Connections Transport & ICT 96252 Private Participation in Urban Rail A Resurgence of Public-Private Partnerships Daniel Pulido and Fabio Hirschhorn Cities in the developing world are relying more on public- 283 private partnerships (PPPs) to carry out the most complex and demanding of their public works initiatives—the development of new urban heavy rail, or metros, usually involving underground lines. Most of the world’s metro systems are operated—and were funded and built—by public agencies. But developing country governments are kilometers shying away from the high cost and complexity of such The combined length of systems and are acquiring more experience partnering new urban heavy rail PPP with the private sector on infrastructure projects. Hence, projects implemented in the PPP approach, tried for metros with mixed results developing countries in the in the 1990s, has become more attractive. In the past past five years five years, 2010-2014, five cities in Latin America and developing Asia have initiated seven new urban heavy rail lines using PPPs. In four of these projects, the PPPs are fully bundled, that is, they encompass design, financing, construction, and operations. It is too early to judge the overall performance of these seven projects, but some recommendations can be drawn from them as well as from earlier urban rail PPPs. The central lessons are the critical importance of a robust planning and management capacity in the public sector partner and the value of strong efficiency incentives for the private sector partners. The Nature of Infrastructure PPPs Assessing Earlier Experience The public sector’s goal in creating PPPs is to Urban heavy rail systems are highly risky projects, obtain expertise, efficiency, and capital. Those often costing more, starting later, and attracting benefits do not come cheaply. Managing contracts fewer riders than planned. The risks of underground cannot be delegated, and it is especially difficult on construction were usually seen as the most threat- megaprojects such as urban heavy rail. Experience ening; so even when PPPs were used for post-con- shows that, regardless of the scope of the PPP struction operations, building the infrastructure was chosen, it requires a highly capable public sector usually taken on by the public sector. Until 2010, with a robust institutional framework and a strong only one new completely underground rail project management team capable of evaluating options, in the developing world had been a fully bundled issues, bids, and contractor performance. PPP (phase 2 of Line 4 in Shenzhen, China). Concessions to operate existing urban rail lines can deliver good performance and financial sustain- MARCH 2015 NOTE 11 ability. However, the PPPs of the 1990–2010 period PPPs in Latin America were able to mobilize pri- for new urban rail have a mixed record. A couple vate financing ranging from 30% to 50% of capital of them have been successful, but most have fallen expenditures (excluding property acquisition), but short of expectations. only with the public sector providing or guarantee- ing the financing on the balance. Notably, in the 1990s, Bangkok, Kuala Lumpur, and Manila implemented six PPPs for new urban rail projects. The Manila project was generally success- Lessons from Recent Experience ful, but two projects in Kuala Lumpur went bank- rupt and had to be bailed out by the government; The longer-term performance of the recent metro and the projects in Bangkok faced delays and could PPPs remains to be seen, but the partnership ar- not be carried forward as originally intended, gen- rangements illustrate three critical needs in such erally because of inadequate public sector planning undertakings: (1) to work hard at optimizing the and poor communication with the private sector. A risk-reward balance and making projects sufficiently similar experience befell the more recent PPP for attractive for the private sector, (2) to minimize the the new Delhi Airport Metro Express Line, which fiscal risk to government by giving concessionaires was ultimately taken over by the government. strong incentives to maximize revenues, and (3) a strong public sector capacity to manage contracts. The New Wave of PPP Projects First, carrying out all phases of a new metro proj- ect involves many specialized firms, so assembling The developing world’s use of PPPs for new metro a bid is a formidable task. Each of the fully bundled systems is on the rise. In the past five years, PPPs projects in Latin America received only one bid, and totaling $30 billion have been established to install a perception exists that the public sector could have 283 kilometers of rail in five cities—São Paulo; done a better job of addressing the concerns of po- Beijing and Hangzhou; Hyderabad; and Lima. The tential bidders worried about the considerable risks total rail length is nearly triple that of such projects in such projects. The public sector can best get a feel in the preceding five years, and the average length for the market and improve its chances of increasing per project, 40 kilometers, is nearly double. Some competition by maintaining a dialogue with all poten- of these projects are riskier, too, involving extensive tial firms during the planning and bidding process. underground construction. Second, productivity incentives are a good way The PPPs in São Paulo (for two lines), Lima, and to attract bidders and eventually promote a more Hyderabad are fully bundled, whereas in China the sustainable rail service. They might include shar- job of developing the infrastructure has primar- ing revenues from ancillary commercial activities ily remained with the public sector. In every case, and from ridership above a certain threshold. Such however, the public sector has partly or entirely as- deals are attractive to the private sector and help sumed some risks, including those related to geo- limit the long-term fiscal risks to government. logical hazards and lower than forecasted ridership. The cost and risks of property acquisition remain Finally, strong management capacity to handle mainly with the public sector. negotiations—as well as renegotiations, which are almost inevitable in these highly complex endeav- Although the projects include large private invest- ors—is fundamental to ensure that the benefits of ments, especially in rolling stock, government has PPPs are realized. still had to make initial investments to ensure the projects’ financial viability. The São Paulo projects re- For more information on this topic: quired a change in the federal PPP law to accommo- A Tale of Three Cities http://www.citiesandclimatechange.org/document/?idItem=154&P date a public investment in the construction phase. HPSESSID=6f746c25e0cd6d2f25cef0f63a64215e Private Sector Participation in Light Rail-Light Metro Transit Their complexity and risks limit the ability of such http://hdl.handle.net/10986/2416 PPPs to raise long-term commercial financing. The Connections is a weekly series of knowledge notes from the World Bank Group’s Transport & Information and Communication Technology (ICT) Global Practice. Covering projects, experiences, and front-line developments, the series is produced by Nancy Vandycke, Shokraneh Minovi, and Adam Diehl and edited by Gregg Forte. The notes are available at http://www.worldbank.org/transport/connections MARCH 2015 NOTE 11