TA 4862-VIE:
Preparing the Ho Chi Minh
City Metro Rail System PPIAF Study Completion Report
August 2008
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.
3.
4.
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
Abbreviations
ADB
BOT
Build-Operate-Transfer
DOPI
DNRE
Department
of
Natural
Resources
&
Environment, HCMC PC
DOF
DTUPWS
DUPA
GVN
HCMC
HIFU
IFI
ODA
PC
Peoples Committee
PPI
PPIAF
PPP
Public-Private Partnership
PSP
SOE
TA
Technical Assistance
ToR
Terms of Reference
MAUR
ii
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
During 2007, the JBICs role in funding increased with principal or sole involvement in the first three MRT
lines.
1
1.2
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 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
4. Stakeholder
Feedback
and
Implementation Arrangements
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).
2.
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
Infrastructure
Gross Cost
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, Risk is shared between the Authority and
and shares extra profits (if any) with the
concessionaire. Optimum sharing of risk will minimise
Authority.
the concession cost.
Revenue
Services
Payments
Authority role
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-formoney 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.
Public
Implementation
with Operating
Concession (PIOC)
Delivery of:
Civil Infrastructure
and Fixed Equipment
Contract negotiated
with an SOE.
Competitively
tendered Gross Cost
contract.
Delivered through a
competitive tendered
Gross Cost concession.
Delivered through
competitively
tendered Net Cost
contract to the
government.
Risk Transfer
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.
Finance
Civil Infrastructure
and Fixed Equipment
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).
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).
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.
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.
3.
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.
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 riskweighted 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
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.
1
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.
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).
Responsibility
National Level
Ministry of Transport (MOT)
From now on in this paper core stakeholders will be referred to only as stakeholders.
11
Responsibility
Vietnam Railways
Administration (VNRA)
under MOT
Transport Development Strategy Develops long and medium term transport sector strategies and plans (in
Institute (TDSI)-under MOT
collaboration with modal administrations)
Department of Planning and
Investment (DPI)-under MOT
HCMC PC level
Peoples Committee
HCMC Management
Plans / implements rail-based mass transit plans and has responsibility for
Authority for Urban Railways 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
(HIFU)
Department of Finance
(DOF)
Investment programming including one year annual budget and five year
Public Investment Program (PIP)
12
Until September 2007, it was known as the Urban Railway Management Unit and was under TUPWS.
13
HCMC PC
Director
Nguyen Do Luong
PMU Line 1
Vice Director
Nguyen Van Quoc
Vice Director
Tran Thi Anh Nguyet
Planning and
Investment
Administration
Technical Quality
Finance and
Accounting
Procurement
Organization and
Training
Vice Director
Le Hong Ha
Source: MAUR
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
Inc easing
Inc easing
Integration of
public transport
in HCMC (1)
Transport
outcome
Introduction
Fairly good MRT
integration more likely
Description
Minimum change to
current institutional
responsibilities.
Examples from
other places
Benefits for
customers
Option 3:
Integrated PT
Authority
Option 4:
Integrated
Transport Authority
Increasing integration
Fully integrated PT
system more probable
Melbourne and
Brisbane, Australia
Agency responsibilities
(2)
DUPA
DUPA
DUPA
DUPA
TUPWS
TUPWS
Integrated Transport
Authority
TUPWS
TUPWS
TUPWS
Integrated Transport
Authority
Financing
policies
Regulation(3)
Safety
standards
Environmental
standards
DNRE
Economic
regulation(5)
MAUR
DNRE
DNRE
MAUR/ Interim PT
Authority
15
DNRE
Option 1:
Strengthen MAUR
Option 2:
Interim PT Authority
Option 3:
Integrated PT
Authority
Option 4:
Integrated
Transport Authority
MAUR
MAUR
Integrated PT
Authority
Integrated Transport
Authority
MAUR
Integrated PT
Authority
Integrated Transport
Authority
Investment
programming &
financing
approval
MAUR/ DPI/DOF/ PC
MAUR/ DPI/DOF/ PC
Integrated PT
Integrated Transport
Authority / DPI/DOF/ Authority / DPI/DOF/ PC
PC
Project design
MAUR
MAUR
Integrated PT
Authority
Integrated Transport
Authority
MAUR/ DNRE
Integrated PT
Authority/ DNRE
Integrated Transport
Authority/ DNRE
Tendering
MAUR
MAUR
Integrated PT
Authority
Integrated Transport
Authority
Contract
management
MAUR
MAUR
Integrated PT
Authority
Integrated Transport
Authority
Infrastructure
maintenance
MRT operators/
concessionaires (for
operations)
MRT operators/
concessionaires (for
operations)
MRT operators/
concessionaires (for
operations)
MRT operators/
concessionaires (for
operations)
MRT service
design
MAUR
MAUR
Integrated PT
Authority
Integrated Transport
Authority
Concession
MAUR
preparation and
management
MAUR
Integrated PT
Authority
Integrated Transport
Authority
Service delivery
Rail services
Operators/
Concessionaires
Operators/
Concessionaires
Operators/
Concessionaires
Operators/
Concessionaires
Bus services
Operators
Operators
Operators
Operators
Ticketing and
fare collection
Marketing
Operators
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
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
(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
Bus
Line 2
BRT
Other
Smartcard
Reader/Device
Operator System
Central System
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
20
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.
21
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.
3.
4.
5.
6.
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.
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
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.
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
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 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
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
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.
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
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
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
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.
Financier who provides or arranges the provision of capital to finance the construction of
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;
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.
2.
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.
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,
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
Informs
Regulation
Setting standards
Registration &
licensing
Enforcement
Program
management
Reports
Project planning
Investment
programming
Project, financing
& other approvals
Design, tendering,
& contracting
Contract/concession
management
Monitoring & quality
assurance
Program
delivery
Infrastructure
Services
Marketing
Finance
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
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:
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.
2.4 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
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.
(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
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.
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
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
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.
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.
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
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
Infrastructure
Gross Cost
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, Risk is shared between the Authority and
and shares extra profits (if any) with the
concessionaire. Optimum sharing of risk will minimise
Authority.
the concession cost.
Revenue
Services
Payments
Authority role
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.
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 underperformance 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
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.
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 interrelationships 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
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
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
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.
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
21
Public
Implementation
with Operating
Concession (PIOC)
Delivery of:
Civil Infrastructure
and Fixed Equipment
Contract negotiated
with an SOE.
Competitively
tendered Gross Cost
contract.
Delivered through a
competitive tendered
Gross Cost concession.
Delivered through
competitively
tendered Net Cost
contract to the
government.
Risk Transfer
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.
Finance
Civil Infrastructure
and Fixed Equipment
The government
pays all costs
incurred by the SOE,
including working
capital
Fare revenue
The government
retains fare and
other revenue (or
pays SOE the
difference between
costs and revenue if
the SOE retains the
revenue).
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
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.
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
Public
Enterprise
Public
Implementation
with Operating
Concession (PIOC)
99
999
99
999
99
999
99
99
99
9
9
99
99
99
999
999
999
System Integration
Minimize capital and
operating costs
Provide integrated MRT
system for passengers
999
9
8
8
99
999
999
999
999
99
99
99
99
999
99
99
999
99
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
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
26
4.
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:
Risk
Public
Enterprise
Public
Implementation
with Operating
Concession
(PIOC)
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
Unexpected
changes in
construction
activities and costs
for original scope of
works
Changes in scope of
works
These risks are generally beyond the control of contractors and the private sector and
so the government should bear the financial consequences of them
The government can allocate most of these risks to contractors,
but may need to be responsible for large unexpected changes.
The government should bear the consequences of any changes in the scope of works
that it proposes.
civil infrastructure
Effect of delayed
construction on
concession
commencement
The concessionaire
is wholly responsible
for managing
implementation and
should bear the
consequences of
delays.
technology
Changes in unit
costs
Delay in E&M and
train delivery
Changes to
27
Concession Option(1)
Risk
Public
Enterprise
Public
Implementation
with Operating
Concession
(PIOC)
Maintenance of assets
Changes in
infrastructure
maintenance needs
Changes in unit
costs for
maintenance of
infrastructure
Inadequate
maintenance of civil
assets
Inadequate
Difficult to transfer
full risk to the
concessionaire
because they did
not chose the
assets.
maintenance of
trains and M&E
assets
Service provision
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
Full responsibility is
transferred to the
concessionaire.
Risk transferred to
the concessionaire
through use of a
simple cost inflation
index.
schedules
Changes in unit
labor costs
Changes in unit
power costs
Changes in unit
costs of other
inputs
E&M and train
maintenance,
rehabilitation and
replacement
Industrial, security
or emergency event
off the system
Government
The risk can be transferred to the
purchase of the
concessionaire.
assets means that
risk associated with
maintenance of
them should remain
with the
government
The risk needs to be shared between the government and the
concessionaire.
28
Concession Option(1)
Risk
Public
Enterprise
Public
Implementation
with Operating
Concession
(PIOC)
Change in fare
patronage due to
poor service quality
policy
Fare collection
security
Change in other
revenue
29
Concession Option(1)
Risk
Public
Enterprise
Public
Implementation
with Operating
Concession
(PIOC)
encourage
concessionaire to
provide good
services
Improper record-
keeping of services
provided
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.
Government has a
limited need
because payments
to the
concessionaire are
not linked to
specific service
provision.
Cost inflation
Potential for
Government will
windfall gains to the capture any gains.
concessionaire
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.
Procurement model
Model is
unattractive to
potential tenderers
Model results in
productive tension
between concession
partners
30
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.
Concession Option(1)
Risk
Inadequate
performance by
concessionaire
Termination of
concessionaire
Public
Enterprise
Public
Implementation
with Operating
Concession
(PIOC)
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.
Government can
Government can establish conditions to terminate the
terminate the
concession in the case of persistent sub-standard performance
concession, though
by the concessionaire.
political lobbying may
make this difficult to
achieve.
movements
Interest rate
changes
Changes to tax
legislation affecting
E&M and train
assets
Changes to tax
legislation affecting
operations
Risk remains with the Primary risk should be transferred to the concessionaire, which
government.
can use various instruments to mitigate the risk. Government
bears some indirect risk through indexation of future payments
to concessionaires.
While the concessionaire has no influence over these risks,
simplicity of management indicates that the risk for nondiscriminatory 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.
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).
32
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
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
36
provide and the conditions of their engagement. This necessitates that the concession
37
38
6.
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
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:
40
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:
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.
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:
Reporting
Advice
Probity Advisor
Tendering Authority
Proposal
Opening
Committee
Competitive Tendering
and Contacting Project
Management Team
Project Advisory
Group (from
various agencies)
Technical Support
(Staff in the Tendering
Authority etc)
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
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
52
116
Year opened
December 1999
August 2003
Type of concession
Concessionaire
Concession description
BMCL was awarded a 25-year BOT concession 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.
Length of Concession
45
Source: Consultant
46
Risk transfer
Government
Government
Concessionaire
Concessionaire
47
Key issues
No
Concessionaire
Comment
Reasonably
Simple
Concession
management
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.
Termination
arrangements
Concessionaire
48
The
Concessionaire
Notes
The
Electrical &
mechanical
assets and
trains
The concessionaire:
As for Gross Cost concession, though
Finances, purchases, operates and maintains compensation might not be paid, depending
the assets and any additional assets
on financial arrangements.
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)
from the government.
The Government:
Monitors the condition of assets and ensures
hand-back conditions are met.
49
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.
Notes
Bidder
Service
planning
Concessionaire
Concessionaire
Service
approval
Government
Concessionaire
Determined
50
Ticketing
system
Determined
Fare revenue
management
Determined
Commercial
development
Could
Contract Payment
Concession
Government pays on a periodic basis (say
payments
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.
Base payment Payment from the government to the
formula
concessionaire could be:
(Note:
VND b /month for initial assets provided
illustrative
by concessionaire; plus
option
VND c1, c2, c3, etc., for any additional
described
assets to be provided by the concessionaire
other options
during the concession; plus
exist)
VND d /train-km of service provided;
plus
VND e /passenger; plus
VND f1, f2, f3, 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.
51
The
Financial
amounts
specified by
the government at the
time of tendering
(for the
payment
structure
described
above)
Amounts to be
indicated by
bidders in their
tender
(for the
payment
structure
described
above)
Issues
52
Concession Management
Government
Major role because:
role
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.
Routine data
needed for
contract
management
(say monthly)
Evidence
Evidence
Periodic data
(say biannually)
Other data as
needed
Information
Evidence
Evidence
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
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 overestimated.
Criteria to be monitored. There is a considerable range of performance criteria that
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
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
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
Limited need
Not needed
Not needed
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
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.
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.
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
56
asset maintenance and renewal). The Authority therefore needs to see that the
financing terms reflect its proposed reliance.
c.
4.
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.
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
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.
57
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.
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-formoney implications for the government. Concession forms play a part in this issue of valuefor-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.
58
8.
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.
59
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
60
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.
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
61
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.
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
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
the appropriate quantity and quality of service without excessive intervention and
management of standards by the Authority.
15.
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
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.
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
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.
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
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
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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
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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.
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.
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.
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
69
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.
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
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:
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.
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
provided;
the Company being placed in statutory insolvency process;
failure to provide the agree services and cumulative poor performance in service
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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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
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.
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 stepin 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 reinvestment 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.
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.
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.
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
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
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
Company; and
the ability for the Lenders to substitute a new concessionaire.
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.
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.
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
In the event where there is a dispute between parties in any circumstances, this provision
should specify the method of dispute settlement and resolution.
78
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 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.
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.
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
HCMCMetroRailSystem
1
ISSUESFOR
PRIVATESECTORPARTICIPATION
6March2008
Structureofthispresentation
2
y Focus
Assumesthatthegovernmentwilluseprivatesector(includingjointventure)contractorsto
construct works.
constructworks.
Focusisthereforeonuseoftheprivatesectorforprovisionoffinance&forMRToperations.
y PartA
IntroductiontoPPIAFtechnicalassistance
y PartB
Experienceinotherplaces
y PartC
KeyissuesforMRTinstitutionalarrangements
y PartD
PrincipaltechnicalissuesrelatedtoprivatesectorparticipationinMRTinHCMC
y PartE
MoredetailedfeaturesofaconcessionagreementfortheoperationofMRTinHCMC
y PartF
Outlinetemplateforaconcessionagreement
6March2008
PartA
3
P U B L I C P R I VAT E I N F R A ST R U C T U R E
A DV I S O RY FAC I L I T Y ( P P I A F )
T EC H N I C A L A S S I STA N C E
6March2008
Role&ScopeofPPIAFTechnicalAssistance
4
PPTA:engineering
design&feasibility
design
& feasibility
TheProject
PPIAF:optionsfor
privateinvolvement
6March2008
FourobjectivesforPPIAFTechnicalAssistance
5
1.
IdentifyoptionsforprivatesectorparticipationinMRT
2.
Assessbenefitsofeachoption
3.
Financialanalysis&financialmodel
4.
Recommendimplementationapproach
contractual&institutional
contractual
& institutional
forwholeMRTnetwork
6March2008
1.FrameworkforConsideringPrivateSectorParticipation
(PSP) OptionsDevelopment
6
y PSPoptionswillbeidentifiedafterconsideringfactorsthatinfluence
MRTdelivery:
Transportsystemmanagementprinciples
Policycontrol:fares,ticketing,MRT&busnetworkintegrationetc
Lowfinancialcostrecovery
ParticipantsinMRTprovision includingcontractors,equipmentsuppliers,
concessionaires/operators,&financiers
BundlingMRTcomponents achieveinternalsynergies(e.g.operations&
) p
(
p )
maintenance)&productivetensions(financierinterestinefficientops.)
Risktransfer identifyingwhatriskanoperatorcancontrolandwhatitcannotto
ensurecostsareminimized
FormsofMRToperatingconcession
Potentialrolesfortheprivatesector
y Output:WorkingPaper
6March2008
2.RiskandValueforMoney(VfM)Analysis
7
y FinancialanalysiswillbeundertakentoestimatetheVfMofeachprivate
sectorparticipationoption:
Todetermineiftheprivatesectorcandeliverinfrastructureandservicesatlower
f
f
costthanthepublicsector
Tohelpthegovernmenttochoosefromamongstarangeofpossibleprocurement
optionsbalancingcost,benefitsandrisks
y Identificationofariskmatrixbystakeholderforeffectiverisk
management:
Projectdesign
Project implementation and capital assets
Projectimplementationandcapitalassets
Maintenanceandoperations
Revenue
Procurementmodel
Otherfinancial
y Output:WorkingPaper
6March2008
3.FinancialAnalysis:FinancingPlan&FinancialModel
8
y Afinancialmodelwillbedevelopedto:
Presentthefinancialprojectionsfromtheperspectivesof:(a)theMRT
operator/concessionaire;and(b)thegovernment
Coveraperiodofabout30years(tobedefined)
Allowforeasyentryofinputdata
Includeclearanddetailedassumptions
Totheextentpossiblewithavailabledata,indicatetheperformanceofindividual
linesandcombinationsoflines
Presentprojectedfinancialstatements(i.e.income&expenditure,cashflowand
balancesheet)fortheHCMCMAUR&forpotentialprivatesectororcorporatized
governmentparticipants
y Output:WorkingPaper&financialmodel(spreadsheet)
6March2008
4.StakeholderFeedback&Implementation
9
y Thisactivitycentersontheinterestsandneedsofstakeholdersduring
implementation&operation:
Capacityofrelevantgovernmentagenciestoadministerpublic&private
partnershipsinurbantransport
Institutionalarrangements proposeoptionsforfuture
Stepsneededtointroduceintegratedfaresandticketing
Institutional&financingresponsibilityimplications
Tenderprocedures(broad)
Ticketingsystemsupplyarrangement
Outlinecontentofpossibleoperatingconcessionagreement
Responsibilitiesrelatedtomanagementofprivatesector
Commentonlegalissuesthatmustbeconsidered
Otherprocurementissues
y Output:Various
6March2008
FinancingMRTinHCMC
10
y Initialcapitalcost
Lines1,2and3couldbearoundUS$34billion
ThecostforallMRTlineswillbemuchmore
Th
f
ll MRT li
ill b
h
y 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
y Sourcesoffundstorepaygovernmentborrowing&privatesectorcapital
Farerevenue
NonfareMRTrevenue
Propertydevelopment
OthernonMRTsources,e.g.existinggovt.revenueandnew(hypothecated)taxes
6March2008
IndicativedistributionofMRTcosts
ShareofInitialCapitalExpenditure
11
5%
10%
10%
Fixedinfrastructure
E&Minfrastructure
75%
ShareofCapitalandO&MCosts
over35Years
Trains
Ticketing
ShareofInitialCapitalandOngoing
Capitalover35Years
25%
45%
Capitalcost(excl.
Interest)
55%
O&M
CapitalExpenditure
forinitialproject
implementation
75%
Capitalexpenditure
forreinvestment
andcapacity
expansionover35
years
6March2008
PartB
12
E X P E R I E N C E I N OT H E R P L AC ES
6March2008
ExamplesofMRTexperienceinotherAsiancities
13
y Sourcesoffinanceforinitialinvestment
Governmentonly(Singapore,HongKong,Manila)
Private sector only (Bangkok Kuala Lumpur Manila)
Privatesectoronly(Bangkok,KualaLumpur,Manila)
Mix(Bangkok)
y Provisionofservicesandinfrastructuremaintenance
Governmentcorporation(HongKong,Manila,Singapore)
Privatesector(Bangkok,KualaLumpur,Manila,Singapore)
y Someinsights
Generalshiftovertimefrompublicsectoroperatorstoprivatesectoroperators
Fare revenue generally meets O&M costs, sometimes train costs, but rarely other capital costs
FarerevenuegenerallymeetsO&Mcosts,sometimestraincosts,butrarelyothercapitalcosts
NonfareMRTrevenueisverysmall(inrangeof28%offarerevenue)
IncomefrompropertydevelopmentsignificantonlyinHongKong aspecialcase
Canusetheprivatesectortooperateservicesandmaintaininfrastructure(O&M) andalso
tofinancesomeassets
Useoftheprivatesectorneednotbelimitedtoactivitieswherecostrecoveryispossible
theycanundertakeactivitiesthroughconventionalpaymentforservicecontracts
6March2008
FourlessonsfromBangkok 1
14
y Patronageandrevenuehavebeenwellbelowexpectations
Resultsfromoptimismbias,i.e.basingplansonidealandhopefuloutcomes
y Greenline(elevated)
Concessionairepaysforallcapitalandoperatingcostsandexpectedtorecoverthese
costsfromfaresandothersourcesofrevenue
Revenueappearstomeetoperatingcosts,costoftrains,butnotallfixed
infrastructurecosts
y Blueline(underground)
Governmentpaidforfixedinfrastructure,andconcessionairefortrainsandother
Government paid for fixed infrastructure and concessionaire for trains and other
electricalandmechanicalequipment
Appearsthatrevenueisinsufficienttomeettheconcessionairescosts
y Potentialcostrecoveryforfuturelineslikelytobelessthanforthefirst
twolines
6March2008
LessonsfromBangkok 2
15
6March2008
LessonsfromBangkok3
16
y Separateticketsystemandfarestructureforeachline
Confusingforpassengers
Must buy separate tickets for each line
Mustbuyseparateticketsforeachline
Moreexpensiveforpassengerswhotransfer(seeexamplebelow)
Bht 25 on BTS
Bht 22 on Blue
Line
Bht 32 for BTS
& Blue Line
Bht 30 for Blue
Line & BTS
6March2008
LessonsfromBangkok4
17
Card A
Not compatible
Card B
6March2008
GenerallessonsfromMRTinothercities
18
y Integration
Integrationisessentialforthesystemtobeattractivetopassengers.
Achieving physical integration of infrastructure should be simple but is surprisingly difficult
Achievingphysicalintegrationofinfrastructureshouldbesimple,butissurprisinglydifficult.
Fare,ticketandserviceintegrationisnotgivensufficientimportance.
IntegrationproblemsincreaseasnewMRTlinesareadded.
y Optimismbias
Generalexperienceisthatcostsareunderestimatedandpatronageisoverestimated.
Canleadtoconcessioncontractsthatareunrealisticandunsustainablebecauserevenuefrom
faresandothersourcesislessthanexpected.
y Financialviability
Substantialgovernmentfinancialsubsidyisneeded.
y Governmentmanagement
GovernmentshouldretainpolicycontrolovertheMRTsystem thisdoesnotrequirethe
governmenttooperateservices.
UsetheprivatesectorforoperationsO&Mandcapitalwherethisprovidesvalueformoney
Poordecisionsinthepastaredifficulttochange.
6March2008
PartC
19
K E Y I S S U ES F O R M RT I N ST I T U T I O N A L
A R R A N G E M E N TS
6March2008
Generalevolutioninpublictransport
managementinotherplaces
20
H
i
s
t
o
r
i
c
Alternative,
direct route
for change
Objective:
avoid poor
service and
high cost of
centralized
approach
Objective:
improve and
integrate public
transport
Trend in 1990s,
e.g. Europe,
S. America,
NZ & Australia
Idealstructureformanagementinthetransportsector
21
y Needseparate
highlevel
strategic direction
strategicdirection
y Separate
management
fromtheactual
undertakingof
operational
activities
Policy &
Strategy
Policy
y framework
Strategic planning
Regulatory policy
Financing &
pricing policies
Performance
monitoring
Informs
Regulation
Setting standards
Registration &
licensing
Enforcement
Program
management
Government
Government
toarrangeforthedelivery
ofinfrastructureandservices
Separateentitiestodeliver
infrastructureandservices
throughcontracts
Reports
Project planning
Investment
programming
Project, financing
& other approvals
Design,
Design tendering
tendering,
& contracting
Contract/concession
management
Monitoring & quality
assurance
Program
d li
delivery
Infrastructure
Services
Marketing
Finance
6March2008
Keyissuesforgovernmentpolicydirectionandcontrol
22
y Issuesrelatedtothestructureofaconcessiontoprovideservices
Samegeneralissuesapplywhetheroperatorisgovernmentorprivate
y Possibleconcessionperiodlikelytobearound35years
P ibl
i
i d lik l
b
d 35
Equaltothelifeoftrains
y Overthisperiod
Demographicandsocioeconomicconditionswillchangesubstantially
Governmentpolicyprioritiesmayalsochange
Cannotforeseeallchangesthatmightoccur
y Governmentthereforeneedstoestablishconcessionssothatitcanmakeessential
6March2008
KeyissuesforMRTintegration
23
y AneffectiveMRTsystemrequires
Integrationofpublictransportservices
WithpassengersabletoeasilytransferbetweenMRTlines,andbetweenbus&MRT
WithpassengersabletoeasilywalktoandfromMRTstations
withpassengersabletoparkmotorcyclesandtransfertoMRT
IntegratedticketingfortheMRTsystem
WithbusroutesandotherpublictransportservicessupportingtheMRTsystem
Integrationandgooddesignofphysicalinfrastructure
Sothatpassengerscanuseasingleticketsuchasastoredvaluecardtoaccessanypartof
theMRTsystemand,ideally,busesandwatertransportalso
h MRT
d id ll b
d
l
Ideally,integratedfares
Sothatpassengersarenotrequiredtopayasecondorsubsequentflagfallcomponent
whentransferringbetweenMRTlinesandalsowithotherpublictransportmodes
y Operationoftrainsbetweenlinesisnotessentialbutcanbeuseful
6March2008
PartD
24
P R I N C I PA L T EC H N I C A L I S S U ES R E L AT E D
TO P R I VAT E S EC TO R PA RT I C I PAT I O N
I N M RT I N H C M C
6March2008
GeneralarrangementforimplementingandoperatingMRT
25
y Fullprivatesectorinvolvement
Possiblearrangement
PrivatesectorfinancesandimplementstheMRTline
OperatestheMRTlineandretainsrevenuefromitforaterm(say3040years)
TransferstheMRTsystembacktothegovernmentattheendoftheterm
LowcostrecoveryforMRTlinesinHCMCwouldrequirethegovernmenttoalso
makepaymentstotheprivatesectorsothattheprivatesectorcanmeetitscosts
AsdiscussedinPartE,thisarrangementisnotfavoured
y Betterapproachwillbeforthegovernmentto
Financeandimplementmostinfrastructure
Itisassumedthatimplementationwilluseprivatecompaniesselectedthroughcompetitive
tenderingandundertakingworksthroughsoundcontracts
UseaseparateentitytooperateMRTservices(andpossiblyprovidesomeassets)
RequiresacontracttomanagetheprovisionofMRTservicesoneachline thisisthefocus
oftherestofthispresentation
6March2008
Acontract(aconcession)tooperateMRTservices
26
y Featuresofthecontract:
Thecontractiscommonlycalledaconcessionandtheholderofthecontractiscalledthe
concessionaire
concessionaire.
Itwouldbebetweenthegovernment(e.g.representedbytheManagementAuthorityfor
UrbanRailwaysorasimilaragency)andtheoperatingcompany.
Thecompanycouldbeagovernmentagencyoraprivatecompany,wherethelattercould
includejointventuresbetweenafullyprivatecompanyandagovernmententerprise.
Itdescribestheresponsibilitiesofthegovernmentandtheconcessionairewithregardtothe
provisionofservices,managementofinfrastructureandfinancialmatters.
Theconcessionairecouldbeinvolvedininfrastructuredesignandprovision.
It
Itwouldbeforaperiodoftime.
ld b f
i d f ti
Itwouldtransferfromthegovernmentfinancialrisk(i.e.uncertainty)thatcanbebetter
managedbytheconcessionaire.
Issuesrelatedtoticketingandmanagementoffarerevenuealsoneedtobeconsidered.
y Issuesrelatedtopaymentarrangementstotheconcessionaireandothercontractual
conditionsareaddressedinPartsEandFofthispresentation
6March2008
Fifteenquestionsthatcanhelpestablishthe
generalfeaturesofaconcessionagreement
27
Isitpossibletodealwithinfrastructuredeliverynowandaddressoperationslater?
ShouldasingleagencydevelopandoperatetheMRT,orshouldtheseactivitiesbeseparated?
3 ShouldtherebeonlyoneoperatorforalllinesintheMRTsystem,aseparateoperatorforeachline,
3.
Should there be only one operator for all lines in the MRT system a separate operator for each line
orsomethingelse?
4. Iftheconcessionaireisagovernmentagency,shoulditbeadepartmentorastateownedenterprise?
5. Isitbetterthattheconcessionairebeagovernmentownedenterpriseoraprivatecompany
(includingajointventurebetweenaprivatecompanywithagovernmententerprise)?
6. Shouldtheconcessionairebeselectedonthebasisofdomesticorinternationalcompetitivebidding?
7. Shouldtheconcessionairebeinvolvedinthedesign&implementationoffixedinfrastructure?
8. Shouldtheconcessionaireselecttrainsandrelatedequipment&systems?
9. Shouldtheconcessionaireselectandfinancetrainsandrelatedequipment&systems?
Should the concessionaire select and finance trains and related equipment & systems?
10. Shouldtheconcessionairefinancefixedinfrastructure?
11. Shouldtheconcessionairemaintainfixedinfrastructure?
12. ShouldaMRToperatingconcessionbeforalongorshortperiod?
13. Howmuchfinancialriskcanbetransferredfromthegovernmenttotheconcessionaire?
14. ShouldticketingbeimplementedasasinglecontractfortheentireMRTsystem?
15. Shouldconcessionaireskeepfarerevenueorgiveittothegovernment?
6March2008
Thequestionsareaddressedonfollowingslides
1.
2.
1.Isitpossibletodealwithinfrastructuredeliverynow
andaddressoperationslater?
28
Somereasonsinfavour
Someagainst
thatwillabsorballgovernmentresourcesfor
theimmediatefuture
y Itwilltakelongertoarrangeandimplement
infrastructurethantodothesamefor
operations
withinfrastructuresothattheprojectdesign
ensurestotalMRTcostsareminimized
y Needtoconsiderifanyassetsandtheir
financingshouldbecombinedwithoperations
todetermineinfrastructureworkspackages
y Willtakelongertoarrangeoperationsifsome
assetsareinvolvedintheconcession
y Project
preparation for the ADB loan needs to
ProjectpreparationfortheADBloanneedsto
coverbothinfrastructuredeliveryand
operations
Conclusion:Operatingarrangementsneedtobedeterminedatthesametimeasinfrastructure
planning.
6March2008
2.ShouldasingleagencydevelopandoperateMRT,
orshouldtheseactivitiesbeseparated?
29
y AsingleagencythatbothdevelopsandoperatesMRTmightallowbetterintegration
Butthisdoesnotoccurinpractice
Slide21showsbestpracticeistoseparatefunctions
p
p
Separationensuresdecisionmakingismoretransparent,andavoidsconflictofinterestandinefficiency
thatoccurswithinasingleagency
y Concludethatshouldseparateservicemanagementfromserviceoperations
Establishacontractualrelationship
Sometimescalledpurchaserproviderorregulatoroperatorapproach
Needangovernmentto
Settechnicalstandards
Structurethecontractfortrainoperationsandinfrastructuremaintenancesoitachievesintegration,servicequality
and other desired outcomes
andotherdesiredoutcomes
Alsoneedanagencytoenforcesafetystandards
Itisusualforthistobeaseparaterailsafetygovernment
y FutureslidesassumeMRToperationsareprovidedthroughaconcession
Theconcessionaireisthebusinessthatisresponsibleformeetingtheconditionsoftheconcession
Theconcessionaireincludestheentitythatoperatesservices
6March2008
3.Shouldtherebeonlyoneoperatorfor
alllinesintheMRTsystem?
30
Somereasonsinfavour
Someagainst
g
g p
p
y Attractingexistingoperatorsfromotherplaces
willbringmorediverseandbetterskills
drawingonskillsandresourcesintheexisting
y Limitedevidenceforeconomiesofscalein
agency
publictransport
y Economiesofscale(i.e.unitcostsdeclineas
theorganisationgetsbigger)willresultinlower y Singleoperator(i.e.amonopolyoperator)will
becomeinefficient
costs
y Verydifficultforthegovernmenttoreplace
theoperatorifitperformsinadequately
y Severaloperators(say23)
as e to e pa d ope at o s to e
es by
y Easiertoexpandoperationstonewlinesby
Allowscomparisonstobemade
Allowsflexibilityandprotectionincaseproblems
emerge
y Canonlyhaveoneoperatoronanyindividual
line
Conclusion:Having23operatorsforthesystemprovidesflexibilityandassistsmanagementofthe
system.
6March2008
4.Iftheconcessionaireisagovernmentagency,shoulditbea
departmentorastateownedenterprise?
31
Somereasonsinfavourofadepartment
Someagainst
y Adepartmentcanbemoreeasilycontrolledby
depa t e t ca be o e eas y co t o ed by
y Adepartmentdoesnothavestrongincentives
depa t e t does ot a e st o g ce t es
thegovernment
y Adepartmentmighthavelowercostsbecause
governmentsalariesarelow
y Thecloselinkbetweengovernmentanda
tobehaveinacommercialmanner
department
Reducestransparencyindecisionmaking
Introducesconflictsofinterest
y Astateownedenterprisehasanincentiveto
minimizeoverallcosts
y Astateownedenterprisecanbemoreeasily
p
y
equitizedatsomefuturetime
Conclusion:Ifpubliclyoperated,theoperatorshouldbeanarmslengthcommercialenterprise.
6March2008
5.Isitbetterthattheconcessionairebeagovernmentownedenterprise
oraprivatecompany(includingajointventurewithagovt.enterprise)?
32
Somereasonsinfavourofagovernment
operator
Someagainst
go e
e t ope ato ca be o e eas y
y Agovernmentoperatorcanbemoreeasily
g
y Controlisexercisedthroughacontractinboth
controlledbythegovernment
y Agovernmentoperatormayhavelowercosts
becausegovernmentsalariesarelower
y Lowergovernmentsalariesarelikelytobe
cases,sodirectcontrolisnotanissue
y
y
y
offsetbylargernumbersofemployeesand
otherhighercosts
Internationalexperienceshowsthat
governmentoperatorsaretypically30%50%
moreexpensivethanprivatesectoroperators
Theprivatesectorisbetteratmanagingrisk
and
controlling costs
andcontrollingcosts
Candrawonprivatesectorspecialistskillsand
experience
Modernpracticeistouseaprivatesector
operator
Conclusion:Useofaprivatesectorcompanytooperateserviceswillalmostcertainlybebetterthan
useofagovernmentoperator.
6March2008
6.Shouldtheconcessionairebeselectedonthebasisofdomesticor
internationalcompetitivebidding?
33
Somereasonsinfavourofdomestic
competitivebidding
Somereasonsinfavourofinternational
competitivebidding
y Thereisnocurrentdomesticenterprisewith
p
skillsinMRToperations
overtheconcessionaire
y Aconcessionairemayhavelowercostsbecause y Aforeigncompanyislikelytoforma
consortiumwithlocalcompaniestoreduce
itdoesnothavetopayinternationalcosts
costsandmeetgovernmentobjectives
y Aconsortiumwillbeamoreeffectivemeans
fordevelopingdomesticskillsinMRT
operationsthanexternaltrainingbecauseit
willoccurinamoreprogrammedand
sustainedmanner
y Aconsortiumisespeciallyimportantiftrains
andrelatedequipmentandservicesaretobe
providedbytheconcessionaire
y Agovernmentmayfeelithasmorecontrol
go e
e t ay ee t as o e co t o
Conclusion:Theconcessionaireshouldbeselectedonthebasisofinternationalcompetitivebidding
toobtainthebestcombinationofskillsandlowestcost.
6March2008
7.ShouldtheMRTconcessionairebeinvolvedinthedesignand
implementationoffixedinfrastructure?
34
Somereasonsinfavour
t s o e e y to esu t o e e o g costs
y Itismorelikelytoresultinlowerlifelongcosts
becausebothinitialcapitalcostsandongoing
costsaretakenintoaccount
Someagainst
t s d cu t to a a ge because t e ope ato
y Itisdifficulttoarrangebecausetheoperator
mustbeselectedatthesametimeasthe
infrastructuredesignengineers
y Itismoredifficulttogetsoundfinancial
tendersfrompotentialoperatorswhenthe
projectdesignisnotfinalised
Conclusion:Itisnotessentialsubjecttouseofinternationalstandardsforinfrastructuredesignand
takingaccountofoperationalissuesinthedesignoffixedinfrastructure.
6March2008
8.ShouldtheMRTconcessionaireselect trainsandrelateditemssuchas
traincontrol&communicationssystemsanddepotequipment?
35
Somereasonsinfavour
Someagainst
y Itgivestheoperatorbettercontroloverthe
t g es t e ope ato bette co t o o e t e
y Theoperatormayselectthemostexpensive
e ope ato ay se ect t e ost e pe s e
qualityofservicethattheyprovide
y Itallowstheoperatortominimizetraincapital
costsandotherO&Mcosts
y Itpreventstheoperatorblamingthe
equipmentprovidedtothembythe
governmentforpoorserviceprovidedbythe
operator
y It
Itallowssomepatronagerisktobetransferred
allows some patronage risk to be transferred
totheconcessionaire thisreducestheneed
foruseofadministrativemeasuresincontract
managementandhencesimplifiescontract
management
trainsratherthanthetrainsthatofferthebest
value
Conclusion:Trains&relatedinfrastructureareessentialtooperatorperformance.Operatorsshouldberesponsible
forchoicesregardingthemsothatoperatingriskandsomepatronageriskcanbetransferredtotheoperators.
6March2008
9.ShouldtheMRTconcessionaireselectandfinance trainsandrelateditems
suchastraincontrol&communicationssystemsanddepotequipment?
36
Somereasonsinfavour
ou easo s p ese ted o t e p e ous s de
y Fourreasonspresentedonthepreviousslide
y Italsointroducesanewpotentialsourceof
Someagainst
t ay educe t e u be o pote t a
y Itmayreducethenumberofpotential
operatorsiftheyhavetroubleraisingcapital
capitalforinvestmentintheproject
y Itbringsafinancierintotheconcession,with
thefinancierabletoputpressureonthe
operatortoperformwelloverthelifeofthe
concessiontoprotectthefinanciersinterest
y Itensuresthattheconcessionairewillseekthe
trains
that will enable it to minimize it overall
trainsthatwillenableittominimizeitoverall
costs
y Theconcessionairewillseektoreducethehigh
costoftrainsprovidedthroughexportcredit
finance
Conclusion:Bestfortheconcessionairetobothselectandfinancetrainssothatcostscanbe
minimisedandthetransferofrisktotheconcessionairecanbemaximised.
6March2008
10.Shouldtheconcessionairefinancefixedinfrastructure?
37
Somereasonsinfavour
Someagainst
y Theconcessionairecantakegreater
e co cess o a e ca ta e g eate
y Itmaylimitthepoolofpossible
t ay
t t e poo o poss b e
responsibilityforensuringthesuccessofthe
entireproject
y Itcouldprovideanetfinancialbenefittothe
governmentifthehighercostofprivatesector
capitalcanbeoffsetbythetransferofmore
financialrisktotheconcessionaire
concessionairesbyeliminatingthosewho
cannotraisethenecessarycapital
y Thegovernmentmaynotgetthebest
consortiumofinfrastructureandfinance
providersandMRToperator
y Theconcessionairemayseekgreatercertainty
toprotecttheirinvestment,whichwill
compromisethetransferofriskand/orreduce
p
/
networkintegrationandpolicyflexibilityfor
thegovernment
Conclusion:Itisunlikelythatprivatesectorcapitalwillprovidealowercostoutcome,butthiscanbe
testedwithavalueformoneyanalysis.
6March2008
11.Shouldtheconcessionairemaintainfixedinfrastructure?
38
Somereasonsinfavour
e co cess o a e
co ta t e peop e o
y Theconcessionairewillcontainthepeoplewho
willbemostawareofproblemswith
infrastructurebecausetheyuseiteveryday
y Theconcessionairehasaninterestinfixing
infrastructureproblemssothattheirservices
arenotdisruptedortheircostsincreased
Someagainst
e co cess o a e o y as a
te est t e
y Theconcessionaireonlyhasaninterestinthe
infrastructureforthetermoftheconcession,
andmaynottakealongtermview
Conclusion:Theconcessionaireshouldmaintainfixedinfrastructure.
6March2008
12.ShouldanMRToperatingconcessionbeforalongorshortperiod?
39
Reasonsforashortperiod
(sayupto10years)
Reasonsforalongperiod
(say35years)
y Aconcessionairecanbemorecertainofcostsover y Theconcessionairecantakealongtermview,e.g.
g
, g
ashorterratherthanalongerterm,andsoneed
theycandevelopstaffskillsandinvestin
notincluderiskpremiumstoallowforuncertainty
worthwhileequipmentandservicesthathavea
overfuturecosts
paybackperiodthatislongerthantheconcession
term
y Aconcessionairecanbereplacedsoonerifthey
donotperformwell
y Acombinationofsuitablecontractconditionsand
useofpriceindiceswillallowcoststobeadjusted
y Theconcessioncanmakearrangementsto
overthetermofalongerconcession
compensatetheconcessionaireforassetsthey
havepurchasedthathaveaneconomiclifethatis y Aconcessioncanincludetermsforearlydismissal
llongerthantheconcessionterm
th th
i t
ofaconcessionaireiftheydonotperformwell
f
i
i if th d
t
f
ll
y Alongertermconcessionavoidsthecostof
selectinganewconcessionairemorefrequently
y Alongertermismoreconsistentwithprovision
andfinancingoftrainsbytheconcessionaire
Conclusion:Alongertermconcessionispreferred,especiallyiftrainsareprovidedandfinancedby
theconcessionaire.A35yearconcessionwouldbesimilartothelifeofthefirstsetoftrains.
6March2008
13.Howmuchfinancialriskcanbetransferred
fromthegovernmenttotheconcessionaire?
40
y Meaningoffinancialrisktransfer
Financialriskistheuncertaintyabouthowcostsmightturnoutinpractice
Transferoffinancialriskmeansmakingtheconcessionaireresponsibleforthecosts,i.e.theycannotaskthe
governmentformoremoneyifcoststurnouthigherthanexpected
y OverallcostsofMRTwillbehigheriftoomuchortoolittleriskistransferredtotheconcessionaire
Iftransfertoomuchrisk
Theconcessionairewillbecomeriskaverse(i.e.verycautious),whichwillreduceinnovationandresponsivenessby
themtomarketneeds
Biddersforaconcessionwillincluderiskpremiums(i.e.extraallowances)intheirbidstoprotectthemagainsthigher
coststhatresultfromrisksthattheycannotmanage
Iftransferinsufficientrisk
Theconcessionairewillnotmanagetheuncertaintyaswellastheymightbecausetheycanpassoncostincreasesto
thegovernment
y Objectiveistotransfertotheconcessionaireriskthattheycanmanageandhenceavoidoccurring
Obj i i
f
h
i
i ik h h
dh
id
i
examples
Transferoperatingcostrisk,butprotecttheconcessionairefromlongertermuncertaintybyusingindicesto
adjustcontractpaymentsforchangesinunitcosts(e.g.energyprices,labourcosts,etc)
Transfersomepatronagerisktomakeconcessionaireresponsetoconsumerneeds.Butrecognisethatthe
concessionairemaybeabletoinfluenceonlyabout10%orsooftheirpatronage(theremainderis
attributabletofactorssuchaswhathappenselsewhereinthenetworkandsocioeconomicconditions)
y Addressedinmoredetailinaseparatepaper
6March2008
14.Shouldticketingbeimplementedasasinglecontract
fortheentireMRTsystem?
41
Somereasonsinfavour
Someagainst
y Asinglesystemavoidsinterfaceproblems
s g e syste a o ds te ace p ob e s
y
y
y
y G
Givesconsiderableresponsibilitytoasingle
es co s de ab e espo s b ty to a s g e
betweenlines
contractor,withgreaterriskifthesystemis
notoptimal
Allowsthebesttechnologytobeusedforthe
entireMRTsystemratherthanthetechnology y Anadditionalcontractthatneedstobe
selectedbythosebiddingforeachline
managed
Makesiteasiertoexpandthesystemtoinclude y Couldbemanagedbycoordinationbetween
morelines,thebussystemandferrieswhen
variouspublictransportoperators
appropriate
y Notessentialifgovernmentdoesnotwishto
Allows
Allowsthetechnologytobemoreeasily
the technology to be more easily
have
haveanintegratedpublictransportsystem
an integrated public transport system
updated
Establishesanindependentcontractthat
makesrevenuemanagement&patronagedata
moretransparent
Conclusion:Integratedfaresandticketingisessentialforasuccessfulpublictransport.Asingleticket
systemimplementedthroughasinglecontractislikelytoprovidethebestoutcome.
6March2008
15.Shouldconcessionaireskeepfarerevenue
orgiveittothegovernment?
42
Somereasonsforconcessionaires
keepingfarerevenue
Somereasonsforthefarerevenuetobe
paidtothegovernment
e co cess o a e ca use t e a e e e ue to
y Theconcessionairecanusethefarerevenueto
t s e y t at t e a e e e ue
be
y Itislikelythatthefarerevenuewillbe
meettheircosts
y Requiresanaccountingsystemtotransfer
fundsbetweenconcessionaireswhere
passengerstransferbetweenMRTlines
y Bestsuitedtosituationswherefarerevenueis
sufficienttomeetthecostsincurredbya
concessionaireandwhereagrosscostform
ofconcessionisused(seeslide30)
(
)
insufficienttomeetconcessionairecosts,so
therewillstillbeaneedforameansforthe
governmenttopayadditionalfundstothe
concessionaire
y Theratiooffarerevenuetocostwillvary
betweenlines,requiringdifferentlevelsof
governmentpaymenttoconcessionaires
y Workswellwhereanintegratedticketing
g
g
systemisused,andrevenueiscollectedbythe
enterprisethatoperatestheticketsystem
y Bestsuitedtoanetcostformofconcession
(seeslide30)
Conclusion:Seelaterdiscussionofformsofconcession.
6March2008
Conclusionstothesefifteenquestions
Question
Conclusion
1.
Isitpossibletodealwithinfrastructuredeliverynowandaddressoperations
later?
Operatingarrangementsneedtobedeterminedatthesametimeasinfrastructureplanning.
2.
ShouldasingleagencydevelopandoperatetheMRT,orshouldthese
activitiesbeseparated?
These activitiesshouldbeseparated,withoperationsundertakenthroughaconcessioncontract.
43
3.
ShouldtherebeonlyoneoperatorforalllinesoftheMRTsystem?
Having23operatorsforthesystemprovidesflexibilityandassistsmanagementofthesystem.
4.
Iftheoperatorisagovernmentagency,shoulditbeadepartmentorastate
ownedenterprise?
d t
i ?
Ifpubliclyoperated,theoperatorshouldbeanarmslengthcommercialenterprise.
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 ShouldtheMRToperatorfinancefixedinfrastructure?
10.
Should the MRT operator finance fixed infrastructure?
Itisunlikelythatprivatesectorcapitalwillprovidealowercostoutcome,butthiscanbetested
It
is unlikely that private sector capital will provide a lower cost outcome but this can be tested
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.
6March2008
Implicationsoftheseconclusions
44
y Seemslikelythatagoodarrangementwillbethat
Theconcessionaireshouldbeaprivatecompanyselectedthroughinternational
competitivebidding
Theconcessionaireshouldprovideandfinancetrainsandrelatedequipmentand
systems,aswellasoperatingtrainservicesandmaintainingfixedinfrastructure
Theconcessionshouldbeforareasonablylongperiod
Operatingriskandsomepatronageriskshouldbetransferredtotheconcessionaire
AsingleticketingsystemshouldbeusedforthewholeMRTsystem,anditshouldbe
implementedasaseparatecontract
y But
Thereisaneedtoconfirmthesemattersthroughavalueformoneyanalysis
Thereareanumberofmoredetailedmattersthatneedtobeconsideredin
designingaconcessionfortheprovisionofMRTservices
thisisaddressedinthenextpartofthepresentation
6March2008
PartE
45
M O R E D E TA I L E D F EAT U R ES O F A
C O N C ES S I O N AG R E E M E N T F O R T H E
O P E R AT I O N O F M RT I N H C M C
6March2008
Introducingtwoformsofconcessionagreement
46
NetCostconcession
GrossCostconcession
Infra
structure
Governmentprovidescivilinfrastructure.Concessionaireprovidestrainsandrelateditemssuchas
train control & communications systems and depot equipment
traincontrol&communicationssystemsanddepotequipment.
Risksharing
Concessionaire assumesallpatronage
Risk issharedbetweenthegovernmentand
risk,butsharesextraprofits(ifany)with concessionaire.Optimumsharingofriskwillminimise
thegovernment.
theconcessioncost.
Revenue
Concessionairekeepsrevenue
Services
Payments
Concessionairemeetscostsfromits
ownrevenue.Additional paymentsmay
beneededfromthegovernmentif
concessionairesrevenueistoolow.
Government paystheconcessionaireforservices
providedaccordingtoratessetonthebasisof
competitivetenderingandquantity/qualityofservice
provided.
Government
role
Governmentinvitestenders&
establishesaconcession;hasonlya
smallrolethereafter;difficulttovary
contractconditions.
Governmentinvitestendersandestablishesa
concession; hasacontinuingmajorroleinmanagingthe
concessionagreement;canvaryconditionswhen
needed.
Fare revenueisgiventothegovernment
6March2008
Assessmentofnetcostandgrosscostconcessions
47
Netcostconcession
Grosscostconcession
y Bestsuitedwhere
est su ted e e
Concessionairecanrecovertheircostsfromfares
andothersuchsources
Theconcessionairehasahighlevelofcontrolover
theircostsandrevenue
Wheretheretheconcessionairehasthepotential
formajorpropertydevelopment
Thegovernmentcanacceptlimitedpolicycontrol
overtheMRTlineforthedurationofthe
concession
Thegovernmentwishesaformofcontractthat
requiresonlylimitedoversight
y Bestsuitedwhere
est su ted e e
Concessionairecannotrecovercostsfromtheir
ownrevenuesources
Theconcessionairehasonlyalimitedlevelof
controlovertheircostsandrevenue,suchasa
singlelineinanMRTsystem
Thegovernmentwishestoretainpolicycontrol
overtheMRTsystem
Thegovernmenthasthecapacitytomanagea
performancebasedcontract
Conclusion:Togivethegovernmentpolicycontrolandtotakeaccountoflowcostrecoveryandlimited
propertydevelopmentopportunitiesinHCMC,agrosscostformofconcessionisstronglyrecommended.
6March2008
Puttingittogether fourpossibleconcessionapproaches
Public
Public Implementation with
Train Supply and Operating
Enterprise
Operating Concession (PIOC)
Concession (TSOC)
48
Delivery of:
Civil Infrastructure and Fixed
Delivered through competitively tendered contracts to the government.
Equipment
Trains, train control and
Delivered through competitively tendered contracts to the
communications and depot
government.
Delivered through a competitive
equipment
tendered Gross Cost concession.
Train services and
d
Contract negotiated
d with
h an SOE. Competitively
l tendered
d d Gross
infrastructure maintenance
Cost contract.
Risk Transfer
Transfer of risk from the
The government transfers more
As for the Public Enterprise
government is limited to the
option but can transfer operating risk to the concessionaire than in
extent allowed in construction
risk to the concessionaire. Some the PIOC option because the
and equipment supply contracts. patronage risk can be transferred concessionaire purchases trains
The government retains risk
and can therefore bear more risk
through the Gross Cost
concession. The government
associated with operations
for operations because they have
retains operating risk related to
through its ownership of the
more control over service quality.
mismatch between trains it
operator.
provides and concessionaire
needs.
Finance
Civil Infrastructure and Fixed
Capital provided by the government.
government
Capital provided by the
Equipment
government.
Trains and Train Control and
Capital provided by the government.
Capital provided by the
Communications Equipment
concessionaire. The government
pays for costs as specified in the
Train services and
The government pays all costs
The government pays for
infrastructure maintenance
incurred by the SOE, including
operating and maintenance costs contract (to cover both capital
and O&M costs).
working capital
as specified in the contract.
Fare revenue
6March2008
Indicativeassessmentofconcessionoptions*
49
Criteria
Public
Enterprise
Public Implementation
with Operating
Concession (PIOC)
99
999
99
99
999
99
99
99
99
9
99
99
99
999
999
999
999
999
999
99
99
99
99
999
99
999
9999
99*
System Integration
9
Minimize capital and operating costs
Provide integrated MRT system for
999
passengers
Policy Flexibility for the Government
Ability for the government to
999
modify MRT system
Risk Transfer from the Government
9
Infrastructure supply risk
8
Operating risk
8
Patronage risk
Management of Operating Concession by the Government
Firm contractual basis for
99
operations
999
Ease of concession management
Incentive for contractor/9
concessionaire to do the thing right
Potential Value-for-Money
Allowing for risk transfer, associated
9
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 intended to be indicative.
** The BOT option may allow moderate value-for-money, but does not provide the government with the flexibility to meet other public interests.
6March2008
Furtherinformationontwokeyapproachesto
Projectimplementation
50
Public Enterprise Model
Implementation of:
Civil infrastructure &
fixed equipment
Trains and train
control equipment
Train services &
infrastructure maint.
Delivered
D
li
d through
th
h competitively
titi l
tendered contracts to the government.
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.
S
Source
off finance
fi
ffor project
j t iimplementation
l
t ti
Civil infrastructure &
fixed equipment
Trains and train
control equipment
Train services &
infrastructure maint.
Fare revenue
6March2008
Recommendedfeaturesofaprivatesector
participationmodel paymentarrangements
51
y Paymentfromthegovernmenttotheconcessionaire
Primarilyrelatedtothequantityofserviceandassetsprovidedbytheconcessionaire,butalso
linked to the quality of service and to patronage
linkedtothequalityofserviceandtopatronage
Patronageandservicequalityrelatedpaymentshouldtransfermanageablerisktothe
concessionaireandincentivizethemtoprovidehighqualityservices
y Allowsforcostescalation
Mayneedseparateescalationforenergy,laborandotheritems
y Allowsforanticipatedandunexpectedtransportdevelopments
Unitcoststopayforvariationsthatmightoccur,e.g.lineextensionsandchangesinMRT
servicesandotherpublictransportservices
p
p
y Concessionmanagement
Inadditiontoprovidingtheincentiveforconcessionairestominimizecostsandmeet
passengerneeds,transferringappropriateriskhasthebenefitof
Reducingsupervisionneedsbyincentivizingtheconcessionairetoperformwellwithouttheneedfor
directgovernmentsupervision
6March2008
Paymentstructureforagrosscostoperatingconcession
52
y 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
operationalactivities,e.g.frompropertydevelopment,advertising,etc.
y Totalpayment=F+D+S+B P O
y Forbidding
thegovernmentwouldspecifyD,BandP
tendererswouldindicateF,SandO
6March2008
**March2008
Summaryofrecommendedapproach
withaprivatesectorparticipationmodel
53
Roleofgovernment
Roleoftheprivatesector
y Ensuresdesignofinfrastructuretakes
Ensures design of infrastructure takes
y Privatesectorconsortiumsbidfor
Private sector consortiums bid for
accountofoperations
y Financeandmanageimplementationof
fixedinfrastructure
y Selectoperatingconcessionaireandticket
supplyandfaremanagementconcession
y Manageconcessionairesandmake
payments according to their respective
paymentsaccordingtotheirrespective
contracts
operatingconcessions(includingsupply
oftrainsetc.)andaticket/farecollection
concession
y Concessionairescoordinatewithfixed
infrastructurecontractorstoinstalltheir
respectiveassets
y Ticket/fareconcessionairepaysfare
Ticket/fare concessionaire pays fare
revenuetothegovernment
y Concessionairesprovideservicesin
accordancewiththeircontractsandare
paidaccordinglybythegovernment
6March2008
PartF
54
T E M P L AT E O F A C O N C ES S I O N AG R E E M E N T
A N D ST E P S TO I M P L E M E N T A C O N C ES S I O N
6March2008
ContentsofaConcessionAgreement 1
55
y PartI:Introduction
Addressesgeneralissuesandthepartiestothecontract:
NameoftheAgreement;DateoftheAgreement;PartiestotheAgreement;Preambleto
theAgreement;Definitions;TheConcession;MRTNetworkandLinks;Coordination
Committee;RepresentativesandRelatedParties
y PartII:PreServiceActivities
Addressesissuesthataretooccurpriortotheoperationoftrainservices:
ConditionsPrecedent;CompanySystems;PreServiceImplementation;ProtectionAgainst
Late Service Commencement;
LateServiceCommencement;
y PartIII:ServicestobeProvided
Addressesthetrainandrelatedservicesthattheconcessionaireistoprovide:
InitialServices;StandardofServices;ChangesintheMRTSystem;ChangesinMRTServices
6March2008
ContentsofaConcessionAgreement 2
56
y PartIV:FinanceandInsurance
Addressesgeneralissuesandthepartiestothecontract:
PaymentandPaymentMechanisms;PaymentEscalation;FarePolicyandRevenue;Routine
NonfareRevenue;SpecialNonfareRevenue;Refinancing;TaxesandDuties;Insurance;
y PartV:EarlyTermination
Addressesissuesthatcouldresultinearlyterminationoftheconcessionand
treatmentoftheconsequencesofsuchearlytermination:
ConditionsforEarlyTermination;ProcessofTermination;ConsequencesofTermination;
y PartVI:SpecialEvents
Addressesspecialeventsthatcouldaffecttheconcession:
ForceMajeureandExceptionalEvents;ConsequencesofForceMajeureandExceptional
Events;Powerofgovernment;
6March2008
ContentsofaConcessionAgreement 3
57
y PartVII:Assets
Addressesissuesrelatedtoassetsprovidedbythegovernmentandconcessionaires:
CivilInfrastructure;AssetsoftheConcessionaire;AssetTitlesandTransfers;LendersDirect
Agreement;AssetTransferValues;
y 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
58
y Establishaprobityprocess
Toensuretransparencyinthepreparationandconductoftendering,assessmentoftenders,
and contract negotiation
andcontractnegotiation
y Usemarkettestingtoidentifymodificationsthatwillincreasemarketinterest
Ensurethatchangesdonotcompromisepublicinterest
Objectiveistogetgoodcompetitionthatshouldresultinlowertenderprices
y PrepareRequestforTender
ClearlysetoutrolesandresponsibilitiesoftheAuthorityandtheconcessionaire
Setoutpaymentarrangements
Indicateinformationtobeprovidedbybidders
Indicate information to be provided by bidders
Requireconsistentinformationforaconformingtender
Encouragebidderstosubmitinnovationsasvariationsoralternativestotheconforming
tender
y Designtenderevaluationprocess
y Invitetenders
6March2008
23
RSC-C71557 (VIE),
TA4862-VIE:
Ho Chi Minh City Metro Rail System
1.
INTRODUCTION
1.1
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
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-formoney 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 lifecycle 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
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.
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 valuefor-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
In the logical framework of MRT programme development and project design, two main
7.
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 criteria1. 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.
1This
evaluation is the subject of an economic analysis, which is addressed in the PPTA report.
2.3
Outcome
Outputs
Revenue
model
Calculations
Patronage
O&M
cost model
Investment
model
Financing
model
Strategy
model inputs*
Rolling stock
capital cost
Capital
structure
Project
model inputs*
Infrastructure
capital cost
Finance cost
& other terms
Investment
schedule
Financiers'
roles
Fare tariff
Inputs
Non-fare
revenue
External
support
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
6
Description
Control page
Project Capital Cost: Input Page
3_Scen_input
4_Passenger_input
5_Train_op_input
6_Other _input
Other Financial Model Assumptions: Assumptions for the financial model other than those covered by the above input pages.
Input Page
This includes a selection of concessioning options.
7_
8_Schedule
9_Rollingstock_plan
10_OM_cost
11_OM_unit_cost
12_Financials
13_Results
Summary of Results
14_Sensitivity
15_Tables
16_Index
Source: this Study
Summary of Tables
Index
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.
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
7
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
Scenario 9
Selected
Line/Segments
Scenario 10
Construction
Selected
Construction
Selected
Construction
End
End
End
1
1
1
1
2013
2015
2015
2015
1
1
1
1
1
2013
2015
2015
2015
2015
1
1
1
1
1
1
2013
2015
2015
2015
2024
2024
MRT1
MRT2
MRT3
MRT4
19.7
10.2
24.0
17.0
2008
2010
2010
2010
MRT1
MRT2
MRT3
MRT4
MRT5
19.7
10.2
24.0
17.0
24.0
2008
2010
2010
2010
2010
MRT1
MRT2
MRT3
MRT4
MRT5
MRT6
19.7
10.2
24.0
17.0
24.0
6.0
2008
2010
2010
2010
2021
2021
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
MRT1
MRT2
MRT3
MRT4
Total Capital
Costs
1,115
871
1,876
813
Local
Foreign
680
515
1,097
496
435
356
779
317
1,148
287
701
175
448
112
Line/Segment
Land acquisition
Local Foreign
111
125
188
81
115
29
Depots
Local
Foreign
45
67
25
35
33
49
46
11
69
17
Civil works
Local Foreign
507
273
351
251
854
460
370
199
523
131
281
70
E&M systems
Local Foreign
17
95
14
70
56
319
12
69
17
4
98
24
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
8
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
(USD million, at year 2008 prices)
HCMC MRT Project
(excluding rollingstock)
Construction Schedule and Cost Distribution Worksheet
Case: 11 HCMC MRT Trend Case
Sub-case:
Segment
Line/Segment
Code
MRT1 Ben Thanh - Suoi Tien
MRT2 Ben Thanh - Thamluang
MRT3 Highway13 - Tan Kien
MRT4 Sai Gon Bridge - Can Giuoc
MRT5 Ben Cat - Nguyen Van Linh
MRT6 Ba Queo - Phu Lam
Source: this Study
0
Length
(km)
19.7
10.2
24.0
17.0
24.0
6.0
2011
334
131
281
122
-
2012
111
261
563
244
-
2013
56
261
563
244
-
2014
87
188
81
-
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 Study2, except for Line 2, which uses the most
recent update for the PPTA study.
Table 2.5 Train operation parameters
HCMC MRT Project
Train Operation Parameters: Input Page
Case:
Subcase:
11
0
Train operation
4.50
14.50
19.00
No. of Stations
2015
Under
ground
Elevated
& atGrade
Total
3
8
11
22
11
7
14
26
7
65
14
8
18
14
26
7
0
0
87
Avg.
speed
(km/h)
30
30
30
30
30
30
0
0
Headway Car/train
(min) (cars/train)
3.0
5.0
3.0
3.0
3.0
3.0
-
6
3
3
3
3
3
3
3
hours / day
hours / day
hours / day (assuming service on week-end & holiday will be as all day off-peak, with no peak
hours)
See PPTA technical paper HCMC Master Plan Ridership and Revenue Forecast Study, January 2008, by MVASystra.
2015
44
94
41
-
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 model3 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 systems4, 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
Unit (m hrs./year) (m hrs./year) (m km./year) (traincars)
(stations)
Y(O&M cost) =
Line Length
(km.)
100%
100%
100%
67%
33%
10%
100%
50%
100%
50%
10%
50%
50%
25%
25%
25%
80%
20%
30%
50%
25%
25%
75%
75%
25%
Trainhours
Car- hours
Car- km
Peak cars
Station
Line Length
(X1)
a1X1
(X2)
+ a2X2
(X3)
+ a3X3
(X4)
+ a4X4
(X5)
+ a5X5
(X6)
+ a6X6
Total
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
a1
a2
a3
a4
a5
a6
37.9
48.2
44.8
44.8
1.4
1.4
0.1 m
0.1 m
0.3 m
0.9 m
0.003 m
0.003 m
security staff and other position not requiring specific MRT skills. The annual O&M cost is
obtained by summing the six products aiXi (i=1,..,6) of unit cost and annual MRT service
resource quantity.
The idea of the O&M unit cost model comes from ADB 2006
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.
4Bangkok
10
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
11/06/08
Case:
Subcase:
Public sector
FINANCIAL STATEMENTS
INCOME STATEMENT
Revenue
Fare revenue
1
Non-fare revenue
Concession fee
Total revenue
Expense
Unit charge generator
1
expense
Pure O&M cost
0
Revenue-related cost
1
Total expense
Gross earnings
Less: Depreciation and
amortization
Earnings before interest and
tax
Less: Interest expenses
Less: Installment paid by Gov.(interest
portion)
Profit before tax
Less: Corporate tax
0%
Net profit after tax
Earning before interest, tax,
depreciation (EBITDA)
Case
All line segments in HCMC MRT
Trend Case
Gross Con.0 Con.1 Con.2 Con.3 Con.4 Con.5 Con.6 Y1
Y2
Y3
Y4
Y5
Y6
Y7
Cost
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
0
24
1
25
28
1
30
92
5
96
106
5
112
124
6
130
143
7
151
166
8
175
90
173
207
227
250
276
305
3
3
8
8
9
10
10
93 177 214 236 259 286 315
(68) (147) (118) (124) (130) (135) (140)
151 180 211 211 213 215 216
136
-
136
-
131
-
125
-
120
-
114
-
109
-
11
Case:
Subcase:
Public sector
FINANCIAL STATEMENTS
BALANCE SHEET
Assets
Current assets
Cash and short-term
investments
Accounts receivable
Total current assets
Operating assets
Less : Accumulated
depreciation
Net operating assets
Net capitalized expenses
Total Assets
Liabilities & Equity
Liabilities
Current liabilities
A/C payable and current
liabilities
Long-term debts
Long-term loans
Government Bonds
Total long-term debts
Other liabilities - Installment - payables
Total liabilities
Equity
Government equity
Retained earnings
Total equity
Total liabilities & equity
Y4
Y5
Y6
Y7
2017
2018
2019
2020
117
117
1
118
105
105
105
271
271
271
13
13
118
- (141) (311)
(513)
(714)
301 1,101 2,156 3,662 5,556 6,416 7,240 7,038 6,888 6,739 6,591 6,384
7
24
64 135 248 238 228
218
208
198
188
178
308 1,124 2,220 3,797 5,803 6,450 6,789 6,132 5,521 4,905 4,284 3,600
991 1,941 3,296 5,000 5,000 4,809 4,612 4,410 4,202 3,989 3,770
991 1,941 3,296 5,000 5,000 4,809 4,612 4,410 4,202 3,989 3,770
991 1,941 3,296 5,000 5,000 4,809 4,612 4,410 4,202 3,989 3,770
1,805
(355)
1,450
6,450
2,799
(818)
1,980
6,789
2,799
(1,278)
1,520
6,132
12
11
Subcase:
Public sector
FINANCIAL STATEMENTS
STATEMENT OF
NPV
Total
CASH FLOW
Earnings before
interest and tax
Less: corporate tax
Add: depreciation and
amortization
Cash flow before
(2,204)
capital requirements
Less: Installment 0
0
principal portion
Movement in working
capital
Capital expenditures NPV
Total
Rollingstock
289
387
Civil works
2,893 3,610
E&M systems
539
673
Land acquisition
440
549
Depots
269
335
Total initial capital
4,430 5,556
expenditure
Interest during
194
248
construction
Additional rollingstock
3,191 6,763
Refurbishment of
238
756
rollingstock
Replacement of E&M
777 2,350
equipment
Additional land
209
408
acquisition
Additional depots
128
249
Additional civil works
1,376 2,682
Additional E&M
257
500
equipment
Total capital
10,800 19,511
expenditures
(13,004) (25,743)
Free cash flow
Debt service:
Interest paid
Debt principal
repayment
Total debt service
Less: Installment interest portion
Cash flow after debt
service
Cash shortfall
Initial
Total
funded by:
Long-term loans
5,000 5,000
Government Bonds
0
0
Government cash
803 14,511
support
Total funding
19,511
Net cash flow
Cash balance
Source: this Study
Y1
Y2
Y3
Y4
Y5
Y6
Y7
2014
2015
2016
2017
2018
2019
2020
(219)
(327)
(329)
(335)
(342)
(350)
(357)
151
180
211
211
213
215
216
(68)
(147)
(118)
(124)
(130)
(135)
(140)
82
15
12
8
117
129
24
20
12
184
387
558
737 1,052 1,052
104
137
196
196
85
112
160
160
52
69
98
98
799 1,056 1,506 1,894
17
40
71
113
501
-
730
-
51
-
54
-
56
-
53
28
33
350
65
17
184
34
118
189
994
51
54
56
(118)
(175)
(183)
(192)
(140)
136
-
136
191
131
197
125
202
120
207
114
213
109
219
136
-
327
-
327
-
327
-
327
-
327
-
327
-
(445)
(503)
(511)
(519)
(468)
105
13
166
24
719
97
994
51
54
56
118
189
994
51
54
56
(204)
(204)
13
Case:
Subcase:
Private Sector
FINANCIAL STATEMENTS
INCOME STATEMENT
Revenue
Fare revenue
Non-fare revenue
Unit charge generator
revenue
Total revenue
Less: Concession fee
Operating revenue after
concession fee
Operating and Maintenance
cost
Pure O&M cost
1
Revenue-related cost
0
Gross earnings
Less: Depreciation and
amortization
Earnings before interest and
tax
Less: Interest expenses
Add: Installment paid by Gov.(interest
portion)
Profit before tax
Less: Corporate tax
28%
Add: Subsidy
Net profit after tax
Earning before interest, tax,
depreciation (EBITDA)
90
173
207
227
250
276
305
90
90
173
173
207
207
227
227
250
250
276
276
305
305
101
126
235
255
276
300
325
101
(11)
-
126
47
-
235
(28)
-
255
(27)
-
276
(25)
-
300
(24)
-
325
(21)
-
(11)
47
(28)
(27)
(25)
(24)
(21)
(11)
(11)
47
10
37
(28)
(28)
(27)
(27)
(25)
(25)
(24)
(24)
(21)
(21)
(11)
47
(28)
(27)
(25)
(24)
(21)
14
Case:
11
Subcase:
Private Sector
FINANCIAL STATEMENTS
0.00%
BALANCE SHEET
Assets
Current assets
Cash and short-term
investments
Accounts receivable
0.00%
Inventory
0.00%
Total current assets
Other assets - Installment - Receivables (net)
Operating assets
Less : Accumulated
depreciation
Net operating assets
Net capitalized expenses
Total Assets
Liabilities & Equity
Liabilities
Current liabilities
A/C payable and current
liabilities
Long-term debts
Long-term loans
Total long-term debts
Total liabilities
Equity
Paid-in capital
Cash deficit support
Legal reserves
Retained earnings
Total equity
Total liabilities & equity
62
51
116
115
113
111
108
104
62
-
51
-
116
-
115
-
113
-
111
-
108
-
104
-
62
51
116
115
113
111
108
104
51
11
62
62
51
11
(11)
51
51
51
39
2
24
116
116
51
67
2
(4)
115
115
51
92
2
(32)
113
113
51
116
2
(57)
111
111
51
51
137 153
2
2
(81) (101)
108 104
108 104
15
Case:
11
Subcase:
Add: Subsidy
Cash deficit support
Net cash flow
Cash balance
Source: this Study
Private Sector
FINANCIAL STATEMENTS
STATEMENT OF CASH
FLOW
Earnings before interest and
tax
Less: corporate tax
Add: depreciation and
amortization
Cash flow before capital
requirements
Add: Installment
Movement in working capital
Capital expenditures
Rollingstock
Civil works
E&M systems
Land acquisition
Depots
Total initial capital
expenditure
Interest during construction
Additional rollingstock
Refurbishment of rollingstock
Replacement of E&M
equipment
Additional land acquisition
Additional depots
Additional civil works
Additional E&M equipment
Total capital expenditures
Free cash flow
Debt service:
Interest paid
Debt principal repayment
Total debt service
Cash flow available for
dividend
Dividends
Cash flow after debt service
and dividends
Cash shortfall funded by:
Long-term loans
Paid-in equity
Total funding
NPV
Total
-
(11)
47
(28)
(27)
(25)
(24)
(21)
(10)
-
(11)
37
(28)
(27)
(25)
(24)
(21)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
253
0
0
0
0
0
972
(11)
37
(28)
(27)
(25)
(24)
(21)
(11)
37
(28)
(27)
(25)
(24)
(21)
(11)
37
(28)
(27)
(25)
(24)
(21)
51
51
11
62
62
(11)
51
28
65
116
27
(1)
115
25
(2)
113
24
(2)
111
21
(3)
108
16
(5)
104
253
0
NPV
Total
Initial Total
0
0
51
51
51
NPV Total
0
0
103
170
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
16
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 review5 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
2.106, 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)
Fixed infrastructure
-elevated
Fixed infrastructureunderground
Rolling stock
Per line km
US$2.34 million
Per line km
US$40 million
Per line km
US$ 100 million
0.53
0.37
0.41
0.60
0.26
0.55
0.40
0.45
0.68
0.33
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
5ADB
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.
17
PPTA7, 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
Budget8.
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
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.
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
7See
ADB TA 4862-VIE: Ho Chi Minh City Metro Rail Study, Final Report 2008 (PPTA Study)
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.
9This section draws on ADB 2007a and ADB 2007b.
18
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
Financing
Civil works and fixed
equipment
Trains with related
systems & equipment
Passenger service
with maintenance of
civil works &
equipment
Delivery
Civil works and fixed
equipment
Trains with related
systems & equipment
Passenger service
with maintenance of
civil works &
equipment
Payment/funding
Fare revenue
Other revenue
Payment from
government
Risk
Investment cost-civil
works and fixed
equipment
Investment cost-trains
& related systems &
equipment
Service operating cost
& all maintenance
costs
Revenue
State owned
enterprise (1)
Private sector
operating concession
(2)
Government sourced
capital
Concessionaire
sourced capital
Concessionaire
sourced working
capital
Concessionaire
sourced working
capital
Build-operatetransfer (BOT)
(4)
Concessionaire
sourced capital
Concessionaire
sourced working
capital
Government procures
by competitive tender
Through Gross Cost
contract by
competitive tender
Revenues collected
under a separate
arrangement
Gross Cost contract
style payment
Paid to government
Paid to government
Paid to government/
Paid to government/
shared
shared
Concessionaire receives competitively bid
payment from government.
Government transfers
some risk to the
private sector in the
design, construction
and equipment supply
contracts
Transferred to private
sector
Government transfers
some risk to the
private sector via the
design, construction
and equipment supply
contracts
Government transfers
some risk to the
private sector in the
design, construction
and equipment supply
contracts
Contracting transfers
some risk to SOE but
state ownership
means ultimate
recourse to
government
Transferred to private
Transferred to private
sector, except what is
sector, except what is
retained through
retained through
indexationb plus the
indexation
risk of government
provided trains not
matching operator
needs
Some patronage risk is transferred to private
sector linked to an incentive payment to keep up
service quality standards
Concessionaire retains
Competitively bid
external support
Transferred to private
sector, except for
agreed indexation
24.
This section reports on a VfM assessment carried out on the four alternatives identified
in the Options and Issues paper10. Their key features are summarized in Table 3.1. They range
10
19
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),
20
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 equipment11. 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
12
21
Government
(3)
(1)
Senior lenders
(2)
Design, build
subcontractors
SPV project
company
Operating
subcontractor
Subordinated
Debt & equity
(4)
Users/
the public
Others eg
insurers
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
Debt-to-equity ratio (times)
Loan terms
-Grace period
-Term including grace period
-Interest rate
Return on equity
Public sector financing
Loan terms
-Grace period
-Term including grace period
-Interest rate
Cost of public sector equity
2.0
5.0
13.5%
7 years
7
27 years
8
3.95%
9
5%
22
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 projects14.
Optimism bias in land public transport projects. In land transport, international
33.
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 forecast16.
13The
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.
14UK Treasury 2003.
15 Flyvbjerg et al, 2002.
16 Flybjerg et al, 2005.
23
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
40
Frequency (%)
30
RAIL PROJECTS
20
10
0
-80
-40
40
80
120
160
200
240
280
Cost
Capital cost
Operation and maintenance cost
Patronage
For operating years 1&2
For operating year 3 and after
+45%
+40%
+15%
+10-20%
+15%
+20%
-55%
-33%
-50%
-30%
-50%
-30%
24
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 projects17.
Other uncertainty. Other uncertainty unrelated to optimisms bias includes unexpected
37.
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)
Base cost
Government concession payment
Fare and non-fare proceeds
Government debt service
Government non-debt financing
Government non-debt financing cost
Total base cost
Adjustment for corporate income tax
Base cost, tax-adjusted
Adjustment due to risk
Capital cost overrun
O&M cost overrun
Revenue shortfall years 1& 2
Revenue shortfall years 3
Total risk adjustment
Expected cost to the community
Private sector
O&M only
(2)
Private sector
train equipment supply
& O&M (3)
BOT
(4)
570
(1,148)
954
441
221
739
(43)
696
570
(1,148)
954
441
221
739
(43)
696
1,563
(1,148)
786
86
71
1,058
(222)
836
3,137
0
0
0
0
3,137
(912)
2,225
622
174
22
502
1,320
2,016
622
87
20
457
1,186
1,881
466
43
20
457
986
1,822
207
87
20
457
771
2,996
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
25
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)
Base cost
Base cost , tax-adjusted
Total risk adjustment
Expected cost to the community
653
598
1,533
2,130
Private sector
O&M only
(2)
653
598
1,368
1,965
Private sector
train equipment supply
& O&M (3)
1,103
820
1,133
1,952
BOT
(4)
3,847
2,707
917
3,623
3.4
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
26
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
27
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, subcontractors 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.
28
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.
29
I.
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
Data input
Description
Comment
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.
1.
2.
3.
4.
Model output/results
Financial appraisal
involves the revenue,
O&M cost and investment
models but not the
funding model (financial
appraisal preceeds
considerations of
funding).
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 self30
II.
3.
Whether as a part of the business case preparation, which can take in a ten- to thirtyyears 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.
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 resourcerelated 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, offpeak 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
31
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/offpeak, headway peak/off-peak, annualisation factor 365 days.
9.
Relationships. The engineers estimate of the cost to create the MRT infrastructure and
10.
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.
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.
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) Designbuild-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.
33
Table A2. Illustrative MRT financial reporting under four concession types
Gross Cost
MRT Assets
1
BSA
Public sector
financial
statements
Private sector
(concessionaire)
financial
statements
DBOM
Net Cost
DBOT
MRT AssetsBSA
MRT AssetsBSA
MRT AssetsBSA
Liability under HP
2
contractBSL
Concession fee
receiptISR, or
BOT concession
liabilityBSL
Viability gap
compensation
paidISE
Concession fee
receiptISR, or
Concessionaire
operating charge
ISE
Concessionaire
operating
chargeISR
Claim on public
sector under HP
contractBSA
O&M costISE
Concessionaire
operating charge
ISR
O&M costISE
Viability gap
compensation
paidISE
Fare and non-fare
revenueISR
Project capital
costBSA
O&M costISE
Concession fee
paymentISE, or
Viability gap
compensation
ISR
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
34
Illustrative
objectives and
tasks
Financial
model
application
Proposal evaluation
Negotiation of
concession contract
Negotiate with shortlisted proposals, starting
with the highest ranked,
in order to better
achieve the set
procurement objectives.
35
24
TA 4862-VIE:
Preparing the Ho Chi Minh
City Metro Rail System PPIAF Study Working Paper
Stakeholder Feedback and
Implementation
Arrangements: Institutional
Options
March 2008
Table of Contents
Summary
1.
2.
........................................................................................................................................................................ i
Introduction .................................................................................................................................................................... 1
1.1
1.2
Development Context...................................................................................................................................... 2
National ..............................................................................................................................................5
2.1.2.
Local....................................................................................................................................................6
2.2
2.3
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.
2.4
2.5
2.6
3.
4.
5.
2.5.1.
2.5.2.
Diagnosis ..........................................................................................................................................................23
Factors Affecting the Role & Structure of an Apex Public Transport Agency and Relevant Functions.....25
3.1
3.2
3.3
3.4
4.2
Assessment of Options..................................................................................................................................35
4.3
4.4
5.2
Appendix A:
Appendix B:
Appendix C: Scoping of the Possible Content of an Integrated Public Transport Law ..............................................59
References and Bibliography...................................................................................................................................................63
Abbreviations
ADB
BOT
Build-Operate-Transfer
DAF
FDI
DOPI
DNRE
Department
of
Natural
Resources
&
Environment, HCMC PC
DOF
DTUPWS
DUPA
GVN
HCMC
HIFU
IFI
ODA
PC
Peoples Committee
PPI
PPIAF
PPP
Public-Private Partnership
PRG
PSP
SOE
TA
Technical Assistance
MAUR
ii
Summary
Si
WO RK I NG PA PE R
STA K E HO LDE R FE E DBACK &
I MPLE ME N TAT I O N A RRA NG E ME N T S:
I N ST I T UT I O NA L O PT I O NS
1.
2.
3.
4.
Implementation approach
9 March 2008
9 March 2008
Problems
4
Bht 22 on Blue
Line
Bht 32 for BTS
& Blue Line
Bht 30 for Blue
Line & BTS
9 March 2008
Problems
5
Card A
Not compatible
Card B
9 March 2008
H
i
s
t
o
r
i
c
Development
approach in
the past
Objective:
Improvement &
integration of
public transport
Trend in 1990s,
eg Europe,
S. America,
NZ & Australia
Objective: innovation
& reduced unit costs
through effective use
of the private sector
9 March 2008
Strategy Level
Function
Agency
National roads
Public enterprise
Tax levels
Intergovernmental transfers
Regulation & competition
policy
Vehicle registration & safety
National ministries
Of the city
In the city
9 March 2008
Diagnosis
9
9 March 2008
Informs
Regulation
Setting standards
Registration &
licensing
Enforcement
Program
management
Reports
Project planning
Investment
programming
Project, financing
& other approvals
Design, tendering,
contracting
Concessioning
Monitoring &
quality assurance
Service
delivery
Infrastructure
Services
Information
9 March 2008
Diagnosis
11
to budget processes
growing rapidly
Key policy needs that influence the role and nature of institutions
9 March 2008
9 March 2008
Other issues
14
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 March 2008
Features:
Same as
Option 1
Except
improved
outcome
possible
through PC
level
coordination
9 March 2008
Features:
Similar to
Option 1 but
MAUR
converted to a
Public
Transport
Authority
Improved
coordination
outcome likely
9 March 2008
Features:
Completely
integrated
transport
authority
9 March 2008
Closing Comment
20
9 March 2008
10
1.
Introduction
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>.
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.
2000
2001
2002
2003
2004
5,175
5,285
5,449
5,630
6,117
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)
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
3
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.
2.
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.
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).
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
Transport
Transport Development Strategy
Institute (TDSI)-under MOT
Department of Planning and
Investment (DPI)-under MOT
Urban
Transport:
HCMC
Railways
Peoples Committees
Local roads:
(Provincial,
District and
Commune)
Support
National
roads
Responsibility
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
Develops long and medium term transport sector strategies
and plans (in collaboration with modal administrations)
VRA
Performs a central planning and advisory role for the local road
network.
Provincial Departments of
Transport (PDOTs),
Sector
Ministry/Administration
(VLA)
Ministry of Natural Resources
and the Environment (MNRE)
Ministry of Planning (MPI)
Ministry of Finance (MOF)
National Assembly
Responsibility
lion) before MOT submission to MPI if land falls under its management.
Reviews and approves Environmental Impact Assessments of
national transportation projects.
Approves Category B and C projects (less than VND 400 billion) for inclusion in PIP and State Budget.
Implicitly approves maintenance budgets of MOTs modal administration (except for VRC) before inclusion in the State
Budget.
Approves Category A projects (more than VND 400 billion)
Administrative authority over VAC, Vinalines, VRC, Vinashin.
Approves projects of national importance such as national
security and defense projects.
Implicitly approves all national transport investments included
in the annual State Budget.
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).
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.
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 stateowned 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 20256 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.
Current demand modelling by the PPTA Team indicate likely mode split may be around 20-25% at 2025.
10
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.
11
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.
12
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.
13
Source: MAUR
14
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 BuildTransfer (BT) Contracts 20057.
New BOT 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.
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.
15
Transport
Roads
Legal Provision
Transport Sector Development Strategy To
2020 (PMD No.206/2004/QD-Ttg)
Purpose
Articulates Vietnams transport policies, set priorities and
defines some targets for transport infrastructure,
services and industries.
16
Sector
1637/UB-DT)
Legal Provision
Purpose
improvements in infrastructure.
Source: Updated from Table 1, Annex 1 of World Bank (2005). MVA (2006) provided information on various
decisions affecting bus transport
Until September 2007, it was known as the Urban Railway Management Unit and was under TUPWS.
17
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.
18
19
MRT
Other Public
Transport
Roads &
Road Vehicles
TUPWS local
VRA national
VEC
expressways
TDSI/ MOT
TUPWS, VRA,
VEC,
consultants
VNRA
MAUR
TUPWS, VRA,
VEC,
contractors
Delivery of works
VNRA, contractors
TUPWS, VRA,
VEC,
contractors
Saigon Traffic
Management
Company
Maintenance
VNRA, contractors
TUPWS, VRA,
VEC,
contractors
Saigon Traffic
Management
Company
Financing
Government
budget / private
finance
HCMC budget/
IFIs/ bilateral
sources/ private
finance/ MAUR
investment
PC / national
budget, tolls/
private finance
for BOT
expressways
Government
budget
PC Budget / MOCPT
investor role
VRC
MAUR to arrange
and can participate
in operations by
Decree 119; other
private or foreign
partners
anticipated
PC Police /
TUPWS Public
Benefit Enterprise
VRC
MAUR to arrange
Na
MAUR to arrange
TUPWS/ MOCPT
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
VRNA/ VRC
MAUR to arrange
MOCPT/ Police
PC Police for
for vehicle
registration &
MOT/ TUPWS
for driver
licensing
PC Police
MOT Inspectorate
MOT Inspectorate
Nil
As above
Na
Source: Table 2.2 (JICA 2004); Table 2.1 (above), MVA (2006) and consultant interviews; Na means Not Applicable.
20
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
National roads
Public enterprise
Tax levels
Intergovernmental transfers
Regulation & competition
policy
Vehicle registration & safety
National ministries
Of the city
In the city
21
Informs
Regulation
Setting standards
Registration &
licensing
Enforcement
Program
management
Reports
Project planning
Investment
programming
Project, financing
& other approvals
Design, tendering,
contracting
Concessioning
Monitoring &
quality assurance
Service
delivery
Infrastructure
Services
Information
22
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
23
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.
24
3.
25
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.
26
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 concessions1 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.
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.
27
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.
28
4.
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.
30
Option 1:
Strengthen MAUR
Option 2:
Interim PT Authority
Increasing
Increasing
Integration of
public transport
in HCMC (1)
Transport
outcome
Introduction
Fairly good MRT
integration more likely
Description
Minimum change to
current institutional
responsibilities.
Examples from
other places
Benefits for
customers
Option 3:
Integrated PT
Authority
Option 4:
Integrated
Transport Authority
Increasing integration
Fully integrated PT
system more probable
Melbourne and
Brisbane, Australia
Agency responsibilities
(2)
DUPA
DUPA
DUPA
DUPA
TUPWS
TUPWS
Integrated Transport
Authority
TUPWS
TUPWS
TUPWS
Integrated Transport
Authority
Financing
policies
Regulation(3)
Safety
standards
Environmental
standards
DNRE
Economic
regulation(5)
MAUR
DNRE
DNRE
MAUR/ Interim PT
Authority
DNRE
MAUR
MAUR
Integrated PT
Authority
Integrated Transport
Authority
MAUR
Integrated PT
Authority
Integrated Transport
Authority
Investment
programming &
financing
approval
MAUR/ DPI/DOF/ PC
Integrated PT
Integrated Transport
Authority / DPI/DOF/ Authority / DPI/DOF/ PC
PC
MAUR/ DPI/DOF/ PC
31
Feature
Project design
Option 1:
Strengthen MAUR
MAUR
Option 2:
Interim PT Authority
Option 3:
Integrated PT
Authority
Option 4:
Integrated
Transport Authority
MAUR
Integrated PT
Authority
Integrated Transport
Authority
MAUR/ DNRE
Integrated PT
Authority/ DNRE
Integrated Transport
Authority/ DNRE
Tendering
MAUR
MAUR
Integrated PT
Authority
Integrated Transport
Authority
Contract
management
MAUR
MAUR
Integrated PT
Authority
Integrated Transport
Authority
Infrastructure
maintenance
MRT operators/
concessionaires (for
operations)
MRT operators/
concessionaires (for
operations)
MRT operators/
concessionaires (for
operations)
MRT operators/
concessionaires (for
operations)
MRT service
design
MAUR
MAUR
Integrated PT
Authority
Integrated Transport
Authority
Concession
MAUR
preparation and
management
MAUR
Integrated PT
Authority
Integrated Transport
Authority
Service delivery
Rail services
Operators/
Concessionaires
Operators/
Concessionaires
Operators/
Concessionaires
Operators/
Concessionaires
Bus services
Operators
Operators
Operators
Operators
Ticketing and
fare collection
Marketing
Operators
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
32
Figure 4.2: Key lines of responsibility for Option 2 Interim Public Transport Authority
33
Figure 4.3: Key lines of responsibility for Option 3 Integrated Public Transport Authority
Figure 4.4: Key lines of responsibility for Option 4 Integrated Transport Authority
34
35
Option 1:
Strengthen
MAUR
Option 2:
Interim PT
Authority
Option 3:
Integrated
PT Authority
Option 4:
Integrated
Transport
Authority
Risk of inertia
-
-
Pace/extent of change
Na
Secure funding
Project implementation
Concession management
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
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.
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.
37
5.
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.
39
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.
40
41
42
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 5.31. 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.
This suggested structure is consistent with Option 1 Strengthened MAUR discussed in Section 4.
43
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.
1
44
- Government agency.
- Integrated service planning and provision.
- Services and infrastructure provided by the
government agency.
Objective:
improve and
integrate public
transport
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
45
46
Table B.1:
Examples of institutional arrangements for public transport in selected Asian and Australian cities
Feature
Kuala Lumpur,
Malaysia
Singapore
Tokyo, Japan
Melbourne,
Australia
Brisbane,
Australia
Bangkok, Thailand
Integrated public
transport under direction of the Ministry of
Land, Infrastructure,
and Transport (MLIT)
with highly marketbased incentives. Individual operators are
responsible for marketing, fares and ticketing with MLITs
permission. Integrated
ticketing system implemented 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 government.
State government
management of public
transport system.
Train, bus & ferry
services provided by
corporatized state
government agencies,
a major local government & private bus
operators within an
integrated framework.
Informal coordination
with other local governments.
Region covered
Area (sq. km)
648
1,098
2,200 (Tokyo
metropolitan city).
7,850 (Suburban)
8,800
2,800
870
Population (m)
1.4
4.2
2.6 (regional)
11 (regional)
Suburban (1,431 km
336km rail
for JR-East, and 1,650 245 km tram (double
km for private
track)
railways including
subway); 13,827 km
bus
300km metropolitan
part of South East
Queensland
44 km MRT
27Km Airport MRT
(construction)
Over 150km more
planned
Busway
None
None
None
18.4 km
None
48
None
Feature
Kuala Lumpur,
Malaysia
Singapore
Tokyo, Japan
Melbourne,
Australia
Brisbane,
Australia
Bangkok, Thailand
No. trains/LRV
NA
NA
NA
NA
No. buses
2,000
3,700
19,000
NA
1,500
1,000
10,000
Rollingstock
Other
Passenger
boardings/weekday (m,
circa 2004))
Approx 0.26m per day 2.5m on MRT and bus 3.2m on MRT
on STAR and PUTRA,
0.045m on monorail
and 0.07m on KTM
Private Sector
Involvement
Suburban:
JR-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 Refranchised 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
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)
49
Feature
Kuala Lumpur,
Malaysia
Singapore
Tokyo, Japan
Melbourne,
Australia
Brisbane,
Australia
Bangkok, Thailand
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
TransLink (a division
Infrastructures
of Queensland
Director of Public
Transport or QT)
Transport is the State
of Victorias
Administrator of Public
Transport
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 Interior. Largely independent agendas but
share common MRT
Master Plan prepared
by MOTs Office of
Transport & Traffic
Policy & Planning
(OTP).
Statutory authority
Government
under the Ministry of department.
Transport. LTA
responsible for all
modes of transport
(incl roads). LTA has
the structure of a govt
department.
Government
department
establishes
arrangements with
infrastructure &
service providers
through contracts.
Government
department
establishes
arrangements with
infrastructure &
service providers
through contracts.
7 members drawn
from govt and private
sector.
None
None
None
None some
consultation with
District Councils
None
No formal MTA at
Land Transport
present. National
Authority (LTA)
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)
Organizational
form
Board
None
50
Feature
Kuala Lumpur,
Malaysia
Singapore
Tokyo, Japan
Melbourne,
Australia
Brisbane,
Australia
Bangkok, Thailand
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
MOTs OTP
transport department
establishes transport
policy and an
implementing strategy
within broader urban
strategy.
Individual operators
are expected to earn
fare revenues to cover
not only direct operating costs but also
indirect costs including infrastructure
costs. JR was owned
by MLIT, but was
privatized in 1987.
Since then it has received no subsidy
from MLIT.
Financed by state
government grants
and implemented by
government agencies
using private contractors. 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 contractors. Investment
decisions subject to
normal budget
process with priorities
determined by policy
priorities.
Institutional responsibilities
Policy & strategy
There is a holistic
strategy for national
development & an
urban transport
strategy. Not fully
effective (Allport
2004)
Infrastructure
provision and
financing
51
Financed by national
budget and loans from
IFIs. Usually implemented by government agencies using
private contractors.
Investment decisions
subject to normal
budget process with
priorities determined
by policy priorities.
Private finance in 2
MRT concessions.
Feature
Kuala Lumpur,
Malaysia
Singapore
Tokyo, Japan
Melbourne,
Australia
Brisbane,
Australia
Bangkok, Thailand
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 assetowning 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.
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.
Ticketing and
marketing
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.
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 JR-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
integrated ticketing
system recently
contracted. Networkwide 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
integrated ticketing
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
integrated ticketing
and fares but w/o
concession contract
revision this will not
be possible. Ditto for
bus.
52
Feature
Kuala Lumpur,
Malaysia
Singapore
Tokyo, Japan
Melbourne,
Australia
Brisbane,
Australia
Bangkok, Thailand
Financing
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.
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.
53
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
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.
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.
1,580
6,500
1,470
322
1,590
Population (m)
7.4
2.0
3.7
8.0
7.8
Region covered
Busway
None
None
None
53 (NYCT)
No. trains/LRV
3,980
Not known
Not known
6,195 (NYCT)
Minor
No. buses
6,200
Not known
4,457 (NYCT)
0.78m (u/g), 0.18m commuter 1.6m (bus), 0.4m (metro line 1) For NYCT, 5.7m (rail) and 3.0m
rail, 0.68m (tram) & 0.7m (bus)
(bus)
Rollingstock
Other
Passenger
boardings/weekday (m)
54
Feature
London, UK
Stockholm, Sweden
Athens, Greece
Bogota, Colombia
Private Sector
Involvement
Negligible involvement
Secondary involvement
TransMilenio
Organizational
form
Board
City government
representatives, selected by the
Mayor. National government
representation due to onlending of World Bank funds to
TransMilenio.
See above
55
Feature
London, UK
Stockholm, Sweden
Athens, Greece
Bogota, Colombia
Institutional responsibilities
Policy & strategy
Infrastructure
Provision
Financing
56
Feature
London, UK
Ticketing and
marketing
Financing
Stockholm, Sweden
Athens, Greece
Bogota, Colombia
Operated by OASA.
Provided by MTA.
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)
57
Table B.3:
58
Objectives
Users
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.
59
Stakeholder
Objectives
according to community expectations
Improved mobility
Changing needs accommodated
Value for Money (VfM)
External benefits (eg environment,
economic) maximized
Public
transport
concessionaires
operators/
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.
61
62
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
Asia.
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:
classifying organisational forms, Transport Policy, 6(3) 147-157.
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
World Bank (2002) Cities on the Move: A World Bank Urban Transport Strategy Review,
Washington DC.
World Bank (2005), Vietnam Transport (Draft)
World Bank (2006), Infrastructure Strategy Cross Sectoral Issues, Vietnam.
World Bank (2007), Project Information Document, Vietnam- HIFU Development Project
Appraisal Stage Report no. AB3058.
64
25
TA 4862-VIE:
Preparing the Ho Chi Minh
City Metro Rail System PPIAF Study Working Paper
June 3, 2008
Table of Contents
Summary & Recommendations ............................................................................................................. i
1.
2.
3.
2.1
2.2
Implications for Fare Price Structure and Form of Fare System ............................... 4
3.2
3.3
4.
Introduction ..................................................................................................................... 13
4.2
4.3
Abbreviations
ADB
BOT
Build-Operate-Transfer
DAF
FDI
DOPI
DNRE
Department
of
Natural
Resources
&
Environment, HCMC PC
DOF
DTUPWS
DUPA
GVN
HCMC
HIFU
IFI
ODA
PC
Peoples Committee
PPI
PPIAF
PPP
Public-Private Partnership
PRG
PSP
SOE
TA
Technical Assistance
MAUR
ii
1.
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). 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.
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 is mobilizing a grant from the Public Private Infrastructure Advisory Facility
(PPIAF1) 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. 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
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 will be 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.
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.
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>.
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.
2.
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 airconditioning and emergency requirements.
A policy objective for HCMC, as it is in most cities that seek to provide an attractive public
transport system, should be:
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
(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.
4
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
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.
Distance Fares
Varying by Line
Arcs radiating
from CBD
Flat
Fare
Standardized
Distance Fare
Simple Zonal
Fare
Zonal Fare
Source: Consultant
Zonal Fare
with Social
Objective
3.
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 tickets1 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.
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 Kong1 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 changes2. 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.
Singapore and Hong Kongs first MRT systems opened around 1980 and 1988 respectively.
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.
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 run1 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.
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 tickets1 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.
10
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.
11
Table 3.1: Estimated short term MRT fare elasticity of demand in HCMC at 2015
Income Range
Distribution
Frequency
of Use(1)
Sensitivity to price
Lowest quartile
25%
Non-Regular/
Occasional user
Price sensitive
Second lowest
quartile
25%
Occasional user
Second highest
quartile
25%
Regular user
-0.4 to -0.7
Highest quartile
25%
Regular user
Total
100%
(1) For definitions of non-regular user (once a month), occasional user (once a week) and regular
user (almost every day)
Source: Consultant
12
4.
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 part1. 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 fares2.
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.
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.
13
Multiple Systems
Integrated by
Interoperability
Standard
Single System
Implemented across all
MRT concessions
High
minimal
Medium
High
simple single
specification
minimal no direct
relationship
minimal - complex
high - simple
minimal no direct
relationship
simple common
equipment
Source: Consultant
14
These rules would include those for fare structure and ticket products and prices.
15
Example
Implications
Pricing method
Conditions of travel
Revenue protection
Ticketing technology
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.
16
Description
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
Duration
-
12 months
3. Ticketing technology Develop functional specification to deliver desired fares and ticketing
specification
system
concurrent
4. Confirm how
ticketing system will
be packaged and
form of outsourcing
concurrent
This work identifies which lines can generate revenues which exceed
operating cost
concurrent
6. Confirm concession
form
concurrent
7. Decide on
appropriate
organization for
ongoing fares &
ticketing
management
Concurrent
8. Confirm willingness
of government to
ongoing financial
support
Concurrent
3 months
9 months
9 months
12. Implementation
2 to 3 years
(depends on
complexity
of preferred
system)
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.
17
18
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, distancebased 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.
Weight
80
80
Ease of implementation
20
Reasonableness (public
acceptability)
10
Revenue protection
25
Cost
80
Reversibility (risk)
20
20
Simplicity
10
Management information
19
The ticketing system comprises two inter-related physical components: tickets (sometimes
called fare media), and ticket validation equipment1. 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
Fare Media
Collection
System
Fare Equipment(1)
Pay on
entry
Cash/token
Fare box
Paper ticket
TVM, validator
Magnetic ticket
Validator, TVM
Smart card
Validator
Credit/debit card*
TVM, ATM
Cash/token
Turnstile/ gate
Paper ticket
TVM, validator
Magnetic ticket
Validator, TVM
Smart card
Validator
Credit/debit card*
TVM, ATM
Cash/token
Paper ticket
Magnetic ticket
Smart card
Barrier
Proof-ofpayment
(barrier
free)
Mode
Bus
Cash/token
Paper ticket
X(2)
Magnetic ticket
Validator (handheld)
X(2)
Smart card
Validator (handheld)
X(2)
Credit/debit card*
TVM, ATM
LRT
Rapid
rail
Commu
-ter rail
X
X
X(3)
(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.
20
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 costeffective 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.
21
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:
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.
22
23
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.
24
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.
25
Lessons on oversight
26
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
4,800
(2000 est)
9,600
(2000 est)
2,800
(2000 est)
25,330
(2001)
21,500
(2001)
2,000
(2005)
3,250,000
19,199,600
13,400,000
8,400,000
16,300,000
% by public
modes 2001
20%
70%
80%
70%
< 5%
(2005)
US$1.40
(Putra)
US$0.26
US$ 0.70
US$0.70
US$0.25
Affordability of
MRT fares today
1.0%
1.2%
0.8%
0.2%
0.3%
1.5% (main
modeled
scenario) or
0.75% for
revenuemaximizing
fare)
No of MRT
passenger/day
and % MRT of
total approx one
year after
opening)
216,000 on
BTS MRT in
April 2001
1.7%
192,000
passenger/day
on Star
(60,000) and
Putra MRT
(132,000)
together at
end 2000
5.9%
210,000
Metrostar at
April 2001
500,000 LRT1
1.1%
(excluding
LRT1)
14% MRT
3.7% heavy
rail
1.7% LRT
(1992)
14% MRT
(1998)
Forecast of
128,000
passenger per
day for fare
shown in 2010
GNI or GDP
(US$) per capita
45%
(2005)
27
Bangkok
No of MRT
passenger and %
MRT (of total in
2005)
Kuala
Lumpur
580,000
260,000 for
passenger/day total system
on BTS and
Blue Line
Subway MRT
in 2005
4.5%
Metro
Manila
Hong Kong
Singapore
HCMC
400,000
Metrostar
550,000 LRT1
2.1%
(excluding
LRT1)
na
na
na
Table A.2: Public Transport Price Comparison with Other Asian Cities (for an average 6
km commuter trip, in US$ 2005 Prices)
City
2005
HCMC
2010
2020
Bangkok
2005
Hong Kong
2005
Singapore
2005
Bus (regular)
$0.11
$0.18
$0.18
Bus (air-con)
$0.11
$0.18
$0.18
$0.13
N/A
$0.45
$0.30
$0.75
$0.25
$0.25
$0.60
$0.25
$0.50
$0.80
$0.55
GDP / Capita
$2,000
$3,100
$5,600
$6,200
$24,000
$22,000
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.
1
Income data are difficult to collect and often understated. Instead many researchers identify household
expenditure which is less problematic.
28
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:
Attribute
Bus
No. of Samples
Sex (%)
Age (%)
Cyclo
Xe om
Total
1,189
374
78
367
2,008
Male
52.6
44.8
30.8
27.8
45.8
Female
47.4
55.2
69.2
72.2
54.2
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
Household Income
(million/month:%)
Taxi
33.3
32.3
34.1
32.8
33.1
<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
0.9
1.7
1.6
2.9
1.5
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
Daily
23.5
10.4
12.8
17.7
19.7
16.5
11.2
20.5
21.7
16.6
Unusual
60.0
78.4
66.7
60.6
63.6
>10.0
Frequency of use of
public transport
29
Table A.4:
Year
2003
2010
GDP / Capita
$1,400
$3,100
47.1%
20%
0.8-4.0
48.4%
48%
26
4.0-10.0
3.0%
30%
64
20
>107
>36
>10.0
Total
Average HHold Income 000
VND/month 2003 prices
1.5%
2%
100.0%
100.0%
1,742
3,830
30
31
Line 1
Line 2
BRT
Other
Smartcard
Reader/Device
Open Standard
Interface
Card/Reader
Operator System
Central System
Open Standard
Interface
Clearinghouse
Central
Clearinghouse
NonTransit
Application
s
Phase II
Source: Consultant
33
34
26
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