Section II - Subject Lecture Material (90 minutes)

1. UNDP Training Module Subject ModuleVolume 1 - Training ManualFinancing, Fare Fixation, & Cost Benefit Analyses Section II - Subject Lecture Material (90 minutes)

2. Objectives of the Module • Understand investment needed in the urban transport sector • Become familiarized with various sources of funding • Understand the key issues involved in urban transport investment • Highlight the various public financing schemes • Become familiarized with the various sources of private sector financing • Understand the concept of Public Private Partnership • Become familiarized with the concept of financing through multilaterals • Understand innovative financing mechanisms • Understand the concepts involved in setting up fare • Comprehend the need and process for fare revision • Understand the concepts of Cost / Benefit analysis , Economic analysis, and Financial analysis • Become familiarized with the project preparation process

3. What does this module not do • Provide a panacea for all financing issues facing urban transport in Indian cities • Dive into in-depth financial analysis and theories, based on the principles of finance / economics • Advocate a particular type of project structuring • Identify precise skill sets / ways forward for financing urban transport projects • Develop financing plans for any project

4. Who are the intended users of this module • Policymakers • Senior-level staff in national, state, and city governments, heading or managing departments that work in transport and related areas such as: motor vehicle licensing and regulation, land use and transport planning, public transport provision (both government and private operators), traffic management, pollution control, road safety, housing, and urban poverty alleviation • NGOs • Media

5. HANDOUT 1: URBAN TRANSPORT INVESTMENT & FINANCING – NEEDS & ISSUES

6. Rapid Urbanization: 100 Million to 200 Million in the last 20 years

7. Rapid Motorization . IIHS 2011. “Urban India 2011: Evidence” Pai, M. 2010. “India Urban Transport Indicators”

8. Road Fatalities Leading causes of premature death in the world: 90% of traffic fatalities occur in low- and middle-income countries and involve 70% of vulnerable users of the road

9. Importance of Urban Transport • Urban Transport is one of the most important and crucial sectors of urban infrastructure and services. • The importance of an efficient and effective transport system to support and promote rational development of urban areas need hardly be stressed. • The National Commission on Urbanization (NCU) has noted that urban transport is the single most important component instrumental in shaping urban development and urban living. • While urban areas may be viewed as engines of growth, urban transport is, figuratively and literally, the wheels of that engine. Transportation is also critical for the economic growth of cities. • Industry, trade, commerce, and other economic activities thrive in areas where accessibility is high.

10. Investment Needs - Mckinsey Global Institute (2007) • MGI has estimated a capital outlay of USD 1.182 trillion (about Rs 53 lakh crores) for the next 20 years to build up services in cities in India to enable them to play their role in the desired economic growth of the country. • Mass rapid transit services and roads together require a major share of the projected investment; more than half of the estimated capital expenditure, i.e. USD 392 and 199 billion (Rs 17 & 9 lakh crores) respectively.

11. Investment Needs - High Powered Expert Committee • The Committee commissioned by the Ministry of Urban Development Government of India estimates a total expenditure of Rs 39,18,670 crores on Indian urban infrastructure and services by 2031. • Major expenditure on urban roads is: Rs 17,28,941 crores • Urban transport is estimated to require Rs 4, 49,426 crores. • In addition, traffic support infrastructure is estimated to require Rs 97,985 crores, and street lighting Rs 18,580 crores.

12. Investment Comparison – MGI vs. HPEC • HPEC’s total expenditure on roads and urban transport together out of the total expenditure is about same order (as a percentage) as the Mckinsey estimate. • However, there is a major difference in the estimate for roads vis-a-vis urban transport.

13. Key Issues affecting Investment in Urban Transportation • High Capital and Operation Cost • Long Gestation Period • Project Viability • User Charge • Fare Revision • Cost Recovery • Demand Risk • Social Linkages • Macro Economic Policies

14. HANDOUT 2: Financing Sources (Public, Private, and Public-Private Partnership)

15. Service Provision Options Urban Transport Services Public Agency: Govt. creates assets & provides services Privatisation: Government transfers entire sector responsibility to the private sector – which then creates assets and provides services PPPs: Contracting of Services - Government creates assets and contracts service provision to private sector PPPs: Government awards concession/ licence to private sector for a fixed term under which it creates assets and provides services

16. Public Financing - investments under 12th FYP • Rs. 3,88,308 crore is estimated to be required from all sources on urban transport. • Development of the street network as well including pedestrian and bicycle facilities is Rs. 1,67,218 crores • The projected investment in public transport is estimated at Rs. 2,02,628 Crore.

17. State Budgets • In the 11th FYP, of the total estimated investment, the states accounted for a 32.6 % share • Within state investment, the state budgetary support accounted for a 66.3% share, followed by a 23.6 % share from borrowings, while internal generation contributed to only 10.1 % of the total investment • 12th Central Finance Commission (CFC) made recommendations on the measures needed to augment the Consolidated Fund of a state to supplement the resources of the panchayats and municipalities • Rs. 20,000 crore for the panchayats and Rs. 5,000 crore for the municipalities may be provided as grants-in-aid to augment the Consolidated Fund of the states for the period 2005-10 to be distributed with inter sate shares

18. Municipal Budgets • The annual outlay in mega cities such as Delhi for the year 2012-13 indicates an outlay of Rs 3372 crores for the transport sector, which is 22 %of the total plan outlay. • The temporal trends of outlays in the 9th , 10th, and 11th FYP period of Delhi reveal that the total outlay increased from 15541.28 cr. in the 9th FYP to 23,000 cr in the 10th FYP and 45,000 cr. in the 11th FYP. • The corresponding share on Transport was 20.3 percent, 23.7 percent, and 33.9 percent respectively, exhibiting the increasing importance of transport in the city’s overall development budget.

19. Central Schemes • Jawaharlal Nehru National Urban Renewal Mission (JnNURM) • Urban infrastructure Development Scheme for Small & Medium Towns (UIDSSMT) • Viability Gap Funding (VGF) • Central Assistance for doing Technical Studies

20. Private Sector Financing • There is an ongoing public policy debate in India on how to find the necessary new investment as well as operations and maintenance on the growing transport infrastructure needs. • The GOI and many state governments are interested in broadening the role of the private sector in transport infrastructure development with a view to strengthening and expanding private financing. • There are several key determinants of the viability of privately financed programmes, including the country regulatory and legal environment and the resulting nature of the public private risk regime. • The main sources of private sector financing in transport projects include: • Debts • Equity

21. Private Sector Financing – Debt • Debt financing takes the form of loans that must be repaid over time, usually with interest. • Businesses can borrow money over the short term (less than one year) or long term (more than one year). • Debt financing offers businesses a tax advantage, because the interest paid on loans is generally deductible. • Debt funding to infrastructure projects is dominated by domestic commercial banks • Debt funding has been restricted by factors such as regulatory uncertainties, rising domestic interest rates, etc.

22. Private Sector Financing – Equity • Equity financing continues to be a vital source of investment for the infrastructure sector. • Given the under-developed state of the Indian debt market, infrastructure developers have to rely quite a lot on equity subscription to fulfil their capital requirements. • While both the primary and secondary equity markets have taken a hammering in the past year, private equity (PE) has remained a surprisingly buoyant source of funding. • Equity investment with respect to infrastructure projects can be divided into two types: (a) active (or ‘direct’) equity investors that seek to participate in the management or operations of the project; and (b) passive (or ‘portfolio’) equity investors that provide for only their funds.

23. Public Private Partnerships – PPP • The Department of Economic Affairs, Government of India defines PPP as: an arrangement between a government or statutory entity or government-owned entity on one side and a private sector entity on the other, for the provision of public assets and/or related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified period of time, where there is a substantial risk sharing with the private sector, and the private sector receives performance-linked payments that conform (or are benchmarked) to specified, pre-determined, and measurable performance standards. • The ultimate accountability to users for the provision of these services vests is with the public entity – even if delivery is by the private partner

24. Why do we need PPPs? • Fiscal reasons - inadequacy of resources with government (most common reason) • By leveraging on committed government funding, it is possible to finance projects of much larger magnitudes. • Efficiency gains due to appropriate risk transfer, speedy decision making, and flexibility of operations (better reason) • Examples of private sector involvement in core sectors: airlines, telecom services, oil refining -private sector is able to take on large projects, complex operations, and can handle reasonable commercial risks attached to projects such as Design, Financing, Construction, Operations, and Maintenance. • Risks that often affect projects implemented by the public sector - time overrun, cost overrun, change of scope, inadequate designs, lower construction quality, leakage of revenues, high maintenance costs – can be assumed by the private player • There is also incentive for the private party to use appropriate technology, develop innovative design solutions, improve project management practices, install more efficient revenue collection practices, and use a life cycle cost approach. • Expected outcomes - value for money, expeditious implementation, and higher quality of assets and services

25. Types of PPPs • Financially free standing projects • Role of public sector - planning, licensing & statutory approvals • No financial support/ payment is made by government • Revenues are by levy of user charges by private sector • Examples: Toll Roads/ Bridges, Telecom services, Port projects • Projects where Government procures services • Private Sector is paid a fee (tipping fee), tariff (shadow toll) or periodical charge (annuity) by Government for providing services • The payment is made against performance • There may be demand risk transfer – either in part or whole • Example - Roads - annuity/ shadow tolls, power - under PPAs. In UK -prisons, education, health services, defence-related services • In both cases, the design, financing, construction, and O&M risks are fully that of the private partner

26. Types of PPPs - 2 • Hybrid Structures – Combine the financially free-standing nature – levy of a user charge – with payment by the public entity • Payment could be as a viability gap subsidy or an annuity payment • Example – toll road project with either viability gap payment by government or annuity payment-based road contract with tolling rights

27. High Low Extent of private sector participation PPP Options

28. Concession Terminologies • BOT - Build Operate Transfer • BOOT - Build Own Operate Transfer • BOO - Build Own Operate • BOOST - Build Own Operate Share Transfer • BOLT - Build Own Lease Transfer • DBFO - Design Build Finance Operate Transfer • OMT - Operate Maintain Transfer

29. What a PPP is not & what it is • PPP is not privatization or disinvestment • PPP is not about borrowing money from the private sector • PPP is more about creating a structure • in which greater value for money is achieved for services • through private sector innovation and management skills • delivering significant improvement in service efficiency levels • This means that the public sector • no longer builds roads, it purchases kilometers of maintained highway • no longer builds prisons, it buys custodial services • no longer operates ports but provides port services through world class operators • No longer builds power plants but purchases power

30. Case-study of Indore City Bus Service PPP in urban transport projects

31. indore: a snap shot

32. Before City Bus: UnorganizedTransport in Indore

33. about AICTSL • Inception in 2006 with a seed capital of Rs. 5 million • Adopted the net-cost based PPP model of bus operations… widely copied in other cities across India • Started with 37 buses with 4 operators. • Installed vehicle tracking systems on the entire fleet, which remains the best in the country to date. • Initiated the BRT project in Indore, which is in the final stage of implementation. • Funding from JnNURM allowed modernizing the fleet with CNG buses that have electronic displays and voice announcement systems.

34. PPP Model of Bus Operations • Public partners role: • Planning of routes • Inviting tenders for bus operations • Providing support infrastructure • Objective: Providing affordable • & quality public transport 2004 2005 2012 2006 • Private operator responsibilities: • Owns, operates, and maintains fleet • Collects fare from passengers • Pays premium to AICTSL for right to operate on route 2011 2007 2010 2008 2009

35. Indore Statistics • Number of routes :: 16 • Average route length :: 18 km • Number of bus stops :: 210 • Fleet Size :: 122 buses • Operating frequency :: 8 minutes (min) 26 minutes (max) • Avg. daily ridership :: 112,000 pax • Avg. daily collection :: Rs. 5,35,000 /day • Ridership per bus :: 920 pax/bus • Avg. revenue per day :: Rs. 7,88,000 /day

36. Mode Shift Safety & Quality has helped attract trips from private travel modes

37. Lives Saved, Emissions Reduced Lives saved due to Indore City Bus :: 6 /year (0.024 fatalities/mill PKT * 0.64 mill PKT per day * 365 days) Hundreds of accidents avoided CO2 Reduced: ~5.5 ton/day

38. System Expansion & Issues • Starting from 37 buses, AICTSL now operates a fleet of 122 buses. • City bus in Indore has a mode-share of 4.4% • The BRT launch will add 50 buses (mode-share > 6%) • However, to sustain growth, the mode-share of PT should increase to 40% or more. • The CMP for Indore recommends having 750 city buses by 2015

39. Challenges • CNG fuel prices have increased by 64% in 24 months, thus reducing profitability to operators • AICTSL has limited financial resources (premium from operators, advertising) for additional infrastructure • Passenger ridership per bus has increased only marginally, not keeping pace with input costs Modernizing the system by way of better workshop infrastructure, improved information for passengers, and customer service is necessary for expanding the system.

40. HANDOUT 3: Financing through multilaterals

41. Multilateral development banks (MDBs) • Multilateral development banks (MDBs) provide finance for investments in human and physical capital that promote development. • This is in broad terms the mandate of the World Bank (WB) and the three regional development banks – the African Development Bank (AfDB), Asian Development Bank (ADB) and Inter-American Development Bank (IADB) – that were established between the late 1940s and the mid 1960s. • MDBs assist in Urban Transport Funding through the following: • Loans • Grants • The Global Environment Facility (GEF) • Clean Development Mechanism (CDM)

42. Loans • Multilateral banks and bilateral public aid help to fund investments in transport systems but not in the operating of the systems. • Soft loans, namely, loans with conditions which are more favorable than bank loans in terms of: • duration: very long-term loans of 15, 20, and even 30 years; • interest rates: bonus rates which are smaller than those on the banking market; • grace periods given before the first installment • The conditions of these loans vary according to the situation in the country; the most favorable treatment is given to the least developed countries. • Typically, soft loans have extended grace periods in which only interest or service charges are due. They also offer longer amortization schedules and lower interest rates than conventional bank loans.

43. Soft Loans Characteristics • Typically, soft loans will have one or more of the following characteristics:Soft loans, namely, loans with conditions which are more favorable than bank loans in terms of: • A lower rate of interest. Some EU subsidised loans may charge less than half the rate of a high street bank. • A repayment holiday before you must start repaying • Offering to act as a guarantor or otherwise arrange for a business loan without the need for you to provide security Example: Delhi Metro Rail Corporation (DMRC) was set up with 50:50 equity participation between the Government of India and the Delhi Government. The project has been implemented in three phases with an outlay of approximately Rs. 55,000 crore, 55% (approximately Rs. 30,000 crs) of which has come from Japan Bank of International Cooperation (JBIC) as an inter- government loan

44. Grants - The Global Environment Facility (GEF) • The Global Environment Facility (GEF) was established in 1991 to provide funding to assist developing countries in meeting the objectives of United Nations Framework Convention on Climate Change (UNFCCC) • It now serves as a financial mechanism of UNFCCC by funding projects and programmes that protect the global environment • GEF grants support projects related to biodiversity, climate change, international waters, land degradation, the ozone layer, and persistent organic pollutants • There are three implementing agencies which manage GEF projects on the ground - UNEP, UNDP, and World Bank.

45. Grants - Clean Development Mechanism (CDM) • A CDM program is one in which emissions reductions are achieved by multiple activities executed over time as a result of a government measure or private sector initiative. The basic characteristics of a CDM program are: • It occurs as a result of a deliberate public sector measure (voluntary or mandatory), or a private sector initiative. • It results in a multitude of dispersed activities that are induced by the program and would not occur but for the implementation of the program. • The GHG reducing activities do not necessarily occur at the same time or in the same location. • The type, size, and timing of the emission reducing activities induced by the program may not be known at the time of project registration. However, the types and sizes of the expected activities must be identifiable ex ante, attributable to the program, and verifiable ex post. • The various activities under the CDM program are submitted to validation and registration through a single Project Design Document.

46. CDM – Examples Delhi Metro • The Delhi Metro has been certified by the United Nations as the first metro rail-based system in the world to get carbon credits for contributing to the fight against climate change by helping to reduce pollution levels in the city by 6.3 lakh tons every year. • The Delhi Metro has helped remove more than 91,000 vehicles from the roads of Delhi daily. • The organization has also earned carbon credits worth Rs 47 crore annually for the next seven years. With nearly 20 lakh people taking the new age transport system every day, the Metro has helped reduce pollution and emission of green house gases, as it is a completely non-polluting and environmentally-friendly system. • DMRC has helped in reducing the emission of harmful gases into the city’s atmosphere, and the United Nations body administering the Clean Development Mechanism (CDM) under the Kyoto Protocol has certified that DMRC has reduced emissions.

47. HANDOUT 4: Innovative Financing Mechanism

48. Non-Fare Box Revenue Potential

49. Innovative Financing Mechanism • The issue of urban transport financing has become increasingly prevalent in recent years as costs of providing transport services have expanded more rapidly than traditional revenue resources. • The National Urban Transport Policy of April 2006 also emphasizes the innovative use of land as a resource for financing public transport projects. • MP LAD Scheme Description • Urban Transport Fund • Financing Through Cross-Subsidy Projects • Property Development • Land Value Capture • Kiosks and Shops at Stations • Taxes and Fiscal Incentives • Cross Subsidy

50. Case Study – FSI-linked TDR for financing BRTS & corridor densification: Pimpri-Chinchwad, India Urban Transport Fund