Issue #7 80655 IFC’s quarterly journal on public-private partnerships road: Brazil’s competitive drive In this issue rail: Speeding toward tomorrow logistics: MIT expert on why logistics clusters matter interview: UPS’s sustainable strategies Road rail ppp s In partnership with Australia • Austria • Brazil • Canada • Catalonia (Spain) • Flanders (Belgium) • France • Ireland • Italy • Japan • Kuwait • Netherlands • Norway • Sweden • Switzerland • United Kingdom • United States • Public-Private Infrastructure Advisory Facility (PPIAF) • Global Partnership for Output-Based Aid (GPOBA) • Private Infrastructure Development Group (PIDG) • African Development Bank • Asian Development Bank • Brazilian Development Bank (BNDES) • Caribbean Development Bank • Central American Bank for Economic Integration • European Investment Bank • European Bank for Reconstruction and Development • Inter-American Development Bank • Infrastructure Consortium for Africa • Islamic Development Bank Issue #7 – October 2012 IFC Advisory Services in Public-Private Partnerships 2121 Pennsylvania Avenue, NW • Washington, D.C. 20433, USA • +1 (202) 458 5326/7 • ifc.org/ppp Editorial Tanya Scobie Oliveira • Alison Buckholtz Art & Design Jeanine Delay • Victoria Adams-Kotsch Outreach Chrysoula Economopoulos Disclaimer This journal was commissioned by IFC, a member of the World Bank Group, through its Advisory Services in Public-Private Partnerships department, which helps governments improve access to basic public services through public-private partnerships in infrastructure, health and education. The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of, IFC or its Board of Directors or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use. Cover photo © GlennD Growth and development are primarily a matter of mobility: Letter from IFC mobility of people who can access employment, education and health, and mobility of goods that ensure global economic activity. In our globalized economy, infrastructure and transport services underpin trade, link production centers to consump- tion areas, and integrate territories beyond administrative boundaries. Road and rail infrastructure and transport services, physically connecting all of these elements, offer everyone the opportunity to contribute to value creation—as well as to enjoy its benefits. “Mobility matters,” as Marc H. Juhel writes in his introduction, because “roads and railways keep development on track.” That’s why this issue of Handshake turns to public-private partnerships (PPPs) in the road and rail sectors. Authors and interviewees explain how PPP approaches have changed the direction of their countries’ highway systems and the future of freight rail. Looking forward, the Director of MIT’s Center for Transportation and Logistics makes the case that logistics clus- ters are permanently transforming the economy, thanks in part to the roads and railways feeding into those hubs. Ultimately, however, mobility makes possible more than a strong econ- omy—it promotes social and political integration. As Ethiopia’s former minister of transport once told Juhel, “Without roads, there is no democracy.” Laurence Carter, Director Tanya Scobie Oliveira, Editor IFC Advisory Services in Public-Private Partnerships Photo © Sussman Imaging IFC | 1 In this issue Road Rail What’s riding on performance-based contracts? | 18 Mass Rapid Transit | 62 Everyone’s business | 22 Next stop: Light rail | 68 Brazil’s competitive drive | 26 Trams then & now | 70 Road scholar | 28 Trains of thought | 72 18 86 Steering Colombia’s future | 32 Mining new transport solutions | 78 Colombia turns a corner | 40 On the fast track | 83 Rewriting the rules of the road | 44 Speeding toward tomorrow | 86 Full speed ahead | 48 Riding Russian rails | 90 The (Silk) road less traveled | 52 2 | IFC.ORG/HANDSHAKE Columns Logistics Moving smarter | 94 PERSPECTIVE Mapping a path to trade | 96 Insights & opinions Brown is the new green | 98 Mobility matters | 06 Fueling trade | 103 IJ INSIGHT Commentary on current events 96 To get to the other side | 10 COMPASS Surveying the PPP landscape Paving the way forward | 13 MONEY TALKS Financing & funding PPPs From A to B with R&B | 56 LEGALEASE Law & legislation, decoded Interview Railroad ties that bind | 92 The long & winding road | 60 IFC | 3 Contributors 22 94 103 Tawia Addo-Ashong 52 Yossi Sheffi Umberto de Pretto Mariana Dahan Tawia Addo-Ashong Robbert van Eerd is the Program Coordinator in the World is a consultant in PPIAF’s Private Participation in Bank’s Global Road Safety Facility. Infrastructure Database team, focusing on Africa and the Middle East and North Africa regions. Richard Bullock is an independent railway consultant. Francisco Estrázulas is a Manager at Castalia LLC, a company Mariana Dahan that advises on PPPs and private finance of is an Innovation and Strategy Development infrastructure. Specialist at the World Bank. Yonah Freemark Jeff Delmon is a journalist who has written on urban issues is a Senior PPP Specialist for East Africa for Next American City, Planning, Dissent, Finance and Private Sector Development Atlantic Cities, and his own website, The based in Dar es Salaam and on the Global Transport Politic. Expert Team on PPPs at the World Bank. Ben Gericke Victoria Delmon is a Lead Transport Specialist in the Transport is a Senior Counsel in the World Bank Sector of the World Bank’s Africa Sustainable Legal Vice Presidency. Development Department. 4 | IFC.ORG/HANDSHAKE Alfonso Guzman Philippe Neves is Managing Director for Castalia LLC, a is an Investment Officer in IFC’s Advisory company that advises on PPPs and private Services in Public-Private Partnerships. finance of infrastructure. Pierre Pozzo di Borgo Brendan Halleman is a Principal Investment Officer with the is a Transport Specialist in the World Bank’s Africa Special Initiative Infrastructure Depart- Global Road Safety Facility. ment at IFC. Marc H. Juhel Umberto de Pretto is the Sector Manager for Transport in is Deputy Secretary General of the International the World Bank’s Sustainable Development Road Transport Union in Geneva, Switzerland. Vice Presidency. John Kjorstad INTERVIEWEES is the Editor of Infrastructure Journal, a global Luis Andrade online news and data resource providing infor- is President of Colombia’s National mation and analysis across key sectors within Infrastructure Agency. project and infrastructure finance. Gajendra Haldea John Leber is Advisor to the Deputy Chairman, Planning is an Investment Officer in IFC’s Advisory Commission for the Government of India. Services in Public-Private Partnerships. Henrique Amarante da Costa Pinto Paulo de Meira Lins is Superintentendent of Project Development is an Investment Officer in IFC’s Advisory for the Brazilian Development Bank (BNDES). Services in Public-Private Partnerships. Nick Rouse Cledan Mandri-Perrott is Managing Director and Fund Manager of is a Lead Financial Officer for the World Bank. the Emerging Africa Infrastructure Fund. Andreea Militaru Yossi Sheffi is a consultant in PPIAF’s Private Participation is Director of MIT’s Center for Transporta- in Infrastructure Database team, focusing on tion and Logistics and Director and Founder Europe, Central Asia, East Asia, and the Pacific of MIT’s Master of Engineering in Logistics regions. program. Sergei Mytarev Scott Wicker is a Principal Investment Officer in the Infra- is UPS’s Chief Sustainability Officer and Vice structure and Natural Resources Department President of corporate plant engineering. at IFC, working in Eastern Europe and Central Asia. IFC | 5 M 6 | IFC.ORG/HANDSHAKE Photo © Luis Argerich obility atters Perspective Whenever possible, well-functioning corridors should promote multi- modal transport, with road and rail as the core components. In the developed world, where time and cost drive decisions, multiple transport infrastructures exist to guarantee mobility of people and freight. But in the developing world, where infrastructure is often still incomplete and inadequate, the first order of business is to ensure access of goods, services, and people to external markets. Transport corridors facilitate this access. Whenever possible, well- functioning corridors should promote multi-modal transport, with road and rail as the core compo- nents. Investment in high-performing transport infrastructure and logistics optimizes cost and increases the reliability of transport services that Roads & railways are critical for growth and development. keep development As roads and railways connect, they create oppor- on track tunity. They link agricultural areas to national or regional markets, unlocking their productive capac- By Marc H. Juhel IFC | 7 ity. By bridging distances between cities and any addition to that network must consider its villages, roads and railways fertilize economic consequences on the distribution of traffic across and social ground within countries and across the whole spectrum of connections. Then—and borders. Such growth brings countries closer this is critical in situations where transport toward regional integration and the promise of infrastructure is still scarce—an assessment improved livelihoods. must be made of the services the new road will Many years ago, Ethiopia’s then-Minister of provide the population. Important questions Transport explained to me the place of transport include: How many people will get access, or links in the regional psyche. “With so many dif- better access, to social services like education ferent ethnic groups scattered across such a large and health? How much easier will it become territory,” he asked, “how to make it possible for farmers to get their production to markets, for everybody to feel part of the same nation and therefore move from subsistence farming to without a comprehensive road network linking commercial exploitation? How many new job them all together?” He answered his own ques- opportunities will become accessible for people tion. “Without roads, there is no democracy,” living away from economic centers? he declared. He understood first-hand that the At this point, it becomes clear that building transport sector promotes social, economic, and a transport infrastructure is just one element political integration. of the development agenda. Another element involves how people will be able to use it. For example, what kind of transport services will actually become available to them, and under which conditions? Building a new road in a “Without roads, country where freight services are operated by a monopoly, for instance, may just extend the rent there is no democracy.” of the monopolist while offering little benefits to producers, unless the road project ushers in industry reform and introduces competition in transport services. These are useful means to an The development agenda end. Designing transport projects to maximize their Similarly, rail lines are not developed in isola- development impact requires a focus beyond tion. By design, a railway will link economic the origin and destination points. Let’s look at and social areas where traffic, people, and freight roads. A road segment is part of a network, and can be consolidated in significant volumes. 8 | IFC.ORG/HANDSHAKE Roads and railways that link agricultural areas to national or regional markets unlock a re- gion’s production capacity, bringing cities and villages closer together. As roads and railways cross borders, they promise integration that aims to improve the living conditions of the poorest. Any door-to-door connection within its area of Consider concessions influence, therefore, will almost always involve a combined rail-road transport service. Under- For both road and rail development projects, scored again is the need to factor in the network concessions offer access to additional financ- effect, across the whole transport system, of any ing options and a wider range of exploitation individual addition. techniques. When carefully designed to take advantage of network effects and mesh with the Even in cases when new rail links are primarily non-concessioned transport system, they can driven by industrial developments—mining provide a new development impetus by help- projects, for instance—they can potentially ing close the mobility and access gap that often contribute to social inclusion objectives if all keeps large segments of the population trapped, potential network effects are carefully assessed literally, in poverty. In these times of shrinking beforehand. Often enough, well designed and fiscal space, there is no doubt that transport compensated public service obligations may offer concessions, road and rail in particular, are a remote communities enhanced access to eco- powerful tool to keep economic development nomic opportunities and maximize the beneficial on track and power inclusive growth. fallout of the new rail infrastructure. IFC | 9 By John Kjorstad To get to the other side Not unlike the philosophical musings that isolate and consider the wider impact completed ponder the origin of the chicken and the egg, a projects are likely to have on the gross domestic similar causality puzzle has long perplexed city product of connected regions. In some cases, this planners and proponents of road and rail infra- requires international cooperation. structure—if you build it, will they come? The Oresund Regional Development between Planners need to know that when they build Copenhagen, Denmark, and Malmö, Sweden a new road or rail connection, people will is a positive example of what local authorities use it, justifying the cost of such expensive can achieve working successfully across borders. infrastructure. Cities with strong regional and Transportation is at the core of the Oresund international transportation links are more likely Committee’s agenda, which aims to bolster to have robust economies, but what drives their the region’s cross-border economy. Its crown- economic growth: the resourcefulness of a com- ing achievement, the Oresund Bridge, opened munity, or its ability to efficiently connect and in July 2000 providing a permanent road and interact with a wider group? rail link between the two cities and countries. Trade is at the heart of economic activity, and Within ten years, the link has dynamically infrastructure is at the heart of global trade. changed how people commute and work in However, the full relationship between invest- the area. The increased activity and openness ments in transportation infrastructure and near- between countries already has regional planners and long-term economic growth is difficult if considering further transportation projects as not impossible to predict. Investment decisions they aim to redress the balance between passen- for major projects require expert advice, care- ger and freight traffic as well as alleviate growing ful analysis, and ultimately an informed leap of capacity concerns on the crossing. faith. Dollar for dollar, passenger and toll revenues Connectivity and prosperity alone do not always justify the upfront capital Transportation can define a society, and history and ongoing maintenance resource required for has given us some very clear examples of how a new road or railway connection. One has to trade corridors develop and civilizations prosper. 10 | IFC.ORG/HANDSHAKE IJ insight Photo © inhaus creative Three thousand years ago, the Nile River in natural barriers and provide easier access to North Africa provided ancient Egyptians with a routes that have challenged mankind for cen- cultural foundation that prompted trade up and turies. In Nepal, feasibility studies have been down the river; years later, the Silk Road—an completed for the $9.8 billion Mechi-Mahakali organic network of interlinking trade routes— and Pokhara-Kathmandu Electrical Railway—a established early ties among Europe, the Middle 1,218 km planned network crossing through East, India, and China, facilitating the exchange difficult mountainous terrain and over deep river of goods and ideas. More recently, extensive rail gorges in the heart of the Himalayas. In South and road networks in Europe and the Interstate America, the equally ambitious $3.3 billion Bio- Highway System in the United States have ceánico Aconcagua Corridor between Argentina supported globalization and nurtured strong and Chile aims to link the Atlantic and Pacific economic growth on both sides of the north oceans with a 52 km low-base tunnel through Atlantic over the past 60 years. the Andes. This would create a historic new Connectivity and prosperity are intertwined, and trade connection that would not only service the rest of the world is catching up fast. In the Brazilian, Argentinean, and Chilean markets past decade, China has made extensive invest- but potentially rival the Panama Canal for ments in its own impressive transport infrastruc- international cargo passing through the southern ture, as well as strategic assets abroad. The other hemisphere. four BRICS (Brazil, Russia, India, and South These projects present unique and difficult Africa) are rapidly building transportation assets engineering challenges as well as high price tags as well. Some employ public-private partnerships that question their feasibility. If built, will trade (PPPs) to attract private capital. For example, follow? Will regional economies grow, delivering Brazil financed the western section of Rodoanel additional value-for-money to private investors, Oeste toll road in São Paulo through a PPP in users, and public stakeholders? 2009; Russia is currently using a PPP structure Some projects will always perform better than to finance its Western High-Speed Diameter others. The physical and cultural environment project in Saint Petersburg; Indonesia’s Jasamarga in which they are constructed creates a complex Bali Toll Road closed in June; and South Africa fabric of unique circumstances dictating out- financed its flagship Gautrain Rapid Rail Link comes. Predicting these outcomes is perhaps the through a PPP in 2007. most difficult job in developing transportation projects. After all, understanding a chicken’s THe next panama canal? motives for crossing a road is not nearly as important as knowing how many chickens are In other emerging markets, ambitious proj- waiting to cross, and how much they’re willing ects are being drawn up to overcome difficult to pay for the privilege. IFC | 11 12 | IFC.ORG/HANDSHAKE Photo © IFC compass PAVING THE WAY forward Private investment in roads Imagine traveling along the Pan-American Highway (47,958 km), Australia’s A1 Ring Highway (14,500 km), and the Trans-Siberian Highway (over 11,000 km), and spending $2.5 million every kilometer. This dizzying figure is precisely what private sector activity has accomplished in the last two decades. Since 1990, by our count, the private sector has been involved in 731 road public-private partnerships (PPPs)—building, rehabilitating, and managing 78,150 km and investing over $193 billion in developing countries. By Andreea Militaru & Robbert van Eerd IFC | 13 Investment share in road PPPs by region (1990-2011) ECA 2% 0% EAP SA MENA 26% 23% SSA LAC 2% 48% Please note: Percentages have been rounded off, leading to a total over 100 percent. Investment by region Contract Types Between 1990 and 2011, Latin America and the The most common contract types during the Caribbean (LAC) attracted the largest share of same period were brownfield concessions, all private investment in roads in the developing greenfield projects, and a (very) few management world, totaling $92.5 billion—only $6 billion contracts or divestitures. More recently, we see less than all private investment in all other trends toward more greenfield projects. In the regions combined. early 2000s, for example, there were about as many brownfields as greenfield projects, while in the last five years, about three-quarters of the projects have been brownfield concessions versus one in five projects being a greenfield. 14 | IFC.ORG/HANDSHAKE Revenue Sources both in length (km) and investment (dollar amount). In LAC, 27,064 km of roads were For the 276 road projects for which revenue built, rehabilitated, or managed, while EAP only source information was available, over two- covered 5,769 km. LAC attracted 42 percent thirds (64 percent) were funded via user fees. more private investment: $41 billion compared Twenty-three percent were funded via a combi- to $28.7 billion in EAP. The largest road PPP nation of user fees and government payments, projects in the developing world closed in LAC: while only 10 percent were funded exclusively by Argentina (Intercity Roads corridors 1-9, 11, fixed payments from the government. 17, 18), Chile (Santiago-Colina-Los Andes Toll Road), and Brazil (Ecosul)—all highway conces- Major trends in road PPPs sions of more than 500 km. In the same period, only one large project closed outside of LAC: a There are three distinct periods in the global 545 km highway divestiture in Jiangsu Province, road PPP market, distinguished by shifts in China in 1997. regional predominance: the 1990s, 2000-2005, and 2006-2011. The first five years of the 2000s signaled two important changes: activity in EAP slowed In the 1990s, East Asia and Pacific (EAP) had down significantly and LAC activity picked the largest number of road PPPs (135), closely up, with 50 percent more projects over the followed by LAC (127). South Asia ranked a five year period than the entire previous decade. distant third (28), and Sub-Saharan Africa (SSA) came in after that (eight). Although more road Most significantly, South Asia showed a steep projects closed in EAP, the projects were smaller, increase in investment in PPP activity. Forty- 30% Road PPPs by contract type (1990-2011) 3% 3% Brownfield concession Divestiture Greenfield project Management and lease contract 64% IFC | 15 two projects closed, implying, on average, a two- adopted the National Highway Development fold increase in the number of projects per year. Program, which helped spur PPP activity in the Private sponsors invested a total of $2.8 billion, road sector. While 100 more projects closed in meaning that, on average, the annual investment South Asia as compared to LAC, investment equaled the combined total investment of the levels in both regions were fairly similar—$40.5 previous decade in South Asia. billion for South Asia and $39.2 billion for LAC. The increase in PPP activity in South Asia was This confirms an earlier trend, where road PPPs driven by India. At the time, India had a “very in LAC generally involved a larger capacity and large network of low-standard roads,” which more investment. On average, road projects were “mostly two lane, with high traffic, low with private participation in LAC had a capacity service, and slow speeds,” according to a 2004 of 288.4 km, while the capacity per project in World Bank report. This led to a focus on high- South Asia was three times lower, or approxi- way brownfield concessions, which represented mately 87 km. Road activity in SSA, however, 76 percent of all road PPPs closed in India. saw a steep decrease: only three projects closed compared to eight in the previous period. Sub-Saharan Africa also saw an increase in the number of projects. On average, twice as many So where are road PPPs not happening? The projects closed each year compared to the previ- answer is in the Middle East and North Africa ous period, while investment levels remained (MENA) and in Europe and Central Asia (ECA) steady. regions. Only two road PPP projects closed in ECA since 1990, involving just $2.6 billion in investment, while there have been no road PPPs in MENA since 1990. South Asia and Latin America, specifically India and Brazil, Going forward will continue to be the center South Asia and Latin America, specifically India of road PPP activity in the and Brazil, will continue to be the center of road developing world. PPP activity in the developing world. The gov- ernment of India intends to increase PPP activity on a state level and Brazil recently announced an ambitious program to modernize and expand the In 2005-2011, South Asia continued to rise to country’s road infrastructure. The national Pro- the top position with an impressive 189 road grama de Investimentos em Logística will involve projects closed, while LAC ranked second with the reconstruction of 7,500 km of highways. 88 projects (almost a twofold increase from the Given the constrained global financial market, previous period). They were followed by EAP the emergence of other road PPP hot spots is with 27 new projects. During this period, India difficult to predict. 16 | IFC.ORG/HANDSHAKE Road PPPs by region East Asia & the Pacific South Asia 2006- 2006- 2011 2011 2000- 2000- 2005 2005 1990- 1990- 1999 1999 0 10 20 30 40 50 0 10 20 30 40 50 0 40 80 120 160 200 0 40 80 120 160 200 Latin America & the Caribbean Sub-Saharan Africa 2006- 2006- 2011 2011 2000- 2000- 2005 2005 1990- 1990- 1999 1999 0 10 20 30 40 50 0 10 20 30 40 50 0 40 80 120 160 200 0 40 80 120 160 200 Europe & Central Asia 2006- 2011 US$ billions 2011 Number of road PPPs 2000- 2005 1990- 1999 Source: World Bank and PPIAF, PPI Project Database 0 10 20 30 40 50 0 40 80 120 160 200 IFC | 17 ROAD performance-based h er W alker contracts top ris Ch © o ot By Ben Gericke Ph Roads are a significant asset to any country—both in terms of the physical investment and the social and economic benefits. Starting in the 1980s, the World Bank’s Transport Sector supported several major road reforms, including the introduction and expansion of contracting methodologies, initially on an output basis and increasingly on an outcome or performance basis, to execute rehabilitation and improvement activities. These innovations continue to evolve, based on lessons learned. Efficiency in the provision of road infrastruc- ture continues to improve. Sustainability remains a major obstacle in the bid document can be used for a wide range of proper management of road networks because performance-based contract applications, from most road agencies lack capacity and systems where the initial rehabilitation or improvement to collect road condition data that would help is paid fully per a standard bill of quantities to develop prioritized maintenance, budgets, and where tasks are paid on the basis of performance, work plans. In response to clients’ needs, the usually in combination with the performance- World Bank in the 1980s developed and sup- based maintenance services. This bid document ported the first performance-based contracts, became the standard document used in World notably Argentina’s widely known CREMA Bank projects with performance-based contract (Performance-based Road Rehabilitation and activities. Maintenance) contracts. These contracts were longer term than traditional works contracts and included both rehabilitation and improvement, Results-focused along with several years of maintenance. contracting Following the successes achieved with the first These innovations in contracting methodol- performance-based contacts, the World Bank ogy resulted in a reallocation of construction developed its first sample bid document for risks—and with it, major changes in road asset Performance-Based Management and Main- management. While there were several perfor- tenance of Roads in 2002. These contracts mance-based contract initiatives that were not focused mostly on routine and periodic main- carried through to contract award, many resulted tenance tasks. In 2006, the performance-based in major efficiency improvements, both in terms contract evolved further with the Output- and of road condition and contract cost. Performance-Based Road Contract sample Based on these lessons learned, the World Bank bid document. This document allowed for the developed the performance-based contracting inclusion of rehabilitation and improvement methodology further. In this iteration, it closely tasks as performance-based activities. The sample follows the Design-Build-Operate-Maintain- IFC | 19 Transfer methodology, where the contractor Overall, the study confirmed that performance- designs and completes the required rehabilitation based contracts tend to: and/or improvements to deliver a certain level • Provide a better focus by the road agency of service and thereafter operates and maintains on governance as a result of the separation the road for several years (as with the $166 from the day-to-day operational activities; million contract on a 180 km section of the paved road between Monrovia and Ganta). The • Deliver a more consistent (and/or better) performance-based methodology can be applied service level across the network; to paved and unpaved roads, as well as to single • Reduce costs and/or set costs at a fixed level road links and road networks. to enable for long term fiscal planning by the road agency; Findings and lessons • Better allocate risk; A World Bank-commissioned report noted that • Improve workmanship; and the innovations in contracting methodology • Address internal labor shortages where moved the institution’s support closer to compre- the authority may not have the internal hensive asset management, where the focus is on resources/capacity to manage a network the desired benefits over the life of the project. according to the traditional model. The process of preparing and implement- ing performance-based contracts forces those While many of these desired outcomes might be responsible for the funding, governance, and achieved via alternative contracting means, the management of the road asset to answer critical performance-based contract specifically requires questions such as: that all of these concerns be addressed together. • What road assets do I own and which Indeed, this is often perceived as the key benefit of these do I wish to be managed under of the contract model: it forces a paradigm shift this contract? and consideration of all the principles of good • What is the level of service that we want asset management. to provide to the road user? • What condition are my road assets in? Moving forward • What is the forward works program Successful implementation of performance- required to deliver the least whole-of- based projects requires strong commitment life-cost solution? from government officials. This commitment should translate into a proper contracting • What risks exist in the delivery of the levels environment—specifically, multi-year financing of service, and how are those risks best commitments and a well-informed contracting managed? community, with good internal understand- 20 | IFC.ORG/HANDSHAKE ing of the contracting methodology. This results in a better procurement process and eventual contract manage- ment. Governments should undertake a comprehensive study of the affected road asset and its current condition, the required future levels of service, and an identification and eventual allocation of all project-related risks. Recommenda- tions from this study should then be used to define the performance-based requirements included in the bidding document. For governments implementing a pilot program, it is essential to understand the value of their road assets and then to plan how this value could be preserved or increased over time. This asset man- agement plan should recommend the amount of works and resulting fund- ing required to provide and maintain the road network at a certain service standard. Such plans would then be used as a basis to decide to what extent and where performance-based contract- ing could be introduced and expanded. The desired result of a well-constructed contract—sustainability of the road infrastructure—can bring social and economic benefits for generations to come. The key benefit of the contract model: it forces a paradigm shift and consideration of all the principles of good asset management. 21 IFC |Kim Photo © Nayu Everyone’s business New partnerships for road safety 22 | IFC.ORG/HANDSHAKE Photo © speedygroundhog ROAD During the last decade, road safety has become an international public health crisis in low and middle-income countries with rapidly increas- ing motorization rates and changing socioeconomic patterns. But these countries are solving the problem with new partnerships that strengthen their public health systems as well as their economic devel- opment objectives. Thanks to steadily growing annual incomes, the to reduce the burden of RTIs, which are esti- pace of vehicle ownership has increased in 70 mated to cost low and middle-income countries countries, home to around 4 billion people. But (LMICs) 1 to 3 percent of gross domestic more cars on the road translates into more inju- product. This role was defined in a recent UN ries on the road. Within these middle-income General Assembly resolution declaring 2011- countries, even a stabilization or limited drop in 2020 the Decade of Action for Road Safety. the frequency of road traffic injuries (RTIs) will Harnessing the private sector’s unique ability to be insufficient to compensate for the massive influence driver behavior is not a new idea. In growth of their vehicle fleet. countries with stable vehicle ownership rates, There is a compelling case for the private sector insurance companies and concession opera- to work alongside governments and civil society tors have long been in the vanguard delivering By Tawia Addo-Ashong & Brendan Halleman IFC | 23 education, research, incentives, and infrastructure, as Roadmap to relief RTIs directly affect their bottom line. More recently, concession contracts have begun including explicit Work-related trips—a category incentives tied to the achievement of pre-agreed road which includes professional drivers safety outcomes. and salespeople but excludes com- muting—account for upwards of 32 percent of vehicles in use across LMICs, representing a significant business and image risk. So corporations are model- Most Effective Action to Stabilize and ing innovative ways to work with the Reduce Global Road Deaths by 2020 public sector in the delivery of targeted road safety programs and international road traffic safety management stan- dards. In LMICs, where comprehensive 26.9% Road Safety partnership in MLIC road safety legislation is often lacking, such programs can help spread good practices on the ground and ultimately encourage the adoption of stricter traf- 19.2% Involvement of CEOs fic safety laws. Businesses also bring new resources, professional expertise, rigorous operat- ing practices, and a culture of planning, 15.4% Global campaign innovation, and accountability, which complete the skill set sometimes lacking in governmental road safety agen- cies. The private sector often delivers 15.4% Others leadership and name recognition to elevate RTI prevention campaigns as well. This leverages additional public resources and garners the attention of 11.5% ISO 39001 implementation national policymakers. More resources and attention will ultimately guarantee that growth in the vehicle fleet tracks alongside awareness of how to manage 11.5% Network of companies that growth. Read more here about the World Bank’s sup- port for the Decade of Action for Road Safety. 24 | IFC.ORG/HANDSHAKE Partnerships make a difference Responding to Africa’s road safety crisis, TOTAL, a market leader of petroleum products distribution, and the World Bank joined forces in 2010 to launch an initiative for road safety along Africa’s main transport development axes (known as the “NEPAD Corridors”). Leveraging their specific resources, partners of the African Road Safety Corridor Initiative (ARSCI) are working to reduce road traffic injuries through awareness campaigns and best practice networks. ARSCI interventions are currently being rolled out along two corridors in Central and East Africa. Total stations Merged wellness/emergency centers IFC Map data © 2012 | 25 Google Annually, over 1.2 billion people travel on Brazil’s highways, and in the last two decades, government recognized that modern, well-maintained roads are key to sustained economic growth. To achieve this, officials made a com- mitment to accelerate the development of infrastructure to improve the coun- try’s competitiveness, reimagining Brazil’s roads from one end of the country to the other. 26 | IFC.ORG/HANDSHAKE Photo © IFC ROAD Despite Brazil’s size and influence—it is the sixth largest economy in the world and is predicted to become the fourth largest by 2050—the country faces a substantial infra- structure gap that threatens to limit growth and competitiveness. This is especially true for the transport sector. Without a railroad network, and with many stretches of unpaved roads, trade costs inevitably increase. This poor transportation infrastructure ultimately prevents the country from reaping greater benefits from international trade. To develop infrastructure that will allow Brazil to achieve its promise, the Brazilian Development Bank (BNDES), the Inter-American Development Bank (IDB), and IFC collaborated to create the Private Sector Participation Program (PSP Brazil) in 2008. The PSP Brazil alliance implements innovative public-private partnerships and fosters best practices through the provision of consulting services to regional and municipal governments. The first PSP Brazil project, a groundbreaking concession to expand, rehabilitate, oper- ate and maintain 667 kilometers of federal roads in the state of Bahia, closed in October 2009. It succeeded in introducing a new contractual structure that served as model for the development of other federal and state road transactions. In particular, this transac- tion—BR116/324—established the performance-based concession as a model for later federal and state road transactions. The concession of the BA093 highway system, which closed in August 2010, was also precedent-setting. It became the first PPP to be structured for an entire highway system, the first to encompass an entire metropolitan area, and the first to adhere to the Equator Principles, guaranteeing that the project will be developed in an environmentally and socially sustainable manner. Both of these transactions will improve economic resilience and encourage broader development throughout the region, including sought-after expansion in trade. Equally important, they will improve safety and access to basic services such as hospitals and schools for millions of Brazilians. In the following interview, Henrique Amarante da Costa Pinto, BNDES’ Superintendent for Project Development, places these developments in context. BNDES is the main financing agent for development in Brazil, and since its founding in 1952, it has played a fundamental role in stimulating the expansion of industry and infrastructure in the country. IFC | 27 Road scholar Henrique Amarante da Costa Pinto has worked for the Brazilian Development Bank (BNDES) since 1982, and currently is Superintendent for the Project Development Division. BNDES is the main financing agent for development in Brazil, and since its founding in 1952, it has played a fundamental role in stimulating the expansion of Brazil’s industry and infrastructure. Lessons from an expert on Brazilian highways Interview by Paulo de Meira Lins The Brazilian road concession The innovations introduced by the model has gone through significant BR116/324 contract helped set a new changes, beginning with concessions national standard. What were they? including BR116/324, developed by BNDES and IFC. What motivated the The main innovations of the BR116/324 contract are threefold: a focus on performance changes? parameters; introduction of the concept of the “traffic trigger”; and the “reequilibrium The evolution of the model can be attributed to discount.” Brazil’s experience in the first road concession contracts, where the quality of the services under With the focus on performance parameters that contract could not be maintained over the long can be objectively measured, we see the use of term without increases in tariffs to fund new short, medium, and long term objective per- rehabilitation of existing infrastructure. There formance parameters. The private operator has was also a general move internationally, through- the freedom to employ innovative technologies out the 1990s, toward performance-based and construction, methods, and materials. This contracts for infrastructure. introduces efficiency and accountability into the 28 | IFC.ORG/HANDSHAKE contract. These performance parameters The BR116/BR324 project was the first road conces- create a clear expectation of outcomes, sion developed by the Brazilian federal government in generating transparency both for the northeast Brazil, the country’s poorest area. It com- private operator and the regulator. prised 554 km of BR116 and 113 km of BR324, as By introducing the concept of the well as sections of two state roads, BA526 and BA528. “traffic trigger” into the contract, we see Both BR116 and BR324 are in heavy use: on average, when demand requires an investment in 25,000 vehicles travel these roads daily. increased capacity. Specifically, it identi- Initially conceived as a public-private partnership due fies a volume of traffic that, if reached, to Brazilian market conditions, the project was ulti- obligates the concessionaire to increase mately developed as a 25-year concession financed by roadway capacity in order to maintain toll revenues from seven new toll stations. Its structure a minimum level of service to the users. was based on performance, with the concessionaire This means that the contract does not responsible for meeting various road condition and need a schedule of pre-determined operational performance standards at different stages investments, as was the case in the first of the project. contracts. The increase in capacity is a An auction model, the bidding process developed result of maintaining a pre-agreed level for this project, promoted international participation of service as traffic exceeds certain pre- in Brazilian road concessions and resulted in strong agreed levels. international interest. Two bidders prequalified and the auction was won by the Rodobahia consortium, a part- nership of Spain’s Isolux Corsan and Brazil’s Engevix and Encalso. The Rodobahia consortium requested 6 a toll rate of $1.23 for a two-axis vehicle, 21 percent lower than the maximum asking price of $1.50. Toll collections will begin after the concessionaire makes 1 the initial priority rehabilitation investments and will be indexed annually for inflation. Certain sections of BR-1 the roads will be expanded to two lanes if specific traf- fic thresholds are reached. The project will benefit thousands of people who use the roads for long distance travel as well as for local commutes to jobs, schools, hospitals, and other services. It will also improve access to the Port of Aratu and contribute to greater social, economic, and regional cohesion by integrating the northeast and southern regions. IFC | 29 Finally, the “reequilibrium discount” is used to the “marginal cash flow model,” which uses reduce the tariff when performance parameters data available at the time of the event to restore are not being met. It is determined through the equilibrium. application of a discount, which is expressed as a percentage of the original tariff for each perfor- mance parameter. A table of discounts is pre- What is the future for private sec- defined in the contract. The discounts represent tor involvement in Brazilian road the resources that are not invested as a result infrastructure? of a failure to meet performance parameters. It functions independently from the application There has been a paradigm shift over time, and of contractual penalties. Under a penalty, the the model will continue to evolve. It’s useful to concessionaire is subject to a reduction in pay- look at the history. Initially, the private sector ment for failing to meet performance parameters was interested in building roads. They didn’t established in the contract. understand a concession as a delivery of services, but as a works contract. As time passed, private To guarantee the application of these contract operators began to understand that concession innovations, the regulator must apply a robust was a different business from building infrastruc- structure to measure the performance parameters ture, and many of them developed specific busi- and to apply the instruments established in the ness entities to respond to the concession model. contract. Most recently, the Brazilian road sector has become very competitive. For example, one proj- How did the BR116/324 contract ect of only 125 km, developed by BNDES and change the country’s understanding IFC in Bahia in May 2010, attracted nine bids, of risk? including from international companies, result- ing in a discount of 31 percent. Last January, Here is where another significant innovation another project structured with support from comes into play: the allocation of risks in rela- BNDES, BR101 ES/BA, attracted eight bids, tion to the restoration of economic-financial resulting in a discount of 45 percent. equilibrium. In this case, the contract clearly establishes which risks each party is responsible for assuming, and the allocation of these risks is How have changes in the perception linked to restoration of economic equilibrium. of Brazil internationally helped the The original proposal for BR116/324 was a com- road sector? plete shift from the use of the static economic equilibrium model—based on the financial Brazil is now a center of excellence capable of model presented by a concessionaire with prices, attracting international investment for infra- traffic estimates, return on investment fixed at structure, particularly as developed markets the time of bid—to a dynamic model called are looking for opportunities further afield. 30 | IFC.ORG/HANDSHAKE Government has declared that without The BA-093 interstate highway system is located in private investment it will be impossible the state of Bahia in northeast Brazil, and is com- to respond to this need. To that end, it posed of a series of roads stretching over 126 kilo- has recently launched a large road and meters. The system connects the entire metropolitan railway concession program. In the road region of Salvador, the capital of the state of Bahia, program alone, 7,500 kilometers will be with the main logistical and industrial hubs of the concessioned, equivalent to 140 percent state, including the airport, the port of Aratu, and of the federal road network. three key industrial hubs. The 60-year-old BA-093 system was in a severe state of disrepair that negatively impacted tourism and the local economy—in fact, 30 to 40 percent of exports needed to be rerouted to out-of-state ports. To rem- edy this, the government of Bahia hired PSP Brazil in May 2008 to structure a concession for the opera- tion, rehabilitation, maintenance, and expansion of BA-093, transferring investment responsibility to the private partner for 25 years. The road network, to be operated by the winning consortium, will include five urban tolls. BA-093 The auction took place in April 2010 at Bovespa, Brazil’s securities, commodities, and futures exchange. Bidding was highly competitive, with nine bidders participating, including both local and international players. The Bahia Norte consortium, composed of Invepar (a subsidiary of OAS Con- strutora) and Odebrecht, won the bid with a tariff of $1.31 per axel, a discount of 31 percent over the base price of $1.89. The project is expected to mobilize $455 million in private investments. Operational costs are expected to amount to approximately $452 million through- out the concession period. The winning consortium pledged to undertake emergency repairs and rehabil- itation of the highways within the first six months of the concession and to expand capacity after the third year. The system will be completed by 2020. IFC | 31 ROAD n g C ol o m r i b e future Ste ia’ s Like other countries in Latin America, Colombia has been expanding its road network through different public-private partnership (PPP) models, and a number of projects have been awarded under a broad range of contractual structures. Over the years, however, many of these projects suffered construction and maintenance delays, leading to contract renegotiations. In addition, these projects attracted very limited participation from international investors and local pen- sion funds. Colombia’s geographical quirks—dual coasts, drastic variations in altitude, and a large land- mass—contribute to the challenge of developing an effective transportation infrastructure. The country’s post-1991 constitution attempts to address these longstanding issues, and the result- ing waves of projects, known as road concession “generations,” have created unprecedented opportunities. In the following section, Handshake tracks the evolution of four generations of Colombian road PPPs. An interview with Luis Andrade, the President of the National Infrastructure Agency for Colombia, ahints at what may lie ahead for Colombian roads. The final feature on the prize- winning Ruta del Sol, which laid the foundation for the fourth “generation,” shows how this new strategy is already setting the standard for road projects in the region. Colombia’s unique- ness—once considered a liability—may prove the inspiration for an entirely new approach to infrastructure. Photo © Andrés Osorio By Philippe Neves 32 | IFC.ORG/HANDSHAKE generation first In the Colombian road sector, the 11 contracts signed between 1994 and 1997 are considered the first generation of concessions, and these concessions benefit from a government-provided minimum revenues guarantee. However, the financial crisis of the late 1990s prevented the government from fulfilling its contractual obligations under the guarantee payment. This resulted in many renegotiations to reestablish the economic equilibrium of the concessionaire. Adding to these woes, the government did not require turn-key contracts that bound concessionaires to a pre-agreed construction cost, and this resulted in government paying up to 30 percent more than originally planned for capital expenditures in some cases. Photo © Euro Estudios IFC | 33 Two contracts signed in 1997 and 1999 applied new contract provisions in response to the challenges that arose in the first generation. These provisions included: • A more detailed consideration of risk allocation; • Provision for more detailed technical documentation during the bidding process; • Protection of investors through contractual compensation mechanisms; and • The inclusion of step-in rights for lenders. In addition, the minimum revenues guarantee was abandoned. (A World Bank line of credit allowed the government to make good on its outstanding obligations.) Instead, contracts varied in length through a mechanism set at bid. Each bidder was required to propose an expected future level of total revenue. The bid present- ing the lowest value won, and once revenues reached this expected amount, the concession would end. These solutions improved the status quo, but problems continued. For example, road capacity was planned on the basis of 20-year traffic projections, and all the investments were made in the first three years, which resulted in overcapacity. Also, there was no integrated vision; each project was considered on a stand-alone basis rather than as part of an integrated network. Lastly, land acquisition remained a government risk and responsibility (just as for the first generation), which resulted in delays and increased costs due to the government’s few dedicated resources. Photo © Pattoncito 34 | IFC.ORG/HANDSHAKE second generation IFC | 35 n atio Third gener 36 | IFC.ORG/HANDSHAKE After 1999, a third generation of concessions aimed to address these issues. These changes included: • Introduction of the concept of a “road corridor” to connect the consumption and production centers (connecting between each, as well as to ports); • A move toward performance-driven contracts, with the introduction of key performance indicators; and • A minimum projected revenues amount proposed by each bidder as the only criterion of the tender. Problems continued, however. The elegant one-criterion tender evaluation led to very aggressive bids where the bidders’ strategy was basically to propose low offers to win, with the idea to re-open the contract negotiation further on to add more construction work. The government was in fact required to renegotiate all these PPP contracts. Incentives to deliver and finalize the construction were absent, resulting in unmanageable delays. It was even pos- sible to comply with the concession contract and the construction requirements without bringing real cash equity to the table. Ruta del Sol, an ambitious project split into three different road PPPs, attempted to resolve these remaining challenges. Between 2007 to 2010, this $3 billion road between Bogotá and the north coast was structured and tendered. It required cash injections from sponsors, an engineering, procurement, and construction turn- key contract, and a clear payment mechanism. Environmental and social risks were transferred to the concessionaire to ensure effective management of these high profile, high impact issues. Ruta del Sol has become the foundation for the fourth and current generation of Colombian road PPPs. Photo © Adrimcm IFC | 37 The signing of a new PPP law (“Ley 1508”) distinguishes this generation from its predecessors. The law limits additions up to 20 percent of the total value of the conces- generation sion contract, and allows prequalification. Additionally, this fourth generation will provide a standardized contract, reflecting the lessons of the earlier challenges. It will facilitate work for bidders as well as the government. Nevertheless, from a techni- cal standpoint, environmental and social risks will remain at the heart of discussions, as private players will have to assume an urth important part of these risks. The scale of the fourth generation road PPP program is vast, with over 5,000 km of road fo under consideration. Its size has piqued the interest of many international players, but this causes some concern. Estimates put the financing need at over $5 billion, a tall order in a global environment comprised of tight capital markets and a limited revenue base from tolls or government coffers. Participation of international players is criti- cal to the fourth generation’s success. After all, Ruta del Sol introduced international best practice, but even this mega-road proj- ect could be financed through Colombia’s financial market. Today the scale is greater, as is the potential. The fourth generation has everything it takes to demonstrate that Colombia has the transparency, capacity, and international good business practices to attract the international audience that will propel it onto the global stage. 38 | IFC.ORG/HANDSHAKE Ruta del Sol In 2007 Colombia’s Ministries of Transport, Finance, and Planning began work- ing with IFC to structure a concession for Ruta del Sol, a 1,071 km highway to connect the interior of the country and the capital of Bogota to the Ports of Santa Marta and Cartagena on the Caribbean Sea. When completed, Ruta del Sol will reduce accidents, travel time, and transportation costs. It will also boost manufac- turing, tourism, agribusiness, and real estate development. Even before its completion, however, Ruta del Sol has become a model for future road concessions. The project won Private Finance International’s Transportation Deal of the Year in 2010 for Section 2 in recognition of its pioneering approach. The fourth generation of Colombian road PPPs are based on this model. The $2.6 billion project was divided into three segments: Section 1: Villeta to El Koran, a double lane greenfield road, which will reduce by one hour travel time for the 78 km between Bogotá and Puerto Salgar. Given its high risk profile, it was structured as a seven-year medium- term concession. The government intends to retender it as a toll road concession in the future. Section 2: Puerto Salgar to San Roque, covering 528 kilometers of flat terrain, which will improve access to major production centers. Section 3: San Roque to three locations near the Caribbean Coast—Carmen de Bolivar, Cienaga, and Valledupar—which are important routes for freight trucks traveling to Cartagena and Santa Maria. This project covers 465 km of semi-flat terrain. For Sections 2 and 3, the concessionaire is paid through toll revenues and avail- ability payments. It is a variable-term concession that expires once a pre-agreed net present value of revenues is reached, limited to a maximum term of 25 years. Project-specific budgetary allocations will be assigned by the Ministry of Finance to each concession and transferred annually to individual concession trusts. The funds will be payable to the concessionaires upon completion of contractually-defined construction milestones. Deductions will be applied to the payments if the conces- sionaire does not meet minimum road condition and operational performance parameters, creating an incentive for compliance with construction and operation and maintenance goals. IFC | 39 Colombia turns a corner Colombia turns a corner Luis Andrade is the President of the National Infrastructure Agency for Colombia (Agencia Nacional de Infraestructura). Prior to joining the government last year, he was director of McKinsey & Company for Colombia and launched its offices in São Paulo and Bogotá. An industrial engineer by training, he also has an MBA from The Wharton School of the University of Pennsylvania. Interview by Philippe Neves 40 | IFC.ORG/HANDSHAKE ROAD At the end of 2011, INCO—the Colombian agency in charge of transport PPPs—was dis- solved and Agencia Nacional de Infraestructura (ANI) replaced it. Why? The main objective behind the creation of ANI was to develop the institutional strength necessary to accelerate transport infra- structure development in Colombia, especially related to the PPP model and concessions. Unfortunately, INCO’s structure did not reflect this objective, and as a result did not have much success. The number of concessions and PPPs awarded under INCO was relatively small, about one per year, and there were many prob- lems to deal with. The structure that has been put in place for ANI aimed at answering these issues. What has changed as a result of this strategic shift? One important change relates to governance: independent board members were introduced and two sub-committees of the IFC | 41 board were created to support the objectives of How does Colombia’s ambitious structuring and managing existing contracts. program for road PPPs sup- These sub-committees are composed entirely of independent board members, who are not part port the country’s new focus on of government or industry. globalization? A second important change is an increase in sala- ries. The compensation was increased by around Without a competitive infrastructure it would 50 percent to allow ANI to compete with the be difficult for the country to take advantage of government sector as an employer. The staff of the opportunities provided by globalization and ANI still earn less than they would in the private international trade agreements. It’s that simple. sector, but well in relation to the rest of public sector. So people who want to serve in the public Why the PPP model over the sector now see ANI as a very good professional alternative. alternatives? There have been other changes in the organiza- We chose the PPP model because the public tional structure to strengthen previously weak works model has shown many deficiencies in areas, including risk management and legal the past. For example: issues. We also introduced the concept of team work and performance management, trying to • It does not have the right long term incentives, emulate best practices in the private sector. as the people who build are not the same who operate and maintain, so when they build the infrastructure, they don’t think long term. We saw this most recently with the heavy rain sea- son. The roads developed under PPP schemes The only way that had problems but could be repaired pretty quickly, whereas the roads that had been con- [Colombia] could make a structed under regular public works had really significant difference in the serious problems. This could be attributed to better design by the PPP operator who, by infrastructure development nature of the contract, has the incentive to care was to leverage PPPs. about future costs, and also the better preven- tative maintenance under PPP contracts. • Another element in favor of PPPs is that under the right circumstances we can recover a large 42 | IFC.ORG/HANDSHAKE part of the infrastructure costs through user What advice would you give gov- fees or tolls, taking pressure away from the ernments facing an infrastructure government deficit. gap similar to Colombia’s? • Finally, the impact on the government budget is predictable and spread out over the life of First: Look for help and participation from the the concession, rather than upfront. Payments private sector. Unless the country has an ample can be conditional on availability and perfor- budget surplus, which most countries do not, it mance to provide the right incentives. is impossible to do a very ambitious project just In the end, the only way that we could make by leveraging the year’s fiscal resources. Search a significant difference in the development of for ways you can find private sector financing infrastructure was to leverage PPPs. and look for ways that users and the government can make the project financially viable. Second: Present clear and stable rules. For What can Colombia achieve with example, find ways to solve disputes that do the recently enacted PPP law that not have to go through the courts, but which was not possible before? can leverage arbitration schemes. This assures the private sector that disputes will be promptly Although many of the things we are doing now and fairly decided. Another example is to ensure were possible with the previous scheme, the a juridical stability in some key issues of the new law improves certain concepts to assure a concession contract, to allay investors’ fears that better legal environment for concessions so that the rules can change in the course of a very long- contracts can move forward. term contract. One significant change is the incentive for the Finally: To develop good projects and good private sector to present unsolicited proposals. contracts, you need to invest money. Specifically, In the last 20 years, we had 25 road PPPs and to have a well-structured project you need to all were initiated by the government. There were invest around 0.5 to 1 percent of the value of zero unsolicited proposals. Since the new law the project in its development. It’s a significant went into effect, we received 13 unsolicited pro- amount of money, but without that investment posals in roads and four in railways, for a total the other 99 percent is likely to fail. investment amount of 14 billion pesos or $8 billion. So the main thing this law has changed is the incentive for the private sector to bring forward unsolicited offers. IFC | 43 ROAD Rewriting the rules © William Loo Kok Wee of the road © rosipaw You have been a key policy shaper and have Gajendra Haldea is Advisor to the Deputy Chairman, Planning played a critical role in the infrastructure Commission, Government of India. development space in India, particularly His largest PPP transaction is the in the area of public-private partnerships $3 million Hyderabad Metro Rail (PPPs). How did this journey start for you project currently under construction. and lead to your current role as Advi- The Highway Model Concession sor to the Deputy Chairman, Planning Agreement that he authored has Commission? become a model for other national infrastructure projects, and is now I joined the Finance Ministry in 1993 as Joint Secretary being adapted for a $2 billion sea (Infrastructure), and at that time the Government of India had begun the process of policy formulation for link in Mumbai. He is the author enabling private participation in infrastructure as part of Infrastructure at Crossroads: of its economic liberalization. In 1999-2001, I wrote The Challenges of Governance, the Electricity Bill that became law in 2003, and I also recently published by Oxford advised several state governments. In 2000, I published University Press. the first Model Concession Agreement (MCA) for national highways, which in effect became the template 44 | IFC.ORG/HANDSHAKE © Harshad Sharma The most criti- cal factor that enabled India’s rapid progress was the stan- dardization of documents and © rosipaw processes. for subsequent government MCAs. I joined ments and technical standards. The appraisal and the Planning Commission in 2004, when the approval processes have also been streamlined. Committee on Infrastructure was set up under As a result, a large number of PPP projects have the chairmanship of the Prime Minister, and been awarded and built. According to a recent I headed its Secretariat. During the past eight World Bank report, India is the top recipient of years, we have worked toward creating the entire PPP investment among developing countries. architecture for PPPs. The Model Concession Agreement is The Indian experience using PPPs recognized as one of the most inno- to develop the national highway vative aspects of Indian PPPs. How network is widely recognized as a many MCAs have been prepared? success. What factors were most What are some of the most innova- important? tive aspects of the MCA? The most critical factor that enabled rapid We have published 12 MCAs in sectors includ- progress was the standardization of documents ing highways, urban rail, airports, ports, power and processes. Besides Model Concession Agree- transmission, and railway stations. Currently, we ments, we have standardized the bidding docu- are working on five new MCAs in different sec- IFC | 45 tors. The MCA serves as a ready-to-use contract replicated. If you take up a few projects first and conforming to international best practices. It evolve an MCA later, several years could be lost. balances the diverse interests of various stake- holders, minimizes the potential for malfeasance, The Viability Gap Funding (VGF) and protects public servants, investors, and lend- model has been a cornerstone of the ers from unintended outcomes. PPP program in highways. Yet, in cer- What were some of the biggest chal- tain cases, the level of traffic is low lenges that the highway PPP program and tolls supplemented with a VGF faced in the initial period, and what capped at 40 percent of capital costs do not make the project viable. In challenges remain? such cases, does the Government of The main challenge came from incumbent India use availability payments-based officials who tend to resist any initiative that models? interferes with their conventional contracts. It takes a long time to change mindsets, especially Viability gap funding of up to 40 percent of The main challenge came from incumbent officials who tend to resist any initiative that interferes with their conventional contracts. when vested interests are at work. project costs is a high level of financial support, especially when the cost of land is borne by the What advice would you give coun- government. If a project is still not viable, the tries undertaking their first PPP government should either reduce its capital costs or increase the revenue potential. If that does not transactions? Is it advisable to first work, the government should build the project develop success stories on individual itself. Use of the availability based model implies transactions and then incorporate deferred budgetary payments, which are akin to country-specific leanings to evolve a government borrowings. Since the cost of private Model Concession Agreement? capital is much higher, the better course is for the government to borrow directly and build An MCA should be drafted around the first projects through turnkey contracts. A significant transaction itself. It can then be improved and part of the efficiency in PPP projects arises from 46 | IFC.ORG/HANDSHAKE the turnkey approach, and the public sector too project authorities do not monitor its implemen- can capture this. Moreover, availability based tation, the users or the public exchequer could payments are off-budget liabilities that could lose out. All these aspects need to be institution- create excessive burdens for future generations. alized as countries move toward greater reliance on PPP. What factors should government This interview was made possible with the help of IFC’s agencies keep in mind as they set out Isabel Chatterton, Bhanu Mehrotra, Pankaj Sinha, and to develop PPPs, specifically in rela- Rachel Jacob. tion to project preparation, regula- tion, and monitoring of the contract? Preparation of a feasibility report is the first step, but the heart of a PPP project is the concession agreement, which should form the basis of com- petitive bidding. Since infrastructure projects provide public services, the concession agree- ment also serves as a statement of public policy. A contract is as good as its enforcement. If the Photo © Harshad Sharma Rolling out road PPPs Due to constraints in public funding during As a result, the share of private sector investment the last decade, public-private partnerships have in the road sector has increased from about 8 come to play a major role in the development percent in the Tenth Five Year Plan (2002-07) to of highways in India. Government has created about 20 percent in the Eleventh Five Year Plan an enabling policy and regulatory framework to (2007-12). This includes national highways as attract competitive private investment, and the well as state highways. According to the World response has been very encouraging. The corner- Bank, India has been the top recipient of PPP stone of India’s success in this area is the adop- investments among developing countries in tion of standardized documents and processes recent years. that have led to a rapid roll out of projects. —Gajendra Haldea IFC | 47 ROAD Full Speed aheadEconomic cost-benefit analyses pave the way for decision-making Photo © Clare Bell An economic cost-benefit analysis (CBA) allows the government to assess the net benefits to society of projects and select the one that generates more benefits. An economic CBA also minimizes public opposition by showing that benefits to society are the deciding factor in implementing a project. By Alfonso Guzman & Francisco Estrázulas 48 | IFC.ORG/HANDSHAKE Consider this scenario: A small Latin American country is about to launch its public-private partnership (PPP) program. The PPP promotion CBA Primer agency aims to select a highway project that will start the program on a positive note. To signal to • Willingness to Pay: Perceived value of the PPP community that it means business, the the benefits to users of the highway. agency selected the rehabilitation and expansion • Financially Viable Projects: Revenues of the existing highway that connects the capital exceed the costs of the project. city to the airport, known as the “Airport Link.” • Economically Viable Projects: Benefits This project is low risk. After all, traffic is high, that society derives from the project users can afford the toll, and construction risk is are greater than the costs to society. low. It’s also financially viable because revenues • Viability Gap: Difference between exceed costs, requiring no fiscal contributions. revenues and costs of the project. The motivation behind this selection is straight- forward: implementing a project that is unlikely to fail will set a good national precedent and increase the attractiveness of PPP programs in general. construction and traffic risks especially—and During the agency’s presentation to the govern- has no chance of being financially viable without ment ministry that would implement the proj- government intervention. ect, the minister raised the point that the main Which project should the government select? challenge to the PPP program wasn’t to capture the interest of the PPP community, but to ensure citizens’ support for this new way to develop Comparing PPP projects infrastructure. He then urged the PPP promo- The answer is clear. An economic cost-benefit tion agency to consider prioritizing a project analysis (CBA) allows the government to assess with high economic returns to show the general the net benefits to society for each of the projects public that PPPs increase community wellbeing. and select the one that generates more benefits. To support this theory, the minister proposed It leads us to the conclusion that the Airport the “Regional Connector,” a greenfield highway Link is not economically viable, despite being in a region of the country with great, yet unex- financially viable. Here’s why: Based on the ploited, production potential due to its poor current traffic, user fees/tolls on this highway, highway infrastructure. Also, this project is a without any improvements, could raise $150 section of a regional highway corridor that is key million (net present value) through tolls—that to increased trade among countries in the region. is, the present value of the tolls that users would However, this project has much higher risks— be willing to pay even though they currently IFC | 49 don’t. (The numbers used in this article are made the project will require a government subsidy up, but based on historical case studies.) of $200 million. A PPP project will be economically viable if the total benefits that society derives from the project are greater than the total cost to society. A subsidy is one of the costs to society. With the proposed rehabilitation and expansion, Here’s a critical point: the project will be eco- the toll revenue could increase to $200 million. nomically viable if the total benefits that society Drivers would be willing to pay more because of derives from the project are greater than the the time savings, increased safety, and other ben- total cost to society—the subsidy being one of efits that the improved highway would provide. the costs to society. In the case of the Regional However, the cost of the expansion and improve- Connector, the government estimated—through ments is $100 million. Therefore, although the an economic CBA—that the competitiveness project is financially viable (revenues of $200 benefits to the local producers in the region million - investment $100 million = $100 mil- amount to $100 million, while the benefits to lion) and low risk, it is not economically viable the country from the increased regional trade are (marginal increase in toll revenue $50 million > $150 million. These benefits, plus the expected $100 million investment). This is likely to gener- revenues—which reflect the direct benefit that ate opposition from the public, who will feel users perceive—add up to $450 million. This is they are overpaying for the additional benefits greater than the total cost of the project ($400 that they are receiving. million). Therefore, the $200 million subsidy for the Regional Connector is justified, and the project is economically viable. Economic viability vs. The main danger in subsidizing a PPP project financial viability is that the government may be transferring too The Regional Connector, however, is economi- much taxpayer money to the PPP investor—that cally viable although it is not financially viable. is, the investor will receive more than the benefit The project costs $400 million, while the that it provides to society. This would trigger expected revenues for the investor are $200 mil- public opposition, as the government will be lion. Therefore, to attract private capital, 50 | IFC.ORG/HANDSHAKE perceived to be a defender of the interests of the countries where assets may not be maintained private investor rather than the public interest. and, therefore, some of the benefits may not be But an economic CBA can give government the delivered under the public alternative. information needed to dispel these concerns. It In the comparative CBA, the government selects can also be an effective tool earlier on in the pro- the option that generates the largest net benefit cess—that is, when deciding whether to imple- to society, rather than the one that costs least. ment a highway project as a PPP or through the traditional public financing alternative. Minimizing public Frontier markets opposition As foreseen by the ministry in charge of high- When deciding whether to implement a high- ways, public opposition—particularly in emerg- way project through a PPP, many governments ing markets such as the small Latin American implement the U.K.-style Value for Money country under consideration—is a sure-fire (VfM) analysis. This is a rather complex analysis way to derail a PPP project, and even a newly that looks at the costs of both alternatives and established PPP program. Opposition can be recommends the lower cost alternative—assum- powerful enough to stop the government’s ing that the value of the project is the same PPP approval process, cause delays during under both alternatives. The deciding factor construction, or even threaten revenues during in this calculation is the cost ascribed to the implementation. risks that the government would transfer to the private party under the PPP arrangement. This is Economic CBA can help mitigate these risks by a methodologically difficult calculation, particu- showing that benefits to society are the factor larly in frontier markets where the data sets are determining the decision to implement a project. not available or unreliable. This is why certain This analysis can also justify the use of subsidies countries—such as New Zealand—have adopted by letting people see the value that they get the comparative CBA. from the subsidy. Furthermore, the government can involve the beneficiaries in determining the By using comparative CBA, government analysts value of benefits and costs to society to ensure avoid having to ascribe costs to risks. Instead, ownership of the results. Then, by socializing they directly estimate costs under each delivery the results of the “validated” CBA, the govern- model—PPP or Public Finance. Also, in com- ment can further reduce the likelihood of public parative CBA, they directly estimate the benefits opposition, mitigating one of the key threats to of projects, which may vary under each alterna- PPPs in frontier markets. That’s a scenario worth tive. This is particularly significant in developing pursuing. IFC | 51 The (Silk) road less traveled International Road Transport Union facilitates trade By Umberto de Pretto 52 | IFC.ORG/HANDSHAKE Photo © IRU ROAD Globalization and containerization have brought unprecedented changes to European-Asian transport links. With the bulk of world trade concentrated in a few major ports, remote areas have suffered from a desertification of trade, which has hurt economic develop- ment. To remedy this, the International Road Transport Union (IRU) works to reopen trade along the ancient Silk Road. It also campaigns to double the use of bus and coach services to achieve sustain-able mobility everywhere in the world. Success of both goals would stimulate trade, investments, tourism, and local employment. The biggest impediments to land trade routes between Europe and Asia, according to a U.S. Chamber of Commerce study, include administra- tive barriers and inappropriate border procedures. International Road Transport Union (IRU) pilot projects support this conclusion, revealing that these administrative barriers and inappropriate customs procedures account for almost 40 percent of road transport time along the Silk Road. About 32 percent of transport costs are from unofficial payments and levies paid by transport operators in transit and at borders. One could expect the same or even more dramatic findings in Africa, the Middle East, and Latin America. These invisible barriers to trade block development, sustaining poverty’s status quo. But countries that implement the key UN multilateral trade IFC | 53 and international road transport facilitation and figures, so that informed legislation feeds instruments, such as the UN Harmonization policies that double the use of buses and coaches and TIR (Transports Internationaux Routiers) and encourage citizens to use them whenever Conventions, could change this. possible. Doing so could take hundreds of millions of cars Lifelines on wheels off the road, returning the existing infrastructure to a more sustainable transport mode. Moreover, Use of the Silk Road would help solve trade achieving Smart Move’s objective of doubling issues, but sustainable mobility is just as critical the use of bus and coach transport would create to reducing poverty around the world. Buses millions of new jobs linked directly or indirectly and coaches are often lifelines to jobs, education, to daily operations. and healthcare for many citizens. These vehicles reach areas that rail and air do not, especially for Both of these IRU goals—facilitating the inter- low income people, those who cannot drive, and national movement of goods on the Silk Road people with disabilities. and doubling the use of bus and coach ser- vices—are realistic and achievable policy objec- Official data identifies buses and coaches as one tives. They can be achieved if political priority of the best collective transport solutions for short is placed on removing barriers to road transport and long distances. Safe, green, efficient, afford- by implementing required measures, incentives, able, and socially inclusive, buses and coaches and policies that steer road transport toward an are an optimal response to current and future efficient future. mobility challenges when used effectively. But policymakers tend not to integrate buses and coaches into transport policies. Worse, they may design ill-informed, improper, and even restric- This article was made possible with the help of Virginia tive legislation. Tanase, Senior Transport Specialist in the Transport, To remedy this, the IRU’s Smart Move campaign Water, Information & Communication Technologies provides accurate, reliable, up-to-date facts Department of the World Bank. The International Road Transport Union (IRU) is the implementing partner of the TIR (Transports Internationaux Routiers) Convention under UN mandate. The TIR Convention facilitates and secures international road transport around the world, allowing customs-sealed vehicles and freight containers to transit coun- tries without border checks. It contributes significantly to reducing border wait- ing times while enhancing security, decreasing costs, and significantly increasing road transport efficiency in many regions of the world. It is the world’s only universal customs transit system. 54 | IFC.ORG/HANDSHAKE Turkish Delight Faster borders, faster growth Trade growth is a priority for Turkey’s government, which has ratified the highest number of UN trade and transport facilitation and security conventions in the region. The effec- tive implementation of these UN multilateral instruments, coupled with public-private partnership initiatives led by the Turkish Union of Commerce and Commodity Exchanges (TOBB) to improve border crossings, has significantly contributed to the development of foreign trade by increasing the efficiency of border crossing procedures. Border waiting times, which formerly took hours if not days, have decreased to minutes. Turkey has also recognized that road transport drives its trade, and it has taken significant measures to strengthen the Turkish international road transport industry. As a result, the Turkish road transport industry is arguably the strongest of the entire region, accounting for 41.7 percent of Turkey’s exports and 23.6 percent of imports. Turkey is consequently the world’s biggest user of the facilitation and security provided by the TIR System. These concerted efforts to facilitate trade and, by extension, international road transport, have increased Turkey’s exports by 310 percent over the past 10 years, according to a Republic of Turkey Ministry of Transport, Maritime Affairs and Communications Country Report (October 2011). Imports have increased by 340 percent, according to the same report, making Turkey the ninth fastest growing economy of the world with an 8.5 percent gross domestic product growth rate. Photo © Andrea Campi IFC | 55 money talks from A B with R B By Jeff Delmon “The person attempting to travel two roads at once will get nowhere.” —Xun Zi, Chinese Philosopher, d. 237 BC Welcome to the second installment of our But those early studies are especially vulnerable walk through transport public-private partner- to the optimism bias that infects most demand ships (PPPs). Last edition we tackled ports and surveys. As fixed links, R&B should be suscep- airports. This time we turn to roads and bridges tible to clear traffic surveys. Demand assessments, (“R&B”—to save ink on spelling it out, plus it however, are more art than science—requiring a suggests a few cool catchphrases). careful balance of planned and likely economic R&B is A to B: moving people and goods growth, demographic changes, use changes, and between fixed geographical points. It is more improvements in linkages (ports, rail, airports, uni-dimensional than ports and airports, with interconnecting roads, and competing roads). only limited opportunity for revenues from ter- Construction plays a particularly important role tiary services (like road side services) compared in R&B. Sponsor teams are usually led by the with other transport PPPs. Advance planning construction contractor, since that contractor is and studies are important for ports and airports, going to make large profits on the construction but for R&B they are critical. After all, a road contract. This means the anchor investor may is unlikely to surprise with super-profits. If the be particularly influenced by the profits to be initial studies do not show its potential, it is earned during construction, more so than during unlikely to have potential. operation. Government and lenders will want to ensure that these core investors remain commit- 56 | IFC.ORG/HANDSHAKE ted to the success of the project over the long or availability payment-based revenue streams term, even if this is not financially efficient. for the concessionaire. The former looks to users, Operation is relatively straightforward, excluding the latter looks to contracting agency payments. electronic tolling and a few whizzy technologies, Hybrids of the two include shadow tolls (where but the added value for government of a secure the contracting agency pays part or all of the toll maintenance program is fundamental. In most that would otherwise be charged to users) and countries R&B maintenance is poor. This costs traffic/revenue guarantees (where the contracting the country, since replacing roads due to poor agency compensates the concessionaire if traffic maintenance is about three times as expensive and/or revenues are insufficient). as maintaining them well, but road maintenance As always, where government bears downside is easy to cut when budgets are lean or some risk (risking part of the cost if the project does other more exciting expenditure is proposed. not do as well as hoped), government should The discipline of PPP maintenance can save a benefit from upside (when the project does bundle for R&B. better than expected). This is often achieved through an escalating sharing of revenues above expected levels. Private involvement helps to A few comments about R&B PPPs are in order, ensure that projects are driven in reverse order of importance: by economic and commercial “Private” priorities rather than political The private partner has a key role to play in preferences. R&B. While the technology for R&B construc- tion is not overly sophisticated (with obvious exceptions of complex bridges, tunnels, elevated For these reasons, R&B is less like financing a sections, and difficult soil conditions), the business (like airports and ports) and more like private partner can help save money through financing a service (like power generation, water procurement efficiencies, construction efficiency, treatment, hospital facilities, prison facilities, life-cycle maintenance/management, and a and similar operations). This means that assess- long-term perspective on the design of the ing an investment in R&B focuses on construc- R&B. Less critical but still important are the tion cost, demand forecast, and tariff formulae. efficiencies available through operating practices, The latter is broadly divided between toll-based tolling technology, and cash management. (The IFC | 57 volumes of cash managed through toll booths central role in managing demand risk and and other tolling mechanisms can be managed helping to ensure robust revenues for the carefully to maximize value and reduce transac- project. tion costs where incentives are rightly designed.) • The public sector will provide land, often Private finance, as with most PPPs, provides large amounts of land, for the works, con- additional sets of eyes to oversee project prepara- struction of the works, lay-down areas for tion, test project viability, and ensure careful construction material, and disposal of spoil implementation of an R&B project. Public from construction (in particular tunneling procurement of R&B often results in cost over- works). The government is well advised to runs, delays, and other complications related to acquire land before receiving bids to avoid lack of forward planning and analysis. While delays (and associated liabilities) due to private financing of PPP requires more time and land acquisition complications. The gov- investment in early project preparation, these ernment will also need to help with licenses investments reap rewards in reducing the waste and permits. that can often result from public procurement. The benefit of private oversight and assessment is probably most obvious in testing the viability “Partnership” of projects—in particular project selection, Most important to a successful R&B PPP is the alignment selection, and traffic forecasts. Private partnership between public and private. The involvement helps to ensure that projects are roles of the two are so closely entwined that the driven by economic and commercial priorities partnership becomes all the more critical to the rather than political preferences. success of an R&B PPP. R&B is not a stand- alone asset that provides a service. It is part of a network, linking roads, interchanges, and “Public” competing transport facilities. Therefore, the Public inputs into R&B are even more impor- transport policy heavily influences the success tant than many other PPP projects. The govern- or failure of an R&B PPP, and equally proper ment will provide essential aspects of an R&B management of the R&B will influence what project that the private sector will be less capable the government can do with its transport policy. of delivering. For example: Changes in policy will influence and be influ- • Demand for R&B services is intrinsically enced by the success of the PPP, so the conces- linked to government policy and actions. sionaire needs to be closely consulted and may Road traffic will depend on economic help guide the government when implementing growth, transport policy, toll regime, and new strategies and technology. For example, competing transport links. It is therefore electronic tolling can help both government and important that the government play a concessionaire, but will need to be implemented 58 | IFC.ORG/HANDSHAKE in a manner that fits with the practices of both partners. Ideally, design of R&B will be allo- cated to the private sector to benefit from value engineering, long life-cycle perspective, and latest technology. However, R&B, in particular bridges, can represent important public image issues. Government may want a say in the design and overall aesthetic. The entity responsible for regulating R&B construction (if there is one) may not be familiar with regulating privately managed R&B, creating extra risk for the private investor. The government may therefore wish to determine the basic design. This reduces the opportu- nity for private investors to influence design and achieve efficiencies, but may result in a more sustainable balance of risk. Nice stories about quick fix R&B through direct negotiations without extensive preparations are usually no more than nice stories, and will end up costing the government. So, in summary, R&B is not for the fainthearted. It requires government involvement, advance planning, and in particular the three “L”s—land, land, and land. Money and time invested in these early preparations will accomplish the fourth, equally important “L,” lever- aging significant benefits for everyone involved. Photo © Daniel Larsson 59 IFC || 59 IFC Road and rail PPP transactions in Africa seem to present challenges that may not exist in other sectors. Why? the long PPPs are difficult in general in Africa. If you look at the power sector, there have only been 16 independent power projects of any reasonable size since 1995, and the power sector is actually and much friendlier to PPPs than road and rail—so winding that tells you something generally about the dif- ficulty of PPPs in Africa. With road and rail specifically, what makes it road even harder is the direct market risk against end users, whether it’s for freight on rail or trucks on road, retail customers, or personal customers. Road and rail PPPs in Africa Understanding patronage numbers is always dif- ficult, and to get the private sector interested in PPPs for road and rail, there has to be confidence Nick Rouse became Managing Direc- in future end-user generated cash flow. But in tor and Fund Manager of the Emerging Africa, where people are very poor, tolls represent Africa Infrastructure Fund (EAIF) and a significant cost and users will simply choose GuarantCo in May 2005, after work- different routes or choose not to travel. ing for Barclays Bank for 33 years. His involvement with EAIF dates from the Are publicly maintained roads a Fund’s inception and he was a member better answer for the continent? of its Credit Committee and a Non- Executive Director between 2002 and The publicly funded road model has not worked 2005. In his current role, he has overseen very well in Africa either, because the roads sim- the completion of 48 deals with a notional ply don’t get maintained. There’s a famous joke value of $926 million, the vast majority in Kenya: “There’s no word for ‘maintenance’ of these in Sub-Saharan Africa. He spoke in Kiswahili.” This is why the turn to PPPs. to Handshake about African road and And when they work, they work well. Tolled rail public-private partnerships (PPPs). turnpikes in the 18th and 19th centuries trans- 60 | IFC.ORG/HANDSHAKE Interview formed U.K. and U.S. roads because people were Is there a demand for passenger rail charged and insisted on a quality of service. They traffic in Africa? wouldn’t pay for poor roads, so the owner of the turnpike had to keep them in proper repair and There is, but we should separate long distance employ people to do that. rail from commuter rail. Commuter rail holds a lot of potential and I think PPPs will work What about rail? there. Practically speaking, the concessions seem to take forever to negotiate because decisions are Rail is a little bit easier. Rift Valley Railways in driven politically. There’s an issue about govern- Kenya and Uganda, which covers the original ment capacity to negotiate these concessions, so colonial railway which the British built from you have to try to take the politics out of it. Mombasa to Kampala, gets its strength from the freight business. In general, African railways What’s your advice for officials who are essentially a freight business because private want to pursue road or rail PPPs? operators are not keen on passenger traffic. Pas- senger trains clutter up the tracks and generate It’s worthy of the time and effort because Africa little revenue. Also, because the track has often clearly needs much better transport links. Road not been maintained, rail speeds are low so opti- and rail are fundamental infrastructure, but mum track usage is vital. For financial reasons, you have to figure out who is going to pay. For this results in prioritizing freight. railways, freight will be the answer. I think Africa will get railways built and refurbished where Do rail PPPs for freight eventually there is good freight traffic. pave the way for passenger rail For roads, because it’s difficult to get people to business? pay, you need a really strong model. You have to identify where there can be considerable time The railways tend to be single track, not condu- savings compared to the other route, with no cive to lots of passenger traffic. So it gives you alternatives and no way for people to get around the capacity for general freight as well as passen- it. And again, it’s promising when these roads gers in theory, but in practice it can be difficult. provide a significant advantage for freight traffic. Freight rail PPPs, especially heavy freight, have Overall, though, there are few role models, so been the only real successes. For example, in you have to look at each project individually. West Africa, there are railways to take the iron ore and minerals out and ship them from the interior or the coast. It’s a bulk freight business, and people are interested in that. Photo © Javier Calvo IFC | 61 A tool for urban expansion Mass Rapid Transit By John Leber & Cledan Mandri-Perrott As the world experiences rapid urbanization, there is growing interest in using Mass Rapid Transit (MRT) to solve urban transportation prob- lems. Yet developing MRTs is a complex and capital intensive process. Governments and public authorities are using a variety of public-private partnership (PPP) models to leverage resources and expertise. MRT is a bus or rail-based public transport encourage higher density development and mode operating on fully or partially exclusive better use of scarce, expensive urban space. rights-of-way—also known as the “alignment.” They can also promote greater equity and This alignment can be at-grade (i.e., surface- mobility for a larger segment of the population. based), elevated, or underground. Some of the most common forms of MRT are metros, streetcars, tramways (sometimes referred to as Critical success factors light-rail transport, or LRT), and bus rapid MRT solutions are typically customized to a transit (BRT). particular city or transportation corridor. Coor- dination is necessary among various levels of central and urban governments that have over- Benefits of MRT lapping responsibilities and policies. Managing MRT solutions are increasingly preferred by pol- such complexity and the associated risks can be a icymakers because they provide high carrying- daunting challenge for even the most experienced capacity coupled with energy efficiency. MRTs and sophisticated public authorities. Critical support strategies for reduced air pollution and success factors for MRT schemes include: 62 | IFC.ORG/HANDSHAKE Rail • Completing robust engineering feasibility the system and its operations can be studies to ensure viable technical design so- dimensioned accordingly. lutions (particularly for elevated and under- • Ensuring that the operation of the system ground MRT). is responsive to customer needs such as • Having a good understanding of the mini- comfort, speed, and punctuality, and that mum passenger volumes (ridership) so that the system is safe and reliable. MRT Speed Peak Capacity Technical Traits Type (pax/hr)** Streetcar/Tram Low Low (5k or less) • Frequent street crossing (less than 30 kph) • Primarily at-grade • Single-car configurations Light Rail Train Low-medium Low-medium • Mostly at-grade (avg. 30 kph) (10k-20k) • Single and double car configurations • 2-3 lanes from existing road “Light” Metro High Medium-high • Either elevated or (avg. 45-65 kph) (15k-30k) underground • Requires grade crossing Heavy Metro High High • Either elevated or (avg. 45-65 kph) (60k or more) underground • Complex civil works *passengers/hour at peak IFC | 63 • Understanding the fare structure and how service can be made up with other forms of that structure may affect demand. revenue, such as advertising and real estate • Designing operations and maintenance to development. Typically, revenues from advertis- maximize the system life, and adequately ing in stations and trains are not significant. budgeting for regular operations and main- Figures represent around 4 percent of farebox tenance expenditures. revenue; station concessions such as small kiosks, newsstands, and vending machines may gener- • Considering continued investment in the ate an additional 7 percent. Similarly, real estate system design and contractual mechanisms development or capturing increased land values that allow for this investment. directly linked to MRT presents challenges. • Considering integration of the MRT scheme with other transportation modes (pedes- trian links, parking, rail, and airport links) to ensure a comprehensive urban transport strategy. True Cost of Service Together, these factors can ensure that the MRT Amortiza- solution, and the PPP mechanism in place to tion of deliver it, are tailored to the particular needs cost of civil works of a city or transport corridor. The economics of MRT Government MRT projects involve large capital expenditures subsidy for the design and construction of the system, along with significant operation and mainte- Amortiza- nance costs (O&M). Revenues generated by the tion of system (known as farebox revenues) are generally capital cost of set by public authorities with political, social, equipment transport, or urban planning objectives in mind. & machinery As a result, farebox revenues rarely cover operat- ing expenses, and rarely cover the full cost of the project. As the graphic to the right shows, O&M cost Non-Farebox for a project to succeed, more often than not of equip- ment & Socially the funding gap must be met by some form of machinery acceptable/ government subsidy. and civil competitive works fare A common misconception is that the gap between the farebox revenue and the cost of Trends in MRT PPPs This structure also does not allow lenders to watch over the operator, which acts as a form PPP models for MRT projects can range from of internal oversight. Care needs to be taken full system concessions, where the private sector to ensure that the contractual terms avoid the takes design, construction, and operation risk, potential for “asset sweating,” where the operator to outsourcing of operation and maintenance, defers maintenance on assets to reduce costs. where the role of the private sector is limited to operations risk. Appropriate risk allocation Contracts can be designed to overcome some is a defining quality for a successful PPP—risk of these issues by incentivizing the operator to should be transferred to the party that is best behave as if it owned the system. One method of suited to manage it. accomplishing this is through a financial struc- ture that encourages ridership, thereby creating Some of the advantages for cities developing the incentive for the operator to ensure the MRT projects through PPP structures include system’s performance is attractive to customers. placing the risk of development and construc- tion with the private sector to achieve improved Another method is through a carefully-defined system design, faster completion, and lower cost, regime of key performance indicators (KPIs) and leveraging the diversity of expertise and that covers a variety of O&M areas, such as experience of a worldwide operator. Together, punctuality of train services, and ensures the best these can help achieve more innovative and cost- use of the system’s assets. Payment deductions effective approaches to service delivery. and bonuses would be based on the operator’s performance, incentivizing the desired behavior. More recently, the trend for MRT PPPs is a In many instances, both of these methods (rider- move away from full concession and investment ship incentive and KPIs) are used in tandem. risk, toward public financing of capital invest- ment with private operation and management. As MRT becomes a tool for urban expansion, it These contracts, which would appear to be easier is important to take stock of its record. Under- to structure and manage, pose their own inher- standing the importance of effectively allocating ent challenges. Although under an O&M con- risk between the public and private parties, tract structure, ownership of the assets remains and developing structures that are flexible and with the government metro authority and some responsive to the public’s needs, will power or all of the operation and maintenance risk MRTs forward in a rapidly urbanizing world. of the metro system is transferred to an O&M operator, the typical commercial incentives are not present. This is because the operator has not had a financial stake in the development of the project and its payments are normally not directly linked to the revenue received from the system’s customers. IFC | 65 4 heavy rail/metro PPPs Seoul’s Metro Line 9 Bangkok’s Skytrain The Seoul Metro Line 9 Corporation devel- Bangkok’s extraordinary levels of traffic oped, operates, and maintains the Seoul Sub- congestion suggested that demand was robust way Line 9 Section 1, a 25.5 km subway line enough to support a large, complex rail with 25 stations. The company benefits from system. But debt and equity investors in Sky- minimum revenue support from the govern- train eventually suffered considerable losses ment for the first 15 years of the 30-year when actual ridership figures fell well below concession. The other eight lines are publicly preliminary estimates. Why? Poor integration owned and operated. The Seoul Metropolitan with other modes of transport and difficult Government concessioned Line 9 to a private access to the system for users. Once these operator to increase productivity and set a problems were addressed, ridership improved. benchmark for the public operators of the other lines. Stockholm’s Metro São Paulo’s Yellow Line (Line 4) The Stockholm Metro ran successfully for By 2012, a critical section of São Paolo’s Yellow years under a purely public sector model. Line, built by the ViaQuatro consortium, will In 1990, Stockholm Transport awarded be 12.8 km long. The concessionaire has spent five- to ten-year operations and mainte- $450 million on equipment and rolling stock, nance contracts for its three metro rail and estimates that its total investment will lines, its light rail system, the suburban reach $2 billion during the 30-year operating railway service, and commuter rail services. contract. During the opening celebrations, This approach has allowed Stockholm officials predicted that São Paulo’s urban Metro to improve service and reduce costs rail network would reach 420 km by 2014. through competitive tendering, and to tap The Yellow Line was implemented as a PPP into private sector expertise to chart the to share development and operational risks course for the system’s next 50 years. with the private sector and to reduce the state government’s capital expenditure, allowing investment in other priority projects. Photo 66 © marksdk | IFC.ORG/HANDSHAKE +2 Light rail PPPs Wellington’s Cable Car The Wellington, New Zealand cable car carries around 3,000 passengers each day from the Central Business District to the university and suburbs on the steep hills above the capital city. The cable car was built with private finance by the Upland Estate Company (UEC). The cable car was completed in 1902, at an estimated cost of £17,479 (equivalent to $1.6 million today). By 1926, annual rider- ship was 2 million. However, by the 1940s, competition from council-run buses resulted in the purchase of the cable car by the Wellington City Council. The Council operated the cable car for 44 years until 1991, when national legislation required council-owned passenger transport services to be corporatized or privatized. This led to the forma- tion of the council-owned Wellington Cable Car Limited (WCCL). WCCL initially tendered out contracts for maintenance and operation to private firms. Serco had the operating contract from 1997 to 2007, and since 2007 WCCL has managed it. Operations and maintenance take place in-house. Washington, D.C.’s Tram For 100 years, streetcars were a common mode of transportation in Washington, D.C.—until the system was dismantled in 1962 as part of a switch to bus service. In the late 1990s, however, the city began considering a series of rapid bus, light rail, and streetcar projects. Plans for a 60 km eight-route tram network were unveiled in 2010 and three low-floor cars were purchased from Czech supplier Skoda-Inekon. The first two lines will be built along blighted commercial corridors. Initially, the system will be funded and owned by the District of Columbia Department of Trans- portation (DDOT), and operated by a third party. The trams will operate on-street. In July 2012, D.C. selected a private contractor to run the first phase of its streetcar system. RATP Dev McDonald Transit Associates will be paid $4 million a year to handle the day-to-day opeations of the 2.2 miles of track along the H Street N.E. corridor for five years. The company will also oversee training and maintenance facilities. DDOT will retain ownership of the line and control fares. Construction of the line is expected to cost $50 million and open in the summer of 2013. DDOT is considering a PPP to speed up the development of the rest of the system. Sources: Railway Gazette, Washington Examiner, and Wikipedia. IFC | 67 Photo © Evan Goldenberg NEXT stop: light rail Where What Cities across the globe are look- ing to improve transportation in response to ever-expanding urban populations, and thus modern LRT systems are being introduced in many cities worldwide, often under a PPP. Over 450 systems are in op- eration worldwide, with with many more at various stages of develop- ment. Major cities such as Paris Light Rail Transit (LRT) is an urban and Washington, D.C. are building rail public transportation system that their first tramlines since World can be developed in stages from a War II (see feature next page), tramway to a rapid transit system. It while Asia and the Middle East are has less capacity and is slower than actively pursuing new systems. urban heavy rail or metro systems. 68 |Photo IFC.ORG/HANDSHAKE © Zsolt Andrassi Rail Why Affordable, environmentally friendly, and socially responsible LRT systems can support urban development and renewal. When well planned and implemented, they can provide vital access to city centers while helping reduce congestion and emissions, and enhance quality of life. Electric tramways are almost cer- tainly the most sustainable form of motorized transport available. The vehicles and tracks are easier to produce, operate, maintain, and recycle. Unlike roads, tracks By 2030, urban areas will be home to have a 50-year lifespan and don’t more than 4.8 billion people, making require periodic resurfacing. With the implementation of efficient and all these benefits, it’s no surprise sustainable public transportations that trams succeed at getting mo- systems.more essential than ever. torists out of their cars and cities Light rail systems are an increasingly on the right track. popular solution. Sources: Light Rail Transit Association and International Association of Public IFC | 69 Transport. RA M S T ion p ress to e ds tD G rea 0s lea e of 3 The he 19 ollaps he f t d c T o r a pi ems. over. t h e s y s t e s ny tak ma orbus w t o mo & n e n e n Hal Siem first ele erlin’s the rovide rvices B s k e ope ay amw s & ctric tr public . ns th e ve o p r t s rchi t dA spo rary an tran tion Lib orta ansp s Tr etro Pho to ©M 3 0 19 ve rchi andA rar y Lib r tation s spo Tran Pho to © Metro 0 ina d. 90 ams d e worl ams. o m te 1 25 y s tr th ear city in ge” o r a f tr o For y maj olden 8 8 1 e v e It i r s t h e “ g 70 | IFC.ORG/HANDSHAKE 1 rail Urban p lanners ideas to sea save citie rch for sprawl a s nd econ from tens decline. omic a r II has ms but Lig and tram ht rail is reborn ld W tra ir- Wor cline of s for the claim cit s, once ag the d e llo w eral y streets ain, i m a tely a n in sev . ult ctio tries. nstru reco ean coun p Euro Photo © Osbornb e Photo ©F d Archiv eli x0 rary an on Lib ©M etro T ransp or t a t i 1970s 199 0s o Phot s 1950 Mass motoring leads to major traffic congestion problems as landscapes are torn down and city centers decline. The disad- vantages of motorization start to become evident. Sources: Light Rail Transit Association and International Association of Public IFC | 71 Transport. trains of Thought Rail concession models in Sub-Saharan Africa By Pierre Pozzo di Borgo Railway privatization debuted in the late 1980s in the United Kingdom and quickly expanded into Latin America. But Sub-Saharan Africa’s (SSA) experi- ence has proven particularly relevant to development practitioners because it has taken place in an extremely challenging market environment. Most of the formerly state-owned railway companies in SSA (outside South Africa) have now been transferred to private operators under various forms of concession contract, and today more than 70 percent of the rail networks in SSA are now in the hands of private operators. Well-performing and reliable railway operations countries, which are especially vulnerable to high are important for Africa’s transport systems and transport costs. economies. In addition to dedicated mining The experience of Sitarail in Côte d’Ivoire/ railways, which are used to cheaply and reliably Burkina Faso illustrates the positive impact that transport large volumes of export cargoes over a well-run railway can have on a landlocked long distances, general freight and passenger rail- country’s economy. It provides a competitive ways also play a key role in supporting economic transport link between Burkina Faso and West growth. This is even truer for Africa’s landlocked Africa’s main port of Abidjan, and its estimated 72 | IFC.ORG/HANDSHAKE Rail Photo © Javier Calvo direct economic impact, comprising mostly fuel import and truck transport savings, is projected 1 Overestimation of the market to top $280 million between 2008 and 2017. In most cases, traffic gains have been much lower Almost all of this impact (96 percent) is likely to than expected because road competition has accrue to Burkina Faso, and is mostly attribut- been fiercer than anticipated. The KRC conces- able to transport cost savings. sion contract, for example, targeted four million tons of traffic between Mombasa and Nairobi, with financial sanctions if this was not achieved. What’s riding on these rails? In reality, traffic increased from 2.2 million to The global performance of railway concessions only 2.5 million tons until it became clear that varies. On the one hand, concessions have the concession contract needed to be revised. resulted in increased labor and asset productivity, Additional capital and investment debt was higher market share for freight services, lower required to make the rail operations financially overall government subsidies, and improved solvent. financial viability. On the other hand, they have Host governments often did not understand the failed to deliver the level of private investment need to equalize rail/road competition, or were originally envisioned, or the expected improve- deterred from doing so by the prevailing political ment in the quality of passenger services. Overall, economy supporting the trucking sector. In SSA, the expectation that concessions would achieve governments originally saddled concessionaires long-term financial sustainability without the with the cost of rail maintenance and rehabilita- financial support of governments has not been tion, while they proved unable to modify road realized. Why is this? Theories include: user regulations and taxation, making truckers IFC | 73 Sizarail DRC 1995-1997, 2008 Transrail Senegal/Mali 2003 RVR Kenya/Uganda 2006 Sitarail Côte d’Ivoire, TRC Burkina Faso Tanzania 1995 2007 Canac/wacem CEAR Togo Malawi 1995/2002 1999 Camrail CDN Cameroon Mozambique 1999 2005 Madarail Transgabonaise Madagascar Gabon 2003 1999 CCFB RSZ Mozambique Zambia 2005 2003 BBR Ressano Garcia Zimbabwe Mozambique 1997 Cancelled Railway operated by PSP projects planned state railway company or underway Part of rail network now Railway now under under private management private management 74 | IFC.ORG/HANDSHAKE shoulder no more than a mere portion of the risk associated with badly crafted passenger cost of road maintenance. subsidy schemes. For example, the financial impact of unpaid passenger subsidies from the 2 Underestimation of invest- Government of Cameroon to Camrail between 1999 and 2008 all but wiped out the cumulative ment needs profits generated by freight services, while repre- Plans for infrastructure rehabilitation usually senting less than 15 percent of the rail operators’ focused only on the first five years of the conces- revenues. sion, ignoring long-term needs, which proved to Markets served by rail concessions in SSA are be far greater than anticipated. This was often usually too small to ensure the sustainability of a result of a downplaying of the investment rail businesses required to finance both rail infra- needs of existing rail infrastructure on the part structure and rolling stock without heavy gov- of the governments and private operators during ernment subsidy. The average yearly revenue of bidding. most rail concessions in SSA is only $35 million, 3 Under-capitalization whereas each network requires rehabilitation investment far in excess of that amount (more The capital base of concession companies was often too limited, in part to lower the risk perceptions of potential private investors. This caused many concessions to rapidly become Markets served by rail cash strapped, as projected positive cash flows did not materialize. The long-term debt burden concessions in SSA are usually inherited from the on-lending of donors’ money too small to ensure the sustain- became too burdensome. ability of rail businesses required to finance both rail infrastructure 4 Unrealistic expectations of and rolling stock without heavy passenger services government subsidy. Since 1996, none of the privately operated passenger services have ever achieved financial solvency. They have all been either indirectly subsidized by freight operations or directly than $200 million for Camrail and Transrail, subsidized by government treasuries. Although according to their respective concessionaires) in subsidization is not intrinsically problematic, the next 10 years (2010-2020). analysts underestimated the political cost and IFC | 75 Traffic volumes and revenues for a sample of SSA railways in 2008 2200 TKM 370 TKM TransGabonais Transrail $ $ $ $32 $ $ $ $ $37 1518 TKM 285 TKM KRC-URC CCFC (Beira) $ $ $ $ $ $ $ $66 $ $11 1211 TKM 212 TKM Camrail CFCO $ $ $ $ $ $ $ $ $ $ $ $114 $ $ $ $ $ $49 883 TKM 134 TKM Sitarail Madarail $ $ $ $ $ $ $ $66 $ $ $17 506 TKM 100 TKM RSZ Nacala $ $ $ $32 $ $7 370 TKM 77 TKM TRC NRC $ $ $ $ $37 $ $2 359 TKM 44 TKM SNCC CEAR $ $ $ $ $ $ $ $66 $ $3 All figures in millions TKM=tonne-kilometer Traffic $ Revenues Model railroad • Private operators taking responsibility for Concession contracts in Cameroon and Mada- financing rolling stock maintenance and gascar have been successfully restructured to renewal, shouldering only the cost of track reflect the lessons learned since the beginning of maintenance; privatization in 1996. The pillars of this restruc- • Governments agreeing to finance track turing include: renewal subject to sharing profits; 76 | IFC.ORG/HANDSHAKE • Governments committing to finance Railing infrastructure, partially securitized by an “infrastructure renewal fee” paid by the against the concessionaire (which represents anywhere from 1 to 4 percent of annual revenues) competition into a secured account managed by it for the government; The main competitive advantages of • Concession contracts stating upfront the rail over road transportation are: estimated infrastructure amounts payable for at least 15 years, so governments grasp • Higher transport capacity per dollar invested (50 percent lower their net commitments (after the infra- cost per kilometer of rehabili- structure renewal fee, profit sharing, and tated rail track compared to a other concession fees); two-lane road). • Instituting intermodal competition poli- • Higher durability (roads need cies to rebalance road-rail competition (for complete rebuilding every seven example, enforcing axle loading for trucks to 10 years, versus every 15 to along competing corridors, and road tolls); 20 years for rail tracks). and • Lower energy consumption and • Separately accounting for passenger services, carbon footprint per ton trans- to reflect governments’ financial obligations ported (up to 75 percent and 85 to these. percent less, respectively). • Higher operational safety— While this approach is likely to ensure the the road accident rate per ton success of railways in SSA, the success of conces- transported is much higher than sions will ultimately be determined by govern- that of rail. (For rail passengers, ments offering private operators rail businesses the worldwide accident rate is with enticing financial returns. However, the below one fatal accident per financial fundamentals that have driven private billion passenger km, versus a investment towards the railway sector are not range of 6 to 700 for road users likely to change soon. worldwide.) IFC | 77 Photo © Beyond Images/istockphoto Mining NEWtransport solutions The mining industry has witnessed many changes in the last decade, Enabling multi-user & including recent soaring commod- ity prices fueled by high demand. multi-modal systems The high commodity price environ- By Pierre Pozzo di Borgo ment has resulted in a consolida- tion of the sector with large private Many governments are trying to extract the companies controlling some key highest possible value from their mining commodities like iron ore. At the resources through in situ transformation require- same time, there is an improved vi- ments. This has resulted in a new approach to ability of resources that were previ- mining development from host countries, which ously considered non-viable, due to now seek to negotiate comprehensive “mining expensive transport infrastructure development agreements” rather than simple resulting from geographical remote- “mining licenses.” ness. Developing these stranded Two key issues arise around the financing, mining resources has created a new construction, and operation of this package set of logistical challenges centered infrastructure. First, we ask which party will be on the financing, construction, and responsible for developing the mining-related long term operations of expensive infrastructure. Following this, how can the transport infrastructure. infrastructure be shared with other mining or freight users? 78 | IFC.ORG/HANDSHAKE Rail Me, you, or them? Project models for mining transport infrastructure There are three primary models for financing and developing mining-related transport infrastructure: Public entity: Rarely seen Mining Company: The Third-party private sector since the 1980s, unlikely most popular model since company: Remains elusive. to occur going forward. the 1990s and the most pragmatic approach. Pros Pros PROS Pros • Government can choose • Project financing. • Facilitates asset pooling. to finance shared-use • Incentive to main- • Allows the use of infrastructure and gain tain good quality project financing and from its broader benefits. infrastructure. integrated construction • Efficiencies from an management. integrated value chain. • Limits barriers to entry • Creates economic gains and fosters core-business if government regulates competition. assets as multi-modal and/or multi-user. Cons Cons CONS Cons • Too costly for most • Creates barriers of entry • Can be more complex emerging market for mid-tier and smaller to structure and requires governments. mining companies. government PPP • Historically dependent • Creates unnecessary know-how. on concessional financ- duplications in most • Difficult to attract strong ing. Little donor appetite cases if multi-modal private sector players due now, especially for single- and/or multi-user to market and geopolitical user projects which are approach is not uncertainties. commercially viable. imposed by regulators. • Requires the miner to • Governments may lack give up some of its equity expertise to design, build, returns to the third party and operate the assets. provider. IFC | 79 The multi-user approach: Can the same transport infrastructure be shared among several mining shippers? Benefits Challenges Mitigants Creates additional Uncertainty around Infrastructure can revenues for the different stages of start off as single-use owner/opera- development of vari- and become multi- tor (from other ous mining projects, user when needed, miners). creating throughput providing upside to uncertainty. the initial investor Agreement on access based on clear and tariffs. transparent access regulations and an Agreement on impartial regulator. transport capacity allocation. Fosters competi- This is rarely in Government may tion: lessens bar- the main mining regulate/require riers of entry for sponsor’s inter- multi-user access to other miners. est. They typically the transportation prefer to guard their infrastructure as destiny through part of the mining dedicated transport company’s license/ infrastructure. concession. Creates more As more projects Adding capacity is viable investment become viable, less challenging/ opportunities, infrastructure needs costly than the which brings to expand, which initial building of additional mining raises the issue of the infrastructure. products to the who should finance Furthermore, traffic global market. capacity expansion. demand risk is no longer prominent. 80 | IFC.ORG/HANDSHAKE The multi-modal approach: Can mining products share the same transport infrastruc- ture with general freight products and passengers? Benefits Challenges Mitigants Creates additional Difficult to project Can only be done revenues for the traffic from other when infrastructure owner/operator industries/users and financing makes (from general devise “fair” access financial sense based freight users). tariffs. on a few key mining Opens the door customers. for requests from Should be designed government to offer to avoid displacing passenger services that mining traffic (uses are rarely operation- extra and unused ally compatible with transport capacity intense mining traffic. only). Creates incentive Not automatically Mining sponsor has for the operator true—still need stronger incentive to to ensure higher to attract strong maintain infrastruc- quality infrastruc- operators. ture to withstand ture due to higher additional traffic. usage. Fosters numerous Under the Third Party Programmatic positive externali- model, “chicken and approach based on ties for the egg” problem: an trade-free zones and host countries. investor has to invest other economic in customers that incentives to attract might only material- third parties. ize if such infrastruc- ture is in place. IFC | 81 Ehoala Port, Madagascar Aynak Copper Deposit, (opened in 2009) Afghanistan Construction of a multi-modal port Copper deposit with an estimated 240 in Ehoala. million tons accessible through surface • The port was 87 percent funded by mining. QMM, a subsidiary of Rio Tinto, • The Aynak copper deposit was the under a concession agreement. first international, transparent, and • While the QMM ilmenite mine is competitive mineral bidding process the port’s key initial customer, it is to take place in Afghanistan. expected to gain other customers • Project will provide direct employ- over time as economic activities ment of 5,000 and an estimated develop. (Currently, agricultural, annual revenue stream of $300 mil- mining, and sea products are under- lion to the government. exploited due to the lack of such • It will put in place shared-use road, infrastructure.) rail, power, and water systems. Moatize Coal Project, Mozam- Siandou Iron Ore, Guinea bique (commissioned in May 2011) (under development) Coal mine with a production capacity of Iron ore project under development in 11 million tons per year. southeast Guinea. • Shipment of the coal to the port of • 600 km rail and associated port to be Beira by rail. The line’s rehabilitation built to export the ore. Government was completed by a private sector will have a 51 percent stake. majority consortium through a PPP with the government. • Plans for the construction of a new rail line to Nacala port, which is expected to be shared-use and involve Source: IFC, 2012; and Mineral Resource Tenders the governments of both Mozam- and Mining Infrastructure Projects Guiding Prin- bique and Malawi. ciples, World Bank 2011. 82 | IFC.ORG/HANDSHAKE Photo © Ivars Linards Zolnerovics/istockphoto Rail On the fast track everything you’ve always wanted to know about railway gauges Around the world, planners constructing new railway lines must determine what rail gauge to adopt. Historically, many different gauges have been used for a range of reasons. Although this ( but were afraid to ask ( variation has lessened over time, there remain By Richard Bullock many locations where passenger and freight rail traffic move from one gauge to another. Several methods have been developed to make these operations as efficient as possible. 1 What exactly is the rail gauge? The term “rail gauge” traditionally refers to the track gauge, which is the distance between the insides of the two rails. But there are other gauges as well—principally the structure gauge, which defines the vertical and horizontal clearances around the track to allow clear passage of the rolling stock. There have been an astonishing number of track gauges used over the years, but today most fall into six groups. Image © Phil Parker IFC | 83 1% 1600 mm (5’3”) Ireland, parts of Australia, Brazil 9% 18% 1676 mm (5’6”) 1067 mm (3’6”) India, Pakistan, 1000 mm (3’3”) Spain, Portugal, Cape gauge and meter gauge parts of Argentina Japan, Africa, Indonesia, many ex-colonial railways 1% 57% 760 mm (2’6”) and 600 mm (2’) Used for many low-volume lines 1435 mm (4’8½”) throughout the world Standard gauge Europe, North America, China Source: Tracks across 14% Continents, Paths through 2 History: The Economic 1520 mm (5’) Dynamics of Standardiza- tion in Railway Gauge by CIS, Finland Douglas J. Puffert (2009) Why are there so many rail gauges? The first railways developed from horse-drawn wagonways, which had a variety of gauges but were typically between 1200mm and 1500mm. The “standard gauge” of 1435mm was more or less the gauge of a wagonway used by the engineers (principally George Stephenson) of the earliest U.K. railways in the 1820s. But other engineers had their own theories, generally wanting to build broader gauges to provide more stability and capacity. Many of these varia- tions were eventually converted during the following decades. Narrower gauges, which typically permit sharper curves than the standard gauge and are cheaper to construct, were subsequently introduced as lines were constructed in hillier terrain and as networks expanded into low- volume regions. In some cases, gauges have been considered an important element of commercial and national security. Variations in gauge between neighboring networks limited diversion of traffic and interchange of rolling stock with adjacent networks. Some countries still consider a break-of- gauge an important factor in strengthening their defenses against invasion. 84 | IFC.ORG/HANDSHAKE 3 Which gauge is the best for efficient freight operations? How do railways solve the problem of transshipment at interchange points? 4 The general engineering consensus has always been that the most technically efficient gauge Freight often has to be physically in normal terrain is somewhere between transshipped, either manually 1500mm and 1800mm—but the gain com- or through bulk transshipment pared to the standard gauge of 1435mm is facilities. Many interchange points not overwhelming. In addition, most modern also have facilities for changing rolling stock outside Russia and India is built the bogies of the vehicles while as standard gauge, and the cost of modify- the contents remain untouched, ing the design to a different gauge is often and for short distances a wagon substantial. Finally, for those rail systems of one gauge can be piggybacked which use cape and meter gauges, change to onto a transporter wagon. But standard gauge is more often than not hardly these arrangements cost money, justifiable on economic grounds. It entails loss delay freight, and are unreliable. of interoperability with neighboring railways Another common solution has been and complete change in rolling stock. This is to avoid the problem by including usually not underpinned by significant gains both gauges in the same track. Dual in freight volume. gauge exists over significant dis- tances of some main lines, and triple gauge can also be found. 5 To what gauge should new railway lines be constructed? Where new lines are connecting with a network, the cost and inconvenience of transshipment is often so steep that there is every incentive to construct the same gauge as the network it is connecting to. Where the new line is standalone (as with high-speed lines in Japan and Spain as well as the Gautrain suburban line in South Africa), however, there are strong arguments for constructing a standard-gauge line. IFC | 85 Speeding toward tomorrow As the retrenchment continues in the public sector worldwide, private sector investors are likely to play an important role in paying for fast train systems. PPPs in France provide two potential models that could prove useful. By Yonah Freemark 86 | IFC.ORG/HANDSHAKE Rail With a depressed economy and little government western France to the existing northern branch money available, there is increasing recognition of the Atlantique line with 182 km of new tracks of the potential value of engaging the private sec- between Le Mans and Rennes by 2016. tor in infrastructure financing. France, which has This PPP contract is being primarily funded by recently signed two large deals to extend its high- the public sector; Reseau Ferré de France (RFF), speed rail network, provides useful examples of the public infrastructure owner, will contribute varying approaches to PPP contracts. €1.4 billion, with state and local governments The first is the €3.4 billion Bretagne-Pays de la paying about €1 billion more. Thirty percent Loire (BPL) high-speed link, which will connect of the costs will be financed with loans by the Emerging Markets tools not currently available to them. PPPs cost more than government-sponsored alternatives In emerging markets, PPPs offer advantages in many cases, but they provide an infusion of that are not as apparent in developed nations. technical knowledge that may not be available High growth rates mean that an investment in without private sector involvement. capital for certain projects may provide a very The significant growth in PPPs in emerging high return. Thus private funds assembled more markets reflects this (more than $80 billion was quickly could result in more significant eco- invested in emerging market PPPs in 2009). To nomic growth over the long term than expen- ensure success, however, effective PPPs require ditures generated from public revenues or loans strong legal systems, a lack of corruption, and from international organizations, which often strong enabling institutions. Emerging markets require a longer development time. must pay close attention to these components to Moreover, developing countries that lack public- avoid even greater risks than developed countries sector expertise in rail construction can use PPPs if they bring in private investors without ensur- to gain access to construction and management ing that an effective regulatory framework is in place first. IFC Photo © | 87 DOS82 private construction group Eiffage. These will be SOJAS investment company (22 percent), and paid back over twenty years with pre-determined AXA Bank (19.2 percent). The 50-year contract, fees from train operators. which includes construction, operations, and Like Lyon’s Rhônexpress airport rail link project, maintenance, is the largest-ever PPP for a Euro- which connects the city center to the airport, pean rail project. this PPP arrangement essentially keeps the LISEA will contribute €3.8 billion to the project, operations risks in the hands of the public sec- with the remainder of costs being granted by tor; if ridership comes in under estimates, the public sector sources. Much of the private fund- government will have to scrounge up funds from ing will come from low-interest, long-term loans elsewhere to pay Eiffage its due. If ridership is that will be repaid through charges on trains above estimates, RFF will profit from the PPP using the line. These will eventually be passed on relationship. to ticket-paying passengers over fifty years. Unlike with the BPL line—which limited risks All rails lead to paris of operational profitability and line ridership The other French project soon to begin construc- to the public sector—in this case, the private tion is the €7.8 billion Sud-Europe Atlantique investors will be responsible if initial estimates line, which by 2017 will extend the southern fall short. branch of the existing Atlantique line 302 km The business case for Sud-Europe Atlantique line from Tours to Bordeaux, bringing that city assumes operational profitability. The interna- within two hours and five minutes of Paris— tional record shows that high-speed rail systems about an hour faster than today. have little difficulty achieving self-support, Because of the expected profitability of the line, so these are not unsound predictions. The RFF signed a concession contract earlier this advantage of acquiring private sector support is year with a private consortium called LISEA, beginning construction more quickly by delaying made up of Vinci construction company (33.3 public investment, and using future revenues to percent), the Caisse des Dépôts (25.4 percent), pay back construction costs. The use of PPPs does not mean that the public at large will ultimately be responsible for a smaller percentage of overall costs. 88 | IFC.ORG/HANDSHAKE It would be a mistake to conclude from these it? Transportation economists argue for user fees examples that private sector involvement will such as the tolls charged to trains in the PPPs save any significant money over the long term discussed here; for economists, it makes perfect for developed countries with streamlined govern- sense to charge users the full cost of not only mental sectors. The use of PPPs does not mean the operation but also the construction of the that the public at large will ultimately be respon- infrastructure they are using. (That said, many sible for a smaller percentage of overall costs. economists note that rail projects have significant PPPs typically require a higher cost of capital positive externalities like pollution reduction and than public financing that may not be offset by land use prioritization that demand direct grants potential efficiency gains from private sector from the government to cover some costs.) involvement. This means that such projects may Others, however, argue that the benefits of rail cost more to complete than those funded only by are economy-wide and that they should be paid the government, and thus will eventually have to for not only by users but by all members of the be paid off by users through higher fees. population through general taxes; therefore, While the taxpayer may appear to be getting a charging the riders alone for the costs of capital discount now by using PPPs (and indeed, some investments would be inappropriate. Moreover, projects provide large upfront cash grants to the unavoidable risks associated with PPPs sponsoring governments), infrastructure users suggest that any decision to incorporate private will inevitably have to face the costs of future investors in public infrastructure should be tolls. In the case of high-speed rail, replacing approached with skepticism. government investment with private financiers To diminish these risks, a 2011 report from means higher ticket prices in the future to pay the Public Interest Research Group suggested back a portion of the costs of construction. aligning “private sector incentives with public There is no free lunch. sector goals,” only pursuing PPPs “where ample competition exists,” ensuring “clear public Who wins? accountability,” retaining public control over But do the benefits of a transportation invest- system decisions, limiting lengths of contracts, ment bring advantages to the entire public or and guaranteeing transparency in the contracting are they reserved only to those people who use process. IFC | 89 Riding RussiaN RailS Public-private solutions solve rolling stock shortage Deregulation and development of the Rus- country’s economy, accounting for the bulk sian and Commonwealth of Independent of goods transport (without taking pipelines States rail sector is a good example of the into account). But after the disintegration of public sector partnering with private busi- the Soviet Union, the country’s rail system was divided among 15 newly independent states, ness in order to resolve a sector capacity which included the infrastructure and rolling issue and facilitate economic growth at the stock. In the end, Russia inherited approximately macro level. 1.1 million freight rail cars (1992 data), all held In the 1980s, the Soviet railroad was the largest by the state. rail system in the world, accounting for half of During the Russian economic collapse of the the world’s total railroad turnover. This is no 1990s, the declining cargo turnover and low surprise: given the size and the terrain of the earnings of the rail system led to very little country, rail was historically the main mode investment in the replacement of the rolling of transportation and the bloodstream of the stock. Just one decade after the record-breaking By Sergei Mytarev 90 | IFC.ORG/HANDSHAKE Photo © Falcon0125 rail statistics of the 1980s, rail traffic in Russia bot- The private sector responded quickly with a mas- tomed out in 1998. At 60 percent of the peak sive acquisition of rail cars. In 2003 the number reached in 1988, a large proportion of the rail of private rail cars in Russia reached 200,000; by car fleet was now parked idle. Worse, because contrast, at the end of 2011 this number shot the cars were aging, thousands of them had to up to 530,000, representing over half of Russia’s be scrapped and very few were replaced due to 1 million strong rail car fleet. Another benefit the lack of finance. As a result, only slightly over accompanied this development: private fleets half of the initial number of rail cars survived tend to be much younger and in better condi- through the 1990s (630,000 cars). tion than those of the state-controlled entities. By 2010, there were a whopping 2,000 private rail car owners (leasing companies and logistics Starting over operators) in the country. At the start of the twenty-first century, Russia’s As these numbers demonstrate, the rail sectors promising economy grew by some 7 percent liberalization and creation of a favorable invest- per year on average between 1999 and 2008. ment environment for the private sector helped This resulted in an increasing demand for the alleviate the rolling stock shortage in Russia and transportation of goods, especially commodi- facilitate the economy’s growth. Other countries ties—which need to be moved by railcars. A lot of the former Soviet Union took similar steps to of railcars. But the aging fleet could not meet attract private sector investment in rolling stock. the demand, as the state still lacked funding to quickly provide new rolling stock for the grow- But the crisis is not quite over. Having addressed ing traffic. the rail car availability constraints, Russia is now facing increasing track capacity shortages To tackle the problem, Russia’s government in certain parts of the rail network, especially decided to turn to private finance. It embarked in proximity to major sea ports. Cooperation on a long-term rail sector liberalization program, between the public sector (which owns the a part of which addressed the issue of providing infrastructure) and private business may offer access to the state-owned rail track to private rail a solution to the fixed infrastructure capacity car owners and incentivizing them through the issue, just as it helped solve the country’s rail tariff system to invest in rolling stock. Spin-off car deficit. and privatization of state-owned rail car opera- tors followed suit. Rail traffic in Russia bottomed out in 1998, just one decade after the record-breaking statistics of the 1980s. IFC | 91 Legalease Railroad ties that By Victoria Delmon bind Legal, regulatory, and policy issues that impact railways Policy, planning, and regulation play critical sion or operating agreement. Clear requirements roles in the railway sector. Following are some are critical—especially those that stipulate of the key issues that arise from the interface whether the operator is required to provide between the public and private sectors in railway access to third parties, on what terms, and concessions. whether its own operations can take priority. These challenges increase where there is cross- Competing access border potential (a particular issue for land- locked countries that need transit services to In situations of vertical integration, where the sea ports). Without appropriate arrangements railway operator owns the track, operates the between governments that determine the rules track, and operates trains on the track, monop- and costs of access for foreign operators, goods oly pricing can restrict access to private opera- will need to be transferred from one country’s tors. This challenge can be managed through train to the other’s at drastically increased cost regulation, by requiring the incumbent to allow and reduced efficiency. This has been a challenge third party access at set rates. Not as easy as it within the European Union, resulting in sig- sounds perhaps, but getting it right allows for nificant regulation that limits discrimination in significant growth of private sector participation, cross-border access to railway track . increased competition, and resulting efficiency gains. Where a railway is being operated by a private Intended use operator, the terms for competing access will An obvious but critical point: government must need to be specifically addressed in the conces- define a railway’s end-use during the concep- 92 | IFC.ORG/HANDSHAKE tualization of new railways or the expansion Public sector obligations of an existing one. This definition will affect specifications, which are often difficult to change Contracts must also assure investors that pre- once the railway has been built. For example, if agreed government obligations will be met on government wants the railway to carry passen- time. Timely provision of land, access roads, gers, the track, route and station specifications and connectivity to other transport modes will will need to reflect this. In contrast, if the track significantly impact the viability of railways. This is to be used for heavy minerals, it will need to is also achieved through a robust compensation be constructed to manage the load. mechanism and/or other remedies. In determining capacity, governments need to predict future need and specify in the contract Regulatory risk how to manage increases in demand. Given the monopolistic nature of public sector Planning for future traffic loads is particularly involvement in railways, and railways’ important important in the case of minerals transportation. place in a nation’s infrastructure, they tend to Often, a dedicated track laid by a mining com- be heavily regulated. From an investor’s perspec- pany is not designed to allow for increased loads tive, it is important that such regulation is fair, from other mines or for passenger transport. If transparent, and predictable. Investors will look the government has envisaged shared use, then it for assurances that regulatory risk is mitigated. In will need to specify this before the track is laid. particular, investors prefer to see an independent regulator—or at least one that is shielded from If connectivity with neighboring countries is government interference. necessary, then compatible gauge must be used. Other technical standards, such as signaling and safety, should also be considered. Change in government There is more discussion on railway reform and PPP in railways in the PPIAF and World policy risk Bank Railway Reform Toolkit for Improving Railways are highly sensitive to changes in Rail Sector Performance. government policy. Concession contracts must More information on legal and regulatory include robust change of law provisions and issues in railways, roads, and other transport compensation mechanisms for the private inves- and infrastructure sectors can be found at the tor who suffers as a result of government actions PPP in Infrastructure Resource Center for and policies that affect traffic. Examples of this Contracts, Laws, and Regulation: could include construction of a parallel road, www.ppiaf.org/railtoolkit a new subsidy for bus routes, or a reduction in taxes for truck freight. IFC | 93 Moving smarter By Mariana Dahan Intelligent transportation systems have revo- One of ITS’s most powerful tools is the ability to lutionized all aspects of urban transportation. connect transportation devices to the cloud com- These systems contribute to more efficient urban puting infrastructure, which allows for real-time transport by helping people plan trips, improv- analysis of data. To see how effective this can be, imagine these headlines: a major snowstorm ing safety on high-volume traffic roads, and hits New York City during rush hour, snaring creating simple mechanisms for service and toll city-wide public transportation. Not only do payments. officials want to know where all of the buses are in the affected area, but also how many people Intelligent transportation systems (ITS) debuted are on each bus. Instead of relying solely on GPS with in-vehicle navigation systems such as data to locate each bus, the local transportation Navteq, Onstar, Navigation Disc programs, and agency can obtain accurate data on the number iDrive systems, which aimed to provide safe, of passengers on each bus and communicate this comfortable, and environmentally friendly driv- critical information to emergency rescue ser- ing guidance. Changes following rapid urbaniza- vices. If the technology embedded in a standard tion increased transport complexity and created bus—a camera, a fare collection terminal, a the need for a more sophisticated tool. passenger counting device, a WiFi and GPS The resulting ITS uses integrated systems, system—is ultimately connected to a cloud wireless communication, data clouds, and cloud computing infrastructure, data can be analyzed computing to respond to the needs of individual in near real-time, providing realistic snapshots at drivers in urban settings. In addition to helping any given moment. drivers, these new systems allow transportation agencies and companies to more efficiently man- age their IT resources and to develop and host Legislating change mobile and web-based applications. The need for “smart” transport was recognized in 2010 by the European Council, European 94 | IFC.ORG/HANDSHAKE Logistics Parliament, and European Commission, as they it refers to a series of events that source prob- agreed on a pan-European Directive for ITS. The lem statements from citizens, civil society, and Directive means that travelers will benefit from development experts; build sectoral and digital seamless services across Europe. Also, authorities literacy for technologists and for development and administrations will reduce waste as network practitioners; develop community structures, reliability and equilibrium are improved through networks and relationships; and use technology the use of more integrated systems. Industry will to visualize solutions. Together, these groups also have a stable market to service, because of hack (i.e., create) rapid iterations of technical the new and sustained business opportunities pilot solutions to conceptualize and build solu- created. Transaction systems, like integrated tions to pressing development challenges. ticketing, road user charging, electronic fee col- The first stage of the Transport Hackathon, a lection, and improved traffic management and Tech Camp, launched in Egypt in June 2012, information systems will be the key to this major and the full Transport Hackathon followed in transition in transport. October 2012. Overall, the event increased To support better and more efficient transport awareness of transport challenges facing Cairo decisions, more and better quality data is essen- and the impact on the city’s sustainability. But tial. In addition to traditional transport statistics, personal interactions were also key. Participants new ways of collecting and sharing data—for acknowledged the importance of creating a example, through crowd-sourcing mechanisms— network of partners that had never before should be combined with sound follow-up collaborated—including Egyptian civil society, actions and enforcement policies. aid agencies, software developers, and relevant Egyptian government offices. In other words, it’s a hack for the greater good—and if it results in Innovative approaches smarter, greener growth for the transportation Changes in the traditional landscape of the sector, it will be even better. transportation industry have translated into another major shift in the development process, welcoming new actors and innovative solutions. To capture this innovation, the World Bank Why Cairo? has initiated Transport Hackathons—a multi- Cairo’s traffic costs the economy as much as $8 month process designed to engage experts in billion in lost productivity, delays, and excess the field of transport and urban development fuel consumption, according to the World alongside experts from the volunteer technology Bank. That amounts to about 3 percent of gross community. domestic product, putting Cairo’s rate several times higher than that of comparable cities. Hackathons represent a new approach to transportation problem-solving. In this context, IFC | 95 Logistics Enhancing trade is the most effective way to reduce poverty at local, national, and regional levels as long as barriers to road transport are removed. After all, research has shown that road transport is a key driver of economic development, and 80 percent of world trade passes through about 30 major ports. To achieve this ultimate goal of economic development, the International Road Transport Union has focused on reopening the ancient Silk Road to trade by road transport, connecting businesses in the region to major world markets. The aim is to stimulate trade, investments, tourism, and employment in landlocked countries that are not yet benefitting from globalization. Mapping a path Truck caravans transform the Silk Road by Umberto de Pretto 96 | IFC.ORG/HANDSHAKE Photo © IRU The International Road Transport Union (IRU) transport time along the Silk Road is lost due has implemented several projects over the past to inappropriate border crossing procedures— 15 years to collect and analyze data on the not to ineffective infrastructure (the common impediments and non-physical barriers to trade misconception). Additionally, some 25 percent by international road transport. Results are of transport costs were due to payments and encouraging: in 2004, the IRU’s Beijing-Brussels levies, both official and unofficial, paid by drivers Truck Caravan highlighted road transport as at borders. an effective means of shipping cargo between Confirming this, the Economic Cooperation Asia, Europe, and the Pacific. Notably, the study Organisation (ECO)—IRU Silk Road Truck found that infrastructure is not a key impedi- Caravan travelled from Islamabad to Istanbul ment to trade. This finding laid the groundwork in 2010 to collect data on border waiting times, for more focused research. customs procedures, and road charges. Research clearly demonstrated that most barriers stem Accumulating answers from the inefficient implementation of key UN In 2007, the Black Sea Ring Highway Caravan multilateral trade and road transport facilitation collected further data on non-physical barriers instruments. ECO followed up in 2011 with to road transport in the Black Sea Economic regular monitoring of trucks, which proved 30 Cooperation (BSEC) region—a concrete first percent of transport time is lost at ECO borders step towards the development of an integrated and “unofficial payments” account for 28 percent road transport market. of transport costs. In 2008, building on all of these initiatives, the IRU’s efforts to revitalize the Silk Road point to IRU’s New Eurasian Land Transport Initiative the need to streamline border crossing proce- (NELTI) investigated the feasibility of Eurasian dures by ratifying and strictly implementing UN land transport for commercial goods. In June multilateral trade and road transport facilitation 2009, NELTI expanded possible routes to China instruments. This action will significantly reduce and Afghanistan, and developed a road map transport times and costs, and greatly enhance to reduce the time and cost of road transport road transport efficiency without further infra- between China and Europe. structure spending. revealing results This article was made possible with the help of Virginia IRU’s NELTI results showed a high competi- Tanase, Senior Transport Specialist in the Transport, tive potential for the development of alternative Water, Information & Communication Technologies trade routes, but revealed that 40 percent of road Department of the World Bank. IFC | 97 is the new green UPS’s sustainability initiatives set new standards for logistics operations Scott Wicker, UPS's Vice President of corporate plant engineering, was named the com- pany's first Chief Sustainability Officer in 2011. Wicker has been deeply involved with the advancement of sustainability at UPS for several years, establishing a dedicated en- gineering group that manages global sustainability data for reporting. His team oversees a cross-functional Sustainability Working Committee and a Sustainability Directors Committee that establishes key performance indicators and goals for the company. Interview by Alison Buckholtz How did UPS come to focus so environmental impact as a result of our high energy usage—we’ve always been focused on aggressively on sustainability? reducing that energy. UPS’s activities to mitigate its environmental impact have been going on for many, many So becoming “green” isn’t a years—long before the term “sustainability” recent decision? entered the mainstream. This is because we have always been a company focused on reducing the No. One of the key things that makes sustain- energy it takes to deliver packages and provide ability work at UPS is that it is integrated into logistics services. When you begin to focus on our business model. It cannot be something being more energy-efficient, as well as using a company does “in addition to” its regular a sustainable source of energy, you really start business. Since UPS was founded on very strong to reduce carbon. Reducing carbon is directly industrial engineering principles, we have always related to burning fossil fuels, which we do a been focused on trying to make our network lot of—after all, we have about 100,000 ground more efficient. Sustainability at UPS is about vehicles on the road everyday in over 220 improving our environment and social impacts countries around the world. We have a sizable while keeping a keen eye on the economic side 98 | IFC.ORG/HANDSHAKE Logistics of the business, and making sure the company ship a package from Atlanta to L.A., it tells us remains prosperous. We are always balancing what type of vehicle was used for each segment the three. This focus on the triple bottom line of travel so we know how much fuel was used; it defines sustainability for us. can account for which facility it went to, and the carbon footprint of the facility; and what mode What is the connection between of transport is used, whether train, plane, truck, or ship. All this information is critical to provid- logistics and sustainability? ing our customers with the data they demand. Our logistics service is about moving goods from point A to point B in a very efficient What’s your advice to companies manner—and the amount of carbon we emit or governments that want to is reduced by having an efficient, optimized and integrated network. You might be shipping increase their sustainability efforts materials to another part of the world, moving in the transportation sector, but goods to manufacturing facilities and back out don’t know where to begin? to distribution centers, and on to ports around the world before these goods ultimately reach It is about knowing your data. If you are looking customers. The transportation piece is where the to become more sustainable, you have to under- majority of the greenhouse gas emissions occur, stand your impact: your environmental impact, so reducing the carbon associated with those your carbon footprint, and other impacts such moves is critical to sustainability. as water and air pollution. If you don’t know it, then that is where you start to figure out where you stand. At UPS, our model is to measure, How much of UPS’s sustainability manage and mitigate. If you measure your effort is in response to customer impact, then you can manage and mitigate to demand? improve the situation. If you have rock solid information you can build from there. Our Our customers started to come to us five or six whole sustainability program came from that years ago wanting to know the carbon output sound understanding, and having accurate data. associated with the goods that we moved for them, so we had to get better and better at Second, in the sustainability space, transparency calculating carbon footprints and understanding is extremely important. In our sustainability exactly how we were burning carbon through- report, for example, we are trying to meet the out our distribution network. As the customer requirements of the global reporting initiative requests became more prevalent and detailed, we and we are trying to lay out the information that had to move away from spreadsheets and auto- our stakeholders are looking for. We have to tell mate. We built our own carbon calculator with our story. Do not underestimate the importance all the relevant information. For example, if you of telling your sustainability story in a very transparent way. IFC | 99 Photo © UPS Corporate Corporate Sustainability Sustainability Report Logistics at the Core 2011 Report 2011 Logistics at the Core How UPS does Technology Continuous Continuous Innovation Innovation it Technology SafetySafety Safety Safety Telematics Telematics improved improved seatbelt seatbelt powers logistics TechnologyTechnology powers and logistics makes and makes our our business more business productive more productive and efficient. and efficient. adherence by 95 percent adherence by 95 percent and and bulkhead ensured that ensured doors that were doors were bulkhead percent closed, an 81closed, an 81 percent improvement. improvement. Improved Improved Stops Stops per per Mile Mile Improved stops per mile Improved saved stops per 5.3 mile saved million 5.3 million miles miles of driving, of driving, which equate to approximately which 528,000 equate to approximately 528,000 gallons of fuel. gallons of fuel. UPS Smart UPS Smart PickupPickup ™ ™ UPS Smart UPS Smart Pickup™ scheduled is a Pickup™ a scheduled pickup is pickup Alternative Alternative Fuel and Fuel and option that automatically option that automatically notifies a UPS notifies a UPS driver driver when you when have you have processed processed a shipment. a shipment. Technology Technology Fleet Fleet By requiring UPS By requiring to come UPSonlyto come when a only when a package package is ready is ready to ship, to ship, customers customers help help A “rollingof A “rolling laboratory” more than of laboratory” 2,500 more than 2,500 reduce save fuel andsave fuel and reduce emissions. emissions. alternative fuel/advanced alternative fuel/advanced technology vehicles, technology vehicles, including including electrics, electrics, electric electric hybrids, hybrids, hydraulic hydraulic hybrids,gas hybrids, and natural and natural gas (propane, (propane, LNG, CNG). LNG, CNG). ORIONORION We’ve begun implementation We’ve begun implementation on our On Roadon our On Road Integrated and Integrated Optimization Navigation Optimization and Navigation (“ORION”) (“ORION”) system, which employs system, which advanced employs advanced algorithms to algorithms to determine the optimal route determine for eachroute the optimal for each delivery delivery while meeting service while commitments. meeting service commitments. 100 | IFC.ORG/HANDSHAKE Results Greenhouse Gas Reduction UPS uses proprietary IT and engineering technology extensively to reduce greenhouse gases. Telematics Outputs Avoiding Left Turns Telematics outputs combine maps of No left turns. Less engine idle time. routes derived from GPS data and detailed Safer crossings. Higher MPG. reports on driver behavior. These and other outputs drive our planning, training, and maintenance activities. Mileage Reduction Telematics helped UPS avoid 5.3 million miles of driving in 2011. Routing technology provided an avoidance of more than 85 million miles of driving, which equates Sensors & GPS to almost 8.4 million gallons of fuel. Sensors throughout our vehicles generate data that help Fuel and Emissions Efficiency us plan smarter routes—and help our people learn more fuel-efficient driving techniques. Each night we upload the UPS uses telematics extensively to increase day’s driving data to look for the next opportunity to get miles per gallon and reduce greenhouse more efficient, and for vehicles that need maintenance gas emissions. Reduce idling in 2011, to keep running clean and safe. drivers with telematics-equipped vehicles cut 98 million minutes of idling time— saving more than 653,000 gallons of fuel. Operational Improvement Even tiny operational improvements from telematics data can cut millions of miles from the total. Data is captured on 200 elements including speed, seatbelt use and engine idling. This information and Telematics Technology utilizes... driver coaching reduces fuel consumption, emissions and maintenance costs while improving safety. And, customers experience more consistent pick up Engine Data GPS Data Sensor Data DIAD Data Map Data times and more reliable deliveries. Courtesy of UPS IFC | 101 Logistics Yossi Sheffi is Director of MIT’s Center for Transportation and Logistics, Director and Founder of MIT’s Master of Engineering in Logistics program, and Elisha Gray II Professor of Engineering Systems. He is an expert in systems optimization, risk analy- sis, and supply chain management, which are the subjects he teaches and researches at MIT. He is also an active entrepreneur and has founded or cofounded five compa- nies since 1987. His new book, Logistics Clusters: Delivering Value and Driving Growth, was published by MIT Press this month. Interview by Alison Buckholtz 102 | IFC.ORG/HANDSHAKE Logistics clusters redraw the transportation map In your new book, you write that it’s especially true for logistics clusters. It’s an ecosystem based on a positive feedback loop: The governments can support logistics more it grows, the more it’s beneficial to all of its clusters through investment, regu- residents, and as a result it grows even more. lation, and trade policy. Is this true in every case? How important are public-private partnerships? The role of government, most of all, is devel- opment of the infrastructure. Then there’s a These partnerships are at the crux of a logistics question of attracting businesses, and the theory cluster. The main difference between a cluster is that to get this flywheel moving they provide that’s successful and a cluster that’s not is this tax and regulatory relief. Of course, there are all alignment of the public and private sectors. kinds of logistics clusters, and some of them just We’re not talking about just one public sector: need government to get out of the way. But in I’m referring to city, county, state, and regional general, governments that have a more accom- governments, labor unions, chambers of com- modating trade policy, governments that don’t merce, etc. When interests are aligned, logistics raise all kinds of tariff and non tariff barriers, will clusters flourish. For example, in Memphis, the promote and support trade. Everything govern- mayor and the governor will drop everything ments do to support trade will in turn impact to help FedEx bring new business in. Zaragosa, the flow of goods in and out of the country. Spain, is an even more striking example. It And once the cluster starts growing, it feeds on started as a brownfield and is now the largest itself. This is true of every kind of cluster, but logistics park in Europe. It was extremely suc- IFC | 103 cessful because the government got everybody clusters, more destinations are serviced directly, involved: national, state, and city government, improving the service even more. This is part of opposition parties, labor unions, and all elements the positive feedback loop that’s unique to the of civil society. This is a striking case of every- growth of logistics clusters. body working together and it’s a huge success. What else makes logistics clusters Are logistics clusters always, nec- different from industrial clusters? essarily, transportation hubs? In general, logistics clusters exist in mode- Yes, because a lot of freight is coming in and out changing places: when you go from ship to of the cluster. As the cluster grows, transporta- airport, rail or ship to truck, airplane to truck. tion companies have high utilization of the So intermodal yards are very important for logis- equipment, and they can use bigger trucks, or tics clusters. Intermodal yards exist in almost all long trains that are very efficient. This is due to the big logistics clusters. This has to do with the two phenomena in the economics of transporta- economics of transportation: when you move tion. The cost of moving a conveyance, say, a long distances, you want to move in very large truck, really depends on how much the truck conveyances like a mile-long train or a huge ship. is loaded, so of course if it’s fully loaded and But then you have to distribute the shipments. the utilization is high, it costs less per pound You can’t bring a mile-long train into the heart of to move the freight. That’s true in almost every a city—you need trucks, sometimes small trucks. mode of transportation. In addition, the cost of So you want to position your distribution centers moving a conveyance does not grow linearly with as close to the urban areas and the retail stores the conveyance size. If the truck is twice as big, as much as you can. Intermodal yards can get it doesn’t cost twice as much to move it. So it is the full container from the ship to the heartland, a lot more efficient to move larger conveyances. close to urban centers. If your intermodal yard The result is that the more flow that comes in is located strategically like this, then within one and out of a cluster, the lower the transportation day of trucking from some of the U.S. logistics costs. clusters in the South and Midwest you can get to tens of millions of consumers. Within two days How does this affect service? you can get to more than 100 million consumers from most of these clusters. Service improves tremendously with efficient transportation because you get more frequent How are logistics clusters mitigat- departures and arrivals, and no one has to wait ing their environmental impact? as long. Since the costs are lower, and the service is better, this attracts even more companies. Some of the best logistics clusters, like Los Ange- Furthermore, as more freight is available in the les, Singapore, and Rotterdam, have become 104 | IFC.ORG/HANDSHAKE The what where & hubs of environmental sustainability and innova- of Logistics Clusters tion. They use hybrid and electric trucks and all kinds of other means to reduce the impact what? of logistics activity on the environment around A logistics cluster is a geographical agglom- them. Singapore and Rotterdam are centers for eration of logistics-intensive operations. It alternative fuel. Precisely because these areas have includes mainly three types of companies: a concentration of possible pollutants from noise (i) logistics services providers, such as and congestion, they have become hubs for envi- transportation carriers, warehousemen, and ronmental innovation. Now, some of the most forwarders, (ii) the logistics operations of promising trends in environmental sustainability industrial firms, such as the distribution are coming from the logistics clusters. After all, operations of retailers, and after-market one of the challenges for a logistics cluster is to parts suppliers, and (iii) manufacturing and be a good neighbor, to do all it can to reduce the headquarters activities of companies with carbon footprint of the operation. logistics-intensive operations. In addition, such clusters include supply chain manage- Which areas are on the cusp of ment facilitators such as customs brokers, becoming successful logistics and specialized consulting and IT providers, as well as academic and research institutions clusters? dedicated to logistics. China is investing mightily in logistics clusters as well as lots of transportation infrastructure, and where? in Asia, Singapore has always invested in logistics Logistics clusters are located strategically to clusters. In Europe, Holland, Belgium, and the enable efficient transportation and delivery Ruhr area of northern Germany near the Dutch services to large populations. Typically, they border are all significant logistics clusters. In are positioned in mode-changing locations fact, the German government is now investing in such as busy seaports (Rotterdam, Shanghai, logistics clusters alongside the usual high profile Los Angeles), airport hubs (Hong Kong, areas such as biotechnology and nanotechnol- Seoul, Memphis) and major intermodal ogy. Germany wants to be a center of logistics yards where freight shipments transfer for all of Europe, so the German government from railcars to trucks (Chicago, Dallas, put logistics at the same level of all these new, and Kansas City). Some of the world’s sexy industries. The important point here is that largest logistics hubs, including Singapore, logistics clusters, by offering low transportation São Paulo, and Memphis, bring together and distribution costs as well as a high level of multiple elements at once: mode-changing service, are becoming crucial nodes in the global services, distribution to nearby populations, supply chain. and transshipment services. IFC | 105 fast facts CO2 (in grams) emitted per metric tonne of freight per km of transportation Modern Truck 60-150 Modern Train 30-150 Minimum emission Maximum emission Source: The Low Carbon Leaders Project, developed under the umbrella of the UN Global Compact’s Caring for Climate Initiative and in cooperation with World Wildlife Fund. Rail travel releases between 3-10 times less carbon dioxide than driving or flying. 1,000,000,000 wide strip of land... using a 3-5 meter transports 50,000 pph number of people who do not have access to an all-weather road. transports 9,000 pph transports 2,000 pph pph=passenger per hour Sources: International Union of Railways; IFC; and “Ticket to the Future,” UITP. 106 | IFC.ORG/HANDSHAKE On traveling: “ I think the only worthwhile way of doing it is the old laborious way of traveling over land, on the road. You really need to be insulted at the border and get in a ramshackle bus or train and travel on. Because that’s how people really live. ” —Paul Theroux on “Studio 360” June 2012 IFC | 107 Subscribe: ifc.org/handshake Connect with us: facebook.com/ifcinfrastructure twitter.com/ifc_advisory scribd.com/ifcppp handshake@ifc.org October 2012