tender
Passenger service
with maintenance of
civil works &
equipment
Via SOEs contract
with government
Through Gross Cost
a

contract by
competitive tender
Payment/funding
Fare revenue Revenues collected
under a separate
arrangement
Paid to government Paid to government
Concessionaire retains Other revenue Paid to government/
shared
Paid to government/
shared
Payment from
government
Gross Cost contract
style payment
Concessionaire receives competitively bid
payment from government.
Competitively bid
external support
Risk
Investment cost-civil
works and fixed
equipment
Government transfers
some risk to the
private sector via the
design, construction
and equipment supply
contracts
some risk to the
private sector in the
contracts
some risk to the
private sector in the
contracts
Transferred to private
sector, except for
agreed indexation
Investment cost-trains
& related systems &
equipment
sector
Service operating cost
& all maintenance
costs
Contracting transfers
some risk to SOE but
state ownership
means ultimate
recourse to
government
sector, except what is
retained through
indexation
b
plus the
risk of government
provided trains not
matching operator
needs
sector, except what is
retained through
indexation
Revenue Risk transfer to SOE
for a similar purpose
as in (2)-(3) seems
less effective, perhaps
because it is realised
that government is not
likely to let an SOE fail
financially
Some patronage risk is transferred to private
sector linked to an incentive payment to keep up
service quality standards
sector, except for any
agreed fare indexation
Source: adapted from Figure 3.1 in Issues and Options paper, this Study
Notes:
a
For a description of the Gross Cost and Net Cost concession forms see Section 2.9 Issues and Options paper, especially
Figure 2.2.
b
In the context of a concession agreement, indexation embodies the principle of allowing the price of a good or service to be
adjusted upward or downward to keep its original purchasing power parity.

24. This section reports on a VfM assessment carried out on the four alternatives identified
in the Options and Issues paper
10
. Their key features are summarized in Table 3.1. They range

10
See Issues and Options paper Section 2 for a detailed discussion.

20

from a state-owned enterprise (SOE) approach (1), in which government plays the maximum
role in the project financing, delivering and funding, taking consequently the full investment,
operating and revenue risk; through increasing levels of private sector participationfrom a
Gross Cost operating concession (2), to a Gross Cost concession, with operator supplied rolling
stock along with train-related E&M systems and equipment (3), to a full build-operate-transfer
(BOT) role under a Net Cost operating concession (4), in which government retains little more
involvement in the project than contract monitoring and evaluation. In the analysis a common
assumption of an integrated public transport system is made for all the options. Accordingly, in
the SOE option, ticketing is assumed to be under a common ticketing authority separate from
the SOE, and an arrangement similar to a Gross Cost contract with a private sector concession
aire is assumed to be in place. The methodology for carrying out the VfM analysis is set out in
Section 3.1.

25. For the analysis, risk is understood to refer to a probability distribution, or in practice a
range of probability ratios, for an occurrence with variable possible financial impact, usually
adverse, quantifiable in monetary terms. The data for the analysis should include not only
estimates for risk but also how it is priced, meaning how in a contested market one side would
be willing to remunerate and the other side to be remunerated for parting with or respectively
taking on a given risk. In consequence, robust market competition to undertake a task with a
specific risk becomes a fundamental assumption in the analysis. The outputs of the analysis are
presented and discussed in Section 3.2. Section 3.3 draws conclusions.

3.2 Methodology

26. Overview. A VfM analysis is carried out to evaluate from the governments (ie the
communitys) perspective the net cost, risk taken into account, of alternative approaches for
carrying out the key project activities of design, construction and procurement, financing and
operation. As shown in Table 3.1, the options are distinguished by the way the public and private
sectors share the responsibility together with the risk in each key project task. The VfM analysis
is carried out as far as possible using a quantitative method, supplemented by a qualitative
assessment where a quantitative approach is not possible. The analysis is based on forecast cash
flows expressed in nominal values. For each option, the output of the analysis is an expected
net present value of the cost to government of ensuring the delivery of the Line 2 service for the
duration of the concession, including the valuation of risk retained by the government.

27. Financial modelling of the PSP options including PPP. The forecast cash flows for
each option are obtained from projected financial statementsbalance sheet, income and cash
flow statementscalculated for each year of an approximate 30 year concession period covering
implementation plus service provision and maintenance activities. Except in the SOE option,
two sets of projected financial statements are generated for each option, one set to report the
governments financial position in the project and the other the private sector participants. In
carrying out the analysis for the PSP options including PPP, the following principles have been
observed:
(a) By either receiving financial payments from the government or else by paying excess
revenue to government, the private sector concessionaire achieves an acceptable rate of
return at a minimum cost to government.
(b) The private sector concessionaires financial plan is based on a limited recourse
arrangement (ie the lenders cannot rely on any loan securityin particular shareholder
guaranteesbeyond that provided in the project), with a proportionate share of debt and
equity in the total capital employed (as measured by a debt-to-equity or a leverage ratio),

21

an average interest rate and a rate of return on equity that reflect the opportunity costs of
the lenders and equity sponsors, taking into account the project risk of each option.
(c) The analysis presents the total cost to the government for each option.

28. Base project costs and revenues. The VfM analysis carried out makes use of the best
estimates obtained from the PPTA study of the Line 2 fare and non-fare revenues, investment
and O&M cost, and also the assumed life-cycles and depreciation rates of categories of civil
works and equipment
11
. In considering the various options, the analysis treats the effects of the
different concession forms on the concessionaires cash flows in the following way:
(a) Under a Net Cost concession there is a payment from the government to the
concessionaire in consequence of the projects funding shortfall.
(b) Under a Gross Cost concession, the project fare and non-fare revenues, being separate
from the concession, are treated as revenues of the government; the concessionaires
revenue is made up of payment from the government for the concessionaires share of
the cost and risk in delivering the project.
(c) The different concession forms have variable effects on (i) the financing costs of the
concessionaire, including the capital structure and the costs of debt and equity; and the
incentive for the concessionaire to maximise patronage. These variable effects relate to
the perception of different levels of risk embedded in each concession form.

29. The private sector financing and delivery arrangements. The private sector
concessionaire is assumed to be organised as a special purpose vehicle (SPV), with a legal and
financial standing separate from its lenders, equity sponsors, and subcontractors. In particular,
its assets and liabilities wholly derive from the concessionaires role and responsibility in the
project; this is necessary in order to exclude any risk that is not project risk. The concessionaires
relationship to other parties having an involvement in the project is illustrated in Figure 3.1. In
Figure 3.1, the role, responsibility, rights and remuneration of the concessionaire or SPV are
formalised in a concession agreement (1)
12
. Under (2), with the governments express
recognition under the terms of the concession agreement, the concessionaires system design,
construction and operation and maintenance responsibility and risk are allocated to
subcontractors with expertise in each field. In (3), under the project financing agreement, the
financing responsibility and risk are allocated among senior lenders (the senior debt will be on
limited recourse terms), any subordinated lenders, and equity sponsors (ie shareholders). In
practice, the senior lenders exercise strong control over the concessionaires fund flows until the
senior debt is repaid. For example, disbursements are made by lenders direct to the design,
construction and/or equipment subcontractors; during the service phase, the concessionaires
remuneration is held in a reserve account, from which payments may be made only under the
lenders supervision, and so on. Finally, under (4), the concessionaire, through the operation and
maintenance subcontracts, provides service on Line 2 to the travelling public.

11
See PPTA study Final Report.
12
The Issues and Options paper elaborates the underlying principles of a concession agreement.

22

Figure 3.1 Private sector concessionaire financing and delivery arrangements
Government
SPV project
company
Senior lenders
Subordinated
Debt & equity
Users/
the public
Design, build
subcontractors
Operating
subcontractor
Others eg
insurers
(4)
(3)
(1)
(2)
Source: adapted from S Gawlic , UNESCAP undated

30. Financing assumptions. The financing assumptions for the private sector
concessionaire, such as leverage ratio, cost of borrowing and equity are shown by concession
type in Table 3.2. In the present study, it is judged that the experience of PPP concessions in
MRT and other infrastructure in Thailand provides a meaningful comparison and may be drawn
on for assumptions relating to financing cost for a hypothetical private sector MRT

Table 3.2 VfM Analysis Financing Assumptions

Private sector financing Net Cost Concession Gross Cost Concession
Debt-to-equity ratio (times) 2.0
1
5.0
2

Loan terms
-Grace period Construction period plus 2 years
3

-Term including grace period 15 years
3

-Interest rate 6.95%
4

Return on equity 13.5%
5
12.75%
6

Public sector financing
Loan terms
-Grace period 7 years
7

-Term including grace period 27 years
7

-Interest rate 3.95%
8

Cost of public sector equity 5%
9

Source: this Study, drawing on ADB 2007a
Notes:
1
Based on a comparison with Bangkok Blue Line concessionaires current capital structure
2
Based on a comparison with UK light rail transit (LRT) concessions eg Nottingham Express Transit.
3
Based on a comparison with Bangkok financial market indications for projects in Thailand
4
For an equivalent US Dollar currency borrowing. The interest rate is based on average market rate for government borrowing
plus a 3% risk premium
5
At a premium of 8.5% above the cost of municipal bond financing, this is comparable with the Blue Line concessionaires cost
of equity
6
Based on a comparison with market rates of 12-13% for Thailand IPP projects (PPP power generation concessions, which
have similar relevant features to MRT Gross Cost concessions with respect to the sharing of usage or demand risk).
7
Average ODA terms
8
Lowest ODA US Dollar equivalent loan interest rate. Raising the rate to the middle range does not alter the analysis results.
9
Cost of US Dollar commercial borrowing rate.

23

concession in the HCMC context.

31. Discount rate. A rate of 4% is used for the common discount rate to obtain the cost to
government of the project development options.

32. Risk and optimism bias. Risk impacts the expected net financial cost to government
of an MRT or another infrastructure project through a variance of the outturn from what was
anticipated when the decision was made to go ahead by any combination of the following: (i)
capital cost overrun through actual cost and/or construction time exceeding plan; (ii) operation
and maintenance cost overrun; and (iii) revenue underperformance. By establishing statistics of
capital and O&M cost overruns and revenue shortfall in a particular sector of infrastructure on
projects implemented by the conventional SOE approach, it is possible to take into account the
risk of pure public sector implementation, in addition to the basic net financial cost of a project.
For example, a 2002 review commissioned by UK Treasury of large British public sector
procurements found clear evidence for the phenomenon known as optimism bias, in a
pronounced tendency for capital cost (and construction time or work duration) to exceed what
was anticipated the time of the decision in each of the project types as shown in Table 3.3
13
.

Table 3.3 Optimism bias in UK Treasury 2002 review of large public projects

Project type Works duration overrun Capital cost overrun
Non-standard buildings
1
39% 51%
Standard buildings 4% 24%
Non-standard civil engineering 15% 66%
Standard civil engineering 34% 44%
Equipment/developmemt 54% 214%
Source: UK Treasury 2002
Note:
1
Non-standard means more complex, difficult or innovative, when compared to standard projects.

Based on the study results, the UK government has made it a rule that optimism bias be
explicitly recognised in the business case preparation and review, a requirement institutionalised
in UK Treasury issued guidance on appraisal and evaluation of public projects
14
.

33. Optimism bias in land public transport projects. In land transport, international
studies of project development have found rigorous statistical evidence of the same optimism
bias. Figure 3.2 illustrates this tendency with respect to capital cost for a sample of 58
international rail projects, where the average cost escalation is 44.7%
15
. A similar tendency has
been statistically established for rail transport demand forecasting. In analyses involving 25
projects, 72% of the sample are found to show more than 40% shortfall in outturned traffic
compared to the forecast current at project approval time. Meanwhile the overall average actual
traffic is 51% below forecast
16
.

13
The UK experience is instructive because Britain has been among the most active countries employing PPP to
deliver infrastructure and public services since the mid 1990s. By March 2006, Britain had over 700 PPP projects
(USD 91 billion equivalent in total value), compared to eg Korea, another active PPP practitioner, with 64 projects
(USD 24 billion equivalent) by December 2005. See ADB 2007b. The published evidence on optimism bias has
mostly been associated with public sector projects. Limited disclosure has inhibited attempts at finding rigorous
evidence on optimism bias in the private sector.
14
UK Treasury 2003.
15
Flyvbjerg et al, 2002.
16
Flybjerg et al, 2005.

24

34. With service operation, sound evidence from comparative international studies of public
transport supports an expectation of greater cost efficiency with private sector provision
compared to public ranging between 30% and 50%. Details are reported in Section 2.10 of the
Issues and Options paper.

35. Optimism bias parameters. Specific details have not been found on the extent of
optimism bias in Vietnam but anecdotal reports show a familiarity with the phenomenon. The
parameters for optimism bias used in the present analysis are set out in Table 3.4. For capital
cost, the statistics for the public sector is based on the international studies of rail transport
public works reported in 32. For operating and maintenance cost, the statistics are based on the
relative cost of public and private sector operation quoted in 33, with an assumed minimum
optimism bias of +10% for the private sector O&M cost. The statistics imply an expectation of

Figure 3.2 Optimism bias on capital cost in rail transport projects

0
10
20
30
40
-80 -40 0 40 80 120 160 200 240 280
F
r
e
q
u
e
n
c
y

(
%
)
Cost escalation (%)
RAIL PROJECTS

Source: Flyvbjerg et al 2002.

a substantially larger propensity to cost overrunning in implementation and operation of a public
transport project, when compared to the private sector. This is consistent with a difference in
approach to resource allocation and management of activities as between government and the
private sector. The commercial approach needed in service delivery and financing appears to

Table 3.4 Allowances for optimism bias in MRT projects
(% difference from the best estimates)

Public sector
implementation
or operation
Private sector concessionaire
implementation or operation
Gross Cost Net Cost
Cost
Capital cost +45% +15% +15%
Operation and maintenance cost +40% +10-20% +20%
Patronage
For operating years 1&2 -55% -50% -50%
For operating year 3 and after -33% -30% -30%
Source: based on international studies on delivery of public transport projects

25

thrive on incentives that appeal to self interest, which is how the private sector operates. It has
been rarely seen to sit well within government, whose principal goals are defined by the public
interest. The difference in relative optimism bias is much less in demand forecast, although
some can still be expected. Government and private sector concessionaires both make use of
specialist transport demand modelling services. At the present state of the discipline, forecasting
transport demand is recognised to be a difficult exercise in assessing a multiplicity of complex
influences on a traveller facing trip choices. The size of the optimism bias allowance being
assumed reflects the statistical record of the performance in forecasting summarised in 32.

36. The optimism bias parameters in Table 3.4 are the same as those suggested in a recent
ADB technical assistance (TA) to the Government of Thailand on standardisation of feasibility
study methods to assess financing and delivery options for Bangkok MRT extension projects
17
.

37. Other uncertainty. Other uncertainty unrelated to optimisms bias includes unexpected
changes concerning prices, law and regulations, tax, and early termination of a concession. This
will need to be assessed qualitatively for its potential effects on the cost to government of the
project development options. The qualitative assessment is based on considerations taken up in
the Issues and Options paper, especially in the elaboration of the concession contract
standardisation in Section 5 and Appendix D. The considerations indicate that the other
uncertainties can be managed so that their impact is invariant across the options, at least from an
initial perspective, and can therefore be ignored for the purposes of the current analysis.

3.3 Analysis results

38. VfM analysis results. The analysis results are highlighted in Table 3.5. The base cost

Table 3.5 Highlights of the VfM analysis
(US$ million, NPV discounting at 4%)

SOE
(1)
Private sector
O&M only
(2)
Private sector
train equip-
ment supply
& O&M (3)
BOT
(4)
Base cost
Government concession payment 570 570 1,563 3,137
Fare and non-fare proceeds (1,148) (1,148) (1,148) 0
Government debt service 954 954 786 0
Government non-debt financing 441 441 86 0
Government non-debt financing cost 221 221 71 0
Total base cost 739 739 1,058 3,137
Adjustment for corporate income tax (43) (43) (222) (912)
Base cost, tax-adjusted 696 696 836 2,225
Adjustment due to risk
Capital cost overrun 622 622 466 207
O&M cost overrun 174 87 43 87
Revenue shortfall years 1& 2 22 20 20 20
Revenue shortfall years 3 502 457 457 457
Total risk adjustment 1,320 1,186 986 771
Expected cost to the community 2,016 1,881 1,822 2,996
Source: this Study

to government is taken net of the proceeds from fare collection and non-fare revenue. The base
cost includes the variable concession payment ( the SOE option is included under this term)

17
ADB 2007a

26

depending on each option. The net base cost is the same in the SOE option as in Option (2), in
which a private sector operating concessionaire delivers service on Line 2 under public financing
of all capital cost. Meanwhile, with a BOT concession, the government collects no revenue and
makes only the one payment to the concessionaire (on account of the Line 2 funding gap). The
adjustment for tax is to eliminate transfer payments; for simplicity, taxes other than corporate
income tax payable by the concessionaire have been ignored in the analysis. The risk adjustment
is added to the base cost to arrive at the expected cost to the community.

39. A comparison of the expected cost to the community across the four options ranks the
SOE alternative above the BOT and below the other two PSP options. Looking at the base cost
only, the substantially lower SOE cost compared to the BOT reflects a lower public sector
financing cost in both project investment and O&M working capital. By comparison there is a
maximum transfer of the project risk from the government to the private sector concessionaire
which saves the community a substantial amount of optimism biasthe risk adjustment in the
SOE case is almost double that of the BOT option. But further comparison shows that the
BOT has an expected cost that is almost 50% above the SOE: the higher financing cost of BOT
make the risk transfer not VfM. Option 3, in which the concessionaire supplies its own train and
associated systems in addition to operating the service, shows a higher base cost compared to
Option 2 and the SOE alternative. This is a reflection of the higher private sector financing
cost for the equipment supplied. When risk is taken into account, Option 3 shows a lower
expected cost to the community compared to Option 2, that is, it is indicated to have the better
value for money.

40. Sensitivity test. The analysis assumes the public cost of debt to be a middling US
Dollar equivalent ODA loan rate (approximately 4%). A test carried out shows that if instead
the lowest end of US Dollar equivalent ODA loan interest rates, ie approximately 3%, is used,
the relative ranking of the four options remains unchanged (Table 3.6). The discount rate used
for the latter scenario is 3%.

Table 3.6 VfM analysis sensitivity test: outputs at 3% public debt cost
(US$ million, NPV discounting at 3%)

SOE
(1)
Private sector
O&M only
(2)
Private sector
train equip-
ment supply
& O&M (3)
BOT
(4)
Base cost 653 653 1,103 3,847
Base cost , tax-adjusted 598 598 820 2,707
Total risk adjustment 1,533 1,368 1,133 917
Expected cost to the community 2,130 1,965 1,952 3,623
Source: this Study

3.4 Assumptions and contingencies

41. It is necessary to understand more precisely under what assumptions and contingencies
are the VfM test results valid. These assumptions and contingencies are as follows.

42. Market competition. In the analysis, the level of government payment to the private
sector concessionaire is assumed to be obtained in a competitive market for the concession and
for all sub-contracts, including the provision of financing. This is the rationale for modelling the
government payment in all the options at no more than cost recovery, represented by the best
estimates of capital and O&M cost and fare and non-fare revenue, plus the indicated private

27

sector financing costs under different options in Table 3.2. VfM requires a competitive tender
market for the concession and for related sub-contracting of the technology (eg design,
construction, systems integration and installation, and operation and maintenance in MRT
service provision) and in addition financing services. The reason is to ensure that payment of
concessionaires and sub-contractors is not in excess of a normal risk-weighted remuneration for
effort. Now an option which has cleared a VfM test could at the procurement stage be facing a
market failure (eg only one bidder), threatening its ability to deliver the anticipated VfM . Thus,
transition and emerging countries in particular often cannot count on a reliable international
supply of private sector financing. The threat of market failure in a specialised field such as
MRT concessioning and sub-contracting should not be dismissed lightly. It will be important
to have alternatives at hand, which means having the ability to switch for example to a PSP
concession for a private sector O&M concessionaire only, should a market sounding suggest that
only one candidate would tender for a private sector concession in train and related E&M
systems supply and operation.

43. Financial and services market distortions. Here are some examples of distortions
that can threaten to dilute VfM.
(a) Limited recourse financing of a PPP concession promotes VfM because the senior
lenders, usually financial institutions regulated by a central bank, will for as long as the
debt is outstanding have in the project an interest that is aligned with the authority
granting the concession, and will bring professional skill to the monitoring of the
concessionaires performance. However the lenders incentive to monitor that
performance is diluted with the lenders use of credit risk transfer (CRT) products or
similar instruments for insure lenders against project risk. This practice can significantly
reduce the benefit the government gains in transferring to the senior lenders a part of its
risky exposure to the concessionaires performance.
(b) Bilateral ODA financing can also introduce distortions in the sub-contracting markets.
The tying of an ODA loan to the supply of goods and services of a national origin
restricts the competitive tendering for the procurement of MRT consulting and
construction services and systems supply. An opportunity can be created for vendors to
use the concessionary pricing of a loan to build in an additional margin on goods and
services. In the long term, the practice can create a situation where, in a narrow field, the
potential suppliers tacitly agree to live and let live instead of competing, with adverse
effect on supply prices and therefore VfM.
(c) Partnering developed over time among financiers and sub-contractors while having a
potential to be an effective project risk management tool for a concessionaire can be
abused if allowed to develop into a collusive arrangement, which in the end threatens
VfM.

44. PPP procurement capability. Ability to procure well is important for realising VfM.
The balance of opinion, if not of evidence, is that a greater capability is required of the public
sector in the procurement of a PPP concessionaire than in a conventional public works
procurement. Ad hoc outsourcing for the required skills leads to limited results. For example,
legal firms skilled in PPP contracting, forced to make a choice through conflict of interest rules,
can tend to opt for working for the concessionaire side rather than government. Institutional
capability building is required.

45. Conclusions. Under normal competitive market conditions and assuming a government
adequately provided with PPP procurement capability, the value-for-money (VfM) test on the
four development options for Line 2 ranks as the best value the concession for private sector
operation and maintenance with concessionaire supply of trains and train-related equipment. In

28

order of preference based on VfM, the other options are ranked as follows: the private sector
O&M concession with government supply of infrastructure and train equipment and systems
comes second; the SOE option third; and the BOT option last. It is emphasised that this result
assumes that competitive markets are in place for the private sector concessionaire, sub-
contractors and financiers. The government procuring authority is recommended to take
precautionary measures in preparing a concession contract for bidding. For instance, options
should be kept open and market soundings be taken for any sign of potential market failure
(only one bidder) in the lead up to tendering. Finally, having adequate PPP procurement
capability is crucial to success.

29

REFERENCES

Asian Development Bank, 2006, Integrating Mass Rapid Transit in Bangkok (TA 4676-THA)
____________________, 2007a, Integrating Mass Rapid Transit in Bangkok Phase II: Final
Report (TA 4904-THA)
____________________, 2007b, Promoting PPP in Bangkok Mass Transit and Other
Infrastructure (TA 4676-THA)
Flyvbjerg B, Skamris Holm M, Buhl S, 2002, Underestimating Costs in Public Works Projects,
Journal of American Planning Association, 68:3
_______________________________, 2005, How Accurate Are Demand Forecasts in Public
Works Projects?, Journal of American Planning Association, 71:2
HM (UK) Treasury, 2002, Review of Large Public Procurements in the UK, study by Mott
MacDonald
_______________, 2003, The Green Book: Appraisal and Evaluation in Central Government.

30

APPENDIX 1. MODEL OPERATION AND MANAGEMENT

1. The model will be found useful in three main areas: in financial appraisal, in financial
planning and budgeting, and in procurement/concessioning. How the model can be operated
and managed is best explained in the context of its application in each of the three areas.
I. The Model and Financial Appraisal
2. Financial appraisal is a part of the set of activities making up the public sector
Table A1. Using the model for financial appraisal
Element Description Comment
Data input
The key input data are the following.
1. Definition of scenarios and constituent lines
and line segments;
2. Forecast of patronage and revenue;
3. Estimated capital costs and investment
schedules; and
4. Estimated O&M costs.
A first-order forecast or
estimate of the key model
input variables is
sufficient for the strategic
and development
programming purposes.
However, patronage
impacts MRT capacity
planning besides
revenue; so demand
forecasting error has a
potential multiplier effect.
Model output/results
The following are the key indicators.
1. Financial internal rate of return (FIRR)
calculated on the free cash flow projection, some
times called the project FIRR;
2. Present value (discounting at the social time
preference rate) of the projected free cash flow
steamthis measure of viability is indispensable
when the FIRR measure cannot be obtained (which
happens for instance when the free cash flow
series is all negative); and
3. The projected time series of free cash flow or
some form of proxy (such as EBITDAearnings
before interest, tax, depreciation and amortisation)
for detail such as a time-profile of the viability gap or
cost-recovery shortfall.
Financial appraisal
involves the revenue,
O&M cost and investment
models but not the
funding model (financial
appraisal preceeds
considerations of
funding).
Model operating steps
1. See that the model is populated with the
correct input data (if the factory-default set of
input, supplied with the model, is not being used);
2. Select Scenario and Case;
3. Select the SOE concessionning option in the
6_Other_input worksheet;
4. Go to the 13_Results worksheet, Public Sector
column, to look up the financial viability indicators.

Source: ADB 2006
strategic planning and development programming and preparation of the MRT network. In
financial appraisal the aim is to obtain quantitative indicators of the financial viability (or self-

31

sustainability or ability to recover cost) of an element of a contemplated MRT network. These
indicators are contrasted and compared across network scenarios, or across elements of a single
scenario, to help assess potential financial impact, including implications for public funding, and
in this way supply information to the process of strategic decision-making and shaping of the
MRT network programme. To serve the purposes outlined above, the required characteristics of
the financial model key data input and the input itself, the model results or output and the steps
in operating the model are shown in Table A1.
II. The Model and Financial Planning
3. Whether as a part of the business case preparation, which can take in a ten- to thirty-
years time horizon, or of a medium term five-year forward view, or whether for institutionalised
budgetary purposes, effective financial planning for an MRT project depends on a clear view of
the complex inter-relationships among many factors. The financial model provides a structured
framework for viewing the quantitative aspects of these complex inter-relationships. It sorts the
factors involved and their relationships into four groups, under the designations: revenue model,
O&M cost model, investment model and funding model. The output of the four main models
supply the exogenous or input lines to the pro forma financial statements.
a. Revenue model
4. Relationships. Revenue is made up of the proceeds of fare collection and rental of
space for advertising and other commercial purposes. The non-fare revenue is modeled as a
simple percentage of fare revenue. Daily fare collection is the product of forecast daily boarding
passengers and the fare tariff. Typically the forecast is based on a working day. With integrated
fare (only one flagfall is paid regardless of the number of transfers between lines), the fare
collection consists of a flagfall fare element and a distance-related element. Flagfall fare
collection is the flagfall fare times the number of boarders net of transfer passengers. The
flagfall fare collection may be distributed or shared between lines in the network in proportion to
each lines share of passenger-kilometres out of the network total passenger-kms. Distance fare
collection is distance(km)-related fare times the average trip length in km times the number of
boarders. Annual fare revenue is the daily fare collection annualised across the number of
working-day equivalents in a year (typically, fewer passenger trips are expected on non-working
days). The model takes 330 days as the annualisation factor.
5. Model input. Daily boarders, the subset boarders transferring from another line, average
trip length (passenger-kms i.e. kilometres travelled by boarding passengers divides by the number
of boarders), fare tariff distinguishing flagfall and distance-related fare elements, annualisation
factor (330), non-fare revenue percentage (7%).
6. Model output. Daily and annual fare and non-fare revenue.
b. O&M cost model
7. Relationships. Operation and maintenance cost is the sum of the costs to provide the
six MRT operating and infrastructure resources shown in Table 6, where an individual resource-
related cost is modelled as the annual cost to provide one unit of the resource in question times
the resource quantum. The unit costs are explained in 3.2. The operating resources, namely the
train- and car-hours, and train- and car-km, ultimately depend on certain parameters set in the
train-operating plan. The parameters are: (i) operating speed (km per hour) during peak, off-
peak hours; (ii) daily operating hours broken up into peak and off-peak; (iii) frequency of trains
per one peak, off-peak hour, usually expressed as the time in minutes between two successive

32

trains going in one direction (headway); (iv) Line length (km). Daily train-hours respectively
car-hours are daily train-kilometres respectively daily car-km divided by the train operating speed,
the car-km being the train-consist (e.g. three cars per train) times the train-km. Daily train-km
are the sum of the daily round-trip distancei.e. two times the line lengthtravelled by peak or
off-peak trains, where the number of peak, off-peak trains are the number of peak, off-peak
trains per hour multiplied by the respective number of peak, off-peak hours. The number of e.g.
peak trains per hour is 60 (minutes) divided by the peak headway. Given a daily service, the
quanta of daily operating resources are annualised at 365 days.
8. Model input. Unit O&M costs per MRT operating or infrastructure resource, number
of stations, line length, operating speed peak/off-peak hour, daily operating hours peak/off-
peak, headway peak/off-peak, annualisation factor 365 days.
9. Model output. Daily and annual O&M cost.
c. Investment model
10. Relationships. The engineers estimate of the cost to create the MRT infrastructure and
operating assets including any necessary land acquisition, given as a constant price number (e.g.
in years 2005 Baht), together with input on the construction schedule, yields the basis for
forecast capital spending during the construction period. Conversion from constant to current
prices makes use of an assumed 3% annual price escalation factor. The model utilises the
engineers estimate for all categories of assets except rollingstock, for which it makes use of just
the engineers price estimate and specification of car passenger carrying capacity . The
acquisition schedule for units of rail cars is generated by the model using peak passenger demand
data from the patronage forecast, car pacity, and parameters from the train operating plan. The
model is constructed to allow for construction scheduling variability. To specify a construction
schedule, input (in worksheet 8_Schedule) construction start and completion dates and an
estimated progress of work/disbursement pattern. The engineers cost estimate covers the
hardware. An allowance is made for the project software costproject development and project
management consulting serviceas a percentage (typically 5%) of the estimated hardware cost.
Interest during construction, a capitalised expense, is also a capital cost in private sector projects.
Within the typical time horizon of a business case, more capital cost is incurred to replace
exhausted E&M systems including intelligent transport systems or ITS, refurbish used rail cars
(after 15 years at a cost equal to one-third of the acquisition cost) and augment the rollingstock
fleet to serve a growing patronage. The model generates a depreciation schedule for all categories
of capital assets, based on their economic life (typically, 50 years for civil works including
trackwork, 30 for rollingstock and depot and 15 for fixed E&M systems) using the straight line
method. The software cost is combined with the cost of hardware by category and depreciated
together.
11. Model input. Engineers estimate of capital cost during the construction period,
detailing at least the cost for each of the asset categories of civil works (viaduct and/or tunnelling
and stations and trackwork), fixed E&M systems including ITS, depot, and rail car price and
passenger capacity (worksheet 2_Capital_cost_input); construction start and completion dates
and disbursement schedule; peak passenger demand (4_Passenger_input); train operation plan
key parameters (5_Train_op_input); economic life of assets by category and depreciation
policy.
12. Model output. Projected annual capital expenditure and annual depreciation.
d. Financing model

33

13. Relationships. What roles are decided on for the public and private sectors in an MRT
project have a bearing on the way the project is financed At one end of the spectrum is the role
combination in a Gross Cost Concession approach, which implies government direct funding for
all the assets, while at the other extreme there is the total private funding of all the assets
consequent upon a Build-Operate-Transfer or its variant Build-Transfer-Operate concession
(such as the BTS situation). In between would be a DBOM (Design-Build-Operate-Maintain)
concession, which implies some form of delayed payment by the public sector for assets
designed and built and initially financed partly or wholly by a private sector concessionaire. The
model also includes a pure public sector investment and operation typical of a state owned
enterprise (SOE) as a technical option. Through the worksheet 6_Other_input, the model is
configured to accept any one of a selection of five concession forms as an input. The model
generates debt-servicing schedules (i.e. annual interest payment and repayment of principal)
given an input interest rate and debt repayment structure. For the private sector, inputting a
leverage ratio (i.e. debt as a percentage of value of assets being funded) for the initial project
investment (respectively investment during the operating stage) automatically determines the
amount of debt funding for investment. Meanwhile, in terms of working capital, accounts
receivable are based on a 60-day collection time, accounts payable are based on a thirty-day
payment period for expenses connected with O&M cost, and an allowance for stocks (spare
parts principally) is made equal to 0.25% of gross fixed assets value.
14. Model input. Key concession forms and associated method of funding MRT assets;
interest rate and debt amortisation structure; private sector leverage ratio and collection and
payment periods as well as a stocks/gross fixed assets ratio and corporate income tax structure.
15. Model output. Annual debt servicing schedule (both interest and principal payments);
private sector debt principal and input equity, accounts receivable, accounts payable, stocks,
annual tax payment.
III. The Model in Procurement/Concessioning
16. Suppose that some element of the MRT network has been approved for implementation
under a chosen concession type and that the time has come to address the question of
procurement of the MRT capital assets and operation and maintenance. Here, too, the model
can find useful application. The model has been developed to simulate the implementation of
MRT network elements under four broad types of concession: (i) Gross Cost Concession; (ii)
Design-build-operate-maintain (DBOM) Concession; (iii) Net Cost Concession; (iv) Design-
build-operate-transfer (DBOT) Concession. Fare and non-fare revenues do not figure in the
concession in the first two concession types, the concessionaire being compensated directly by
the government. With the remaining two concession types, the concessionaire finds its
compensation out of its fare and commercial revenue collection plus government viability gap
funding to meet any shortfall. The model incorporates pro forma financial reporting for the
different concessions as highlighted in Table A2. To select the concession form with which to
operate the model, enter the appropriate concession code in the worksheet 6_Other_input. Use
the Index to navigate among the public/ private sector pro forma financial statements and
supporting schedules in the worksheet 12_Financials.
17. Table A3 illustrates the models potential application in the main stages of procurement/
concessioning of an MRT line or larger network element.

34

Table A2. Illustrative MRT financial reporting under four concession types
Gross Cost DBOM Net Cost DBOT
Public sector
financial
statements
MRT Assets
BSA
1

Fare and non-
fare revenue
ISR
3

Concessionaire
operating
chargeISE
4

MRT AssetsBSA
Liability under HP
contractBSL
2

Fare and non-fare
revenueISR
Concessionaire
operating charge
ISE
MRT AssetsBSA
Concession fee
receiptISR, or
Viability gap
compensation
paidISE
MRT AssetsBSA
BOT concession
liabilityBSL
Concession fee
receiptISR, or
Viability gap
compensation
paidISE
Private sector
(concessionaire)
financial
statements
Concessionaire
operating
chargeISR
O&M costISE
Claim on public
sector under HP
contractBSA
Concessionaire
operating charge
ISR
O&M costISE
Fare and non-fare
revenueISR
O&M costISE
Concession fee
paymentISE, or
Viability gap
compensation
ISR
Project capital
costBSA
Fare and non-fare
revenueISR
O&M costISE
Concession fee
paymentISE, or
Viability gap
compensationISR
Notes:
1
Balance sheet asset;
2
balance sheet liability;
3
income statement revenue;
3
income statement expense
Source: ADB 2006

35

Table A3. Using the financial model in MRT procurement/concessioning
Procurement/concessioning stage
Preparation and issue of
request for proposal
Proposal evaluation Negotiation of
concession contract
Illustrative
objectives and
tasks
1. Set procurement
objectives: required MRT
network element at best
value for money (VfM);
government control of fare
policy; consistency with
MRT network-wide
integrated fare and ticketing
arrangement.
2. Determine bid
variable(s) which would best
secure objectives in 1.
3. Determine bid
evaluation method to secure
objectives in 1.
4. Prepare bid terms of
reference, scope of work
and associated
documentation to go out
with request for proposal
1. Evaluate and rank
proposals using the chosen
evaluation method*.
2. Short-list highest-ranked
proposals.
* The potential VfM of a
proposal depends on these key
factors: qualification (capability
and experience) of
concessionaire; risks
transferable to and incentives
of concessionaire.
Negotiate with short-
listed proposals, starting
with the highest ranked,
in order to better
achieve the set
procurement objectives.
Financial
model
application
1. In the VfM review, use
the model (with updated
input) to determine the
base-case, or most
probable cost, of e.g.
turnkey MRT capital assets;
operation and maintenance
in a Gross Cost
Concession; single-
packaged capital assets and
operation and maintenance
in a DBFOM (design-build-
finance-operate-and-
maintain) concession etc.
(N.B. the financial model
alone cannot complete the
VfM review, which further
requires analysis and
pricing of the risks under
alternative public-private
risk allocation scenarios.)
2. The TOR should
require that proposals
include submission of a
financial model, in both
electronic and hard copies,
of a specified format, to
support the financial bid.
For each proposal the model
(with suitably updated input)
can help to answer the
following questions.
1. Is the bid supported by
sound financial planning?
2. Are the bidders model
input data
reasonable/realizable?
3. How are the bidders
prospective returns on
investment (and therefore its
incentive to help produce the
VfM)?
At each step of the
negotiations, through
appropriate input
updating, the model can
be used to work out the
financial implications for
each side of the
negotiating table.
Source: ADB 2006


Appendix C: Stakeholder Feedback and Implementation
Arrangements: Institutional Options Working Paper
24

TA 4862-VIE:
PPIAF Study -
Working Paper
Stakeholder Feedback and
Implementation
Arrangements: Institutional
Options
March 2008
i
Table of Contents
Summary ........................................................................................................................................................................ i
1. Introduction.................................................................................................................................................................... 1
1.1 Background and Purpose................................................................................................................................. 1
1.2 Development Context...................................................................................................................................... 2
2. Current Institutional and Regulatory Arrangements ............................................................................................... 5
2.1 National and Local Responsibilities............................................................................................................... 5
2.1.1. National .............................................................................................................................................. 5
2.1.2. Local.................................................................................................................................................... 6
2.2 Current Funding Arrangements ..................................................................................................................... 8
2.3 Key Policies and Regulatory Provisions...................................................................................................... 10
2.3.1. Policy.................................................................................................................................................10
2.3.2. Key Laws..........................................................................................................................................11
2.3.3. Laws Governing Involvement of the Private Sector in Urban MRT Operations and
Related Investment .........................................................................................................................................14
2.3.4. Other Relevant Laws and Decrees ..............................................................................................16
2.4 Transport Agencies and Functions in HCMC........................................................................................... 17
2.5 A Framework for Analyzing Institutional Functions ............................................................................... 19
2.5.1. A Hierarchy of Transport Organization.....................................................................................19
2.5.2. Structuring Transport Activities...................................................................................................21
2.6 Diagnosis .......................................................................................................................................................... 23
3. Factors Affecting the Role & Structure of an Apex Public Transport Agency and Relevant Functions..... 25
3.1 Policy Framework........................................................................................................................................... 25
3.2 Hierarchy and Structure................................................................................................................................. 26
3.3 Key Public Transport Management Functions.......................................................................................... 26
3.4 Other Issues ..................................................................................................................................................... 27
4. Potential Institutional Arrangements for Delivering Integrated Public Transport .......................................... 29
4.1 Institutional Options ...................................................................................................................................... 29
4.2 Assessment of Options.................................................................................................................................. 35
4.3 Building Technical and Managerial Capacity ............................................................................................. 36
4.4 Legal Basis for Integrated Transport or Integrated Public Transport................................................... 37
5. Some Lessons on Organizational Structure for Efficient MRT.......................................................................... 38
5.1 Overview of Lessons from Other Cities..................................................................................................... 38
5.2 Guidance for HCMCs MAUR..................................................................................................................... 39
Appendix A: Trends in the Management & Provision of Public Transport ......................................................... 44
Appendix B: Review of Other Arrangements for Management & Provision of Public Transport.................. 46
Appendix C: Scoping of the Possible Content of an Integrated Public Transport Law.............................................. 59
References and Bibliography................................................................................................................................................... 63
ii
Abbreviations
DAF Development Assistance Fund
FDI Foreign Direct Investment
PC
HCMC PC
Urban Development
PRG Partial Risk Guarantee
HCMC PC
Si
Summary
1
1
PPIAF TA for HCMC MRT
Summary
WORKING PAPER
STAKEHOLDER FEEDBACK &
IMPLEMENTATION ARRANGEMENTS:
INSTITUTIONAL OPTIONS
4 Objectives for PPIAF TA
1. Identify options for private sector participation in MRT
2. Assess benefits of each option
3. Financial analysis & financial model
4. Implementation approach
contractual including PPP & institutional
for whole MRT network
9 March 2008
2
2
9 March 2008
3
Problems if MRT is not treated as a Network
Poor physical integration:
- of MRT lines
- with bus
- with urban environment
Inconvenient & unsafe travel
long transfer between MRT lines
Problems
9 March 2008
4
Bht 25 on BTS
Bht 22 on Blue
Line
Bht 32 for BTS
& Blue Line
Bht 30 for Blue
Line & BTS
Bangkok MRT fares differ for each line
3
Problems
9 March 2008
5
2 smart card ticketing systems are NOT compatible
Card A Card B Not compatible
Principles for Integration & Efficient Operations
MRT is a network of services
not separate MRT lines
O&M of MRT is just as important as the infrastructure
Whole of life cost of O&M will be equal to initial infrastructure cost
Common ticketing and fares
In London, Hong Kong and Singapore etc ticketing and fares are separated
from the O&M for each line
Common approach for MRT O&M on all lines in the network
To ensure integration, accountable operations & policy control
A standard contract/concession type for any operator (private, public or JV)
O&M concession should exclude ticketing system
Integration of MRT and other public transport
Need a coordinating authority at PC level egSingapore LTA, London TfL
Need legal basis for integrated public transport
9 March 2008
6
4
Provision and Management of Public Transport recent
experience
9 March 2008
7
Centrali zed public transport
authority
- government agency
- integrated service planning &
provision
- services provided by the
authority or other government
agencies
- substantial subsidies needed
Dispersed public transport
service provision
- limited role by government for
service planning & integration
- services & sometimes
infrastructure provided by the
private sector
- limited or no government
subsidy
H
i
s
t
o
r
i
c
Public transport management authority
- government agency
- integrated service planning (with
operators and others)
- services provided by private operators
under contract to the authority
- various forms of payment arrangements
between the authority and contractors
Objective:
Improvement &
integration of
public transport
Objective: innovation
& reduced unit costs
through effective use
of the private sector
Development
approach in
the past
Trend in 1990s,
eg Europe,
S. America,
NZ & Australia
Alternative
direct route
for change
Structuring Authority Functions Level of Government
StrategyLevel Function Agency
For the city
National roads
Public enterprise
Tax levels
Intergovernmental transfers
Regulation & competition
policy
Vehicle registration & safety
National ministries
Of the city
Urban structure planning
Strategic transport planning
Local road management
Public transport planning &
procurement
Traffic management
Law enforcement
Road safety
Local / regional government
Inthe city
Public transport operations
Road construction &
maintenance
Local government/ Private
9 March 2008
8
Based on World Bank (2002)
5
Diagnosis
GVNs agencies undertake those for the city functions such as
national railway lines and highways as is desirable
HCMC PC is very heavily involved in of the city as is considered
desirable by Figure 2.2 dealing with essentially local functions for
HCMC citizens
Local HCMC firms and agencies are also extensively involved in in
the city functions as is desirable
Conclusion: HCMC is fortunate that the PC has a fair degree of
autonomy for key local functions
9 March 2008
9
Structuring Authority Functions - Institutional
9 March 2008
10
Policy &
st rategy
Policy framework
Strategic planning
Regulatory policy
Financing and
pricing policies
Performance
monitoring
Regulation
Setting standards
Registration &
licensing
Enforcement
Effectiveness doi ng the ri ght thing
Program
management
Project planning
Investment
programming
Project, financing
& other approvals
Design, tendering,
contracting
Concessioning
Monitoring &
quality assurance
Service
del ivery
Infrastructure
Services
Information
Efficiency doing the t hing right
Informs
Reports
Focus is on clear separate policy, regulation, system
management & operations (ie service delivery)
6
Diagnosis
Policy and strategy can be strengthened and more closely linked
to budget processes
Regulatory functions can be improved.The capacity/authority of
public regulatory agencies need to be strengthened
Program management can be improved eg bus subsidies are
growing rapidly
Regulatory and service delivery functions are compromised by
involvement of the PC in both
Service and other contracting delivery can be improved
9 March 2008
11
Structuring Authority Functions - Policy Needs
Key policy needs that influence the role and nature of institutions
in the transport sector are:
Defining desired outcomes
Linking land use and public transport development
Coordinated, multi-modal transport planning
Public transport service standards and planning
Integration of public transport services
Investment planning and decision-making
Role of the private sector
9 March 2008
12
7
Key Public Transport Management Functions
Core functions for an Authority that includes MRT are:
project planning and programming, including preparation of business case for
projects, coordinating projects, and budget programming
coordinating requests for funding for infrastructure development and, where
needed, subsidies for service provision
infrastructure delivery, which will includes establishing financing
arrangements, the manner for delivering projects, and taking account of life-
cycle costs and management
public transport services delivery through concessions (to private sector or
other) or other business-like arrangements
fare policy, ticketing, and revenue management, which would be a minor
activity if there was no integrated fares and ticketing but is otherwise more
complex
passenger information and marketing
9 March 2008
13
Other issues
Level of government. HCMC PC &other provincial governments in the region
could be involved in the Authority through an advisory committee.
Community involvement. Can be achieved through, for example, their
involvement in various advisory committees of a Authority.
Metro rail ieMRT expertise. Special expertise is needed to manage the
development & operation of MRTbecauseof its special characteristics
Funding policy. Government will need to continue finance fixed
infrastructure for future rail lines in HCMC. Fare revenue will be inadequate
to recover all operating and maintenance costs
Extent of public transport integration. The effectiveness of an MRT system
will be maximized through integration with other public transport services
and integration of ticketing and fare systems for public transport. Achieving
this adds technical and institutional challenges, and requires the Authority to
have a broader capacity than simple delivery of rail mass rapid transit lines
with private or public delivery of rail services.
9 March 2008
14
8
4 Institutional Strengthening Options
9 March 2008
15
Option 1: Strengthen MAUR
Option 2: Interim Public Transport Authority
Option 3: Integrated Public Transport Authority
Option 4: Integrated Transport Authority
Increasing
integration
Option 1: Strengthen MAUR
9 March 2008
16
Advantages:
MAUR exists
Has breadth of
powers needed
Transport policy
set by TUPWS
Clear delineation
for MRT policy
setting & service
procurement
Disadvantages
Linkage with bus &
other policy can be
strengthened
9
Option 2: Interim Public Transport Authority
9 March 2008
17
Features:
Same as
Option 1
Except
improved
outcome
possible
through PC
level
coordination
Option 3: Integrated Public Transport Authority
9 March 2008
18
Features:
Similar to
Option 1 but
MAUR
converted to a
Public
Transport
Authority
Improved
coordination
outcome likely
10
Option 4: Integrated Transport Authority
9 March 2008
19
Features:
Completely
integrated
transport
authority
Closing Comment
HCMC PC has a single Authority for MRT already
The PPIAF team will work with the HCMC PC including MAUR staff
to refine the proposed options for effective & efficient MRT development
9 March 2008
20
1
1. Introduction
1.1 Background and Purpose
Master Plan (as approved in January 2007).
Two lines (MRT2 and MRT3) have been proposed for Asian Development Bank (ADB)
funding with another line (MRT1) to be financed by the Government of Japan. The
Government of China, is a developing a proposal for an MRT line, there are other proposals
including one from China for MRT, Malaysian interests to develop a monorail, and for a
French consortium to develop a tram route.
program.
In parallel, ADB is mobilizing a grant from the Public Private Infrastructure Advisory Facility
(PPIAF
1
) to optimize private sector participation in MRT 2 and 3, and to assist the HCMC PC
arrangements for MRT in the context of wider urban transport. The scope of the PPIAF
technical assistance (TA) therefore covers developing (i) a framework for considering private
sector participation in implementation and operation of the Project; (ii) a value-for-money
analysis for implementation approaches that involve varying degrees of private sector
participation, (iii) a detailed financial model reflecting the preferred approach and measuring
participants; and (iv) a stakeholder feedback and a description of necessary institutional and
contractual arrangements given the preferred implementation approach.
prepared by consultants undertaking the PPTA. The results of its work will be presented in

1
The Public-Private Infrastructure Advisory Facility (PPIAF) is a multi-donor technical assistance facility aimed
at helping developing countries improve the quality of their infrastructure through private sector involvement.
For more information on the facility see the website: <www.ppiaf.org>.
2
While the MRT system will be developed by the PC, the GVN will also be involved through
various approval processes and possibly financing also. It is therefore necessary to establish in
detail the roles for various agencies of these governments for project approval and
implementation, and the manner in which integrated MRT development in HCMC will be
managed.
This Working Paper presents the initial proposals for appropriate institutional
arrangements in HCMC based on identified needs, and an analysis of the strengths
and weaknesses of the current situation. The focus of the work is on the institutional
arrangements for the development and operation of optimal MRT in the long term taking into
the needs for integration with other public transport and land use developments.
The appropriate institutional arrangements need to be planned at the same time the possible
modalities for financing and operation are being considered. Hence, this Working Paper on
institutional arrangements was prepared in conjunction with the separate but
complementary paper on Private Sector Participation Options.
1.2 Development Context
With a population of approximately 6.1 million in 2004, HCMC is the largest city in Viet Nam
and its economic hub. HCMC has a total administrative area of 2,095 km2 covering 19 urban
and five suburban/rural districts. The average population density is about 2,900 inhabitants
per square km with a central area density of around 45,000 inhabitants per square km (JICA
2004). Approximately 2.3 million people were estimated to live in the three adjoining
provinces of Dong Nai, Binh Duong, and Long An which make up the Greater HCMC region
which is illustrated in Figure 1.1.
Population grew at a rate of 2.5% pa from 1989 to 2001 to reach a population of 5.285 million
in 2001. Annual growth appears to have accelerated from 2001 to 2004 as shown in Table 1.1
but it appears the apparent quickening is due to possible definitional changes over time and
differences between data sources. In this regard, MVA Asia (2005) stated that:
Over the last few years, HCMC population growth has increased from 2.18% in 2000 to 8.65% in
2004 Natural growth has been reducing over the years while migration growth has increased. A large
part of the Year 2004 apparent growth might be due to data being collected from different data sources
explaining the large increases between Year 2003 and Year 2004.
3
Figure 1.1: Greater HCMC Area
Source: J ICA (2004) ie HOUTRANS
Table 1.1: Historic Ho Chi Minh City Population
Population 2000 2001 2002 2003 2004
Average population ( 000) 5,175 5,285 5,449 5,630 6,117
Overall growth rate % pa with
components of:
2.18% 2.13% 3.10% 3.32% 8.65%
Natural growth 1.37% 1.3% 1.27% 1.15% 1.1% (est)
Migration growth 0.82% 0.77% 0.90% 1.20% 1.4% (est)
Other growth 0.00% 0.06% 0.93% 0.97% 6.15% (est)
Source: MVA Asia 2005
Population in the three adjoining provinces which in addition to HCMC make up Greater
HCMC grew from 1.949 million in 1995 to 2.244 million by 2002 according to HOUTRANS
(JICA 2004) which represents a growth rate of 2.0% pa. Residential developments and
industry are spreading from the northern and northeastern parts of HCMC in the southern
areas of Binh Duong province and in and around Bien Hoa City of Dong Nai province.
Population for the region was forecast to reach 13.5 million by 2020 with 10 million in HCMC
by HOUTRANS (JICA 2004). MVA Asia (2005) for TEWETs 2005 demand and revenue
update took a more pessimistic view assuming the 2020 HCMC population would likely reach
7.7 million up from the estimate of 7.2 million for the region in the 2003 study.
Currently, the HCMC region spreads out over an area roughly 50km in radius with
development beyond the central area concentrated along major road corridors with large areas
of agricultural or low intensity use in-between. The current dispersed structure has been made
possible by the relatively high level of motorization, specifically motorcycle ownership as
described below.
The PCs plan for HCMC is to formalize and intensify the current mono-centric urban
structure into a poly-centric arrangement with several activity or business centers located
4
around the central area along key corridors. Major expansion of the current road network is
also proposed:
46 km of elevated urban expressways are intended to strengthen accessibility of the city
center;
The primary arterial network would be extended from 206 km (within HCMC) to 476
km forming the backbone of the urban area road network. Projects comprise
construction and improvement of three ring roads, widening of existing primary roads,
and construction of new roads; and
The secondary road network would be greatly improved overall in order to form a basic
traffic distribution network.
These road projects without major travel demand management measures are considered likely
to disperse land use, and make private travel more necessary and more attractive.
Current trends are for continuing rapid growth in incomes and motorization, increased
urbanization, and associated traffic congestion, and related pollution (local and global) and
crashes, which will to some extent reduce the productivity of regions, and therefore, Viet
Nams economy. Addressing this considerable challenge requires as its foundation appropriate
institutional and regulatory arrangements to coordinate land use and transport development
management, formulation and implementation of transport policies and infrastructure, and the
delivery of efficient integrated, multi-modal transport services.
5
2. Current Institutional and Regulatory Arrangements
Central and local government policies on transport infrastructure provision, in some cases its
operation of services, and its regulation of transport infrastructure and services undertaken by
the private sector have an important influence over transport outcomes. Authoritative plans
with realistic financing, sound institutional and regulatory arrangements, and adequate
resources (human and financial) are therefore important for obtaining a well planned
transport system that is constructed to a high standard, is operated and maintained efficiently,
and provides attractive services that are financially sustainable.
This section of the Working Paper provides a review of current relevant laws, policies and
plans and a description and analysis of current institutional and regulatory arrangements.
2.1 National and Local Responsibilities
Vietnam has a unitary system of government characterized by dual subordination
2
. Central
government has decentralized considerable responsibilities to provincial and local
governments over the last decade. Hence, HCMC has considerable powers for developing
policies, plans, making investments, raising finance and regulation and operation of transport
services. Nevertheless, while considerable power is subordinated to local governments moving
decisions and outcomes closer to local communities, there remains the need to refer back to
central government for comment and often approval for key decisions.
Peoples Councils (PC) are elected at the provincial, district and commune levels with the last
elections held in April 2004. The Peoples Council is the highest state institution at the
regional and local levels and is responsible to the electorate at each level and the National
Assembly at the national level. The Peoples Council elects a Peoples Committee to serve as
the executive institution. Peoples Councils have formal practical oversight over Peoples
Committees (TI, 2006).
Ho Chi Minh City is a municipality that exists at the same level as Vietnam's provinces. It
therefore has a similar political structure to its provinces, with a People's Council of 95 elected
deputies, and a People's Committee (PC) of 13 members chosen by the council, being the
principal local governmental entities. The relevant roles and responsibilities for planning of
transport and so on of national and HCMC and other local agencies is described below based
on World Bank (2005):
2.1.1. National
MOT prepares long term transport strategies, five year plans for inclusion in the Public
Investment Program (PIP) and one year plans for inclusion in the annual State Budget
for national transport infrastructure. MOTs Transport Development Strategy Institute
(TDSI) develops the long term transport sector strategies and plans. These plans
typically identify investments and total costs for the next five to ten years and are prepared
to meet the development goals without much attention to budget constraints. Provincial
and city governments participate in the identification and definition of national projects in
their provinces.
The long term transport strategies and plans are used as a basis for preparing 5 year
investment programs that also include annual projected expenditures and potential sources

2
Oversight and accountability function according to a system of dual subordination. Ministerial departments and
agencies at each level of government report horizontally to the associated Peoples Council and vertically to the
parent agency, depending on the particular sector in which they operate (TI 2006).
6
of financing. These plans are submitted to MOTs Department of Planning and
Investment (DPI) for inclusion in the PIP but according to World Bank (2005) the
selection criteria are unclear. DPI then collates the different investment lists with the
expected sources of financing and MOT submits a comprehensive list to the Ministry of
Planning and Investment (MPI).
PIPs are also prepared without constraints of resource availability. MPI identifies available
and potential sources of financing to fund the PIP. But gaps remain. Individual projects
require approval of the National Assembly but not the PIP as a whole. Projects of
national importance (eg national security) are approved by the National Assembly; those
costing over VND 400 billion are approved by the Prime Minister; and those costing less
than VND 400 billion are approved by MPI. Road and other transport projects costing
less than VND 400 billion also have to be approved by the Viet Nam Land
Administration (VLA) before submission by MOT to MPI if the roads fall under VLAs
management. Feasibility studies are typically the basis for granting these approvals. The
Ministry of Natural Resources and the Environment (MNRE) reviews and approves
environmental impact assessments for transport projects.
The annual investment program prepared by MOT and submitted to MPI to secure the
annual budgetary appropriation does not always include the projects that were listed in the
PIP. Some projects are added while others are removed. Typically, projects listed in the
PIP require a larger budget than is allocated to MOT in the annual State Budget.
2.1.2. Local
In HCMC, as in other cities, the Transport and Urban Public Works Services
(TUPWS) of the PCs develop transport strategies, long-term plans, five year plans and
annual plans for the cities, districts, and communes and submit them for approval to the
PC. The current plans place an emphasis on the development of new urban rail and mass
rapid transit systems. In provinces, the provincial Departments of Transport (PDOT)
provide the same functions as TUPWS. During preparation of these plans, the city
authority must consult the Ministry of Transport (MOT) and obtain their
recommendations, but are not obliged to follow them. This system of dual and upward
checking is commonly called dual subordination
3
. In the case of urban projects, the
Ministry of Construction must usually be consulted.
Article 15 of the Railways Act 2005 requires HCMC PC, and other key cities and
provinces, the responsibility to formulate urban railway infrastructure development plans
after submitting to people council of the same level for initial approval and then submit to
the Minister of Transport for approval. The authority, which approves railway
infrastructure development plans . shall have right to amend the plans when necessary .
Article 14 of the Railways Act requires plans to be reasonably definitive for the first period
of 10 years and more indicative for a further period of 10 years. HCMC has an MRT
Master Plan for the year 2025 which was approved by the Prime Minister in January,
2007.
District and commune governments are subject to more binding dual subordination. The
transport plans of districts and communes have to be approved by their respective local
level PCs as well as by the TUPWS.

3
Oversight and accountability function according to a system of dual subordination. Ministerial departments and
agencies at each level of government report horizontally but upwards to the associated Peoples Council and
vertically to the parent agency, depending on the particular sector in which they operate (TI, 2006).
7
Table 2.1 summarizes the key agencies related to land and in particular urban transport and
the roles they play.
Table 2.1: Policy, Regulatory and Oversight Responsibilities
Sector Ministry/Administration Responsibility
Transport
Ministry of Transport (MOT)
Through its different modal administrations and departments
(a) plans, manages and maintains national infrastructure
through its different departments and administrations; (b) as-
sists local governments in developing transport plans and se-
lecting transport projects; and (c) manages public bus transport
plans by approving cities master plans
Transport Development Strategy
Institute (TDSI)-under MOT
Develops long and medium term transport sector strategies
and plans (in collaboration with modal administrations)
Investment (DPI)-under MOT
Integrates investment plans prepared by modal administrations
for submission to MPI for inclusion in the PIP and to MOF for
inclusion in the State Budget.
Urban
Transport:
HCMC
Peoples Committees Approves key issues such as fares, opening and closing of
routes, schedules and subsidies.
Transport and Urban Public
Works Services (TUPWS)
Transport and Industry
Management Department
(TIMD); and the Management
and Operations Centre for Public
Transport (MOCPT).
Develops cities transport strategies; Plans and manages
construction; Maintains urban transport infrastructure;
Manages bus transport; Coordinates planning and
implementation of traffic management with Police
Traffic Police under the Public
Security Department
Enforces traffic management including the operation of traffic
signals in coordination with TUPWS
HCM City Management
Authority for Urban Railways
Plans / implements rail-based mass transit plans and has
responsibility for managing and arranging for operations
and maintenance.
Railways Vietnam Railways Administration
(VNRA)under MOT
Plans and manages the development of the sub sector
Regulates the sub-sector including national and other rail
systems including metro or MRT in cities and provinces.
Provides oversight of City and Provincial rail and MRT Master
Plans and is charged with approval of technical standards
and safety of rail and MRT systems.
Vietnam Railway Corporation
(VRC)
Sole provider of rail services on national rail network
Manages enterprises that carry out construction and mainten-
ance activities, and other commercial activities unrelated to rail
National
roads
Vietnam Expressway Corpora-
tion (VEC)-under MOT
Mandated by MOT: (a) develop, finance, manage and maintain
expressways; (b) collect toll revenues; and (c) invest in off road
construction and services (such as rest areas)
Vietnam Road Administration
(VRA)under MOT
VRA operates through 4 Re-
gional Road Management Units
(RRMUs)
Plans and manages the development of the national road net-
work. Maintains the national road network
Designated Provincial Depart-
ments of Transport (PDOTs).
Mandated by MOT/VRA to manage half of the national road
network
Local roads:
(Provincial,
District and
Commune)
VRA Performs a central planning and advisory role for the local road
network.
Provincial Departments of
Transport (PDOTs),
Develops provincial, district and commune transport strategies.
Plans and manage the construction of provincial road net-
works. Maintains provincial road networks. Supports district
and commune governments in planning the maintenance of
their networks
Provincial Peoples Committees
(PPC)
Approves provincial transport strategies and plans.
District Departments of Trans-
port (DDOTs), and Communes
Peoples Committees (CPC)
Approves district and commune transport plans.
Support Vietnam Land Administration Approves Category B and C projects (less than VND 400 bil-
8
Sector Ministry/Administration Responsibility
(VLA) lion) before MOT submission to MPI if land falls under its man-
agement.
Ministry of Natural Resources
and the Environment (MNRE)
Reviews and approves Environmental Impact Assessments of
national transportation projects.
Ministry of Planning (MPI) Approves Category B and C projects (less than VND 400 bil-
lion) for inclusion in PIP and State Budget.
Ministry of Finance (MOF) Implicitly approves maintenance budgets of MOTs modal ad-
ministration (except for VRC) before inclusion in the State
Budget.
Prime Ministers Office Approves Category A projects (more than VND 400 billion)
Administrative authority over VAC, Vinalines, VRC, Vinashin.
National Assembly
Approves projects of national importance such as national
security and defense projects.
Implicitly approves all national transport investments included
in the annual State Budget.
Source: Edited from Table 2, Annex 1 of World Bank (2005).
2.2 Current Funding Arrangements
More generally the capacity of HCMC PC to meet recurrent obligations is of interest.
All taxes and all charges are administered at national level including property and fuel taxes.
There are no local taxes. Provincial and City tax departments are responsible for collecting
taxes. Initial enquiries indicate that information relating to the HCMC PCs capacity to meet
ongoing financial obligations is currently sparse:
The PC has four main sources of income: (i) grant allocations from central government
which represent its share of national tax collection
4
according to agreed formula (ii) own
source revenues, including (a) profits from its own business activities, and (b) bonds etc
that it raises and which it must in time repay; (iii) grants from the national government
(which will include some IFI finance); and (iv) loans from IFIs to the national government
that are on-lent to the PC and which the PC must repay.
Business activities (Item (ii)a) may include development or auction of underutilized lands
but the potential to raise significant income from this source appears to be limited as
considerable land holdings are under the control of State-owned enterprises and 80% of
revenue that can be realized from such activity must be remitted to MOF which is likely to
reduce the enthusiasm for such projects. The City may also develop or participate in
commercially-oriented projects such as toll roads which if successful may generate returns.
The Ho Chi Minh City Infrastructure Fund for Urban Development (HIFU)
5
managed
the first municipal bonds (Item (ii) b) issued by the HCMC PC. In a loan approved in June
2007 the World Bank will provide a line of credit to HIFU to invest in cost recovery

4
The revenues from some taxes are retained 100% at the central level, some other taxes are assigned 100% to
provinces, and revenues of remaining taxes are shared between the central government and the provincial
governments where the taxes are collected. District and commune governments can collect certain fees such as
waste collection and school tuition fees, but there are no local taxes. It is understood that around 15% to 17% of
all taxes collected in HCMC are assigned to the PC for funding of local administrative costs and maintenance
activities.
5
The Ho Chi Minh City Infrastructure Fund for Urban Development (HIFU) was established in 2003 to
aggregate and managing funds from a variety of sources, to finance a range of infrastructure projects and to
provide a legal structure for organizing joint ventures with private investors (Coulthart et al, 2006).
9
oriented municipal infrastructure investments in partnership with the private sector. In
identifying potential investments HIFU will work with the Department of Planning and
Investment (DPI) and other departments to identify investment needs in HCMC, as
described in HCMC master plan, which can be financed via public private partnerships.
HIFU will then work with the city departments to put in place effective project structures
and then invite private investors to participate in the projects (World Bank 2007). In
November 2007, the Chairman of HCMC PC requested HIFU to be the key City Agency
responsible for arranging finance for MRT Line 2.
Other sources of income include revenue from equitization of State Owned Enterprises.
The amount of revenue received from this source by HCMC is unknown but in general
for Viet Nam the amount of revenue is low.
Information on budgeted income and expenditure appears to be available for the PC
either from MOF or the PC. Budgeted or actual historic outturn expenditure by type may
also be available but at the time of writing the PPIAF team has not sighted this
information.
What is missing is a reliable forward program of committed funding of all types
(administration, recurrent expenditure and planned investment) to enable reliable financial
planning. This information gap has significant consequences for any reliable assessment of
the Citys capacity to meet recurrent obligations of MRT or any other equally important
project or program. This apparent significant weakness at PC level was described by
World Bank (2006) as existing at national level also. This is due to there being no reliable
process of forward recurrent expenditure and investment programming (nor the ongoing
operating and maintenance liabilities of this investment) at national or local government
levels.
Further complicating these problems is (a) an identified high need for future urban
infrastructure several orders of magnitude higher than in the 1990s (Coulthart et al 2006);
(b) lack of realistic integrated sectoral planning, spatial and project planning caused by
fragmented responsibilities between and among national and local agencies (c) project
feasibility studies of inadequate quality leading to unreliable cost estimates and inadequate
prioritization; and fragmented responsibilities for investment versus maintenance and
operations. Consequently, Coulthart et al (2006) identified the need for cities and
provinces to reduce their reliance on the state budget and to start the transition away from
concessional donor financing for urban infrastructure services. This would involve
diversification of the financing sources for infrastructure development focusing on
increasing the role of the private sector.
Detailed analysis of this issue is not within the scope of the PPIAF work. ADB is proposing
to carry out a TA on the Citys Socio-Development Framework which will include a
component on municipal finance.
It is noted that as at early 2008, the Ministry of Finance had embarked on preparation of the
future investment, funding and implementation plan for MRT in Vietnam. ADB and JBIC
have both proposed to Ministry of Finance that IFI lending for MRT infrastructure be given
as grants to local governments but finance for trains etc be on lent.
10
2.3 Key Policies and Regulatory Provisions
2.3.1. Policy
As described above, HCMC (and Hanoi) have major responsibilities for city level urban
transport although the central (ie national) government retains great influence through its role
as the approving authority for major plans and investments.
At a national level the Transport Sector Development Strategy (TSDS) to 2020 has been
developed to support the ten year (2001-2010) Socio Economic Development Strategy
(SEDS) and the Comprehensive Poverty Reduction and Growth Strategy. World Bank (2005)
states SEDS strongly endorses the development of public transport services and long
term transport planning in large cities and cites the rising rate of traffic accidents as a
concern.
World Bank (2005) reports that TSDS lists the following policies that govern the
implementation of the development strategy including:
Targeting domestic and foreign sources of finance, both private and public, and
charging users for the construction and maintenance of infrastructure whenever
possible.
Encouraging private sector participation by speeding up the equitization of state-
owned enterprises and separating state management from operations and business.
Ensuring transport safety and environmental protection in all transport related
business.
Utilizing new technologies and processes in construction and operations.
For both HCMC and Hanoi a key focus is to promote and develop public transport, and to
develop road infrastructure to alleviate congestion, and as appropriate open up new areas for
urbanization (World Bank 2005). The citys master plan focuses on bus system development
through 2010 and significant investments in urban rail by 2020 and has set the goal of raising
the public transport mode share to 20% by 2010 and 44% by 2025
6
rising from around a 5%
share in 2007.
Both cities aim to limit to limit the ownership and use of motorcycles but despite some steps
in this direction the overall impact of this policy is likely to be muted.
Current transport policies for HCMC are contained in a variety of documents and decrees.
MVA (2006) amplified their understanding of current policies of the HCMC PC in relation to
public transport:
to very significantly increase the number of trips served by public transport,
to contain the growth in public subsidies to the public transport system to an acceptable
level,
to avoid the city having to purchase buses from its own funds in future
to encourage the participation of private companies in the provision of urban bus
services, and
protect the most vulnerable social groups from the adverse impacts of any fares
increases.

6
Current demand modelling by the PPTA Team indicate likely mode split may be around 20-25% at 2025.
11
Noting that some of the policies were contradictory MVA (2006) concluded that an
appropriate compromise will be needed to meet future needs in HCMC.
2.3.2. Key Laws
National and city legislation governs the present provision of public transport services,
currently mainly bus, in HCMC. These are described in more detail in the next section.
The laws of most relevance to urban rail or urban MRT are:
Railway Law 2005 (NA Order No. 35/2005/QH11); and
HC PC Decree 119/ 2007/QD-UBND establishing the Management Authority for
Urban Railways.
Railway Law
Within cities the Railway Law 2005 defines relevant types of urban railway as including metro
or MRT using a wide variety of technologies. Authority for planning urban railway networks is
given to Peoples Committees (Articles 14 and 15). Master Plans shall be prepared covering a
detailed period of 10 years and less definitive further 10 year period.
Article 15 states The Provincial Peoples Committees shall assume the responsibility to
formulate urban railway infrastructure development plans after submitting to Peoples Council
of the same level for initial approval and then submit to the Minister of Transport for
approval. The authority, which approves railway infrastructure development plans . shall
have right to amend the plans when necessary . Ultimately the Prime Minister shall approve
the Master Plan.
Article 16 on urban railway policies recognizes that urban rail is a key urban public transport
mode, that central government will support the total investment for approved railway
projects with State budget and each year the Government shall extract an amount from the
State Budget to support expenses for public transport services in cities including urban railway
transport.
Article 58 on basic requirements for construction of urban railway infrastructure reinforces
urban railways will be constructed according to technical standards stipulated by the Minister
of Transport, that urban railways will ensure the connection to other urban public
transport modes and the national railway for easy transit of the passengers. This confirms
Article 9 which gives the Inspectorate of the Ministry of Transport responsibility for
inspection of railway activities (implies certification of both technical standards and standard
of safety).
Article 61 on urban railway infrastructure management and maintenance states that
peoples committees shall stipulate the management, maintenance of the urban railway
infrastructure invested by organisations and individuals and that the urban railway enterprise
shall be responsible to maintain state financed infrastructure through public tender or public
service orders by provincial peoples committees.
Article 74 on railway transport controlling provides the power to sign to sign contracts
with railway infrastructure operators on using railway infrastructure for railway transport; to
sign contracts with railway transport operators on supplying controlling and other services
related to railway transport.
12
Article 83 defines railway business activities as covering railway transport operation and
supplying services supporting railway traffic and Article 84 provides for a level playing field
to be provided for all operators.
Article 85 defines railway infrastructure business as the activity to invest, manage, and
maintain infrastructure for selling, giving concession of, leasing or collecting fee from using
railway infrastructure system and to provide railway supporting services and other services on
the base of exploiting their managed railway infrastructure capacity and that organisations
and individuals using railway infrastructures owned by the State or other organisations for
their business activities must pay fees or charges for such usages, and further that railway
infrastructure invested by the State shall be allocated to enterprises through tender, orders or
plans.
Article 93 on railway transport fare, price of ticket states that fares for passenger
transportation on railways are set by railway transport enterprises thus (railway transport
enterprises are interpreted to be operators refer Article 91 on Passenger Transportation
Contracts). Where the operator is operating on the urban rail network then to ensure policy
control is retained by the PC, the operating contract or agreement between the PC and the
operator will need to clarify that the PC sets fares. The review by the PPTAs legal team has
since confirmed that fare setting control is retained by the PC.
Decree 119/ 2007/QD-UBND establishing Management Authority for Urban
Railways, HCMC
The Urban Railway Management Unit (known as the Management Authority for Urban
Railways) was established in September 2007 by Decree 119. The Authority replaced the
previous Urban Railway Management Division under TUPWS. MAUR is also under the
guidance of Central Ministries branches and Departments branches of the city.
The Decree provides that the Authority is an administrative unit which has to ensure by itself
a part of its operation cost; has legal entity; has its own stamp and is entitled to open bank
account at the City Treasury according to provisions of law.
Key responsibilities assigned to the Authority are:
1. To provide the city Peoples Committee with consultancy regarding the master plan
for construction, operation and exploitation of urban railway lines of the city; the
development of the urban railway network according to the transport planning up to
2020.
2. To be Investor and to manage, operate urban railway lines of the city.
3. To carry out the role and function of a direct partner to foreign partners in
transactions relating to the project.
4. To prepare documents, materials, contents of negotiation and together with related
agencies to help the city Peoples Committee negotiate treaties and other agreements
with sponsors relating to projects constructing urban railway lines of the city.
5. To develop detailed programmes, plans and implementation schedule of component
projects; to organize the effective management, operation, use of sources of the
project and to deal with problems arising during projects implementation.
6. To guarantee adequate data according to requirements of foreign partners for the
management, operation phase of the project following the programmes, plans
approved by competent authorities.
13
7. To fully execute legal provisions of the State during the management and operation of
the investment project and related issues according to international practice and
provisions of Vietnamese laws.
8. Strictly execute the financial report regime, regimes on accounting, statistics, auditing,
balancing according to current provisions and requirements of foreign partners in
compliance with the signed contents.
9. To ensure the cooperation with functional agencies and other related projects of the
city in order to effectively carry out the project.
10. To import, export materials, equipment for construction and operation of approved
projects.
11. To prepare annual plan for capital use, disbursement (domestic capital and loan source
from foreign countries) following requirements of project schedule and in compliance
with the domestic financial mechanism and requirements of foreign partners in order
to guarantee project implementation schedule.
12. To ensure full compilation and implementation of contents, processes in the fields of
train operation, exploitation management after construction phase is completed.
13. The Urban Railway Management Unit is allowed to establish Project management
units and subordinates to manage and operate projects when they are brought into use
or to employ qualified organizations which have experiences and financial capability
for management, operation of urban railway lines when construction is completed.
14. To associate with or join domestic or foreign organizations or to employ experienced
experts in order to train, improve professional knowledge in the fields of project
management and operation, exploitation organization.
15. To co-operate with local authorities, related individuals, organizations to settle issues
relating to compensation, assistance, resettlement, relocation.
16. To ensure the implementation of the archive information, confidentiality and report
regime according to provisions.
17. To carry out other tasks authorized or assigned in writing by the Chairman of the city
Peoples Committee.
It is noted that Decree 119 provides the Authority with wide powers but creates unusual
incentives in that:
It has to find a portion of its operating cost;
It can carry out the role and function of a direct partner to foreign partners in
transactions relating to the project; and
It can be both an investor, regulator and operator of MRT services and a partner to
foreign investors.
According to a HCMC PC regulation the current MAUR structure is shown in Figure 2.1.
With new responsibilities for management of operations and maintenance, the number of staff
in MAUR is increasing. It is also understood that it is proposed to revise the current structure
of MAUR in the near future to better reflect the management and operational functions.
Guidance and suggestions on how a new structure may be derived is provided in Section 5.
14
Figure 2.1: Current Structure of MAUR
Source: MAUR
2.3.3. Laws Governing Involvement of the Private Sector in Urban MRT
Operations and Related Investment
MVA (2006) identified the following national legislation that requires any organization or
individual wishing to carryon business in public passenger transport must satisfy the
requirements of the following national legislation, whichever is appropriate to the status of the
applicant:
Law on Enterprises, 1999;
Law on Foreign Investment in Vietnam, 2000;
Law on Cooperatives, 2003; and
Law of State-Owned Enterprises 2003.
The approval is specific to the business of public passenger transport. Foreign investment is
permitted through Business Cooperation Contracts or Joint Venture with a Vietnamese
Partner. The rules of investment are administered by the Ministry of Planning and Investment
who are the licensing authority.
National and municipal legislation governing public transport (ie bus) services and also the
role of the authority also comprises both national and municipal legislation:
Decree of the Government No.92/2001/ND-CP of December 11, 2001 Conditions
for Carrying on the Motor Vehicle Transport Business;
Government Decree 24/2000/ND-CP of 31 July 2003 Regulations on Foreign
Investment in Vietnam;
Government Decree No. 27/2003/ND-CP of 19 March 2003 providing amendments
and additions to Decree 24/2000; and
Government Decree No. 31/2005/ND-CP of 11 March 2005 on The Manufacture
and Provision of Goods and Services for Public Utilities' (including buses).
15
MVA (2006) also reports that the HCMC PC has also enacted the following decisions to
manage and regulate bus services:
Saigon Bus was established by Decision 5350/QD-UB of HCMC PC of 1 October
1997;
Decision No. 4196/QD-UB-NC Establishment of MOCPT (under TUPWS);
Decision No. 355/1998QD-UB-NC, Approval for organization and activity
regulations of MOCPT (TUPWS);
Decision No. 321/2003/QD-UB of 30 Dec 2003 Issuing the Regulation for
Management of Public Passenger Transport by Bus in Ho Chi Minh City; and
Decision 49/2005/QD-UB of HCMC PC Amendment of Decision No.
321/2003/QD-UB of 30 Dec 2003.
These laws and decrees would appear also to be largely relevant to the approval of an urban
MRT operator even if they invest in some of the equipment such as trains, as bus operators
also invest in the buses they operate.
A law with apparent, but little practical relevance to the participation of the private sector in
urban railways, where there is investment contemplated is the (Draft) Decree on Investment
in the Form of Build-Operate-Transfer (BOT), Build-Transfer-Operate (BTO) and Build-
Transfer (BT) Contracts 2005
7
.
NewBOT Decree, dated 11th May 2007
The new BOT decree does not address social services such as those that have limited scope
for cost recovery such as MRT. That is, it does not obviously cover PPP possibilities in MRT.
The law also allows for government to invest in a project delivery organization which creates a
conflict of interest.
Chiplunkar (2006) in his review of the then draft BOT Law concluded:
there is a need to review basic philosophy in BOT
Approval mechanism by govt. for design and construction inputs, supervision during
construction etc. must be appropriate to risk transferred eg if design risk is with private
sector, monitor the performance not approve the design...
Risk transfer to private sector not efficient due to above...
And that:
...that options for PSP to be need to be made more flexible to include variations of
BOT.

7
Proposed to replace (a) Decree 77/CP dated June 18, 1997 of the Government issuing Regulations on
investment in the form of Build-Operate-Transfer (BOT) contracts applicable to domestic investments (b)
Decree 62/1998/ND-CP dated August 15, 1998 of the Government issuing Regulations on investment in the
form of Build-Operate-Transfer (BOT), Build-Transfer-Operate (BTO) and Build-Transfer (BT) Contracts
applicable to foreign investments in Vietnam; and (c) Decree 02/1999/ND-CP dated January 27, 1999 of the
Government on amendment of and addition to a number of articles of the Regulations on investment in the
form of Build-Operate-Transfer (BOT), Build-Transfer-Operate (BTO) and Build-Transfer (BT) Contracts
applicable to foreign investments in Vietnam.
16
2.3.4. Other Relevant Laws and Decrees
Other generally relevant laws are:
Law on Procurement. No. 61/2005/ QH11 regulating procurement activities to select
bidders for the provision of consulting services, goods and civil works of amongst
others things investment projects using State funds of 30% or more and for major
reconstruction and maintenance;
Law on Construction which took effect July 1, 2004;
Draft Unified Enterprise Law to ensure a level playing field between any type of
operator (eg State or private); and
Draft Law on Management and Use of State Assets (in Vietnamese language) the
PPTAs legal team have been requested to review this Draft Law to check the relevance
in relation to use of a possible Gross Cost / availability style operating contract for
MRT.
Table 2.2 summarizes the main legal and regulatory provisions governing the transport sector
in Viet Nam.
Table 2.2: Main Legal and Regulatory Provisions Governing the Transport Sector
Sector Legal Provision Purpose
Transport
Transport Sector Development Strategy To
2020 (PMD No.206/2004/QD-Ttg)
Articulates Vietnams transport policies, set priorities and
defines some targets for transport infrastructure,
services and industries.
Responsibilities of Ministry of Communication
and Transport (Gov. Decree No.34/2003/ND-CP)
Specifies functions, responsibilities, and organization of
Ministry of Communication and Transport.
Roads
Road Transport Plans To 2010 and Orientation
to 2020 (PMD No.162/2002/QD.TTg)
Sets out government policy for national, provincial,
urban and rural roads.
Road and Traffic Law (NA Order No.
26/2001/QH10)
Establishes traffic and road safety rules, defines six
classes of roads and the responsibilities for their
financing and administration.
Management of Road Infrastructure (Gov.
Decree No.186/2004/ND-CP)
Establishes technical standards for the definition of the
different road classes; and defines procedures for
infrastructure planning and project approval.
Establishment of Vietnam Investment and
Expressway Development Corporation (VEC)
(MoT Decision No. 3033/QD-BGTVT, October
2004)
Specifies the broad responsibilities for VEC.
Organizational and operational charter of the company
to be established by the Board of Directors.
Vehicle inspection -nationwide
(Ministry of Transport Decision No. 4134/2001/QD-
BGTVT)
Defines rules and procedures for 4-wheel motor vehicles
to undergo regular vehicle inspection for technical safety
and environment protection
Railways
Establishment of Vietnam Railway Corporation-
VRC
(PMD No.34/2003/Q-TTg)
Establishes the corporation as the operator of rail
services.
Establishment of Vietnam Railway
Administration-VNRA
(Decree No. 34/2003/ND-CP)
Places policy, development and regulatory functions in
VNRA.
Railway Law
(NA Order No. 35/2005/QH11)
Regulates railway activities, including investment,
construction, and management of infrastructure,
management of vehicles and participants on train
operations including 3
rd
party operators, railway traffic,
safety. Delegates rail and MRT responsibility to Cities
and Provinces.
Urban
Transport
Mass Transit Master Plan to 2025
(Approved J anuary 2007)
Master plan that lays out investment strategy including a
focus on bus development until 2025.
Public (Bus) Transport
(Decisions No. 02/2001/CT-UB, No. 45/2002/QD-
UB and Official letters No. 89/UB-DT and No.
Plan to promote public transport. Describes Model Bus
scheme on pilot routes with increased frequencies new
(government subsidized) buses and associated
17
Sector Legal Provision Purpose
1637/UB-DT) improvements in infrastructure.
Establishing the Management Authority for
Urban Railways
(HC PC Decree 119/ 2007/QD-UBND).
Urban rail and MRT preparation, construction, and
arrangement of operations and maintenance. Updating
of Urban Rail including MRT Master Plan.
Decision 5350/QD-UB of HCMC PC of 1 October
1997
Establish Saigon Bus
Decision No. 4196/QD-UB-NC Establishment of MOCPT (under TUPWS)
Decision No. 355/1998QD-UB-NC Approval for organization and activity regulations of
MOCPT (TUPWS)
Decision No. 321/2003/QD-UB of 30 Dec 2003 Regulations for Management of Public Passenger
Transport by Bus in Ho Chi Minh City
Decision 49/2005/QD-UB of HCMC PC Amendment of Decision No. 321/2003/QD-UB of 30 Dec
2003
Decision No: 101/ QD-TTg of 22 J anuary 2007 Mass Rapid Transit master plan
Urban traffic congestion prevention program
Decision No. 72/2005/QD-TTG
5 point program on urban traffic congestion prevention.
Includes enhancing public transport while restraining
private vehicle ownership and use.
Source: Updated from Table 1, Annex 1 of World Bank (2005). MVA (2006) provided information on various
decisions affecting bus transport
2.4 Transport Agencies and Functions in HCMC
The HCMC PC is the key agency responsible for planning and delivery (ie here referring to
regulation, purchasing of services and oversight, and construction of infrastructure) of public
transport (bus) and mass rapid transit and supporting land use and transport management
functions. Within the PC the following agencies have key roles for urban transport:
Transport and Urban Public Works Services (TUPWS) which is responsible for
preparation of city transport strategies, the planning and management of construction,
maintaining urban transport infrastructure, planning and managing bus transport; and
coordinating planning and implementation of traffic management with Police. For
planning and regulation of urban public transport (bus/ other) the Management and
Operations Centre for Public Transport (MOCPT) of TUPWS is the most important
agency;
Management Authority for Urban Railways (MAUR)
8
plans and implements rail
based mass transit infrastructure and responsible for operations refer Section 2.2.2;
Urban Planning and Architecture Department (DUPA) Land Use Master Plan
preparation and approval of developments. The process of planning is normative and
appears not to reflect market preferences nor what is optimal in terms of infrastructure
and social services provision. Land approvals are separately made by the Department of
Natural Resources and Environment (DNRE) with little linkage to the Master Plan.
Similarly infrastructure planning is made with little reference to the Master Plan. In
addition, even for individual building and more major developments there are no
specific standards or guidelines providing certainty to developers on how much Gross

8
Until September 2007, it was known as the Urban Railway Management Unit and was under TUPWS.
18
Floor Area (GFA) they can build or other conditions such as building set back and
building form; and
Department of Planning and Investment investment promotion, coordination of
investment including development of development assistance from IFIs and bilateral
sources;
Department of Finance treasury, budget, investment planning and arrangement of
sources of finance.
There are a further 19 Departments within the HCMC PC and these are:
Department of Industry;
Department of Tourism;
Department of Natural Resources and Environment;
Department of Education and Training;
Department of Science and Technology;
Department of Labor, War Invalid and Social Affairs;
Department of Foreign Affairs;
Department of Agriculture and Rural Development;
Service of Trade;
Department of Justice;
Department of Culture and Information; and
Department of Construction.
Department of Health;
Department of Physical Culture and Sports;
Department of Post and Telecommunication;
HCMC Customs Bureau;
HCMC Tax Bureau;
HCMC Statistics Bureau; and
HCMC Department of Fire Brigade.
The key functions of national and local government with respect to transport are mapped by
the main transport agencies responsible for rail MRT, bus and other public transport, roads
and traffic and street management and shown in Table 2.3. This table confirms the important
role of the HCMC PC for urban transport in the city. While further comment is made later in
Section 4 of this Working Paper on the appropriateness of the allocation of functions, it can
be seen that at present, the regulatory (including service specification) and operational
arrangements for urban mass rapid transit are defined as belonging to the newly created
MAUR thus confirming the important role of this PPIAF financed TA in providing
appropriate advice on how best to establish appropriate arrangements.
19
2.5 A Framework for Analyzing Institutional Functions
2.5.1. A Hierarchy of Transport Organization
World Bank (2002) provides a helpful means for ensuring a coherent approach to transport
planning and management, noting that urban transport strategy operates at three levels (refer
Figure 2.2):
Strategy for the city which is the concern of the GVN and HCMC PC and other
local governments in the region, which have the responsibility for formulating regional
development policy, for allocating intergovernmental funding transfers, and for
establishing the legal framework within which lower-level authorities and agencies
operate;
Strategy of the city which is the concern of HCMC and other local governments as
they are responsible for determining their own internal priorities, supplementing the
resources available from local sources, and allocating the resources at their disposal to
achieve city objectives it is also the concern of citizens who may not be well heard or
represented through the local political process; and
Strategy in the city which is the concern of implementing agencies, both private and
public sector, who have the responsibility for performing tasks for which they are
responsible, and who may have some degree of technical autonomy in undertaking these
duties.
20
Table 2.3: Current Main Transport Agency Functions in HCMC
Functions Transport sector agencies
Rail (inter-
urban)
MRT Other Public
Transport
Roads &
Road Vehicles
Traffic & Street
Management
Policy and Planning
Policy and Planning VNRA MAUR TUPWS with advice of
its Management and
Operations Centre for
Public Transport
(MOCPT)
TUPWS local
VRA national
VEC
expressways
TDSI/ MOT
TUPWS & its
Urban Transport
Management
Division (UTMD)
Program development and management for infrastructure provision
Design VNRA, consultants MAUR, consultants TUPWS TUPWS, VRA,
VEC,
consultants
TUPWS & UTMD
Construction preparation &
management including land
acquisition
VNRA, contractors MAUR, consultants TUPWS TUPWS, VRA,
VEC,
contractors
TUPWS & UTMD
Delivery of works VNRA, contractors MAUR, contractors TUPWS TUPWS, VRA,
VEC,
contractors
Saigon Traffic
Management
Company
Maintenance VNRA, contractors MAUR, contractors TUPWS TUPWS, VRA,
VEC,
contractors
Saigon Traffic
Management
Company
Financing Government
budget / private
finance
HCMC budget/
IFIs/ bilateral
sources/ private
finance/ MAUR
investment
PC Budget / MOCPT
investor role
PC / national
budget, tolls/
private finance
for BOT
expressways
Government
budget
Service delivery, including operations & maintenance
Provision of services VRC MAUR to arrange
and can participate
in operations by
Decree 119; other
private or foreign
partners
anticipated
Saigion Bus Company,
(SGB 100% State-
owned)/ Saigon Star
J V of SGB &overseas
investors, Citranco a
private company with
shareholding by SGB,
and many Coopera-
tives (private)
UPWS, VRA,
VEC,
contractors
PC Police /
TUPWS Public
Benefit Enterprise
Ticketing/ tolls and
marketing
VRC MAUR to arrange MOCPT plus operators TUPWS, VRA,
VEC
Na
Service specification &fares VRNA/ VRC MAUR to arrange TUPWS/ MOCPT VEC for tolls Na
Contracting VRNA/ VRC MAUR to arrange MOCPT TUPWS, VRA,
VEC
Na
Contract compliance VRNA/ VRC MAUR to arrange MOCPT TUPWS, VRA,
VEC
Na
Financing Government
budget/ user fees
MAUR to arrange Government subsidy
and revenue from
passenger fares
Private for BOT
expressways/
government
budget
Na
Regulation & enforcement VRNA/ VRC MAUR to arrange MOCPT/ Police PC Police for
for vehicle
registration &
MOT/ TUPWS
for driver
licensing
PC Police
Certification and safety MOT Inspectorate MOT Inspectorate Nil As above Na
Source: Table 2.2 (J ICA 2004); Table 2.1 (above), MVA (2006) and consultant interviews; Na means Not Applicable.
21
These general principles are observed in a general sense with the current split of
responsibilities in HCMC PC and Central Government (ie GVN). Further discussion is
provided in the next section dealing with diagnosis.
Figure 2.2: Allocation of Strategic Functions
Strategy Level Function Agency
For the city
National roads
Public enterprise
Tax levels
Intergovernmental transfers
Regulation & competition
policy
Vehicle registration & safety
National ministries
Of the city
Urban structure planning
Strategic transport planning
Local road management
Public transport planning &
procurement
Traffic management
Law enforcement
Road safety
Local / regional government
In the city
Public transport operations
Road construction &
maintenance
Local government/ Private
Source: World Bank (2002:154)
2.5.2. Structuring Transport Activities
In addition to consideration of the vertical distribution of transport functions between
levels of government, the horizontal distribution of functions within any given level will
have a substantial impact on the effectiveness and efficiency of activities in the transport
sector. The activities undertaken by transport agencies can be categorized as (see also Figure
2.3):
policy and planning, which involves identifying future strategic needs and developing
the policies and plans required to achieve government objectives. It also includes
monitoring and evaluating the performance of outcomes against government objectives,
using this information to refine strategies, and identifying strategic resource needs;
regulation, which involves establishing and applying technical standards for safety,
security and environmental performance of public transport, and economic regulation
needed in response to market failure;
program development and management, which involves translating policies,
strategies and regulatory requirements into specific actions such as programs and
projects and providing oversight and monitoring of their delivery; and
service delivery, which involves delivering, or ensuring the delivery, of transport
infrastructure and services.
22
Figure 2.3: Categorizing Government Transport Functions
Source: Study Team
These categories of activity serve two broad objectives:
effectiveness, which is related to ensuring that choices are directed to achieving the
things that the community values, with clear linkages from the desired outcomes to the
outputs of government activities that are needed to achieve the outcomes to, in turn, the
controls, services or other outputs that need to be delivered to achieve these outcomes;
and
efficiency, which is to provide the identified controls, services or other outputs that
have been decided on at the lowest possible cost.
This approach has a number of implications for institutional management, for example, it:
identifies the need to establish clear policies and implementing strategies so that those
involved in delivering transport infrastructure and services have an explicit
understanding of what is expected of them;
ensures a productive tension between those responsible for strategic planning, project
development and delivery;
reinforces the need for clear allocation of tasks to agencies to avoid ambiguity about
which agency is responsible for each of them;
indicates the need for performance management systems that are transparent and hold
managers accountable for delivery of agreed outputs;
shows a need to separate conflicting functions, in particular;
o to separate regulatory from operational activities to avoid the conflict of interest
that arises from an agency regulating itself;
Policy &
strategy
Policy framework
Strategic planning
Regulatory policy
Financing and
pricing policies
Performance
monitoring
Regul ation
Setting standards
Registration &
licensing
Enforcement
Eff ectiveness doing the right thing
Program
management
Project planning
Investment
programming
Project, financing
& other approvals
Design, tendering,
contracting
Concessioning
Monitoring &
quality assurance
Servi ce
del ivery
Infrastructure
Services
Information
Informs
Reports
23
o more generally, to separate decisions on effectiveness from those regarding
efficiency so that each area of activity is undertaken with a clear focus; and
o to separate commercial activities from non-commercial activities so that the
former are undertaken in a businesslike way with a unmistakable commercial
imperative; and
indicates that the private sector can be used to deliver services within a clear framework
set by government, and that the choice of whether to use government agencies or the
private sector to deliver services is a decision that should be based on the approach that
has the lowest cost.
2.6 Diagnosis
Figure 2.2 shows a general allocation of functions that supports transport integrity, minimizes
the overlap between levels of government and community institutions, and which draws on
the respective strengths of these institutions. Comparing current participating agencies with
the allocation of functions in Figure 2.2:
GVNs agencies undertake those for the city functions such as national railway lines
and highways as is desirable;
HCMC PC is very heavily involved in of the city as is considered desirable by Figure
2.2 dealing with essentially local functions for HCMC citizens;
Local HCMC firms and agencies are also extensively involved in in the city functions
as is desirable.
Although approvals or comment need to be made from the centre (ie national level) what is
proposed and the execution of of the city and in the city functions is local. Provincial and
city government transport authorities prepare their plans that are then approved by the
Peoples Committees and Councils and are then submitted to MPI. These transport authorities
request and receive recommendations on their plans from MOT but are not obliged to follow
them.
World Bank (2005) confirms this analysis while noting some problems by stating that the
decentralization of the last decade has been a positive step in moving decision making closer
to those most affected by their outcomes. Not unexpectedly, decentralization has resulted in
difficulties in coordination across different levels of government. While subject to dual
subordination, decentralization has afforded local governments considerable autonomy in
decision makingAt present there is no coordinating mechanism to ensure consistency
between national and local plans, and the adherence of local plans to broad planning
guidelines.
Problems also exist in the vertical distribution of effectiveness functions (policy and
strategy, regulation) and efficiency functions (program management, service delivery):
Policy and strategy is weak. World Bank (2005) identifies that the inadequate policy
and planning framework is a major deficiency. At the planning level, there tends to be a
gap between broad government strategies and detailed sectoral plans, as well as a
fragmentation in the responsibilities for developing plans often resulting in long lists of
wish lists many of which are not consistent, viable or have the required financing.
Some of the projects that get implemented were not in the plan. The basis for the
selection of the projects that end up being implemented is not clear. Agencies at PC
level do not appear to get involved in early formal coordination with each other but do
so at the PC level where scope for optimization is limited. Feasibility studies are
24
excessively focused on technical matters and not on demand or pricing matters. The
planning process can also be characterized by suboptimal resource allocation at various
levels with misallocation between new investment and maintenance, among modes and
among different investments within each sub sector. The separation of planning and
budgeting decisions creates a disconnect between planning for new investment and
maintenance. Section 2.2 confirms these observations of the World Bank
Regulatory functions need to be improved. The capacity/authority of public
regulatory agencies in Ho Chi Minh City needs to be strengthened (World Bank 2005).
Program management is poor. Bus routes are allocated to operators in an ad-hoc
manner even though operators receive significant subsidies which are likely not
sustainable nor audited (World Bank 2005).
Regulatory and service delivery functions are compromised by involvement of the
PC in both. For example, some bus operators providing bus services are directly owned
by the PC. Construction firms also are units of the PC competing for contracts
procured by the PC. Project Management Units responsible for implementation on
behalf of PCs and donor agencies are weak and resultant construction quality is poor as
is time performance. This comment also potentially applies to the new Management
Authority for Urban Railways under Decree 119 of HCMC PC.
Service eg bus and other contracting delivery is of less than desirable efficiency
and quality.
Overall, World Bank (2005) summarizes the main challenges facing the transport sector in
Viet Nam as (1) how to increase efficiency in both resource utilization and service delivery,
(2) how to achieve adequate and sustainable financing and (3) how to facilitate growth for
future urbanization. These challenges are formidable given the rapid growth of the economy,
associated motorization and related congestion, emissions and crashes.
Other problems noted by World Bank (2005) and JICA (2004) relevant to urban transport are:
Rigid planning process, lack of cross boundary coordination between local
governments, unstructured peri-urban growth, distorted land markets;
Poor traffic organization as a result of a lack of a traffic management culture and
fragmentation of responsibilities between different elements of the PCs Public Works
Department (responsible for planning, designing, implementation and some elements of
enforcement) and the traffic police (responsible for operations and most enforcement);
and
Resettlement is a major source of implementation delay in transportation projects due to
(a) lack of sufficient resources (b) inadequate capacity for managing resettlement policies
(c) limited awareness and lack of transparency leading to inequity in resettlement, may
delay implementation; and (d) the differences in resettlement regulations between GVN
and donors.
25
3. Factors Affecting the Role & Structure of an Apex Public
Transport Agency and Relevant Functions
3.1 Policy Framework
The development and provision of public transport in HCMC needs to be guided by clear,
sound policies. This needs to occur within a hierarchical framework of an urban transport
strategy for the metropolitan region, which in turn fits within an urban development strategy.
It is not the role of the current review to review or establish these policy frameworks.
However, it is noted that ambiguity in them will almost certainly result in unclear and probably
conflicting public transport policies, and hence in public transport that fails to achieve its
potential. As it is generally difficult to attract people from car or motorcycle travel to public
transport, deficiencies in the provision and management of public transport will have long
lasting, if not permanent, detrimental effects on the economic, social and environmental
performance of HCMC.
Some key policy needs for public transport that influence the role and nature of institutions in
the transport sector are:
Defining desired outcomes. Above all other things, it is necessary to be clear about
the outcomes that the government wishes with regard to the provision of public
transport. The outcomes should to be defined with reasonable preciseness and
prioritized so that those charged with managing public transport are able to make
decisions on investment and services needed to achieve them.
Linking land use and public transport development. Public transport needs to
respond to the travel needs of people, and hence be closely linked to the locations to
and from which people need to travel. Land use also needs to be sufficiently flexible
that it can respond to the improved accessibility offered by, in particular, new MRT
facilities. There is a need to monitor the patterns and rate of urban development to
ensure that the proposed extensions remain pertinent and to assist in re-prioritizing the
network development program. There is also a need for explicit policies with regard to
land use controls and development to ensure that property developments make best use
of the improved accessibility offered by the rail lines.
Coordinated, multi-modal transport planning. The future MRT lines will gain some
of their demand from walk-in patronage. Their full potential will, however, only be
achieved if they are supported by complementary transport services such as feeder buses
and motorcycle and car access. Even so, the rail lines can meet only a part of public
transport travel demand, and there will remain a major need for buses and more local
forms of public transport to serve travel needs that cannot be met by the MRT lines.
Public transport service standards and planning. Many cities in developed countries
have had a single public transport agency that has been responsible for planning and
providing public transport. The trend in many countries in the last decade or two to
contract out public transport service provision suggests that there is a worthwhile role
for service providers in the planning of services (eg routes and schedules) in association
with communities and their representatives (eg Larwin 2005, Preston 2005, van de
Velde 1999, Wallis and Lupton 1999). This allows operators to shift resources so that
services are both cost-effective and meet passenger needs. If service planning is to be
dispersed, be it somewhat or substantially so, there is a need for a central authority to
establish minimum standards to which operators and others must comply, for example
26
locations to which feeder bus services should be provided, hours of service operations,
and the location of bus stops.
Integration of public transport services. A rail line can only provide direct services to
people traveling between locations along the line. This will be a relatively small share of
total travel. Even in cities with a dominant Central Business District (CBD) and hence a
greater ability for people to travel directly, it is common for up to about one-quarter of
trips by public transport to still involve a transfer, eg Singapore about 25% of trips
involve a transfer, while the share is 33% in Adelaide and 40% in Melbourne. In cities
such as London, New York and Tokyo where land use is more distributed and the
public transport system more complex, an even higher share of people need to
interchange to undertake their journey. The ease of these interchanges can do much to
improve the attractiveness of public transport to people and hence attract patronage.
Three factors support this: improved physical linkages; a common ticketing system; and
an integrated fare system.
Investment planning and decision-making. There is a need to ensure that proposed
investment projects represent the best value to the community. This requires that
problems be clearly identified and alternative approaches to address the problems be
considered. The estimation of project benefits needs to take account of network effects
in the public transport system and externalities such as reduced environmental impacts.
Role of the private sector. World Bank (2007) identified the need for, and recognition
by GVN that, an increased role for private sector finance and operations of
infrastructure including transport is needed in future. At the same time the need to
reduce the proliferation of State Owned Enterprises engaged in all aspects of
infrastructure delivery and operations or at the least to enhance their efficiency is
warranted. The new BOT law is a sign of this recognition as is the current partial role
for private firms to operate bus services in HCMC.
3.2 Hierarchy and Structure
The identified framework for analyzing institutional functions set out in Section 2.5 can also
be used to assign the key public transport including MRT functions defined below.
3.3 Key Public Transport Management Functions
One conceptual arrangement for an Authority is to be responsible for all aspects of public
transport, from policy through to being the agency that operates services. This approach of a
public monopoly is an arrangement that no longer represents good practice because of the
lack of separation of conflicting responsibilities and because monopoly provision of services
results in higher costs and reduced quality than is possible with other delivery mechanisms.
Accordingly, this model is rejected from the outset. The focus is instead on arrangements that
more clearly separate policy, regulation, system management and operations and which seek to
make best use of the private sector to reduce unit costs and improve service quality and
innovation.
Taking account of the discussion in previous sections, the responsibilities of an Authority
most clearly relate to the provision of efficient public transport. On this basis, the core
functions for an Authority that includes MRT are:
project planning and programming, including preparation of business case for projects,
coordinating projects, and budget programming;
27
coordinating requests for funding for infrastructure development and, where needed,
subsidies for service provision;
infrastructure delivery, which will includes establishing financing arrangements, the
manner for delivering projects, and taking account of life-cycle costs and management;
public transport services delivery through concessions
1
or other business-like
arrangements;
fare policy, ticketing, and revenue management, which would be a minor activity if there
was no integrated fares and ticketing but is otherwise more complex; and
passenger information and marketing.
The effectiveness function needs to be the responsibility of a different and independent
agency probably located at City or Regional Level to provide the policy direction and strategic
planning framework for public transport development in HCMC that the Authority is to
deliver in the most efficient manner.
3.4 Other Issues
Other issues that assist in defining the scope of the activities, and hence the form, of an
Authority include:
Level of government. HCMCs geographical area of authority is less than the entire
region of Greater HCMC. While local government involvement in an Authority is
important, looking to the long term, it may not be appropriate for this reason for the
HCMC PC to be the level of government to which the Authority should be responsible.
It is common in other countries for an Authority to be responsible to a level of
governments with a broader responsibility than the city (eg to state governments in
Australia or regional groupings of local government in the USA) where there is no local
government authority for the city as a whole. In the first instance, HCMC PC and other
provincial governments in the region could be involved in the Authority through
membership of an advisory committee.
Community involvement. Gaining cooperation and insights from a range of groups in
the community, for example, business, disabled, environmental and others, can improve
the effectiveness of public transport (eg Booth and Richardson 2001). This can be
achieved through, for example, their involvement in various advisory committees of a
Authority.

1
The general experience is that provision of public transport services by the private sector under contract to an
Authority results in lower costs than provision of services by the Authority and other government agencies.
Wallis and Hensher (2005) reports that competitive tendering for the provision of bus services resulted in unit
cost reductions mostly in the range of 20% to 50%. It is noted that the extent of these savings is influenced both
by the cost efficiency of the previous monopoly) service provider, and by numerous factors relating to the design
and management of the competitive process and the existence of a strong market of potential suppliers. There
has been only limited experience with the competitive tendering of former government provided train services,
with no known studies reporting on cost savings.
Various contractual arrangements between an Authority and the private sector can be used to provide services,
including gross cost service contracts, net cost service contracts, management contracting, franchising and
concessions (World Bank 2002). The principal differences between these contractual arrangements relate to the
allocation of responsibilities for provision of assets, planning of public transport services, and payment
arrangements. The allocation of financial risk between the Authority and contractors can vary within each of
these contracting arrangements.
28
Metro rail ie MRT expertise. Special expertise is needed to effectively manage the
development and operation of mass rail transit because of its special characteristics,
including high frequency of service, technology and safety standards that reflect the
intensity of human activity associated with them, and integration with other public
transport modes and urban activity in general. The expertise is also different to that
pertinent for other types of railway operations such as freight and commuter or regional
passenger services. Seeking to develop this expertise in more than one agency is both
wasteful and likely to result in no agency having effective capacity for some time. There
is no agency in Viet Nam currently involved in urban rail MRT.
Funding policy. The initial financial analysis of this PPIAF study and experience and
from other places, indicates that the Government will, with little doubt, need to
continue finance fixed infrastructure for future rail lines in HCMC. Fare revenue is
needed to finance other infrastructure and provision of services but is likely to be
inadequate to recover all operating and maintenance costs. There may be some, though
limited, opportunity to develop land or air-rights associated with rail lines. Thus, the
capacity for an Authority to generate revenue that can be used to service debt will be
limited to modest property prospects and any additional hypothecated taxes that
government might impose and assign to the Authority. The latter could include
betterment taxes (ie a tax on the increase in property values attributed to rail projects)
or charges for use of roads along which rail lines are located though these are difficult
to apply in practice - or more general taxes such as an annual property tax or surcharges
on vehicle registration fees or fuel tax. The capacity for the Authority to independently
borrow will depend on the extent to which it can gain secure and significant revenue
from these sources. But at present these taxes or charges are specified by national laws
and any revision would apply nationally, and would be equally be to all infrastructure
types and programs, in every local government. Even if this was possible, the question
remains as to whether it is worthwhile developing the high level of expertise in
Authority needed for it to gain independent access to capital markets. In the end it may
be simpler and more cost-effective to leave fund generation to PCs HIFU and /or DPI
with MOF equivalent other than with respect to development of land and air-rights that
are assigned to the Authority and which it may be able to develop in a way that is
supportive of the rail system.
Extent of public transport integration. The effectiveness of an MRT system will be
maximized through integration with other public transport services and integration of
ticketing and fare systems for public transport. Achieving this adds technical and
institutional challenges, and requires the Authority to have a broader capacity than
simple delivery of rail mass rapid transit lines with private delivery of rail services.
29
4. Potential Institutional Arrangements for Delivering Integrated
Public Transport
4.1 Institutional Options
Given the previous discussion, the alternative arrangements for an Authority relate primarily
to the scope of its functions rather than to the underlying functions themselves. On this basis,
four options for improved institutional arrangements for HCMC are identified:
Option 1: Strengthen the Management Authority for Urban Railways (MAUR).
Refer Figure 4.1. Currently, the MAUR is solely responsible for coordinating all
proposals for urban rail system development, including those by potential donors. To
date, however, MAUR has taken what appears to be a somewhat passive role regarding
rail line proposals in which all are welcomed irrespective of investment cost, operating
and maintenance cost characteristics, ability to meet demand and cost recovery. MAUR
is also responsible for planning and implementing rail based mass transit infrastructure,
and arranging MRT operations, but requires strengthening in these yet to be performed
functions as it will in specifying and procuring an appropriate MRT operator or
operators to provide integrated MRT services. Land acquisition and resettlement
problems delay many projects and require specialist expertise. Given the planned
volume of new MRT lines in future, the current dedicated land acquisition and
resettlement function within MAUR may need to be strengthened. This Option 1
therefore requires a strengthened MAUR that goes beyond treating MRT as a series of
construction projects ie an Authority for MRT or Metropolitan Transit Authority
(MTA). In this option, MAUR would be responsible for ensuring the planning and
arrangement of operation for a fully integrated passenger rail system for HCMC. As an
Authority MAUR would (a) plan effectively by seeking to meet demand (b) consider the
whole of life attributes of proposed MRT; (c) arrange construction and operations (d)
procure contractors for construction of civil works; (e) procure services to be operated
so that they are all on the same basis; and (f) plan and program works and budgets in a
disciplined manner. It would take overall transport policy and transport guidance from
TUPWS of which its predecessor organization was a part. This option would enable
MRT ticketing and fares to be integrated as long as MRT operating concessions are
consistent. An independent rail safety regulator is also envisaged as required by the
Railways Act. A revision to the current Decree 119 establishing MAUR does not appear
to be required except where the Decree authorizes fundamental conflicts of interest
between regulator and operator functions and so on. Future operators whether private,
joint venture (between government and private) and wholly government should be kept
at arms length and operate under a clearly defined contractual structure. This option is
similar to the Mass Rapid Transit Authority in Bangkok, Thailand although in Bangkok
two other agencies also provide similar functions thus hampering network integration. It
is understood that MAUR is currently proposing to revise its organizational structure
and comment and recommendations on an appropriate revised organizational
arrangement are provided below.
Option 2: Interim Public Transport Authority. Refer Figure 4.2. This option builds
on Option 1 (Strengthened MAUR) and proposes also a high level permanent
committee at the PC level most likely chaired by the Chairman of the PC (or the Vice
Chairman) to provide strong direction from the top and improve coordination
horizontally between TUPWS and MAUR and with other important departments such
as Department of Planning and Investment, Department of Finance and Department of
Urban Planning and Architecture. This arrangement has existed in the past in Bangkok,
30
Thailand, through the standing Committee for Management of Land Transport, chaired
by the Prime Minister. While currently inactive the Committees function was more
important when fragmentation of various agencies under different ministries existed.
Currently, almost all relevant agencies including two agencies responsible for urban rail
or MRT are under the authority of the Minister of Transport. A third MRT authority is
the Bangkok City government which although under the purview of the Minster of
Interior, is largely independent.
Option 3: Integrated Public Transport Authority. Refer Figure 4.3. In this option
the proposed Integrated Public Transport Authority would be solely responsible for
ensuring the delivery and operation of a fully integrated public transport system
(MRT and bus) for HCMC. This option would enable all public transport ticketing
and fares to be integrated as long as MRT and bus operating arrangements are
consistent. The proposed new Authority would take overall transport policy and
transport guidance from TUPWS as for previous options. It would create a new formal
structure in which civil works design and procurement and services would be arranged
by new Engineering Design and Procurement and Operations Divisions respectively.
Care would be taken to ensure that in a single organization (as for Option 1) that policy
and operational functions are sufficiently separated to avoid a conflict of interest. Under
this option, close links would be developed with TUPWS (as for Options 1 and 2) and
with the Department of Planning and Investment, Department of Finance and
Department of Urban Planning and Architecture. [Under this option TUPWS would
give up its responsibility for bus service planning and contracting and construction and
maintenance of bus facilities, but would retain its road planning and construction
functions]. As a true apex organization the proposed Authority would be staffed
by very senior and respected official to direct the organization and cultivate the
needed relationships for the new organization to fulfill its potential. This is a
common arrangement for public transport system management around the world eg
Brisbane, Australia and Stockholm, Sweden. An independent rail safety regulator and
possibly a new bus safety regulator is also envisaged the rail safety regulatory functions
are a Ministry of Transport responsibility but the bus safety regulation function could be
developed as a new skill at PC level within the proposed Integrated Public Transport
Authority.
Option 4: Integrated Transport Authority. Refer Figure 4.4. In this option, a
wholly integrated Authority would plan the multi-modal network, specify the
services, program the investment (including roads, MRT and bus) in conjunction
with the PC and Department of Planning and Investment and Department of Finance,
and procure the services to be operated so that they are all on the same basis, thus
enabling integrated fares and ticketing and integrated investment according to overall
need. A close coordinating role with the Department of Urban PLanning and
Architecture is also envisaged to coordinate land use developments at MRT stations and
in conjunction with new road developments. As for Option 4 it is envisaged that very
close coordination between DPI and the Authority would exist. This is a common
arrangement for transport system management (eg Singapore, Hong Kong, London )
around the world. An independent rail safety regulator is also envisaged.
The nature of each of the improved institutional options and the allocation of the
responsibilities of proposed agencies are elaborated in Table 4.1. Linkages with other agencies
are shown in Figures 4.1 to 4.4 respectively.
31
Table 4.1: Improvement Options
Feature Option 1:
Strengthen MAUR
Option 2:
Option 3:
Integrated PT
Authority
Option 4:
Integrated
Transport Authority
Integration of
public transport
in HCMC
(1) Increasing Increasing
Increasing integration
Introduction
Transport
outcome
Fairly good MRT
integration possible
Fairly good MRT
integration more likely
Fully integrated PT
systemmore probable
Fully integrated public
transport system
Description Minimum change to
current institutional
responsibilities.
As for Option 1 but
improved direction &
coordination
purpose for PT
purpose for transport &
land use
Examples from
other places
Hong Kong &
Singapore in the 1980s
Bangkok in 1990s Melbourne and
Brisbane, Australia
Hong Kong, Singapore
Benefits for
customers
Ease of use of MRT
with integrated
ticketing and easy
interchanging where
MRT lines intersect
possible
Ease of use of MRT
with integrated
ticketing and easy
interchanging where
MRT lines intersect.
Integration with buses
likely.
Passengers able to use
the PT system as
though it was a single
system, with fares,
tickets, marketing and
presentation
integrated. Physical
integration good.
As for Option 3 but
better integration with
land use and road
network.
Agency responsibilities
Transport policy & planning
(2)
Urban planning DUPA DUPA DUPA DUPA
Transport policy TUPWS TUPWS TUPWS Integrated Transport
Authority
Strategic trans-
port planning
TUPWS TUPWS TUPWS Integrated Transport
Authority
Financing
policies
DPI & DOF DPI & DOF DPI, DOF with advice
of Integrated PT
Authority
DPI, DOF with advice
of Integrated Transport
Authority
Fares policy and
service
standards
MAUR for MRT;
TUPWS/ MOCPT for
bus
MAUR for rail; TUPWS/
MOCPT for bus
for MRT and bus
Authority for MRT and
bus
Regulation
(3)
Safety
standards
TUPWS for bus
TUPWS for bus
for bus
Authority for bus
Environmental
standards
DNRE DNRE DNRE DNRE
Economic
regulation
(5)
MAUR MAUR/ Interim PT
Authority
Integrated PT Authority Integrated Transport
Authority
Public transport program management
(4)
Program
coordination &
direction
Authority
Authority
Project planning
& feasibility
studies
Authority
Authority
Investment
programming &
financing
approval
MAUR/ DPI/DOF/ PC MAUR/ DPI/DOF/ PC Integrated PT
Authority / DPI/DOF/
PC
Authority / DPI/DOF/ PC
32
Feature Option 1:
Strengthen MAUR
Option 2:
Option 3:
Integrated PT
Authority
Option 4:
Integrated
Transport Authority
Project design MAUR MAUR Integrated PT
Authority
Authority
Environmental &
other approvals
MAUR/ DNRE MAUR/ DNRE Integrated PT
Authority/ DNRE
Authority/ DNRE
Tendering MAUR MAUR Integrated PT
Authority
Authority
Contract
management
Authority
Authority
Infrastructure
maintenance
MRT operators/
operations)
MRT operators/
operations)
MRT operators/
operations)
MRT operators/
operations)
MRT service
design
Authority
Authority
Concession
preparation and
management
Authority
Authority
Service delivery
Rail services Operators/
Concessionaires
Operators/
Concessionaires
Operators/
Concessionaires
Operators/
Concessionaires
Bus services Operators Operators Operators Operators
Ticketing and
fare collection
PC
PC
Authority
Marketing Operators Operators Integrated PT Authority
and operators
Authority and
operators
(1) All options cover the provision of formal public transport in Greater HCMC. (2) Covers setting of policies within which
agencies do detailed project planning & implementation & provision of services. (3) In the case of public transport,
regulation relates primarily to safety. Vehicle registration and driver licensing, which are applicable for bus services, are not
addressed because they are the same for all options. Economic regulation needs to be treated as an integral part of the
Transport Policy and Planning function, though some aspects such as anti-monopoly regulation will be managed by other
government agencies. (4) Includes activities to put strategies into practice strategies, including development and
implementation of projects and arranging for the delivery of public transport and ancillary services. (5) Includes control over
entry to the market (eg how many buses and companies are allowed) and control of fares.
Source: Consultant
33
Figure 4.1: Key lines of responsibility for Option 1 Strengthen MAUR
Source: Study Team
Figure 4.2: Key lines of responsibility for Option 2 Interim Public Transport Authority
Source: Study Team
34
Figure 4.3: Key lines of responsibility for Option 3 Integrated Public Transport Authority
Source: Study Team
Figure 4.4: Key lines of responsibility for Option 4 Integrated Transport Authority
Source: Study Team
35
4.2 Assessment of Options
For the purpose of evaluating these options, the following criteria are judged to best reflect
the outcomes that are desired from changed institutional circumstances are:
Clarity of public transport management, eg ability to ensure consistent direction and
priorities for public transport, a focus on core functions, involvement of transport users,
and the risk of BITA reverting to inertia given its comprehensive role.
Appropriateness of the institutional structure, eg clear allocation of responsibilities,
accountability for outcomes, separation of potentially conflicting functions, links with
key partners, and ease of implementation.
Ability to deliver projects and services, eg businesslike, prepare programs, secure
funding, tender, award and supervise concessions.
Ability to meet passenger needs, eg integration of fares and services, provision of
information on services, integration with land use.
An assessment of the options with respect to these criteria is shown in Table 4.2. While the
assessment unavoidably involves judgment, it is intuitively evident that Option 3 (Integrated
Public Transport Authority) is the most appropriate in for ensuring integrated public transport
including MRT and bus system development and services for HCMC. Option 4 (Integrated
Transport Authority) carried Option 3 a step further and integrates all transport including
roads.
All options assume use of one or more private sector operators or a corporatized government
operator (not proposed by us) to efficiently deliver MRT services, with continued use of the
private sector for delivery of bus services.
As a practical matter in the first instance a strengthened MAUR (Option 1) is an important
first step for institutional improvement and is documented below.
36
Table 4.2: Comparison of Institutional Options
Existing
arrange-
ments
Option 1:
Strengthen
MAUR
Option 2:
Interim PT
Authority
Option 3:
Integrated
PT Authority
Option 4:
Integrated
Transport
Authority
Clarity of strategic direction
Ensure consistent directions &
priorities
-
Focus on core functions
Involvement of transport users - -
Risk of inertia - - -
Appropriateness of the institutional structure
Clear allocation of responsibilities
Accountability for outcomes -
Separation of conflicting functions -
Links with key partners -
Pace/extent of change Na
Ability to deliver projects and services
Businesslike arrangements -
Ability to prepare and manage
programs
-
Secure funding -
Project implementation -
Concession management -
Ability to meet passenger needs
Ticket and fare integration -
Marketing and information -
Integration of public transport and
land use
- - -
Conclusion Change
needed
Fair for
Integrated
MRT
Fair for
Integrated
Bus and
MRT
Good for
Integrated
Bus and
MRT
Good for
Integrated
Transport
Source: Consultant
4.3 Building Technical and Managerial Capacity
Depending on the option eventually chosen, with the exception of Option 4 (Integrated
Transit Authority) the proposed agency will have a key role in working to efficiently and
effectively connect high level transport policy and plan making done by TUPWS to detailed
implementation.
DPI will continue to have an important role in overseeing the performance of the transport
sector in terms of fiscal monitoring, but would also benefit from having a stronger MAUR or
Integrated Public Transport Authority to provide economic regulation and technical
management of MRT (and/or bus) investment programming and management of annual
MRT operating budgets, and desirably for other public transport.
Economic regulation and oversight involves issues of pricing including fares, subsidies (and
community service obligations), competition, concessioning including compliance supervision
and requires skills in economics and to associated legal and financial impacts.
Technical supervision of rail MRT and public transport investments and their integrated
operation requires high level knowledge and skills in:
37
interpreting transport policy and master plans prepared by TUPWS and central
governments MOT and providing appropriate feedback and advice;
translating these policies and plans into appropriate forward work programs that can
result in timely and efficient implementation of MRT, other public transport
improvements and reforms, and integrative systems;
providing appropriate advice to TUPWS/ DPI/ DOF/ DUPA and other agencies as
required; and
appropriate coordination with the Department of Natural Resources and Environment.
While the PC is acting to strengthen MAUR (under Options 1 and 2) or if it intends to create
an Integrated Public Transport Authority (Option 3) or an Integrated Transport Authority
(Option 4) it should be careful to match the skills and capabilities of the people to be engaged
and /or transferred to the desired new organization and its structure taking full account of the
needed capabilities in high level economic and technical supervision and oversight.
The ADB/ PPIAF and PPTA team will later identify the scope of capacity building activities
for the future.
4.4 Legal Basis for Integrated Transport or Integrated Public Transport
An important complementary measure to a preferred institutional arrangement to achieve
integrated transport or public transport only would be a new law
1
to mandate that all agencies
are responsible for achievement of an integrated transport or public transport system.
In Appendix C we have identified the possible outline content of a new law to achieve
integrated public transport. This is not to say achievement of integrated transport is not
desirable however.

1
This is a development of the concept recommended by MVA in 2006 for BRT in which they recommended the
need for a White Paper ie a high level policy on public transport.
38
5. Some Lessons on Organizational Structure for Efficient MRT
5.1 Overview of Lessons from Other Cities
A review was undertaken of institutional and delivery arrangements for public transport in
other cities. Tables B.1 and B.2 summarize institutional and delivery arrangements for public
transport in other cities that either have some similar arrangements to key Asian cities eg
Singapore, Hong Kong), where private sector finance and organizations are used to delivery
public transport) or are similar in character to HCMC in jurisdictional terms (eg London,
which is a dominant city in a unitary state and has also used a mix of delivery mechanisms for
public transport).
The review indicates there to be a wide variety of possible institutional arrangements. Indeed,
each city has characteristics with regard to the management and delivery of public transport
that differentiates it from other cities. This reflects historic, constitutional, political, financial,
social and other factors. In some cases the arrangements have changed little over time, while
in others change has occurred more frequently. Nevertheless, key lessons that are evident are:
All cities except Kuala Lumpur and Bangkok have an apex organization (eg an
Authority) that is responsible for managing all public transport.
Of the Authorities (or equivalent organization) in the 12 cities reviewed in detail, 6 are
government departments (ie directly responsible to the minister for the department), 4
are government authorities (with a board), and two are corporatized government
agencies. Most organize transport across their entire metropolitan region.
All Authorities are responsible for the tactical (ie not long term) planning of urban
public transport and ensuring the delivery of services. Some also undertake strategic
planning. As far as can be established, the policy framework for public transport is
determined by higher levels of government. The general dependence on subsidies
requires Authorities to operate within the fiscal discipline of government finance
agencies.
Only one Authority (New York) both manages public transport and provides all services
using its own employees (through subsidiary companies). In contrast, Stockholm,
Bogota and Melbourne engage private companies to provide all services (with the
companies generally selected through competitive tendering, though there are
negotiated contracts for some bus services in, for example, Melbourne). Other agencies,
to varying extents, provide services using their own resources, or engage corporatized
government operators and public and private companies to provide services (either with
competitively tendered or negotiated contracts). That is, use is made of the full possible
range of means for providing services.
Two Authorities (London and Singapore) are also responsible for roads as well as public
transport while not responsible for all roads, the Authority in New York is in charge
of toll bridges and tunnels.
Six Authorities have boards to direct their activities (ie the four that are statutory
authorities and the two corporatized government agencies). It appears that members of
the boards are appointed by government in all cases. Boards range from entirely non-
government directors in the case of London to government representatives in Bogota.
Interest groups (labor and community) are represented on the board in New York and
Athens. Authority executives are generally not members of their boards, though there
are exceptions (eg Athens).
39
Authorities are responsible to local government in only three places (London, Bogota
and New York) and the same, in effect, in the city-states of Singapore and Hong Kong.
Local government is represented on the board in Athens. The remaining 6 Authorities
are responsible to national or state governments.
Where services are provided by a number of agencies or companies, ticketing, marketing
and branding is usually centralized within a division of the Authority or by a
government owned corporation.
Only two cities have an Authority that can issue bonds (New York and, in the case of
Hong Kong, the MTR, which is an arm of the Government that is now listed on the
stock market). In these cases, the Authorities are able to issue bonds because they have
their own sources of income that can support borrowing, eg property income and, for
New York, hypothecated taxes.
Two Authorities are explicitly funded by a share of fare revenue (2% of fare revenue in
Athens, and 4% in Bogota). The higher share in Bogota may reflect the role that the
Authority has in developing a bus rapid transit system for the city as well as provision of
established public transport services.
Railway infrastructure is always owned by government in one form or another. In Hong
Kong the railway operators develop infrastructure and provide services within a
framework set by government. New York is similar. In Singapore and other cities, a
central agency plans, funds and builds the rail fixed infrastructure and contracts out
operations through concessions. In Bangkok, the two MRT concessions were BTO
form.
Hong Kong is the only city where rail companies come close to securing sufficient
revenue to meet the entire capital and operating cost of trains. It also appears that
railways in Tokyo are able to recover operating costs and a significant share of capital
costs from fare revenue. The TransMilenio busway system in Bogota involves
government finance of fixed infrastructure, with all other costs recovered from fares.
Within the limits of available information, it appears that governments finance most if
not all fixed infrastructure and rollingstock, and often subsidize operating costs,
especially in wealthier countries.
5.2 Guidance for HCMCs MAUR
Three cities in the Asian region reviewed in Table B.1 provide useful lessons good and bad for
HCMC. These cities are Bangkok, Singapore and Hong Kong.
From Bangkok both good and bad lessons can be learned. The bad lessons are that:
Having three agencies responsible for MRT (ie SRT, BMA and MRTA) leads to
duplication in the MRT network and poor prioritization as each agency wants its lines
developed at any cost. Refer Figure 5.1; and
Each line is developed separately with its own ticketing systems and fare structures with
little hope of integration.
The good lessons are that:
The private sector can be used to provide expertise and capital and develop into world
class operating entities in a relatively short time (Allport 2004).
40
Thailands Mass Rapid Transit Authority (although one of three agencies responsible for
MRT) is the closest to a reasonably well functioning Authority for MRT. In the past
MRTA focused principally on engineering but it is recognized that operations, finance
and their management are just as important.
MRTA as does the other two MRT agencies operates within the overall transport policy
and planning advice of government.
MRTAs structure is also shown in Figure 5.1 and shows that its three key groups are:
Engineering;
Administration; and
Operations including concessioning and management.
Hong Kong and Singapore provide similar but contrasting lessons (Refer Figure 5.2). Both
developed their MRTs in the late 1970s to mid 1980s and initially created a special
government MRT organization (department of government). In Hong Kong there was an
existing government regional rail operator the Kowloon Canton Railway. They were both
corporatized in the 1990s and have since been listed on the stock market. (In October 2007
their shareholders agreed to a merger). These MRT operators are essentially private firms
today but operate within the policy framework of government. Hong Kong has private bus
operators also and an integrated smart card-based ticketing system. Ticketing is provided by a
separate organization under the guidance of the Transport Department and ticketing is not
provided as part of operational agreements.
Singapores history is somewhat similar but differs in an important respect. In the 1995, the
Singapore Government prepared its transport policy for integrated transport. This White
Paper on transport laid out the basis for creation of the Land Transport Authority and
corporatization of the Singapore Mass Transit organization to become SMRT Corp. (a
government-owned corporation). LTA sets the policy framework, invests and the SMRT
operates agreed services on a gross cost basis.
In the late 1990s, the Singapore government decided to develop two multi modal (ie MRT and
bus) operators. It merged SMRT and the government-owned TransIsland Bus Services to
create one operator and allowed SBS Bus Services to develop into an MRT operator by
awarding it the concession (after competitive tender) for the North East Light MRT project.
SBS Transit provides these services on a gross cost basis. As a result Singapore has an
integrated bus and MRT network and integrated fares and ticketing. The key lessons for
HCMC are:
All MRT and bus service provision takes place within the governments determined
policy eg on fares;
Two MRT (and bus) operators exist a Government owned corporation and a new
private operator. The private operator was permitted to develop for benchmarking and
strategic reasons;
MRT and bus services are provided on a gross cost basis and all fares collected from
passengers are remitted to government; and
Ticketing is provided by a separate organization under LTA and ticketing is not
provided as part of operational contracts.
41
Figure 5.1: MRT Arrangements in Bangkok, Thailand
Source: Study Team
Source: MRTA, Thailand
42
Figure 5.2: Integrated Transport Arrangements in Hong Kong and Singapore
Source: TD, Hong Kong
Source: LTA, Singapore
43
Figure 2.1 showed the current broad structure of the MAUR HCMC. Advice was sought by
MAUR staff on some principles for revising the current organizational structure to better
carry out its new responsibilities. The challenge in any re-structure is how to observe key
functions and the creation of formal business-like relationships within the conventions of the
current governmental norms. Consequently, a simplified suggestion on how important MRT
functions may be structured in future is shown in Figure 5.3
1
. Key points are:
Policy advice to the PC determined by the MAUR board based on the advice of their
technical departments (general transport policy framework jointly determined with
TUPWS);
Management of MRT operations clearly separated from operational entities whether
government-owned or not;
Ticketing operations done as single contract for the entire MRT network; and
All functions appropriately resourced.
Figure 5.3: Possible Revised Structure for MAUR
Source: Study Team

1
This suggested structure is consistent with Option 1 Strengthened MAUR discussed in Section 4.
44
Appendix A: Trends in the Management & Provision of Public
Transport
The way in which public transport has been provided has changed over time. This is not
immediately apparent from the comparison of current institutional arrangements presented in
the previous section.
A common development pattern for public transport has been, in the first instance, for it to
be provided by the private sector with only a modest role for government. This included rail
infrastructure, though it has been common over time for the infrastructure to be taken over
by government when the private sector failed to achieve expected financial returns. Examples
include development of the initial lines of the London Underground in the later 19
th
and early
20
th
century, and street-car (ie tram) lines in the USA in the 1930s.
Changing economic and social conditions in developed countries made bus services
unprofitable by the late 1960s. Together with other changes such as a reaction against urban
freeways, rises in fuel prices and a desire for improved public transport, the trend in developed
countries in the 1970s was for governments to take full responsibility for urban public
transport. This usually involved establishing a government agency that was responsible for
ensuring the provision of integrated public transport for a city. Commonly, the agency also
owned public transport assets and provided services. The now collapsed State-owned bus
operators in HCMC and Hanoi may be seen as a product of this era.
These changes enabled major improvements, in particular integration of routes, services, fares
and ticketing across all modes of public transport. However, there were also disadvantages, in
particular decreasing productivity that resulted in rising unit costs. To varying extents, quality
of service and innovation also declined.
Ground-breaking reforms by the government in the United Kingdom in the early to mid-
1980s, the substantial, and sometimes radical, economic and regulatory policy reform that
followed in New Zealand, microeconomic reform in Australia in the early 1990s, and related
trends in South America and Europe have resulted in a new model for provision of public
transport (eg see van de Velde 2001
1
). While there is considerable variation in the models
used, general features are:
government is responsible for ensuring the provision of an integrated public transport
system;
the private sector deliver public transport services (and infrastructure projects selected
by government) through contracts with the government that are awarded on the basis of
competitive tendering; and
government meets the difference between the cost of providing services and revenue
collected from passengers.
This model has not been adopted everywhere, but it represents the current trend and is
considered best practice (eg World Bank 2002). The trend is illustrated in Figure A.1. HCMC
has the opportunity to move more directly to this model, which allows improved, integrated
public transport to be delivered at lowest possible cost.

1
The biannual International Conference on Competition and Ownership in Land Passenger Transport initiated
in 1987 has followed the subject see http://www.itls.usyd.edu.au/conferences/thredbo/thredbo_main.asp.
45
Figure A.1: Development Patterns for the
Provision and Management of Public Transport
Centrali zed publi c transport operator
- Integrated service planning and provision.
- Services and infrastructure provided by the
government agency.
- Increasing costs & decreasing service
quality.
Dispersed public transport service
provision
- Limited role by government for
service planning & integration.
- Services provided by the private
sector, and sometimes infrastructure
also.
- Limited or no government subsidy.
H
i
s
t
o
r
i
c
Publi c transport management government
- Integrated fares, ticketing and services.
- Services provided by private operators under contract to the
government.
- Government pays contractors for services using performance
based contracts with appropriate incentives and penalties.
Objective:
improve and
integrate public
transport
Objective: better services
and reduced unit costs
through effective use of the
private sector
Typical develop-
ment approach in
the past
Trend in 1990s,
e.g. Europe,
S. America,
NZ & Australia
Alternative,
direct route
for change
Objective:
avoid poor
service and
high cost of
centralized
approach
Source: Study Team
46
Appendix B: Review of Other Arrangements for Management &
Provision of Public Transport
A review was undertaken of institutional and delivery arrangements for public transport in
other cities. Tables B.1 and B.2 summarize institutional and delivery arrangements for public
transport in other cities that either have some similar arrangements to key Asian cities eg
Singapore, Hong Kong), where private sector finance and organizations are used to delivery
public transport) or are similar in character to HCMC in jurisdictional terms (eg London,
which is a dominant city in a unitary state and has also used a mix of delivery mechanisms for
public transport). Table B.3 provides additional information.
48
Table B.1: Examples of institutional arrangements for public transport in selected Asian and Australian cities
Feature Kuala Lumpur,
Malaysia
Singapore Hong Kong, China Tokyo, J apan Melbourne,
Australia
Brisbane,
Australia
Bangkok, Thailand
General introduc-
tion
Similar operating en-
vironment. Malaysian
MoF bought back two
existing MRT opera-
tors in 2001. Govern-
ment developing an
integrated ticketing
multi-modal ticketing
& payment system in
Klang Valley centered
on KL.
Strong unitary gov-
ernment with clear
policy framework.
Multi-modal operators
being encouraged
with area franchises
and integrated ticket-
ing system imple-
mented in 2002.
Strong unitary gov-
ernment with clear
policy framework.
Two rail and several
bus operators being
promoted. integrated
ticketing system im-
plemented in 1997.
Integrated public
transport under direc-
tion of the Ministry of
Land, Infrastructure,
and Transport (MLIT)
with highly market-
based incentives. In-
dividual operators are
responsible for mar-
keting, fares and tick-
eting with MLITs
permission. Integrated
ticketing system im-
plemented in 2000.
State government
management of public
transport system in
Melbourne, by agency
(DOI) which is also
responsible for the
road system. Train,
LRT & bus services
provided by private
operators within an
integrated framework.
Informal coordination
with local govern-
ment.
State government
management of public
transport system.
Train, bus & ferry
services provided by
corporatized state
government agencies,
a major local govern-
ment & private bus
operators within an
integrated framework.
Informal coordination
with other local gov-
ernments.
Similar operating en-
vironment. Regional
train and bus services
by State Enterprises ie
State Railways of
Thailand and Bangkok
Mass Transport Au-
thority respectively.
Two MRT lines pro-
vided by different
combinations of pri-
vate finance and are
operated by private
firms. A third line to
new Airport under
development. Three
agencies currently
have MRT responsibil-
ities.
Region covered
Area (sq. km) 243 (excludes Klang
Valley)
648 1,098 2,200 (Tokyo
metropolitan city).
7,850 (Suburban)
8,800 2,800 870
Population (m) 1.4 4.2 7 12.1 (Tokyo m. city) 3 2.6 (regional) 11 (regional)
Public transport system features
Length of fixed track line
Rail 56 km (Star LRT &
Putra MRT) & 58 km
Express Rail Link to KL
International Airport.
150kmelectrified
suburban rail system
(KTM). 9 km monorail.
128 km including 19
km of LRT
MTRC (119 kms incl.
35 km Airport
Express) and KCRC
(34 km East Rail, 36
km Tsuen Mun LRT
and 31 km West Rail)
Suburban (1,431 km
for J R-East, and 1,650
km for private
railways including
subway); 13,827 km
bus
336km rail
245 km tram (double
track)
300km metropolitan
part of South East
Queensland
44 km MRT
27Km Airport MRT
(construction)
Over 150km more
planned
Busway None None None None None 18.4 km First line under con-
struction by local gov-
ernment, the BMA
49
Malaysia
Australia
Brisbane,
Australia
Bangkok, Thailand
Rollingstock
No. trains/LRV NA NA NA NA 158 train sets, 480
trams
100 train sets 55 MRT 3 car train
sets approx; further 9
Airport Line train sets
being procured
No. buses 2,000 3,700 19,000 NA 1,500 1,000 10,000
Other
Passenger
boardings/-
weekday (m,
circa 2004))
Approx 0.26m per day
on STAR and PUTRA,
0.045m on monorail
and 0.07m on KTM
2.5m on MRT and bus 3.2m on MRT Tokyo city 27m
Suburban 43m
0.37m (rail), 0.37m
(tram) & 0.26m (bus)
0.13m (rail), 0.2m
(bus & water)
0.60m on MRT; 7.0m
on bus and other pub-
lic modes
Private Sector
Involvement
Private STAR and
PUTRA rail
concessions taken
back into a public
asset corporation &
merged after financial
failure. Airport
Express & monorail
operated separately.
KTM operates nation-
wide. Two major
nation-wide bus
companies.
Government funding
of MRT infrastructure
& rollingstock. Two 2
multimodal
operators created.
SBS Transit operate
North East Line
(20km) and bus
services & SMRT the
remainder (now
incorporating Trans
Island Bus Services)
Five private sector
companies bus
services. Former govt-
owned MTRC now
listed on stock
exchange. MTRC has
issued bonds for
railway development.
Regional railway
(KCRC) is government
owned.
Suburban:
J R-East has the
largest share (34%).
21 private sector
companies.
Tokyo metropolitan
city owns Tokyo
metropolitan subway
and bus.
Train: franchised to 2
operators in 1999 but
re-franchised to 1
operator in 2004
Tram: franchised to 2
operators in 1999 Re-
franchised to 1
operator in 2004.
Buses: several private
operators
15 private bus
operators server outer
suburbs. All other
public transport
services provided by
corporatized state
government agencies
35 private bus com-
panies under contract
to BMTA State Enter-
prise urban bus oper-
ator plus some 1,500
owners of small ve-
hicles involved in ur-
ban transport; 2 MRT
concessionaires:
Bangkok Transit Sys-
tem Corp for Bangkok
Metropolitan Adminis-
trations elevated
24km BTO Skytrain
project (1999 open-
ing) & Bangkok Metro
Corp Ltd for MRTAs
BTO Blue Line Subway
Operations and E&M
concession (2004
opening)
50
Malaysia
Australia
Brisbane,
Australia
Bangkok, Thailand
Features of the MTA (or equivalent)
Name No formal MTA at
present. National
government through
PM department has
dominated. All
concessions under
MOT. Concessions and
SPNB regulated by
MOT. Proposal for a
KL Urban Transport
Authority under
Authority under PM
Dept (Allport 2004)
Land Transport
Authority (LTA)
Transport Department
(TD). Reports to
Transport Advisory
Committee (CTA) &
Transport Policy
Coordination
Committee. Railway
Corporations
regulated by TDs
Transport Branch.
No formal authority.
Ministry of Land,
Infrastructure, and
Transport (MLIT)
supervises public
transport system.
Department of
Infrastructures
Director of Public
Transport is the State
of Victorias
Administrator of Public
Transport
TransLink (a division
of Queensland
Transport or QT)
No formal MTA. 2
MRT agencies (ie SRT
and MRTA) under
supervision of Ministry
of Transport and one
Bangkok Metropolitan
Administration for
under Minister of In-
terior. Largely inde-
pendent agendas but
share common MRT
Master Plan prepared
by MOTs Office of
Transport & Traffic
Policy & Planning
(OTP).
Organizational
form
Statutory authority
under the Ministry of
Transport. LTA
responsible for all
modes of transport
(incl roads). LTA has
the structure of a govt
department.
Government
department.
MLIT has a Railway
Bureau and a Road
Transport Bureau.
Also, under MLTI are
local bureaus such as
Kanto Regional
Development Bureau
for the larger
suburban area.
Government
department
establishes
arrangements with
infrastructure &
service providers
through contracts.
Government
department
establishes
arrangements with
infrastructure &
service providers
through contracts.
BMA is a local gov-
ernment & SRT and
BMTA are State-En-
terprises.
Board None 7 members drawn
from govt and private
sector.
None None None Translink is a part of a
government
department and has
no board
BMTA and SRT have
boards.
Local government
involvement
KL City Government
represented on KL
transport committee
in absence of an
integrated authority
None some
consultation with
District Councils
None None except Tokyo
metropolitan subway
and bus subsidized by
Tokyo metropolitan
city.
None some
consultation with
District Councils
State Government &
Brisbane City Council
(BCC), agree to
cooperate through
Capital City Transit
Group (CCTG)
Local government (ie
Bangkok) involvement
in Skytrain only. No
coordination with
other local govern-
ments in region.
51
Malaysia
Australia
Brisbane,
Australia
Bangkok, Thailand
Institutional responsibilities
Policy & strategy There is a holistic
strategy for national
development & an
urban transport
strategy. Not fully
effective (Allport
2004)
Comprehensive multi-
modal strategy
established in 1996
and regularly updated.
Strong integration
with land use and
other sectors (eg Info
Communications
Technology)
Comprehensive multi-
modal strategy &
modal strategies
regularly updated.
Strong market-based
operations by
individual operators
are encouraged by
MLIT. Strategic
decisions are made by
individual operators
with MLITs approval.
State government
transport department
establishes transport
policy and an
implementing strategy
within broader urban
strategy.
State government
transport department
establishes transport
policy and an
implementing strategy
within broader urban
strategy.
MOTs OTP
Infrastructure
provision and
financing
All new MRT lines
were built & funded
by private sector. KTM
is national railway
operator.
All MRT lines funded
by Government.
KCRC & MRTC de-
velop, operate &
maintain MRT infra-
structure. Until re-
cently a property
based MRT financing
avoided the need for
public subsidy of de-
velopment of MRT.
MTRC can issue bonds
in own right since has
revenues from prop-
erty & railway opera-
tions.
Individual operators
are expected to earn
fare revenues to cover
not only direct oper-
ating costs but also
indirect costs includ-
ing infrastructure
costs. J R was owned
by MLIT, but was
privatized in 1987.
Since then it has re-
ceived no subsidy
from MLIT.
Financed by state
government grants
and implemented by
government agencies
using private con-
tractors. Investment
decisions subject to
normal budget
process with priorities
determined by policy
priorities.
Financed by state
government grants
and implemented by
government agencies
using private con-
tractors. Investment
decisions subject to
normal budget
process with priorities
determined by policy
priorities.
Financed by national
budget and loans from
IFIs. Usually imple-
mented by govern-
ment agencies using
private contractors.
Investment decisions
subject to normal
budget process with
priorities determined
by policy priorities.
Private finance in 2
MRT concessions.
52
Malaysia
Australia
Brisbane,
Australia
Bangkok, Thailand
Operation and services
Provision Individual operators
for rail & bus see
above. Current focus
is to restructure based
on: (1) A new Urban
Transport Authority to
be established under
PM (2) an asset-
owning Company
SPNB (PUTRA, STAR,
Intrakota, Park May)
who would contract
OpCo to operate all
services (Allport
2004).
2 multi-modal
operators under
concession to govt.
Concessions usually
start at 10 years and
can be extended to 30
years. Standards for
services set by an
independent Public
Transport Council
established in 1987.
15 Council members
are drawn from
distinguished
community leaders.
See above. The
merger of KCRC and
MTRC is planned to
integrate their
networks & services
and lead to better
future provision.
In principle, individual
operators are
responsible for
provision of services,
as well as
maintenance of assets
and infrastructure.
MLIT supervises and
provides guidelines
where necessary. In
some cases, local
authorities provide
supports or directly
intervene, to maintain
specific services.
Government provides
services through
contracting.
Operational planning
is the responsibility of
franchisees within the
terms of franchises
that specify a
minimum service
standard & an
Operational
Performance Regime
(OPR). Rail operators
financially rewarded
or penalized according
to OPR performance
against an agreed
benchmark.
TransLink developed
new contractual
arrangements
between the state
government and bus
operators. Queensland
Transports Rail, Ports
& Freight Division
oversee urban and
state-wide rail
services & pay
subsidy.
BMTA operates bus
services & sub-
contracts least
profitable bus services
to private sector.
MRTA concessisoned
operations and
maintenance and E&M
investment incl. trains
and depot to BMCL, a
private consortium.
BMA arranged BTO
concession for all
investment to BTSC in
early 1990s new
BMA lines to be for
operations and some
E&M investment only.
Ticketing and
marketing
KLs common payment
system (tolls, parking
as well as public
transport fares)
system was
implemented in 2003.
using a cashless card
(TouchnGo). System
for public transport
was developed by the
7 major public
transport operators
who formed a joint
ticketing company
known as Uniticket.
Ez-Link, an integrated
fare system using
smart cards, was
implemented in 2002 -
Ez-Link is a company
and a subsidiary of
the LTA. Individual
operators established
a jointly owned
company to integrate
marketing,
information provision
& physical integration.
Creative Star supplied
& operated integrated
ticketing system since
1997. Government
owned.
Integrated ticketing
system implemented.
In 2000, a prepaid
Passnet Card, which
is valid for 22 private
railway and subway
companies in Tokyo,
was introduced. In
2001, an IC Suica
card was introduced
by J R-East. In 2006, a
new integrated IC
card will be
introduced. Good
voluntary coordination
among individual
operators exists.
Integrated ticketing
system implemented
for several years. New
system recently
contracted. Network-
wide services provider
(passenger
information &
marketing) is provided
by Metlink Victoria Pty
Ltd which is owned by
the operators & the
Bus Association of
Victoria
TransLink is
implementing &
managing the new
system. It also
provides centralized
marketing & provision
of information to the
public.
Currently separate
MRT concessions with
own ticketing systems
and fare structures.
Desire to develop
and fares but w/o
concession contract
revision this will not
be possible. Ditto for
bus.
53
Malaysia
Australia
Brisbane,
Australia
Bangkok, Thailand
Financing Fare revenue plus
specific payments (eg
PUTRA/STAR) or
general budget
support from national
government.
Government requires
MRT projects to fund
incremental operating
costs and asset
replacement costs
from incremental
farebox and ancillary
revenues
Until recently no
public subsidy was
required in rail
operations. Change in
the property market &
two poorly performing
projects have led to
government finance
becoming necessary
(Allport 2004)
Basically individual
operators are
expected to earn fare
revenues to cover not
only direct operating
costs but also indirect
costs.
Revenues only cover a
proportion of costs
(the remainder of
income coming from
fixed payments set at
the bid stage plus
incentive payments).
Franchisees required
to maintain condition
of infrastructure.
TransLink collects all
revenue for operators.
Pays operators on
basis of the services
they provide (on a
per-km basis or on the
basis of purchasing a
basket of services for
a set fee).
MRT concessionaires
retain all revenues.
BMTA deficit financed
by government.
Sources: ADB (2006a) with original sources cited as follows Kuala Lumpur (consultant ie ADB 2006a); Singapore (consultant and Allport 2004); Hong Kong
(consultant); Tokyo (Ms. Rika Yuasa, Researcher, Japan Bank for International Cooperation); Melbourne (consultant); Brisbane (consultant); and Adelaide
(consultant). Information for Bangkok from PPIAF study team.
54
Table B.2: Examples of institutional arrangements for public transport in selected cities in the UK, Europe & Americas
Feature London, UK Stockholm, Sweden Athens, Greece New York, USA Bogota, Colombia
General
introduction
Powerful, metropolitan
transport agency responsible to
the citys Mayor. Responsible
for most public transport in
London (& for roads also).
Agency of the Greater London
Authority. Not responsible for
trains using national rail
network. Little direct
involvement by the national
government.
Each county is required to have
a Passenger Transport Authority
no involvement of the
national government. PTAs
provide centralized services and
tender / outsource all
operations & services but
develop & fund major
infrastructure.
Public company responsible for
planning, coordination,
monitoring and provision of
public transport in Athens
metropolitan region. Uses
subsidiary, government-owned
companies to provide services.
Comprehensive Metropolitan
Transit Authority for the City of
New York that carries out
planning, operations (through
subsidiaries) for all public
transport and tolled bridges and
tunnels and also raises finance
for infrastructure and manages
& implements a major capital
works program.
TransMilenio established by
citys Mayor to develop and
operate a busway system for
the city. Provides fixed
infrastructure, & arranges for
the provision of services by
private companies through
contracts.
Region covered
Area (sq. km) 1,580 6,500 1,470 322 1,590
Population (m) 7.4 2.0 3.7 8.0 7.8
Public transport system features
Length of fixed track line
Rail 408km underground (the
Tube, with 275 stations);
57km LRT (788km national rail)
na Metro line 1 (23 stations), 2
nd
and 3
rd
line open.
494 (New York City Transit
NYCT))
One minor line only
Busway None None None 53 (NYCT) 84km (with 116 stations, by
end-2006). 388km total length
planned.
Rollingstock
No. trains/LRV 3,980 Not known Not known 6,195 (NYCT) Minor
No. buses 6,200 Not known 1,800 diesel and gas; 400
trolley bus
4,457 (NYCT) 1,186 buses for 2006 system,
including 381 feeder buses.
Other
Passenger
boardings/-
weekday (m)
5m (bus), 3m (Tube), 1.4m
(rail), 0.2m (LRT)
0.78m (u/g), 0.18m commuter
rail, 0.68m (tram) & 0.7m (bus)
1.6m (bus), 0.4m (metro line 1) For NYCT, 5.7m (rail) and 3.0m
(bus)
1.4m on 2006 busway system
55
Private Sector
Involvement
26 companies (mostly private)
provide bus services, and one
operates some LRT services.
Private companies operate
national rail services and
maintain Tube infrastructure.
Private sector operated rail (3
operators), tram & bus services
(3 operators).
Negligible involvement Secondary involvement Government built fixed
infrastructure. Private sector
purchase buses and provide
services. Private company
contracted to provide and
operate fare collection system.
Features of the MTA (or equivalent)
Name Transport for London (TfL) Passenger Transport Authority
(PTA) for Stockholm & 21
other counties required by law.
In Stockholm the PTA is called
SL- AB Storstockholms
Lokaltrafik.
OASA (Athens Urban
Transportation Organization)
Metropolitan Transit Authority
(incorporates New York City
Transit)
TransMilenio
Organizational
form
Statutory body established
under Greater London Authority
Act.
Statutory authority Public company, owned by the
national government. Financed
with 2% of public transport fare
revenue
A public-benefit corporation
chartered by New York State in
1965.
Public company, owned by city
government agencies. Financed
with 4% of public transport fare
revenue. 70 staff.
Board 12 member Board chaired by
Mayor of London. Members are
not executives of TfL, and have
academic, technical and
community-based backgrounds.
Representatives of local &
county councils & other
respected persons
11 member board, appointed
for five years: 7 members
represent the government, 2
employees, one from the
Economic and Social Committee
(OKE - a government advisory
board), and one from the Union
of Prefectural Administration of
Greece (ENAE).
17-person Board. Members are
nominated by the Governor,
with some recommended by
New York City's mayor & the
county executives of Nassau,
Suffolk, Westchester, Dutchess,
Orange, Rockland, and Putnam
counties. The Board also has six
rotating non-voting seats held
by representatives of organized
labor and the Permanent
Citizens Advisory Committee
(PCAC),
City government
representatives, selected by the
Mayor. National government
representation due to on-
lending of World Bank funds to
TransMilenio.
Local government
involvement
Entity of the city government. Direct involvement of local &
county councils
One member of the Board See above Leadership from city Mayor and
ownership by city agencies.
56
Institutional responsibilities
Policy & strategy Responsible to Mayor for
London and London Assembly,
within framework of Greater
London Authority Act.
Operational activities
undertaken separate companies
owned by TfL.
Other agencies within county
and local governments
J oint Ministerial Decisions of
Ministers of Economy and
Transport.
Responsible to State of New
York Governor for multi-modal
planning, design & construction
& maintenance of
infrastructure.
Operates within policy
framework established by city
authorities.
Infrastructure
Provision Private companies maintain the
Tube under contract to TfL
company. Service providers
maintain other infrastructure as
part of service contract with
TfL.
SL provides financing &
development of the total system
By associated public companies. MTAs Capital Construction
Company formed in J uly 2003
responsible for funding, design
& construction. Other operating
entities of MTA provide
rollingstock & operations.
TransMilenio plans and arranges
for delivery and maintenance of
fixed infrastructure. City
government agency arranges
construction. Buses provided by
service contractors.
Financing TfL finances infrastructure,
mostly directly, but some
instances of financing through
PPPs. Funding is provided from
local and national government
sources.
Local public transport is
financed both by the county &
the local governments within
the county - ie not by the state.
Government Capital projects are funded from
a combination of bond sales
and federal, state, and local
allocations. MTA has large
property holdings & revenues
from property.
15% tax on petrol sales in
Bogot, supplemented with
national government grants, is
used to finance TransMilenio
fixed infrastructure.
Operation and services
Provision TfL operates Tube services,
some LRT, and a few bus
services. All other services are
provided by private companies
under contract to TfL, or private
companies for other rail
services.
SL decides about structure,
standards, fares & service
levels. SL contracts out all
operational & station services &
outsourced the operating
subsidiaries from the SL group.
Tendering was made district-
wise. Bus operators supply their
own buses Train operators rent
the rollingstock from SL.
Services provided by public
companies: ETHEL SA (internal
combustion engined buses
owned by OASA); ILPAP SA
(trolley buses owned by OASA
and municipal government);
ISAP SA (local electric railway
owned by OASA); ATTIKO
METRO SA (metro owned by
the national government);
TRAM SA (trams owned by
ATTIKO SA); and
PROASTIAKOS SA (suburban
railways owned by the
national government).
Operating wholly owned entities
of MTA include; New York City
Transit; MTA Metro-North
Railroad; MTA Long Island Rail
Road; MTA Bridges and
Tunnels; & MTA Long Island
Bus. Currently being
reorganized.
Seven private companies
currently provide buses and
services through contracts to
TransMilenio selected through
competitive tendering.
TransMilenio plans services and
operates a central busway
management system.
57
Ticketing and
marketing
Some tickets usable only within
a single mode, but shifting
towards integrated ticketing for
all modes and services. A
private company (Transys) has
been contracted to develop and
implement the new ticketing
system.
SL provides all marketing,
branding & ticketing
Operated by OASA. Provided by MTA. Private company contracted
through competitive tendering
to provide and manage ticketing
and fare collection. A separate
company manages the fare
revenue.
Financing Fare revenue less than public
transport operating costs.
Subsidy needed for some
operating costs and all capital
costs. Finance from local and
national government.
Fare revenue less than public
Subsidy needed. Finance from
county & local government.
Maintenance of vehicles by
operators.
Fare revenue less than public
Subsidy needed for some
operating costs and all capital
cost. Financed by government.
Funded by fares & other
funding as above.
Cost of bus services, ticketing
and TransMilenio covered from
fares.
Source: ADB (2006a) with original sources cited as follows: principal Sources: London (http://www.tfl.gov.uk/tfl/, Stockholm (Nordstrand 2004)); New York
(www.mta.nyc.ny.us); Athens (http://www.oasa.gr/uk/index_gr.asp, Taxiltaris and Spandou 2005); Bogota
(http://www.transmilenio.gov.co/transmilenio/home.htm and consultants ie ADB 2006a)
58
Table B.3: Authority ie MTA functions in other cities
Source: Wallis and Lupton (1999)
59
Appendix C: Scoping of the Possible Content of an Integrated
Public Transport Law
An important complementary measure to a preferred institutional arrangement to achieve
integrated transport or public transport only would be a new law
13
to mandate that all agencies
are responsible for achievement of an integrated transport or public transport system.
In this Appendix we have identified the possible outline content of a new law to achieve
integrated public transport. This is not to say achievement of integrated transport is not
desirable however.
Such a law should be applied in all cities throughout Vietnam. But for the purposes of this
Appendix the law has been assumed to apply to HCMC only.
Key concepts related to achievement of an integrated public transport system would be:
A) Key questions
Why is government involved in MRT and public transport at all?
Answer: MRT particularly involves a large investment with mainly non monetary benefits to
users and urban traffic and environment it would not be provided if not for government
involvement.
Why does government need to regulate MRT and public transport?
Answer: Government involvement is needed to provide financial support for investment and
future operations, facilitate safe and convenient travel and ensure that public transport
maximizes external benefits.
There is an identified need for a new legal instrument specifically to ensure
development of an integrated HCMC public transport (including MRT system) for the
public interest.
B) Key MRT Stakeholders & Objectives
Stakeholder Objectives
Users
Demand responsive services that are
convenient and affordable and
maximize external benefits
Services that are punctual (refer to
standard)
MRT services that are integrated with
bus and other modes
Comfortable, clean and safe vehicles
(refer to possible standard)
Integrated and affordable fares
Access for persons with disabilities

13
This is a development of the concept recommended by MVA in 2006 for BRT in which they recommended
the need for a White Paper ie a high level policy on public transport.
60
Stakeholder Objectives
according to community expectations
Government/ community/ tax payers
Improved mobility
Changing needs accommodated
Value for Money (VfM)
External benefits (eg environment,
economic) maximized
Public Transport Authority
Appropriate infrastructure, systems
and facilities provided to consistent
standard to permit essential long term
needs for integration of lines and use
of common assets (eg depots) to
ensure value for money for the
community
Facilitate investment and operations
to minimize life-cycle cost &
maximize VfM by appropriate risk
transfer ie dont transfer demand
risk to a concessionaire where it
cannot be controlled
Ensure systems are inter-operable and
open where beneficial
Ensure safety and security of users etc
Concessionaires to be responsive to
government policy
Public transport operators/
concessionaires
Fair financial return in stable,
predictable operating framework
C) Specific Issues to Address in a New Law
(i) Objectives
A new law possibly entitled HCMC Public Transport Integration Act would aim to:
Permit development of an integrated public transport system for the benefit of the
public in HCMC
Public Transport should refer to both rail MRT, Bus Rapid Transit (BRT), other public bus
services and water transport services.
Integration means as a minimum:
Physical integration of MRT lines and stations.
Integrated fares meaning a common fare structure comprising a single flagfall plus a
common distance-based charge for all MRT will apply ie a person transferring from
61
one MRT line to another will not have to pay a second flagfall when entering the new
MRT line.
Integrated ticketing system whereby a single ticket can be used on all MRT lines and
ultimately all modes of public transport.
Integrated planning and concessioning of MRT lines to operate as a network of services
for the convenience of the public irrespective of which agency is the owner of a
particular MRT project.
(ii) Role of Administrator of the Law
The law should be promulgated by the relevant person in the PC who would be the
Administrator of the law. The law should give the Administrator the power to set standards
and regulations to achieve the purposes of the law including:
To achieve greater standardization and integration of feasibility studies; and
Specifically recognize, and be consistent with, current and proposed laws on PPP.
(iii) HCMC Integrated Public Transport Authority
An integrated HCMC Integrated Public Transport Authority will be established.
(iii) Role and Composition of HCMC Integrated Public Transport Authority
The Administrator will prepare the structure and duties of the new HCMC Integrated Public
Transport Authority.
Secretary to the Committee could be the XXXXX. The Authority should meet frequently and
not less than every three months. Agencies ie project owners should report on
concessionaire and/or operator performance to the Secretary of the Committee on a monthly
basis.
The Secretary should be charged with the responsibility of informing the Authority of any
significant breech of concession terms.
(iv) Relationship to Existing Legislation and Administrative Procedures
Where existing laws and administrative procedures conflict they shall be superseded by the
new Act.
(v) Single MRT Infrastructure and Services Plan
The Authority would prepare and update (on 5 year basis) the integrated long term public
transport infrastructure and services plan that presents an integrated view of the entire public
transport network.
An important focus of the Masterplan would be to examine how public transport would
operate as a network, with integrated services (coordinated with rail and bus) linking the
individual sub-regions of HCMC The public transport infrastructure and services plan shall
define service desired standards for connecting the principal origins and destinations within
HCMC (eg 90% of households to 90% of jobs, educational opportunities etc) in terms of
proximity to stations, waiting times, and overall travel times, associated priorities and
budgetary needs.
This public transport infrastructure and services plan would be used to inform planning,
financing and budgeting by other agencies.
62
(vi) Integrated Ticketing
Integrated ticketing should be provided by or for all public transport systems.
(vii) Integrated Fares
Integrated fares should be provided for MRT, bus and water transport services. Fares should
be set taking into account the quality of service provided, affordability to passengers and the
cost-recovery of the MRT system, as well to maximize usage of MRT.
(viii) Common Marketing and Branding
Even though MRT and other public transport services are to be operated by various different
companies or agencies, a common approach to marketing, branding and provision of
information on public transport is needed.
(ix) Inter-operable and open systems
The ability for trains on one MRT line to operate on another is desirable to permit
establishment of common depots and workshops to serve more than one MRT line.
Ultimately, inter-operable revenue services should be able to be operated from one MRT line
to any other, where it is beneficial to do so.
(x) Common Approach to Concessions
The gross cost concession model shall be applied to all future MRT lines recognizing that the
different cost-recovery characteristics of individual MRT lines, the need for an MRT system
that is integrated from the perspective of users and under the policy control of government,
and allocation of risks associated with MRT lines to the concessionaire and the Government
according to the party best able to manage them.
These concessions will specifically prohibit exclusivity and first right of refusal for
extension of concession contracts.
(xi) Rail MRT Safety
A common approach to rail and MRT rail safety throughout Vietnam is needed. VRNA have
this responsibility but in view of the specialist nature of MRT safety, and the lack of specific
experience on this subject in Vietnam, the Decree should foreshadow a national MRT and rail
safety and workplace health regulator to be established in a defined time frame
63
References and Bibliography
Asian Development Bank and the Government of Thailand (2006a) Integrating Mass Rapid
Transit in Bangkok: Options Report, TA 4676-THA: Small Scale Technical Assistance for
Infrastructure Investment Advisory Assistance, Thailand. February.
Asian Development Bank and the Government of Thailand (2006b) Integrating Mass Rapid
Transit in Bangkok: Summary of Resource Papers, TA 4676-THA: Small Scale Technical
Assistance for Infrastructure Investment Advisory Assistance, Thailand. July.
Asian Development Bank and the Government of Thailand (2007) Integrating Mass Rapid
Transit in Bangkok: Phase II, Final Report, TA 4904 -THA: Technical Assistance for
Infrastructure Investment Advisory Assistance (Phase II), Thailand. July.
Asian Development Bank (2007), HCMC Metro Rail System Project, Strategic Financial
Model Update, TA RSC-C61011 (VIE). March.
Allport R (2004) A Tale of Three Cities: Urban Rail Concessions in Bangkok, Kuala Lumpur
and Manila., prepared by Halcrow Group Ltd for World Bank as part of ADB-JBIC-World
Bank East Asia and Pacific Infrastructure Flagship Study.
Astris Finance and Systra (2005), Hanoi LRT Pilot Line Feasibility Study, Executive
Summary, Ocober.
Booth, C. and Richardson, T. (2001) Placing the public in integrated transport planning,
Transport Policy, 8(2) 141-149.
Chiplunkar, A (2006), Presentation on Public Private Partnerships (PPPs) Framework for
Infrastructure Development in Vietnam. Dr Chiplunkar served as ADB Staff Consultant on
PPP in GMS.
Finlayson, R (2007), Viet Nam Case Studies on Private Sector Development and Operations
A Case Study from the 2007 Special Evaluation Study on Private Sector Development and
Operations: Harnessing Synergies with the Public Sector, Prepared for ADB Operations
Evaluation Department. June.
Fouracre P R, Allport R J, Thomson J M (1990) The Performance and Impact of Rail Mass
Transit in Developing Countries, Transport and Road Research Laboratory, Research Report
278, UK.
HCMC PC 2007. Web site: <http://www.hochiminhcity.gov.vn/eng>. Accessed October 24.
Japan Bank for International Cooperation, Japan (2006) Terms of Reference for Special
Assistance for Project Formation (SAPROF) for Japanese Line, HCMC.
Japan International Cooperation Agency (2004) Study on Urban Transport Master Plan and
Feasibility Study in Ho Chi Minh Metropolitan Area (Houtrans) undertaken for the Ministry
of Transport and the Ho Chi Minh City People's Committee with support from the Japan
International Cooperation Agency. Prepared by ALMEC Consultants, Japan.
Japan International Cooperation Agency (2006) Integrated Urban and UMRT Line 1
Development Strategy in HCMC draft Final Report. Prepared by ALMEC Consultants,
Japan.
Larwin, T. F. (2005) Transit Planning for the 21st Century, ITE Journal, 75(8) 24-28
MVA Asia (2006), Task 3 Report, Institutional Recommendations for Involvement of the
Private Sector Involvement, Technical Assistance for Consolidation and Development of a
Bus System in Ho Chi Minh City, Viet Nam for World Bank with PPIAF funding, April.
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Parsons Brinckerhoff International and Japan Railway Technical Services (2006) Special
Assistance for Project Formation for Ho Chi Minh City Urban Transportation Improvements
Project Urban Mass Rapid Transit (UMRT) Line 1, Eastern Section, September.
Policy Appraisal Services Pty Ltd and Economic and Policy Services (2001) Bangkok Mass
Transit (Skytrain) Externalities Study, prepared for the International Finance Corporation
(June).
Preston, J. (2005) Contracting out public transport planning: options and prospects, 9th
International Conference on Competition and Ownership in Land Passenger Transport,
Lisbon, Portugal, 5-9 September.
Transparency International (2006), National Integrity Systems: Country Study Report, Viet
Nam.
Transport East West Expert Team GmbH (2003), Feasibility Study: MEtropolitan RAil
System (METRAS), Ho Chi Minh City.
Transport East West Expert Team GmbH (2005a), Addendum to the Feasibility Study:
MEtropolitan RAil System (METRAS), Ho Chi Minh City, September. Prepared by MVA
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Transport East West Expert Team GmbH (2005b), METRAS, Metropolitan Rail System
HCMC, Financing Report, Berlin, November.
van de Velde, D. M. (1999) Organisational forms and entrepreneurship in public transport:
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Wallis, I. P. and Hensher, D. A. (2005) Competitive tendering for urban bus services - cost
impacts: international experience and issues, 9th International Conference on Competition
and Ownership in Land Passenger Transport, Lisbon, Portugal, 5-9 September.
Wallis, I. and Lupton, D. (1999) Metropolitan Public Transport Policy and Planning:
Institutional Development in a Multi-Operator Environment, 6th International Conference
on Competition and Ownership in Land Passenger Transport, Cape Town, September
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World Bank (2005), Vietnam Transport (Draft)
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World Bank (2007), Project Information Document, Vietnam- HIFU Development Project
Appraisal Stage Report no. AB3058.

Appendix D: Fares and Ticketing Working Paper

25

TA 4862-VIE:
PPIAF Study -
Working Paper
Fares & Ticketing
J une 3, 2008
Table of Contents
Summary & Recommendations ............................................................................................................. i
1. Background and Purpose............................................................................................................ 1
2. Fares Policy Issues & Implications for Fare Structure ........................................................... 3
2.1 Policy Issues ....................................................................................................................... 3
2.2 Implications for Fare Price Structure and Form of Fare System............................... 4
3. Patronage and Revenue Impacts of Fare Price Changes........................................................ 7
3.1 Relevant Experience on Fare Price Elasticities............................................................. 7
3.2 Fare Price Elasticities Using Results of Demand Modeling...................................... 10
3.2.1. 2005 Study...........................................................................................................10
3.2.1. 2007/ 2008 Study...............................................................................................11
3.3 Conclusion on MRT Fare Price Elasticity in HCMC at 2015................................... 11
4. Achieving Uniform Fares and Integrated Ticketing ............................................................. 13
4.1 Introduction ..................................................................................................................... 13
4.2 Separating Ticketing from Other Aspects of MRT Operations............................... 13
4.3 Addressing the Challenges of Implementation........................................................... 15
4.3.1. Importance of Fare Pricing Policy...................................................................18
4.3.2. Specification of Ticketing System Components............................................18
4.3.3. Procurement Options for Ticketing System..................................................21
4.3.4. Integrated Ticketing Administration...............................................................25
Appendix A: Affordability Analysis & Tourist Use......................................................................... 27
A.1 Introduction......................................................................................................................... 27
A.2 Alternative Affordability Analysis ................................................................................... 28
A.3 Tourist Use .......................................................................................................................... 30
Appendix B: Most Likely Technical Option..................................................................................... 31
B.1 Likely Technical Components........................................................................................... 31
B.2 System Scalability Requirements....................................................................................... 32
References and Bibliography............................................................................................................... 33
Abbreviations
DAF Development Assistance Fund
FDI Foreign Direct Investment
PC
HCMC PC
Urban Development
PRG Partial Risk Guarantee
HCMC PC
i
Summary & Recommendations
An objective for rail mass rapid transit (MRT) in HCMC is that it be convenient to use and
free of artificial barriers that could be imposed if MRT lines and their method of operations
were to be done on a standalone basis.
Fare policy and an associated ticketing system are essential to the success of MRT and the
broader public transport system. Fare policy is vital because:
financially, it affects the number of people who will use MRT, which in turn influences
fare revenue, MRT operating costs and, ultimately, the viability of MRT lines;
socially, the absolute level affects the affordability of public transport to people, while
community;
system in general and the ticket system in particular; and
use made of other public transport and the amount of private travel, with consequences
for the transport system and community as a whole.
an integrated ticket and fare systemfor MRT and, ultimately, the bus system also; and
uniform fares for modes of similar quality.
It will be exceptionally difficult, perhaps impracticable, to implement an integrated ticketing
system with each public transport operator supplying their own equipment. Accordingly, there
is a universal movement towards integrated ticketing and fare systems that are managed
centrally rather than by individual service providers. It is recommended that such an approach
is essential for HCMC.
Moving towards implementation of such a system requires an appropriate framework in which
all necessary studies and activities can be undertaken. This framework is discussed below and
is presented in more detail in Table 4.3.
While it is not essential that the fare structure and level be confirmed before commencing the
process of planning an integrated ticketing system, an early decision will provide clarity and
direction to future work. In any event, establishing the fare structure and level is essential to
the development of future MRT lines in HCMC, and is thus a matter than needs urgent
attention. Accordingly, it is recommended that work commence as soon as possible to
examine a range of fare structures and levels, and identify the option that best balances MRT
financial viability and social obligations.
Experience elsewhere suggests that a practical way forward to implementation of an integrated
ticket system is to commence with a high level working group that should:
recommend a preferred fare structure and level;
prepare a functional specification for the ticketing system, identify a preferred
technology, and estimate likely capital and ongoing operating and maintenance costs;
ii
recommend arrangements for an integrated procurement contract that covers both
implementation and ongoing operation and maintenance of the ticket system, and which
also considers possible private sector financing of capital costs;
recommend institutional arrangements for the management of fares and ticketing for
MRT in HCMC following implementation of a new integrated ticket system; and
present a program for implementation of the recommendations that describes activities,
costs, schedules and agency responsibilities for government consideration and approval.
It is recommended that this working group should comprise representatives of the PCs
Management Authority for Urban Rail (MAUR), Transport and Urban Public Works Services
(TUPWS), Department of Planning and Investment (DPI) and Department of Finance or
could be an embryonic form of the Integrated Public Transport Authority.
Representatives of organizations and the community who will be affected by the proposals
should be invited to participate, either as members of a steering committee or an advisory
panel. A period of about 12 months will be required for the working group to undertake the
above tasks to the necessary level of detail.
Following a positive decision on the working groups report, it is recommended that the
government organization that is to be responsible for managing the ticket and fare system
should be established (at least in the form of a project office), and required to prepare:
bidding documents;
plans to implement the procurement process, including tender assessment, award and
management procedures; and
plans for operation of integrated ticketing across the entire MRT system, including
current lines, bus and other modes.
This work is likely to take a further six to twelve months, and will permit the government to
proceed to formalization of institutional arrangements, implementation of the ticketing system
and its ongoing operation. Based on experience in other cities, it is expected that it will then
take about three to four years to tender, contract, deliver, install and commission the ticketing
system, including establishing arrangements for delivery, sale and use of new smartcard-type
tickets and management of fare revenue.
Finally, responsibility for developing a suitable integrated ticketing and fare policy to support
an integrated MRT and public transport system for HCMC rests with the Management
Authority for Urban Rail (MAUR) in the first instance. The thinking needed to develop an
appropriate ticketing system and fare policy cannot be outsourced to others.
1
1. Background and Purpose
Master Plan (as approved in January 2007). Hitherto, two lines (MRT2 and MRT3) were
proposed for Asian Development Bank (ADB) funding with another line (MRT1) to be
financed by the Government of Japan. The Government of China, is a developing a proposal
for an MRT line, there are other proposals including one from China for MRT, Malaysian
interests to develop a monorail, and for a French consortium to develop a tram route.
program.
In parallel, ADB is mobilizing a grant from the Public Private Infrastructure Advisory Facility
(PPIAF
1
) to optimize private sector participation in MRT 2 and 3, and to assist the HCMC PC
arrangements for MRT in the context of wider urban transport. The scope of the PPIAF
technical assistance (TA) therefore covers developing (i) a framework for considering private
sector participation in implementation and operation of the Project; (ii) a value-for-money
analysis for implementation approaches that involve varying degrees of private sector
participation, (iii) a detailed financial model reflecting the preferred approach and measuring
participants; and (iv) a stakeholder feedback and a description of necessary institutional and
contractual arrangements given the preferred implementation approach.
prepared by consultants undertaking the PPTA. The results of its work will be presented in
While the MRT system will be developed by the PC, the GVN will also be involved through
various approval processes and possibly financing also. It is therefore necessary to establish in
detail the roles for various agencies of these governments for project approval and
implementation, and the manner in which integrated MRT development, including fares and
ticketing, in HCMC will be managed.

1
The Public-Private Infrastructure Advisory Facility (PPIAF) is a multi-donor technical assistance facility aimed
at helping developing countries improve the quality of their infrastructure through private sector involvement.
For more information on the facility see the website: <www.ppiaf.org>.
2
This Working Paper presents a discussion of the policy issues regarding fares and
ticketing systems and recommends an approach to secure both integrated fares and an
integrated ticketing system primarily for MRT, but also for other public transport, as
MRT will rely on an integrated public transport system to maximize its performance.
3
2. Fares Policy Issues & Implications for Fare Structure
2.1 Policy Issues
This section summarizes the key issues related to why both uniform fares and integrated
ticketing are needed in Greater HCMC. The principal focus of this paper is on fares and
ticketing for MRT. But a common approach to developing fares and ticketing policy needs to
be taken for MRT and the wider public transport system which in future, even with extensive
MRT, will rely on bus transport.
The benefit of an MRT network is that it substantially increases the range of locations
between which people can travel, though this also requires people to more frequently
interchange between lines, and to access the MRT network using bus services (and other
modes). Integration of ticketing systems enables people to use a single ticket on different
MRT lines, and potentially on bus services, independent of the fare structure for the various
lines.
However, from a passengers perspective, if there is a need to pay a second flagfall (also
known as the boarding charge) when transferring between trains of different operators would
likely be that it is unfair and is counter to the implicit objective of providing a convenient
transfer between various lines of an MRT system. Achieving integrated fares, that is with no
flagfall for second or subsequent boardings in the course of a single trip, ensures that public
transport users are not affected adversely in a financial sense by the possible adoption of
different fares policies on different MRT lines. A similar line of discussion applies to transfers
between MRT and bus.
Achieving integrated fares requires additional policy decisions and intervention by the
Government. If the fare system is integrated, people would not be charged a second or
subsequent flagfall for a single trip that involved use of several lines.
There is a second aspect to fare integration. It is that fare rates could vary between MRT lines
and bus services. Policy analysis could note that the different fares reflect the different cost
1
of
providing services on various lines but could still seek to establish a simpler fare structure that
is easier for the community to understand, for example a standard flagfall and distance charge
for all MRT, and possibly bus, lines (ie uniform fares). This is generally the practice for MRT
and bus systems in most cities.
Finally, in considering fare policy, it is necessary to also recognize that if fares are set too low,
substantial subsidies are needed, which must be funded from other taxes on the community.
Low fares also encourage additional demand, which raises the cost of providing services and
further increases the need for subsidies. Complex fare structures and arrangements discourage
use of MRT. Fares policy needs to balance the need for cost-recovery, simplicity of
understanding, and other Government policies such as with regard to the environment
and social equity.

1
The cost of providing services on a subway system such as the proposed Line 2 would be higher than for an
MRT line where much of it is above-ground or at-grade such as Line 1 because of, for example, additional air-
conditioning and emergency requirements.
4
the integration of the ticketing and fare systems of MRT and, ultimately, the bus
system; and
the adoption of uniform fares for modes of similar quality.
Fare policy is a matter that needs to be addressed at the outset, because it affects
passenger demand, design of stations and interchanges, the financial viability of
public transport, and the form and content of operating concessions.
Table 2.1 shows that achievement of uniform fares and integrated ticketing is best suited to a
Gross Cost form of operating contract (as recommended by the PPIAF Working Paper on
private sector participation options) and that both need an MRT or Public Transport
Authority with ability to manage more complex concession agreements with more intricate
financial arrangements.
Table 2.1: Requirements for Uniform and Integrated fares
Fare
(1)
Ticket Concession MRT Authority
Uniform & integrated Must be integrated All concessions on same basis. Need
revenue settlement system, perhaps with
fares collected by third party. Gross
cost
(2)
form of concession is better.
Needs an Authority with
ability to manage more
complex concession
agreements with more
intricate financial
arrangements
(1)Uniform fare = same Fare VND/km on all lines; Integrated fare = no second or subsequent flagfall
Link to cost recovery: (i) how will loss of second flagfall with integrated fares be recovered?; and (ii)
how will concessionaires be compensated for different level of cost recovery for each line with
uniform and integrated fares?
(2) Gross cost concession all fare revenue is paid to the government with bids made for the amount
the government should pay for provision of the tasks set out in the concession. Can involve some
transfer of patronage risk to the concessionaire.
Source: Consultant
The addition of uniform fares (ie with the same fare per kilometer traveled in addition to only
a single common flagfall) is very complex because it requires net financial transfers between
operators, if there is more than one. However, integrated and uniform fares are the usual
situation for urban public transport systems because they provide a standard fare structure
that is easily understood by travelers and judged by them to be fair.
To users, the entire public transport system (ie MRT, bus etc) should be presented as an
integrated system with no fare-related impediments to making best use of the network. Hence,
it is recommended that Government policy on fares should aim for this situation.
Implementing the approach requires a substantial role for the Government.
2.2 Implications for Fare Price Structure and Form of Fare System
Fare prices influence demand and any proposal to develop a new uniform fares and integrated
ticketing system for HCMC can be expected to affect demand and associated revenue in
complex ways. A change in fares, keeping all other factors the same, will have an immediate
effect on patronage and revenue, which can be expected to prevail in the short term. Many
other factors affect patronage and revenue such as modal quality, trip purpose, availability of
other modes and the income status of passengers. Also relevant as indicated above is the fare
structure such as whether fares are flat, distance-based or zonal.
5
Distance based fare systems are typically preferred by public operators as they are more likely
to balance demand across the system and to yield the highest patronage-related revenue.
Economists prefer distance based fares for similar reasons. On the other hand graduated or
zonal fares may be preferred for simplicity. Flat fares are also easier to implement and need
only relatively simple, and therefore not so expensive, ticketing systems.
In HCMC at present the current bus operators make use of flat fares structures with the fares
and fare product types shown in Table 2.2.
Table 2.2: Bus Fares
Source: MVA (2008); A set is a book of 30 tickets.
For the purposes of this paper, some typical fare structures that could be applied are
illustrated in Figure 2.1:
Proposed MRT system two different boarding charges plus different distance-based
fare structures;
Proposed MRT system common different distance-based fare structures plus common
boarding charges;
Flat fare for all public transport ie including bus and MRT or just MRT alone;
Zonal systems for all public transport or just MRT alone.
The diagram shows that a detailed zonal system could be structured in a variety of ways:
Flat fare a single zone fare system;
Simple zonal fare system with few zones;
More complex zonal fare system to an extent that if there are a large number of zones it
approximates a distance-based fare system; and
Other zonal structures eg with widely spaced zones in outer suburban areas if low
income groups are heavily represented. Zonal fare structures need not necessarily be
circles but could consist of arcs across the region or a patchwork quilt approach based
on neighborhoods.
6
Figure 2.1: Example of Possible Fare Structure Options
Flat
Fare
Distance Fares
Varying by Line
Standardized
Distance Fare
Simple Zonal
Fare
Zonal Fare
Zonal Fare
with Social
Objective
Arcs radiating
from CBD
Patchwork
Quilt based on
neighborhoods
Source: Consultant
7
3. Patronage and Revenue Impacts of Fare Price Changes
A change in fares, keeping all other factors the same, will have an immediate effect on
patronage and revenue, which can be expected to prevail in the short term. Many other factors
affect patronage and therefore revenue and they include:
fare structure whether flat fare or distance-based or zonal fares;
purpose of trips and their importance ie essential trips such as for work or education
versus those that are more discretionary in nature such as shopping or personal
business;
effects of service frequency, quality of service and vehicles, waiting times, and ease of
access to stations and movement within stations;
influence of marketing and range of ticket products and concession tickets
1
for school
children, monks etc;
availability, and the costs in time and money, of alternative modes of transportation
such as private modes (car, motorcycle), bus etc. These effects take into account
congestion encountered by buses and cars and so on.
household incomes average income and distribution of incomes;
economic situation price of goods and employment situation; and
urban development patterns including the extent of substitutability of key destinations
such as shopping and business centers, and regional travel patterns.
The interaction of these other factors is complex and generally become more important in the
medium to long term when the economy, urban development and incomes and car ownership
can all vary considerably. The current Working Paper focuses briefly on the implications of
MRT fare price level and fare structure on MRT patronage and revenue, and only gives
preliminary consideration to the many other factors which may also come into play.
3.1 Relevant Experience on Fare Price Elasticities
The approach to estimating the effect of fare level on patronage and associated revenue is to
review previous experience for similar situations. The way this is most appropriately done is to
use the concept of elasticity. Elasticity is the impact of a change in an independent (or
stimulus) variable on a dependent (or response) variable, both measured in percentage changes
(Hague 1999). If a 1% increase in the MRT fares results in a decrease in MRT passenger trips
by 0.3%, the fare elasticity of the demand for MRT travel is -0.3 (=-0.3/1).
Elasticities are defined using the ceteris paribus condition: they are valid under the
assumption that all other things (eg other independent variables) do not change. An elasticity
can be positive or negative. If an elasticity (in absolute values) exceeds 1, the dependent
variable is called elastic (eg elastic demand) with respect to the independent variable, ie
demand is highly variable with fares. If the elasticity value (in absolute terms) is low, the
dependent variable is described as being inelastic, ie demand is not substantially affected by
fares.

1
Concession tickets are those that may be offered at lower than normal prices for special groups such as school
children, religious persons, the elderly or those with disabilities.
8
For MRT and other public transport, as for most other goods and services, an increase in
prices leads to a reduction in demand. The normal range of MRT and public transport fare
price elasticities would be between 0 and -1.0. An elasticity of zero would mean that demand is
inelastic and would not vary with price. While this condition may apply for small increases in
price for wealthy people higher and higher prices would be expected to reduce demand
eventually.
An elasticity of -1.0 means that an increase in price reduces demand by the same amount. For
example, an increase in price of 10% would lead to a reduction in demand of 10% thus
meaning that revenue would stay the same. This condition can be attained by a commercial
MRT or public transport operator that is free to raise prices to maximize their income, as
would be commonly experienced in sectors where the price is unregulated or only lightly
regulated (airport limousine services, airline travel, tourist coach services).
How can we measure fare price elasticity of MRT passenger demand? Transit Cooperative
Research Program (1999) identifies the following general methods:
time series analysis using historical data on fares and passenger demand using
regression analysis to isolate the effects of other factors (eg fuel price changes, MRT
service level changes);
before and after analysis of demand for a particular fare change;
use of a demand function, often on the basis of stated preference surveys or use of a
revealed choices as simulated by available transport models; and
review of industry experience for similar cities with similar MRT systems.
For this PPIAF study we use the third and fourth approaches. The third approach makes use
of Systra MVAs transport model which is used to simulate the effect of a variety of fares on
passenger demand and revenue. The fourth approach makes use of available published or
unpublished data on MRT fare elasticities from other cities in the region.
There appears to be no MRT fare price elasticity information available for similar cities to
HCMC at somewhat similar stages of development (eg Singapore and Hong Kong
1
in the
1970s and 1980s; and Manila, Philippines and Kuala Lumpur, Malaysia, in the 1980s).
Current information from Hong Kongs urban and suburban railway operator KCRC
indicates their systems fare price elasticity of demand is about -0.3 (Personal Communication
2006d). Experience from Manilas MRT3 (Metrostar) indicates that the fare price elasticity of
demand is around -0.7 (Personal Communication 2007). In Bangkok, Thailand as the only two
MRT systems BTS and BMCLs Blue Line subway did not adjust their full (undiscounted)
fares until mid 2007 since their opening in December 1999 and mid 2004 respectively, there is
no available information for Bangkok on demand response to MRT fare price changes
2
. There
is a longer history with bus fares although until recently there have been relatively few fare
price changes. Given the quality differences between existing bus services and MRT in
Bangkok any information on bus fare price elasticity for Bangkok buses is not considered
applicable to MRT.

1
Singapore and Hong Kongs first MRT systems opened around 1980 and 1988 respectively.
2
It is possible that if BTS and BMCL had closely monitored the effects of various discount fares on demand and
were able to separate it from the wider effects of underlying growth some information on demand response to
fare price could be gained by them.
9
There is more extensive information reported on MRT and suburban rail fare price elasticities
of demand for western cities. For the purposes of this section, this is satisfactory, as the aim is
not to precisely define likely MRT fare price elasticities of MRT demand for HCMC but
merely to suggest their likely size.
Balcombe et al (2004) found in their review of various studies found that:
MRT fare price elasticities in the short run
1
had a mean elasticity of -0.31 with a range of
-0.15 to -0.55.
Suburban rail in UK had a mean fare price elasticity of -0.50 with a range of -0.09 to -
1.02.
MRT fare price elasticities in the long run had a mean elasticity of -0.57 with a range of -
0.40 to -0.69.
Short run MRT fare price elasticities for the peak period had a mean of -0.25 which was
shown to be higher than the off-peak period when the mean was found to be -0.42.
Short run suburban rail fare price elasticities for the peak period has a mean of -0.34
which was shown to be higher than the off-peak period when the mean was found to be
-0.79.
Wardman and Shires (2003), found that in the UK, MRT fare price elasticities for commuter
tickets (no concession tickets at discounted prices) the underground MRT fare price elasticity
of demand in the short run was -0.33 and in the long run was -0.44.
It would be expected that MRT fare price elasticity will increase, ie become more elastic, as
follows:
With the passage of time as incomes and associated access to private modes increase.
Balcombe et al (2004) found that long run elasticities are higher (ie more elastic) than
short run elasticities;
In response to how essential the trips are for more important trips such as work/
education, the MRT price elasticity would be expected to be lower than for less essential
trips or those where a variety of destinations can satisfy the same desire for travel eg
shopping could take place at a variety of centers. As more less essential travel occurs
within off-peak periods it is not surprising that off-peak elasticities were found by
Balcombe et al (2004) to be higher (ie more elastic) than in the peak period;
As incomes decrease lower income groups would be expected to be inclined to
manage their overall expenditure to match available budgets. For very poor people that
occasionally use MRT for essential trips a fare increase would be expected to lead to a
direct reduction in expenditure on other items or conversely on MRT travel itself as
total household expenditure is held to the available budget; and
As land use and travel patterns change.

1 Balcombe defined short term one or two years with the long run as being 12 to 15 years, and possibly
longer eg 20 years. In a very dynamic growing city such as HCMC with relatively low car ownership (94% of
households are estimated by SYSTRA MVA (2008) to not have had access to a car in 2007 although 91% had
access to one or more motorcycles) the short run may be considered to be a period of a few months, with the
long run being a period of three to five years or longer.
10
MRT fare price elasticities can also be expected to decrease with distance as the impact of the
flagfall becomes more muted. Similarly, MRT (and bus fare) price elasticities can be expected
to decrease with the adoption of integrated fares which imply the payment of only one flagfall
irrespective of how many modes are used.
Fare price elasticities would be also expected to be lower where there are available ticket
products at deep discounts as exist for set tickets
1
and monthly tickets for bus today in
HCMC and which would likely be adopted for MRT also. For example, as shown in Table 2.2,
the use of a set ticket on a single trip basis is at a discount of over 20% compared to the full
price single ticket.
3.2 Fare Price Elasticities Using Results of Demand Modeling
3.2.1. 2005 Study
For TEWET (2003 and 2005), MVA prepared demand forecasts and also examined the
impact of different fares levels on demand and associated revenue. For the current PPTA
study, SYSTRA MVA et al (2008) updated the earlier demand model and have prepared
revised estimates of patronage and revenue for various assumptions including different fare
price levels.
ADB (2007a) found in its review of the work of TEWET (2003 and 2005) that for an MRT
opening year of 2010:
Forecast demand is extraordinarily sensitive to fare level the implied demand with
respect to fare price elasticity (defined below) at 2010 is -1.1 which is higher than might
be expected. In HCMC an elasticity of perhaps around -0.7 to -0.8 would have been
expected at these relatively low fare price levels. Further discussion on elasticities is
made below.
This is also surprising given that bus fares in 2005 prices are VND2,860 which
from years 2010 to 2017 . are higher or almost the same as METRAS fares. And, as
discussed above, this level of bus fare is broadly consistent with the current bus fare in
terms of affordability to passengers and therefore their behavior.
While on the one hand demand here appears overly sensitive to price, as transport models do
not model many of the degrees of freedom actually available to travelers (changes of
budgeting and associated consumption patterns) and often model others poorly (changes in
origins, destinations, trips with multiple legs, social constraints where travel is captive to
certain modes due to the nature of the trip, or even the decision to travel at all) the elasticity
estimated from a transport model would usually be expected to understate the actual
elasticity.
The analysis reported in Appendix A presents an alternative approach to examining the
sensitivity of demand with respect to fare price by examining likely affordability. This analysis
reported by ADB (2007a) required many assumptions but indicated that the demand with
respect to fare price elasticity implied by the results of TEWET (2003 and 2005) were overly
high. This conclusion appears to have been confirmed by the results of the 2007 demand
forecasting of SYSTRA MVA et al (2008) as shown below.

1
A set is a book of 30 tickets.
11
3.2.1. 2007/ 2008 Study
Non Integrated Fares
A review of the results of SYSTRA MVA et al (2008) show that for Lines 2 and 3 for non
integrated fares
1
that:
For an opening year of 2015, forecast demand with respect to fare price level exhibits
a fare price elasticity of around -0.9 rising from a fare of VND4,000 (in 2007 prices) to
-1.0 at the revenue maximizing fare of around VND4,500 (in 2007 prices).
For an opening year of 2025, forecast demand with respect to fare price level exhibits
a fare price elasticity of around -0.6 rising from a fare of VND4,000 (in 2007 prices) to
-1.0 at the revenue maximizing fare of around VND6,500 (in 2007 prices).
Average household incomes at 2025 would be approximately 2.26 times greater than at 2015
(based on assumed average GDP growth of 8.5% pa). The modeling results show that as
incomes rise, demand is expected to show less sensitivity to fare price and this effect is
reflected in lower derived elasticities as shown by comparing the 2007 modeling results to
2003 and 2005, and the forecasts at 2025 compared to 2015.
Integrated Fares
SYSTRA MVA et al (2008) showed that the forecast demand and the revenue with an
integrated fare
2
are also both higher than with non integrated fares. For Lines 2, SYSTRA
MVA et all forecast that demand and revenue increased by 24%. For Line 3, demand and
revenue were both forecast to increase by 10.2%.
3.3 Conclusion on MRT Fare Price Elasticity in HCMC at 2015
Elasticity of demand with respect to fare price is clearly a complex matter. Elasticities depend
on the price level too. By definition, the elasticity at the revenue maximizing fare is -1.0.
Normally, in a developing city an average short run elasticity of around -0.7 to -0.8 would be
expected. A similar result in HCMC is also expected on average.
Elasticities would vary by income level. Lower income groups would be expected to exhibit
higher sensitivity with respect to fare price and have a higher elasticity. The long term MRT
fare price elasticity in HCMC would also be expected to be higher. Refer Table 3.1.
Over a much longer period such as 2015 to 2025, and as incomes grow, the demand with
respect to a (reasonable) fare price level would be expected to become less sensitive with both
short and long run elasticities reducing on average.

1
The user has to pay VND4,000 per boarding.
2
That is, only an initial boarding charge when entering the first MRT line but no subsequent boarding charge for
transfers to a second or other line.
12
Table 3.1: Estimated short term MRT fare elasticity of demand in HCMCat 2015
Income Range Distribution Frequency
of Use
(1)
Sensitivity to price Likely short term
MRT fare price
elasticity
Lowest quartile 25% Non-Regular/
Occasional user
Price sensitive Greater than -1.0
Second lowest
quartile
25% Occasional user Somewhat price sensitive Around -0.7 to -1.0
Second highest
quartile
25% Regular user Not very price sensitive -0.4 to -0.7
Highest quartile 25% Regular user Not price sensitive Less than -0.40
Total 100% Around -0.7 to -0.8
on average
(1) For definitions of non-regular user (once a month), occasional user (once a week) and regular
user (almost every day)
Source: Consultant
13
4. Achieving Uniform Fares and Integrated Ticketing
4.1 Introduction
In this section the question of how to decide what is the appropriate system of uniform fares
and the supporting integrated ticketing system for Greater HCMC is addressed.
In this section three distinct concepts are discussed:
Integrated ticketing involving a common ticketing system making use of an
appropriate technology that permit convenient travel on the entire public transport
system and convenient back office revenue clearing and handling.
Integrated fares public transport ticket prices implicitly involve a two-part fare
structure, consisting of a flagfall (an initial amount related to boarding a vehicle) and a
distance-related part
1
. Integrated fares requires that only a single flagfall be paid, ie a
passenger who needs to transfer between public transport vehicles to undertake their
journey should not be penalized because the public transport system does not allow
them to make the trip on a single vehicle.
Uniform fares - Uniform fares requires some standardization of the distance-related
portion of fares
2
.
By necessity, integrated and uniform fares requires standard definitions of discounted (or
concession) fares, and require an integrated ticketing system to permit the fares to be
implemented.
The SAPROF Study for Line 1 (PB Asia et al 2006) and the TEWET (2003 and 2005) studies
only considered ticketing in the context of their proposed individual MRT lines and not the
needs of the future MRT network. The focus in the PPIAF fares and ticketing work is the
policy needs for the future MRT network such as having a convenient and integrated
ticketing system where one ticket can be used on different lines in the future MRT
network (and desirably on other public transport).
The discussion on this section is on ticketing for MRT as providing ticketing for various MRT
lines with possible different operators is very complex. The capacity for the chosen method of
ticketing to be provided for the bus system at the same or a later time is implied.
4.2 Separating Ticketing from Other Aspects of MRT Operations
The Working Paper on private sector participation of this PPIAF recommended a gross cost
form of operating concession (or contract) with some investment in the form of key operating
assets such as trains and control system.

1
In this way, the fare for a 10 km journey on a single vehicle is less than double the fare for a 5 km journey.
However, the cost of a 10 km trip that involves say 5 km on one vehicle and a transfer to a 5 km trip on another
vehicle will cost double a single 5 km trip for the distance-related component.
2
Some consideration can be given to different distance-related fares to reflect cost and quality attributes of
public transport models, eg MRT, and non air-conditioned and air-conditioned bus services.
14
From a ticketing perspective a gross cost concession environment provides:
greater control of ticketing policy by government, enabling the simpler implementation
of social objectives, such as common fares; and
a significantly simpler fare revenue management arrangement.
There are two basic system options for implementing integrated ticketing within the gross cost
concession environment:
integrating multiple and possible disparate systems by the use of a interoperability
standard; or
the implementation of a single system across all MRT concessions.
The issues arising from these two options are summarized in Table 4.1. Based on the
assessment in Table 4.1, the procurement of a single system is the preferred option for
HCMC. The alternative of integrating multiple and possible disparate systems by the use of a
interoperability standard is exceptionally risky. Other benefits of procuring a single system will
include the minimization of multiple procurement transactions costs and the likely cost-
efficiencies due to single-systems economies of scale.
Table 4.1: Assessment of System Options
Issues Multiple Systems
Integrated by
Interoperability
Standard
Single System
Implemented across all
MRT concessions
Coordination and regulatory effort to
achieve common ticketing
High minimal
Risk of vendor lock-in Medium High
Standardization of equipment, system
and operational performance
requirements
difficult multiple contracts simple single
specification
Government ability to direct ticketing
contractor(s)
minimal no direct
relationship
high direct contractual
relationship
Government ability to coordinate and
implement future enhancements
minimal - complex high - simple
Government ability to deal with system
performance issues
minimal no direct
relationship
high direct contractual
relationship
Ability to provide common look and feel
to customers
difficult differing
equipment types and
operating regimes
simple common
equipment
Source: Consultant
International experience confirms this approach. There is a universal movement towards
ticketing and fare systems that are integrated across the public transport network of cities, in
recognition of the impracticality of coordinating numerous independent systems and to
provide good public transport services to the community. It is therefore considered essential
that the ticketing system for MRT, and potentially other public transport, in HCMC should be
designed and managed by a separate agency rather than by individual service providers. The
remainder of this working paper is based on such an arrangement.
15
4.3 Addressing the Challenges of Implementation
It is common for there to be an assumption that integrated ticketing issues can be dealt with
by adopting a particular technology (eg smart cards) and method of procurement (eg turnkey
supply, operate and maintain contract). But this assumption is incorrect.
Implementing an integrated ticketing (and uniform fares) is challenging with strong inter-
linkages to transport policy (eg on fares and level of integration of transport services desired),
MRT concessioning and with major financial implications for government.
For example fares policy and the implications of standardization of business rules
1
for
ticketing across all operators involves extensive technical analysis of the revenue implications
and consultation with all parties and public transport users. A wide variety of fare systems and
associated methods of validation and revenue protection would need to be considered. The
policy issues and challenges for a public transport system where there are existing separate
MRT operators with different fares (and concession agreements) include:
what are the objectives of an integrated ticketing system with uniform fares passenger
convenience or some other financial measure;
should bus and other modes be integrated into the new integrated fare system for MRT
if so, when and how? Desirably, the answer should be yes and as soon as practicable.
what fare structure is to be adopted, eg:
o zonal fares should they be used, how many zones should be used, and how will
they operate?
o flat fares should they be used, what level should be used, should they be
completely flat, even for very long journeys?
o distance-based fares what flagfall, what distance charge, how will the distance
based component be measured and monitored, should bus and MRT fares be the
same?
should ticket products and prices be standardized across all operators/ modes;
what concession or special fares and tickets should be created;
how will ticket validation be handled closed systems are less vulnerable to revenue
leakage;
how should trade-offs be made between those who will benefit and lose from changes;
should implementation of a new integrated ticketing system be staged;
what technology or technologies would be appropriate;
what is the capital and operating and maintenance cost of the ticketing system; and
what are the financial implications of any chosen fare system? pricing of average fares
below average system cost recovery implies external financial support would be
required.
HCMC is in the fortunate position that at present there are presently no MRT operators and
there is a bus system which has common fares. Consequently, the issues for fares and ticketing

1
These rules would include those for fare structure and ticket products and prices.
16
are potentially simpler but require appropriate decisions in advance of embarking on
implementation.
The general array of policy elements and implications to be faced when considering any
integrated approach to fares and ticketing is set out in Table 4.2.
Table 4.2: Key Policy Issues for Integrated Ticketing
Policy Element Example Implications
Aims & objectives Revenue versus simplicity Influences decision on zones
and number versus sections or
distance-fares
Availability of other revenue
sources
Public Service Obligations
(PSOs) payments for
concessions or lower price
levels
Influences passenger types and
ticket types
Passenger types & concessions Full fare, child, student, senior,
monk etc
Influences ticket types and
pricing
Pricing method Flat fares, sections, zones Influences ticket types and
prices
Base fare level Single adult fare Influences the discount scheme
Ticket types & discounts Return, daily, weekly Creates travel conditions
Conditions of travel Times, dates, service area e Creates a need for validation
Revenue protection Visual checking or electronic
validation
Influences the technology
choice
Ticketing technology Paper ticket issuers, magnetic
cards, smart cards
Impacts on ease of use of
system and costs
Source: Based on table of SEQ Integrated Ticketing Project Team (1999:10)
Moving purposefully towards implementation of integrated ticketing and fare system requires
well thought out and comprehensive action by a body with appropriate authority and with
supporting budgets. Studies to progress the subject need to be undertaken within a clear
framework and with explicit objectives that enable key decisions to be made in a step-wise
fashion towards the ultimate goal of implementation. Experience in other cities suggests that
this body is best initiated as an inter-agency project working group, and could be formalized
into a separate agency or division of an agency when procurement begins. It is preferable that
the working group have appropriate institutional and consumer representation to ensure all
key stakeholders are involved in the process.
Table 4.3 sets out a series of sequential steps that can permit the efficient and effective
implementation of integrated ticketing and fares. Each step involves complex challenges and
difficult decisions. Ticket technology and the method of procurement while costly and very
important should be addressed after the other policy matters are decided. Based on experience
in other places, the entire process of planning and initiate procurement of an integrated
ticketing system is likely to take at least two years. Depending on the scope and complexity of
the system an additional three or four years would be needed for implementation.
17
Table 4.3: Steps to Implement Integrated Ticketing and Fares
Step Description Duration
1. Set up inter-agency
working group
Working Group charged to develop and deliver best option for uniform fares
and ticketing on a project basis
-
2.Develop fares policy Fares zone or distance based? Revenue implications, business rules, modes
to be included, implications for concession arrangements and revenue
handling
12 months
3. Ticketing technology
specification
Develop functional specification to deliver desired fares and ticketing
system
concurrent
4. Confirm how
ticketing system will
be packaged and
form of outsourcing
Three options identified:
(1) Traditional supply tender with separate O&M
(2) Turnkey supply and O&M contract funded by government on on-going
basis
(3) Turnkey supply and O&M concession funded by % of revenues collected
concurrent
5. Confirm likely cost-
recovery of each
MRT line (and bus
etc)
This work identifies which lines can generate revenues which exceed
operating cost
concurrent
6. Confirm concession
form
Confirm MRT (and bus) preferred operating concession arrangements,
method of revenue management and implications for ongoing government
financial support
concurrent
7. Decide on
appropriate
organization for
ongoing fares &
ticketing
management
Option 1: Government management (30 people) policy setting,
administration & management of outsourced ticketing contract on supply/
operate/ maintain including clearing house & handling of legal/ banking
aspects
Option 2: Government oversight (< 10 people) policy setting, auditing,
with outsourced administration done separately to outsourced ticketing
contract on supply/ operate/ maintain including clearing house & handling
of legal/ banking aspects
Concurrent
8. Confirm willingness
of government to
ongoing financial
support
Examine likely packaging of MRT lines to minimize direct revenue support
from government & identify MoF operating financial support needed
Concurrent
9. Prepare roll-out plan Details of phased roll-out 3 months
10. Prepare tender
documents for
ticketing system &
separate
administration
contract (as
necessary)
Prepare tender documents 9 months
11. Tender assessment Bidding & award 9 months
12. Implementation Delivery, installation and testing of equipment, tickets and support systems 2 to 3 years
(depends on
complexity
of preferred
system)
13. Convert project to
long term
institutional form
Set up organization, arrange agreements with banks etc Concurrent
Source: Consultant
It is not desirable for Government (ie MOT and MOF) to outsource the thinking needed to
address the various inter-related policy issues. Four major issues are discussed in following
subsections to illustrate why government needs to remain in firm control of the
implementation process.
18
4.3.1. Importance of Fare Pricing Policy
Fare policy is vital because:
financially, it affects the number of people who will use MRT and bus/ other , which in
turn affects revenue collected from passengers, MRT operating costs and, ultimately, the
viability of future proposed MRT lines and bus services etc;
socially, the absolute level can affect the affordability of public transport to people and
community;
system in general and the ticket system in particular (though it will generally be desired
that the ticketing system be able to accommodate a range of possible fare structures and
levels to allow for policy changes in the future); and
quantity of use made of other public transport and of private travel, with consequences
for the transport system as a whole.
The potential effect of the level and structure of fares on public transport patronage and costs
can be substantial. While it is not essential that the fare structure and level be confirmed
before commencing the process of planning an integrated ticketing system, an early decision
will provide clarity and direction. In any event, establishing the fare structure and level is
essential to the development of future MRT lines in HCMC, and is thus a matter than needs
urgent attention. Accordingly, it is recommended that work commence as soon as possible to
examine a range of fare structures and levels, and identify the option that best balances MRT
financial viability and social obligations. Similar analysis for the bus and wider public transport
system would also be needed.
Clearly, fare pricing has significant financial implications and is a major transport policy and
national finance issue. Any decision of fare price and form of fare system (eg zones, distance-
based etc) should only be taken after careful study, analysis, technical discussion and
consultation with stakeholders. A general approach to fare restructuring, as adopted in the by
the Chicago Transit Authority (CTA) in the USA, is described in Box 4.1. The criteria used by
the CTA to evaluate various fare options are presented in Table 4.4.
4.3.2. Specification of Ticketing System Components
The total capital cost of a smart card ticketing system for all public transport in HCMC could
be in the order of US$80 million and around the same amount in present value terms for
operation and maintenance over ten years. Given the complexity and high cost of operations
and maintenance (O&M) of ticketing equipment, it is increasingly common for supply and
O&M of ticketing equipment to be integrated in a single contract.
19
Table 4.4: Fare Options Evaluation Criteria of Chicago Transit Authority
Evaluation Criteria Weight Criterion Definition/ Evaluation Guidelines
Maximize revenue while minimizing
ridership loss
80 Ability to raise additional revenue compared to base case
Maximize ridership while
maintaining sting net revenue
80 Ability to increase ridership w/o losing revenue, compared to
base case
Ease of implementation 20 Phasing necessary to achieve reasonable transition, reflected
in costs and timing, evaluated using discounting
Reasonableness (public
acceptability)
10 Assessment based on experience from market research and
public meetings
Revenue protection 25 Evaluated in qualitative terms, based on scope and likelihood
of improvements in revenue protection
Cost 80 Includes capital costs of fare equipment and station
modifications, and revenue collection costs
Reversibility (risk) 20 Ease with which an option can be implemented or
abandoned; includes institutional, public relations, other
factors
Maximize rides by disadvantaged 20 Equity of fares, especially of the transportation disadvantaged
Simplicity 10 Assess simplicity, ease of understanding and convenience of
use of each option
Management information 5 Assess extent of improvement in each of three areas:
financial accounting/ revenue control; operational control;
marketing/ planning
Source: Table 31, TCRP (1999)
Box 4.1: Fare restructuring study - example of Chicago Transit Authority
Chicago Transit Authority (CTA) has performed two major fare structure studies in the recent years. The first, in
1987, evaluated the following types of fare strategies:
Distance-based pricing,
Peak/off-peak differential,
Bus/rail differential, and
Maximum prepayment.
The steps included in this study, which laid the groundwork for the subsequent study, were as follows:
Identify Fare Policy Goals Goals were identified and "strategic trade-offs" between specific goals were
established through discussions with staff from various departments and selected Board members.
Develop Evaluation Framework Ten criteria were identified, and evaluation guidelines were defined for
each criterion. Where possible, specific quantitative guidelines were provided. The criteria and guidelines are
summarized in Table 4.4, along with the relative weights assigned each criterion; the criteria weights were
based on interviews with CTA Board members. As shown in Table 4.4 ridership, revenue, and costs were
considered the most important, while the provision of management information was ranked lowest.
Define and Analyze CTA's Markets Considerable effort was devoted to defining and analyzing the
potential markets for CTA service. Elasticities were based on the results of a series of "stated preference"
surveys of riders and non-riders and were used to predict the effect of different fare options on ridership.
Develop and Estimate Costs for Fare Options Six different options were developed and evaluated in
isolationin order to understand the implications of eacheven though it was acknowledged that actual fare
structures might include a combination of strategies. The options included peak/off-peak differentials, distance-
based pricing (zonal for rail only or system-wide, and rail point to point), modal differentials, and maximization
of prepayment. Potential costs (capital and operating) were calculated for each option. The distance-based
options were found to cost the most, largely because a new fare technology probably would be needed to
implement such a strategy effectively.
Evaluate Options Each options was evaluated on a comparative basis with regard to each of the weighted
criteria.
20
The ticketing system comprises two inter-related physical components: tickets (sometimes
called fare media), and ticket validation equipment
1
. Ticketing system components for
various types of fare collection system using a variety of fare media (eg paper tickets, magnetic
stripe cards, smart card etc) are shown in Table 4.5 and likely applicability to various modes
including bus and MRT (ie rail and LRT) as occurs in the USA. The most likely and
appropriate fare collection system for HCMC would be closed barrier systems for MRT (as
in Hong Kong, Singapore, Bangkok etc) and conductor-validated systems for bus.
Table 4.5: Ticketing System Components
Fare
Collection
System
Fare Media Fare Equipment
(1)
Mode
Bus LRT Rapid
rail
Commu
-ter rail
Pay on
entry
Cash/token Fare box X
Paper ticket TVM, validator X X
Magnetic ticket Validator, TVM X
Smart card Validator X
Credit/debit card* TVM, ATM X X
Barrier Cash/token Turnstile/ gate X X
Paper ticket TVM, validator X
Magnetic ticket Validator, TVM X X X
(3)
Smart card Validator X X
Credit/debit card* TVM, ATM X X
Proof-of-
payment
(barrier
free)
Cash/token -
Paper ticket TVM, TOM, validator (handheld) X X X
Magnetic ticket -
Smart card -
Credit/ debit card* TVM, ATM X X X
Conductor-
validated
Cash/token -
Paper ticket TVM, TOM, validator (handheld) X
(2)
X X X
Magnetic ticket Validator (handheld) X
(2)
Smart card Validator (handheld) X
(2)
Credit/debit card* TVM, ATM X X X
(1) AVM = Automatic Vending Machine; ATM = Automatic Teller Machine; TOM = Ticket
Office Machine
(2) Purchase of ticket media needed also
(3) Metra Electric is the only current barrier commuter rail system in USA
Source: Adapted from Table 41, TCRP (1999)
The most appropriate fare collection system and fare media for HCMC needs detailed study.
Smart cards are now an established technology in public transport systems, but there a variety
of systems with different costs. The more functions a smart card is intended to have the more
complex and expensive the entire system becomes.
In 1997 Hong Kong became a model for how smart cards could be introduced into city-wide
public transport systems with the smart card extended to pay for other forms of transport, and
minor purchases at convenience stores and so on. The overall, integrated system is called
Octopus and was introduced by Creative Star, a joint venture company formed by the Mass

1
This is complemented by management systems for maintaining the equipment, managing the supply and
distribution of tickets, managing revenue (including distribution of revenue to appropriate parties), and collecting
and using statistics on patronage.
21
Box 4.2: Scope of Singapores ez-Link
Originally known as the EIFS (Enhanced Integrated
Fare System), Singapores ez-Link is an integrated
smart card ticketing project that was awarded to ERG
of Australia in April 1999 for full implementation by
end 2002.
Maintenance was separately contracted and
exceeded the capital cost. The full upfront, capital
cost was S$134.6M (ie about US $80M) and included
22,000 readers, 3,800 on-bus tag on and tag off
ticketing systems, and five million smart cards (more
than one per capita). It also included the installation
of GPS systems on 3,800 buses. An ez-Link company
was also established as a subsidiary of the Land
Transport Authority.
Source: Sayeg and Charles (2004)
Transit Railway (MTR) and five other
transport operators. This fully integrated
ticketing system now allows passengers to
travel more conveniently on all modes of
public transport (ie trams, light rail, bus and
ferry) and minimizes the need to carry cash or
to purchase tickets. The multi-modal cards
can now be used at retail and fast food stores.
Most pay phones also accept the card. The
system was fully operational by end 1999.
Other cities in the world including Singapore
(refer Box 4.2), Sydney, Brisbane, Melbourne,
London and Kuala Lumpur have since
followed, or are following, the model adopted
by Hong Kong.
Although smart cards are becoming widespread in public transport schemes around the world,
conventional smart cards are considered to be expensive by some operators as not all trips
made by regular users not all regular users will travel on period passes and several ticket
options are not best served by smart cards. A new low cost smart card is now available on the
market although is not yet widespread. Box 4.3 discusses some key features of smart cards and
new limited use smart tickets.
The advantages and disadvantages of each ticketing technology need to be fully considered
and in due course a functional specification developed to procure the most appropriate cost-
effective system for HCMCs needs.
Appendix B provides an overview of what might be the most likely technical option which
would the use of some kind of smart card for more detailed consideration at a later stage.
4.3.3. Procurement Options for Ticketing System
Three procurement issues need to be considered: (i) the supply of equipment and its ongoing
operation and maintenance; (ii) whether government or private sector capital should be used
to purchase the equipment in the first instance; and (iii) how payment should be made to the
contractor who supplies and undertakes O&M for the ticketing system. With regard to the last
item, the case is made in a separate working paper on the desirability that the cost of ticketing
be recovered from passenger fare revenue.
Under the recommended Gross Cost form of MRT operating concession, fare revenue would
accrue to the government, which could then pay the government ticket system contractor
using these funds.
22
Box 4.3: Smart Cards and New Limited Use Smart Tickets
The smart card is technically an integrated circuit card and has a built in logic. All types of smart cards can store
large amounts of data. An advantage of smart cards over magnetic stripe cards is they offer a greater measure of
security and can be used as an instrument for controlling access as well as to stored value to be used to purchase a
variety of services. Smart cards can store different amounts in their memory for different clients or agencies.
Contactless smart cards offer the advantage of not having to be read or swiped by a ticket reader. Instead these
cards only have to be placed close to the reader resulting in less wear and tear on equipment and greater
convenience for passengers and people with disabilities who may find presenting and inserting conventional tickets
or smart cards difficult. Smart cards remain expensive at (depending on the application) and volume from at least
US$2 each up to several dollars each. Smart cards have also a growing application in very secure credit cards,
payment, and secure ID (national ID cards; ID cards for libraries, universities, driving licenses etc). The more uses
and functions on a card the more expensive they become.
What are Limited Use Smart Tickets? They are low cost (around a fifth to a less of conventional smart cards) and
offer a viable smart ticketing solution for low-cost or limited-use ticket types which characterize a substantial
proportion of journeys carried-out on worldwide rail, bus and metro networks such as single or return journeys. For
example, on BTS and the Blue Line Subway around 50% of users are represented by single trip tickets/ tokens.
Limited Use Smart Tickets are similar to contactless smart cards and have a IC attached to an antenna using Radio
Frequency Identification (RFID) technology that is embedded in the card however they:
Are paper instead of plastic;
Have a smaller memory, no processing;
Have a lower cost;
Are used for a period (typically 1 day to a month) and then disposed of.
Limited Use Smart Tickets are being used in Europe (Capri 4 million cards; Porto 3 million cards; Lisbon 12
million cards; Firenze 1 million cards; Netherlands 15 million cards; Oslo 10 million cards). Several major cities
including Santiago, Sydney, Melbourne, and several US cities are planning to use Limited Use Smart Tickets.
Based on European experience the current media cost per ticket (depends on volume) is around US$0.30. Below
US$0.15 per ticket Limited Use Smart Tickets become commercially viable. Limited Use Smart Tickets can work side
by side in the same equipment used by conventional smart cards with any ISO14443 standard reader infrastructure:
No hardware modification should be needed; and
Minor software changes may be required to: allow the reader to recognize the chip signature; ensure that
correct read/write data protocol is followed; software changes are minimal.
Source: TCRP (1999); Sayeg and Charles (2004b); Crotch-Harvey (2005)
Three options to procure the ticketing system have been identified in Step 4 in Table 4.3
(showing the proposed integrated ticketing implementation steps):
traditional supply tender with separate O&M, with government financing capital in the
first instance;
single turnkey supply and O&M contract with government financing capital in the first
instance; and
single turnkey supply and O&M concession, with the concessionaire providing the
system using their own capital in the first instance, and being reimbursed over time,
possibly through their retention of a share of fare revenue.
Ticketing systems, especially those using smart cards, are extremely complex and despite
various international standards much hardware and software is somewhat proprietary so it is it
not possible to separate the supply of equipment from its operation and maintenance. In
addition, combining both into a single contract ensures the whole of life cycle cost and
benefits are fully considered by the supplier/contractor consortium. Most cities implementing
smart card ticketing systems are therefore adopting the approach of direct government
funding of a single contract for supply, testing and implementation and operation and
maintenance. Accordingly, the first option listed above is not recommended.
23
Box 4.4: Bogotas TransMilenio Ticket
Concession
TransMilenio (a bus rapid transit system) uses pre-paid
contact-less smartcard technology as part of a ticketing
system that applies to its system only. A private
company was contracted through competitive tendering
to provide and manage ticketing and fare collection on
behalf of the management authority for the TransMilenio
system. The private concessionaire financed the
ticketing system and is paid a share of the fare revenue
that it collects. The concessionaire pays the revenue it
collects into a trust fund, from whence it is distributed to
various companies involved in providing and operating
the TransMilenio system, including the management
authority, in agreed shares.
Source: Consultant
Under the second approach described
above, the government would engage a
consortium to provide and operate the
ticketing system. It would pay for the
capital cost of supplying, installing and
commissioning of the ticketing system on
completion and would pay for O&M on a
periodic basis. Most associated services
including operating the clearing house for
revenue management and settlement
would for convenience purposes would
also be operated by the consortium.
Finally, it is possible to also adopt a similar
integrated supply and operate approach
but to implement it though a Public-
Private Partnership (PPP) concession. In this case, private finance would be used to
implement the system, with the concessionaire receiving payment either according to an
agreed schedule or by retaining a share of revenue they collect. The latter arrangement has
been adopted in Bogota (see Box 4.4). The merit of using private sector capital in this way can
be assessed using a value-for-money analysis that takes account of risk transfer to the private
sector (see the Concession Model Working Paper for a more detailed discussion of this issue).
Particular care is required in the case of payment being recovered as a share of fare revenue to
ensure that a transparent and cost-effective arrangement is achieved. The advantages and
disadvantages of the second and third options need to be studied further by Government to
establish the preferred approach.
Ticketing System Requirements
The ticketing system to be procured will comprise all devices and systems required to
implement the common ticketing system in HCMC A generic model of a smartcard-based fare
collection system using a typical tier typology is illustrated in Figure 4.1.
Figure 4.1: Generic Smartcard-based Fare Collection System
Source: TCRP 115 (2006)
24
The specification for the common ticketing system will include the following devices and
systems as a minimum:
smartcards including transit application definition as well as card format compliance
to an adopted interoperability standard;
smartcard readers;
fare gates;
ticket office machines for smartcard distribution and reload;
smartcard reload machines;
handheld smartcard readers for revenue protection officers;
data system servers as required often necessary at stations;
station-level control systems;
operator head-office accessibility often requiring integration into other operator
systems;
a central system principally for transaction processing, configuration data management
(such as fare tables and card hotlists) and system and device monitoring;
appropriate redundancy for both security and disaster recovery considerations; and
requisite communications infrastructure for network connectivity.
Operations Requirements
The common ticketing system will also require the following on-going operational services as
a minimum: card management; maintenance management; operator technical support; asset
management; training; marketing; system management and monitoring; configuration
management; financial reconciliation and settlement; and reporting.
Clearinghouse Ownership and Governance
In the preferred gross cost concession environment envisaged, with all fare revenues being
remitted to the government, the importance of transaction clearing is significantly reduced.
However, as discussed above clearing activities will be a consideration both initially for the
current concessions (between themselves, as well as with the new common ticketing system)
as well as ultimately with non-transit partners.
Given the uncertainties surrounding these future partners it is only possible at this stage to
define some of the governing principles which will guide any future considerations of
clearinghouse ownership and governance:
government should retain adequate control (by way of ownership or regulation) to
enable it to continue to implement its transit fare policies;
governance should generally be established based upon equity investment, tempered by
the governments need to facilitate social objectives within its transit systems. This may
also require an appropriate regulatory framework; and
existing banking regulations regarding the use of open e-purse schemes will need to be
accommodated.
25
In terms of transit purposes, as discussed above two clearinghouse arrangements will require
consideration:
a clearinghouse for use between the two existing concessions to enable interoperability;
and
a possible common ticketing system clearinghouse to interface with the two existing
concessions until these are modified to a gross cost contract arrangement.
In the case of the clearinghouse for the two existing concessions, it is envisaged that the most
appropriate form of ownership would involve the two parties only. However, it is likely that
the clearinghouses governance will need regulatory involvement of government to ensure its
strategic fit with the proposed new common ticketing system. This regulatory involvement
would cover issues of compatibility as well as the more fundamental compulsion to interact
with the new system.
As the clearinghouse for the new common ticketing system will deal principally with the
remittance of fare revenues to government, it is consider logical that it be owned and
governed by government (through an appropriate agency). As discussed above, the
clearinghouse ownership and governance framework is likely to require a more sophisticated
approach if non-transit expansion of the system is to be realized in the future.
4.3.4. Integrated Ticketing Administration
Step 7 of Table 4.3 discusses two generic options for the organization that would be charged
to administer and manage the integrated ticketing system. A wide variety of models are
possible, but usually the organization is embedded within an established government
organization eg MAUR, HIFU or the Department of Finance at PC level. In HCMC, it may
need to be established as some form of government-owned entity in order for it to deal
directly with the private sector including financial institutions. Two basic options are:
Option 1: Government management (30 people) for policy setting, administration &
management of outsourced ticketing contract for the supply, O&M, clearing house and
handling of legal and banking aspects; and
Option 2: Government oversight (less than 10 people) for policy setting and auditing,
with separately outsourced administration that supervises the outsourced ticketing
contract for the supply, O&M, clearing house and handling of legal and banking aspects.
Based on interviews with the heads of three systems for which integrated ticketing systems
have either recently been implemented (Singapore) or are being implemented (Sydney and
Brisbane, Australia) the two identified options encompass the principal possibilities (see Table
4.6 for lessons learned from these interviews). Either option is workable but a final decision
needs to be made taking into account the form of ticketing procurement chosen.
26
Table 4.6: Lessons on Integrated Ticketing Administration
City Lessons on oversight
Singapore (ez-Link) Integrated smart card ticketing
project (1999-2002). ez-Link company was established as a
subsidiary of the Land Transport Authority.
Few staff in LTA/ ez-Link to oversee; can always increase if
needed. Difficult to reduce.
Policy of outsourcing adopted as most skills of non-recurrent
nature.
Routine financial auditing annually. Integrity auditing 3 yearly.
Brisbane, Australia Integrated smart card ticketing
system required the integration of ticket products &
systems for train, ferry and over 20 bus operators.
Overseen & managed by newly established TransLink (a
government agency). Operations and Maintenance
separately contracted over 10 years & likely to > capital
cost of A$100M (ie about US$77M). Roll-out commenced in
J uly 2005.
TransLink in implementation phase with 15 staff. Will reduce
later & outsource. May end up with 5 staff in contract
management functions.
Some additional call centre staff needed will sit alongside
public transport call center staff on usual toll free no.
TransLink want to maintain customer interface.
Sydney, Australia Integrated smart card ticketing
project. Currently trialling. Targeting an organization of 30
people after ticketing system is procured. Ticketing
contractor will control/ manage/ maintain ticketing
equipment performance; autoload facility; clearing house,
put money in Bank Accounts (accounts all in government
name). NSW Transport Administration Corporation, the
ticketing authority, not required to make a profit ie must
extract what money it needs from operators/ stakeholders
who will hold it closely accountable.
Due to need for clear separation of goverment & business
interests staff to oversee will be largish to: monitor contract ie
Key Performance Indicators. Will have a bias to more
financial/ accounting staff.
Could outsource almost all functions.
Govt. operates the ticketing call centre as an extension of
public transport information centre an additional 12 people;
important that govt. maintains relationship with customers.
Due to long implementation period (4 years) for big bang
approach there is operator fatigue. A staged approach has
merit.
Source: Personal Communication 2006a, b and c
27
Appendix A: Affordability Analysis & Tourist Use
This Appendix reproduces with only minor editing an affordability analysis reported by ADB
(2007a) which interpreted available information on household incomes in HCMC reported by
TEWET (2005).
A.1 Introduction
Information in Table A.1 provides a preliminary assessment of affordability. It shows that at
2010 the main modeled fare of VND4,000 (2005 prices) proposed for MRT in HCMC is less
affordable than MRT fares in Bangkok, Kuala Lumpur and Manila by a third, quarter and 90%
respectively shortly after their MRT systems opened. For the revenue-maximizing fare of
VND 2,000 (2005 prices) the affordability in HCMC would be slightly better than for the
other cities.
Table A.2 presents similar data from MVA Asia (2005) which shows also in 2005, HCMC
MRT the main modeled fare of VND4,000 (2005 prices) relative to GDP would be much
more expensive than Bangkok, Hong Kong and Singapore. However, for the forecast GDP
for HCMC (and implied associated income growth assumptions) by 2010 the fares would
relatively the same as Bangkok although still relatively much more expensive than those for
Hong Kong and Singapore. By 2020, however, relative MRT fares for HCMC would be
cheaper than Bangkok today although still 50% relatively more expensive than Hong Kong
and Singapore. That is, with economic growth and associated income growth, MRT fares in
HCMC are expected to become relatively more affordable.
Table A.1: Summary of MRT Fares and Demand in Other Cities
Bangkok Kuala
Lumpur
Metro
Manila
Hong Kong Singapore HCMC
GNI or GDP
(US$) per capita
4,800
(2000 est)
9,600
(2000 est)
2,800
(2000 est)
25,330
(2001)
21,500
(2001)
2,000
(2005)
Total est. linked
person trips in City
area defined
above
12,800,000 3,250,000 19,199,600 13,400,000 8,400,000 16,300,000
% by public
modes 2001
45%
(2005)
20% 70% 80% 70% < 5%
(2005)
Fares in $US for
average full fare 8
km trip in 2001 or
proposed for
HCMC 2010
US$0.6 US$1.40
(Putra)
US$0.26 US$ 0.70 US$0.70 US$0.25
Affordability of
MRT fares today
1.0% 1.2% 0.8% 0.2% 0.3% 1.5% (main
modeled
scenario) or
0.75% for
revenue-
maximizing
fare)
No of MRT
passenger/day
and % MRT of
total approx one
year after
opening)
216,000 on
BTS MRT in
April 2001
1.7%
192,000
passenger/day
on Star
(60,000) and
Putra MRT
(132,000)
together at
end 2000
5.9%
210,000
Metrostar at
April 2001
500,000 LRT1
1.1%
(excluding
LRT1)
14% MRT
3.7% heavy
rail
1.7% LRT
(1992)
14% MRT
(1998)
Forecast of
128,000
passenger per
day for fare
shown in 2010
28
Bangkok Kuala
Lumpur
Metro
Manila
Hong Kong Singapore HCMC
No of MRT
passenger and %
MRT (of total in
2005)
580,000
passenger/day
on BTS and
Blue Line
Subway MRT
in 2005
4.5%
260,000 for
total system
400,000
Metrostar
550,000 LRT1
2.1%
(excluding
LRT1)
na na na
Source Consultant. Notes:
1. GNI or GDP 2020 is available. For HCMC 2020 GDP per capita from MVA 2005 and stated in 2005 prices.
2. Linked person trips per day on mechanized modes and unmechanized modes. A linked trip is a journey from A to B
including all modes used along the way. Data for Bangkok Metropolitan Region shows that in 2005 it is estimated there are
19.7 million linked trips including 15% walking etc with a population of 10 million from Len J ohnstone, Transport Modeler.
For HCMC data for 2001 from Houtrans (J ICA 2003) shows that HCMC region population was 8.6 million in 2001 and linked
person trips were 23 million including 17% walking etc. Hence, Bangkok Metro Region person trip rate is 2.0 per capita per
day and for HCMC region, 3.0 per capita per day. For other cities linked trips are estimated as 2.5 trips per capita per day
except Metro Manila where 2 trips per capita per day used.
4. The % of total linked trips by public modes including bus, MRT, taxi etc in 2001 or as stated. For HCMC, data from MVA
Asia (2005) and Houtrans (J ICA 2004). Other data sourced from Appendices of PAS/ EPS 2001.
5. Fares in $US for average full fare 8 km trip in 2001 or proposed for HCMC 2010 for the main modeled fare of VND4,000
in 2005 prices and VND2,000 (revenue-maximizing fare) also in 2005 prices . 2001 is approximately date of opening of
several of the MRT systems. Source of 2001 data is PAS/EPS 2001.
6. Affordability of MRT fares circa 2005 ie Average fare/ GDP/12 per capita *100
7. No and % MRT after approx one year of operation using latest available patronage figures for MRT demand divided by
total linked trips. For Manila, LRT Line 1 ignored as opened in 1984 and not a recent MRT. Source: Appendixes of PAS/
EPS 2001 and J Leather ADB 2006 for Manila figures. For Singapore and Hong Kong with well developed MRT networks that
commenced in the 1980s, only mode split shown.
8. Latest number and % of MRT Figures for MRT demand divided by total linked trips stated for earlier year. Source:
Appendixes of PAS/ EPS 2001 and J Leather ADB 2006 for Manila figures.
Table A.2: Public Transport Price Comparison with Other Asian Cities (for an average 6
km commuter trip, in US$ 2005 Prices)
City HCMC Bangkok
2005
Hong Kong
2005
Singapore
2005
2005 2010 2020
Bus (regular) $0.11 $0.18 $0.18 $0.13 N/A $0.45
Bus (air-con) $0.11 $0.18 $0.18 $0.30 $0.75 $0.60
MRT (VND4,000 for HCMC) $0.25 $0.25 $0.25 $0.50 $0.80 $0.55
GDP / Capita $2,000 $3,100 $5,600 $6,200 $24,000 $22,000
Affordability of MRT fares
(Average fare/ GDP/12 per
capita *100)
1.04% 0.67% 0.37% 0.67% 0.26% 0.21%
Source: MVA Asia (2005), Table 5.2 and others. Data on GDP differs slightly from shown in Table A.1 due to different
sources and years.
A.2 Alternative Affordability Analysis
An alternative way of examining affordability is to examine the distribution of household
incomes by income
1
group. These data are unavailable to the team. JICA (2004) provide
survey data of public transport users in 2002 or 2003 for a variety of public transport modes
as shown in Table A.3. The average distribution of incomes for all public transport users is
likely a more useful starting point than average HCMC household incomes which would likely
be lower on average.

1
Income data are difficult to collect and often understated. Instead many researchers identify household
expenditure which is less problematic.
29
Based on Table A.4, the potential household trip frequency for MRT at 2010 at the main fare
modeled by MVA Asia (2005) (ie VND4,000 in 2005 prices or VND3,500 in 2003 prices) was
estimated as shown in Table A.4 This table shows that at 2010 20% of households who are
potential public transport users would not be able to afford to purchase more than four MRT
fares per week in total per household equivalent to 2 round-trips. In contrast, 80% of
households would be able to purchase more than MRT 12 fares per week or 6 round-trips ie
to travel every day. This table also shows in broad terms that perhaps most households may
not be all that sensitive to modest fare increases above the chosen fare. For example, at an
assumed fare 20% higher than the chosen fare almost 80% of households could still purchase
almost at least 8 MRT fares per week or 4 round-trips per week ie to travel almost every day.
This also implies that affordability may be better than implied by the revenue maximizing
demand forecasts and fare price level assumed by MVA Asia (2003 and 2005).
Table A.3: Houtrans Public Transport Users Interview Summary 2002-03
Attribute Bus Taxi Cyclo Xe om Total
No. of Samples 1,189 374 78 367 2,008
Sex (%) Male 52.6 44.8 30.8 27.8 45.8
Female 47.4 55.2 69.2 72.2 54.2
Age (%) 15 0.8 - - 0.8 0.6
16-25 33.9 22.1 26.2 25.6 30.0
26-35 27.5 46.4 23.0 34.0 32.0
36-45 18.5 21.5 37.7 28.4 21.5
46-55 10.7 7.0 9.8 7.5 9.4
56-65 5.8 2.2 3.3 2.5 4.5
>66 2.8 0.8 - 1.1 2.1
Average Age 33.3 32.3 34.1 32.8 33.1
Household Income
(million/month:%)
<0.8 57.7 24.7 49.2 40.9 47.1
0.8-4.0 40.6 65.4 49.2 51.7 48.4
4.0-10.0 0.8 8.1 - 4.5 3.0
>10.0 0.9 1.7 1.6 2.9 1.5
Average Household Income (000/month) 1,412 2,368 1,607 2,035 1,742
Vehicle Ownership
(Individual)
Car 0.3 1.1 1.3 - 0.4
Motorbike 46.5 84.6 29.9 51.4 53.6
Bicycle 21.6 4.5 22.1 23.1 18.8
None 31.7 9.8 46.8 25.4 27.2
Frequency of use of
public transport
Daily 23.5 10.4 12.8 17.7 19.7
At least once a week 16.5 11.2 20.5 21.7 16.6
Unusual 60.0 78.4 66.7 60.6 63.6
Source: Houtrans (J ICA 2004)
30
Table A.4: Potential Trip Frequency for MRT at 2010
Year 2003 2010 Est MRT Trips Per
HHold per month
Est MRT Trips per
week
GDP / Capita $1,400 $3,100
HHold Income (VND million/ month) 2003 prices
<0.8 47.1% 20% 9 3
0.8-4.0 48.4% 48% 26 8
4.0-10.0 3.0% 30% 64 20
>10.0 1.5% 2% >107 >36
Total 100.0% 100.0%
Average HHold Income 000
VND/month 2003 prices
1,742 3,830
Source: Consultant. Notes:
GDP per capita from Table A.2; 2003 household Income % for public transport users from Table A.3. Estimated household
income % for public transport users by Consultant; Est MRT Trips per month per household: 15% of representative hhold
income divided by VND 3,500 (2010 fare of VND4,000 in 2005 prices deflated to 2003 prices) divided by assuming MRT can
only represent one third of all hhold transport expenditure. In Thailand 1998, according to the National Statistics Office, on
average households spent Baht 2,677 from an average income of Baht 19,820 on transport and communication or 13.5%
hence 15% was chosen as a reasonable approximation for HCMC.
A.3 Tourist Use
There appears to be little specific consideration of the potential for tourist use of MRT in
HCMC in the forecasts by TEWET (2005) or Systra MVA et al (2008).
Evidence from Bangkok for Bangkok Transit System (BTS) is that tourist use is apparently
low. According to data on BTS ticket sales for February 2005, one day tourist passes
represented 1.6% of all ticket sales. For Bangkoks Blue Line Subway sales of tourist tickets in
October 2005 represented 0.04% of all ticket sales.
What these data do not reveal is how many foreigners (or Thai residents from outside
Bangkok who are visiting in Bangkok for tourism or social reasons) have purchased ordinary
tickets. Surveys of BTS users in early 2001 about six months after its opening showed that
foreigners accounted for 3.4% of Bangkok Transit System passengers (with about half being
tourists and the other half being business people). It is likely that the proportion of foreigners
using BTS is similar today.
It concluded that for HCMC that there is the potential for the MRT to carry a similar
proportion of tourists assuming the government attempts to facilitate foreign inbound tourism
through both promotion and simplifying visa/immigration requirements and develops a
reputation as a reliable place to invest. Overall, assuming current policies, a target of 1% of
tourists in addition to demand generated by HCMC residents may be plausible in the early
years of the system operation which may increase over time to say, 2% by 2020.
Tourists would also likely to be less sensitive to absolute fare price levels than HCMC
residents.
31
Appendix B: Most Likely Technical Option
B.1 Likely Technical Components
Based on the conclusion that a single ticketing system is needed the available technical option
is shown in Figure B.1 which illustrates a single system comprising:
a single card (ie. single issuer);
a single central system;
a single clearinghouse. It should be noted that in a gross cost concession environment
revenue apportionment is not typically required, however the clearinghouse would be
necessary for any extension of the system to non-gross cost operators or particularly
expansion into non-transit applications of the card;
compatible field equipment (gates and ticket office devices) deployed into all
concessions;
the implementation of an open interoperability standard at a minimum of the
card/reader and central system/clearinghouse interfaces. The strategic implementation
of an open standard will limit the impacts of any possible vendor lock-in;
in-principle expansion of the MRT system onto the citys bus systems (when and how
this can be achieved is not however within this TAs scope. The complexity involved in
the implementation of advanced technologies onto bus fleets should not be under-
estimated); and
the existing bus operators integrated into the new system if possible (or replaced if this
is not feasible).
While Figure B.1 represents the end state of the common ticketing system.
32
Figure B.1: Common Ticketing - Preferred Technical Option
Source: Consultant
B.2 System Scalability Requirements
The system procured will need to allow for growth both in level of activity as well as the
number of participants.
The system will need to be capable of processing at least an order of magnitude increase in
transactions without significant impact on system performance. This will place significant
importance on the card-reader interaction (a maximum of 200 msec is suggested) as well as
the fundamental design of the transaction processing database. A set of appropriate
performance levels throughout the system should be specified which can be clearly
demonstrated during system testing.
The system operating schema should also be sympathetic to the possible extension of the
MRT system to other modes. Bus always poses significant challenges to any fare collection
system, and particularly a bus system as vast as that currently operating in and around HCMC.
The design of the initially MRT fare collection system should be undertaken contemplating
the expansion of the system into other modes. Thus, operating fundamentals will need to be
carefully considered, such as:
operating logistics eg tag-on only validation vs tag-on/tag-off;
degree of automation eg ongoing use of bus conductors; and
environmental issues eg bus fleet condition in terms of electrical noise, power
reliability, structural integrity, etc.
The ultimate expansion of the system into non-transit applications will also be a necessary
design consideration. In this respect it will be important for the design of the system to
consider fundamental card transaction security as well as clearinghouse performance.
Line 1
Line 2 Bus BRT Other
Smartcard
Reader/Device
Operator System
Central System
Central
Clearinghouse
Phase II
Open Standard Clearinghouse
Interface
Open Standard Card/Reader
Interface
Non-
Transit
Application
s
Lines 3 etc
33
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