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

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2 Asian Development Bank Public Private Infrastructure Advisory Facility TA 4862-VIE: Preparing the Ho Chi Minh City Metro Rail System - PPIAF Study - Completion Report August 2008

3 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF Table of Contents Synopsis... i 1. Introduction Background Objectives of PPIAF Technical Assistance This Completion Report Study Team Activity 1: Framework for Considering Private Sector Participation (PSP) Options Development Activities 2 and 3: Financial Modeling Including Risk Financial Model Financing and Delivery Options Value for Money (VFM) Test Assumptions and contingencies Activity 4: Stakeholder Feedback and Implementation Arrangements Key Tasks Key Stakeholders Transport Agencies and Functions in HCMC Key Laws Institutional Options Fares and Ticketing Building Technical and Managerial Capacity Appendix A: Issues and Options for Private Sector Participation and Concession Template Working Paper Appendix B: Financial Modeling Working Paper Appendix C: Stakeholder Feedback and Implementation Arrangements: Institutional Options Working Paper Appendix D: Fares and Ticketing Working Paper References and Bibliography i

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

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

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

7 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF 1.2 Objectives of PPIAF Technical Assistance The objectives of the PPIAF technical assistance (TA) therefore included developing (i) a framework for considering private sector participation in implementation and operation of the Project; (ii) a value-for-money analysis for implementation approaches that involve varying degrees of private sector participation, (iii) a detailed financial model reflecting the preferred approach and measuring the performance of the project from the points of view of the government and private sector participants; and (iv) a stakeholder feedback and a description of necessary institutional and contractual arrangements given the preferred implementation approach. This PPIAF TA draws on detailed information on project costs, patronage and revenue prepared by consultants undertaking the PPTA. The results of its work were presented in conjunction with the work of the PPTA to ensure an integrated and complete business case that the HCMC PC and ADB can use to direct implementation and ongoing operations. 1.3 This Completion Report This Completion Report summarizes the key findings and recommendations of the TA. In doing so, it draws upon the following reports, working papers or other outputs prepared by the TA: Table 1.1: Activities and Outputs Activity 1. Framework for Considering Private Sector Participation (PSP) Options Development Principal Outputs Issues and Options for Private Sector Participation & Concession Template Working Paper Vietnamese and English language versions (April 2008). Refer Appendix A for English Version. 2. Risk and Value-for-Money Analysis Financial Modeling Working Paper & Model Vietnamese and English language versions (June 2008). Refer Appendix B for English Version. 3. Financial Analysis: Financing Plan & Financial Model 4. Stakeholder Feedback and Implementation Arrangements Financial Modeling as above Inception Report English language version only (March 2008) Stakeholder Feedback and Implementation Arrangements: Institutional Options Working Paper Vietnamese and English language versions (March 2008). Refer Appendix C for English Version. Stakeholder Engagement Plan English language version only (March 2008) Informal document. Fares and Ticketing Working Paper Vietnamese and English language versions (June 2008). Refer Appendix D for English Version. The PPIAF TA mobilized on March 3, Work proceeded intermittently in HCMC and the consultants home offices over the period to July Subsequent sections of the report discuss identified key issues and priorities and the work program formulated to meet the 2

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

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

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

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

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

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

14 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF A VfM test carried out for the four options indicates that option (iii), private sector trains and train-related systems supply and service operation, incurs the lowest expected cost to the community; with option (ii) the next lowest. The BOT option shows a lower optimism bias than all the other options, but, since it uses the concessionaire s private sector financing for the full project investment, it incurs a maximum premium on the government s financing cost; this option turns out to have the highest expected cost to the community, the SOE option included. Evidently the BOT option is a doubly inappropriate approach to MRT project development. Details of the VfM test methodology, input data and parameters, as well as results can be found in the Financial Model paper Assumptions and contingencies It is important to understand what assumptions are necessary for, and what contingencies would invalidate, the VfM test results. These are summarized below. Market competition. VfM requires a competitive tender market for the concession and for related sub-contracting of the technology (eg design, construction, systems integration and installation, operation and maintenance in MRT service provision) and financing services to ensure that payment of concessionaires and sub-contractors is not in excess of a normal riskweighted remuneration for effort. This means that an option which has cleared a VfM test could at the procurement stage be facing a market failure (eg only one bidder), threatening its ability to deliver the anticipated VfM 1. Thus, transition and emerging countries in particular often cannot count on a reliable international supply of private sector financing. The threat of market failure in a specialized field such as MRT concessioning and sub-contracting should not be dismissed lightly. Financial and services market distortions. Here are some examples of distortions that can threaten or dilute VfM: Limited recourse financing of a PPP concession promotes VfM because the senior lenders, usually financial institutions regulated by a central bank, will for as long as the debt is outstanding have an interest in the project which is aligned with the authority granting the concession and bring professional skill to the monitoring of the concessionaire s performance. The lenders incentive to monitor the concessionaire performance is diluted with the lenders use of credit risk transfer (CRT) products. This practice dilutes the concession authority s effort to share an exposure to the concessionaire s performance level with the senior lenders, minimizing the monitoring cost in the process. Bilateral ODA financing can also introduce distortions in the sub-contracting markets. The tying of an ODA loan to supply of goods and services of a national origin restricts the competitive tendering for the procurement of MRT consulting and construction services and systems supply. An opportunity can be created for vendors to use the concessionary pricing of a loan to build in an additional margin on goods and services. In the long term, the practice can create a situation where, in a narrow field, the potential suppliers tacitly agree to live and let live instead of competing, with adverse effect on supply prices and therefore VfM. Partnering developed over time among financiers and sub-contractors while having a potential to be an effective project risk management tool for a concessionaire can be 1 The UK Treasury s answer to this problem, to give an illustration, is to require any candidate for a PPP development to have a back-up public sector option to be activated in the event of a market failure. 9

15 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF abused if allowed to develop into a collusive arrangement, which in the end threatens VfM. PPP procurement capability. Ability to procure well is important for realizing VfM. The balance of opinion, if not of evidence, is that a greater capability is required of the public sector in the procurement of a PPP concessionaire than in a conventional public works procurement. Ad hoc outsourcing for the required skills leads to limited results. For example, legal firms skilled in PPP contracting, forced to make a choice through conflict of interest rules, can tend to opt for working for the concessionaire side rather than government. Institutional capability building is required. 10

16 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF 4. Activity 4: Stakeholder Feedback and Implementation Arrangements 4.1 Key Tasks Key tasks carried out under this Activity were: Stakeholder analysis; Concession Template; Analysis of institutional options; and Fares and ticketing analysis and options. The outputs of these tasks are Stakeholder Feedback and Implementation Arrangements: Institutional Options Working Paper Vietnamese and English language versions (March 2008). Refer Appendix C for English Version. Stakeholder Engagement Plan English language version only (March 2008) Informal document; Concession Template refer Section 2 and Appendix A; Fares and Ticketing Working Paper Vietnamese and English language versions (June 2008). Refer Appendix D for English Version. Other capacity, likely legal and procurement requirements recognizing the PPIAF team did not have any legal resources available to them (covered variously in all outputs). 4.2 Key Stakeholders A list of identified core stakeholders 1 within HCMC is shown in Table 4.1. This list is based on the information contained in the Working Paper entitled Stakeholder Feedback and Implementation Arrangements: Institutional Options. While several stakeholders at national and HCMC levels have been identified the most important are shown in bold text in Table 4.1. IFIs or other bilateral donors have been excluded from the Table. Table 4.1: Identified Key Stakeholders Stakeholder National Level Ministry of Transport (MOT) Responsibility Through its different modal administrations and departments (a) plans, manages and maintains national infrastructure through its different departments and administrations; (b) assists local governments in developing transport plans and selecting transport projects; and (c) manages public bus transport plans by approving cities master plans 1 From now on in this paper core stakeholders will be referred to only as stakeholders. 11

17 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF Stakeholder Vietnam Railways Administration (VNRA) under MOT Ministry of Finance (MOF) Transport Development Strategy Institute (TDSI)-under MOT Department of Planning and Investment (DPI)-under MOT The Ministry of Natural Resources and the Environment (MNRE) HCMC PC level People s Committee Transport and Urban Public Works Services (TUPWS) Transport and Industry Management Department (TIMD); and the Management and Operations Centre for Public Transport (MOCPT). HCMC Management Authority for Urban Railways HCMC Investment Fund (HIFU) Department of Finance (DOF) District Level and Commune Governments Urban Planning and Architecture Department (DUPA) Department of Planning and Investment (DPI) Traffic Police under the Public Security Department Responsibility Plans and manages the development of the sub sector Regulates the sub-sector including national and other rail systems including metro or MRT in cities and provinces. Provides oversight of City and Provincial rail and MRT Master Plans and is charged with approval of technical standards and safety of rail and MRT systems. Main functions of relevance to project: Informal MRT Master Plan approval MRT technical standards MRT safety standards & compliance Arranging of finance from external agencies including IFIs and provision of finance to local governments. Currently, financial planning aspects of future MRT development in Vietnam. Develops long and medium term transport sector strategies and plans (in collaboration with modal administrations) Integrates investment plans prepared by modal administrations for submission to MPI for inclusion in the PIP and to MOF for inclusion in the State Budget. Reviews and approves environmental impact assessments for transport projects. Approves key issues such as fares, opening and closing of routes, schedules and subsidies. Develops cities transport strategies; Plans and manages construction; Maintains urban transport infrastructure; Manages bus transport; Coordinates planning and implementation of traffic management with Police. Main functions of relevance to project: Transport Strategy Traffic management and parking Bus route planning & franchising incl bus-mrt integration Bus system ticketing Plans / implements rail-based mass transit plans and has responsibility for managing and arranging for operations and maintenance. Main functions of relevance to project: MRT civil infrastructure development incl land acquisition MRT rolling stock & E&M supply MRT ticketing MRT operations procurement and/or operations directly Arrangement of finance through bond issue for counterpart funds, coordination with private sector incl private financial institutions, possible shareholding role in a JV operating entity Treasury functions such as processing of project-related local expenditures including counterpart payments Relevant district governments through which a project passes will have a role in land acquisition & other facilitation Land Use Master Plan preparation and approval of developments. Land approvals are separately made by the Department of Natural Resources and Environment (DNRE) with little linkage to the Master Plan. Investment programming including one year annual budget and five year Public Investment Program (PIP) Enforces traffic management including the operation of traffic signals in coordination with TUPWS 12

18 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF 4.3 Transport Agencies and Functions in HCMC The HCMC PC is the key agency responsible for planning and delivery (ie here referring to regulation, purchasing of services and oversight, and construction of infrastructure) of public transport, such as bus, mass rapid transit and supporting land use and transport management functions. Within the PC the following agencies have key roles for urban transport: Transport and Urban Public Works Services (TUPWS) which is responsible for preparation of city transport strategies, the planning and management of construction, maintaining urban transport infrastructure, planning and managing bus transport; and coordinating planning and implementation of traffic management with Police. For planning and regulation of urban public transport (bus/ other) the Management and Operations Centre for Public Transport (MOCPT) of TUPWS is the most important agency; Management Authority for Urban Railways (MAUR) 1 plans and implements rail based mass transit infrastructure and responsible for operations; Urban Planning and Architecture Department (DUPA) Land Use Master Plan preparation and approval of developments. The process of planning is normative and appears not to reflect market preferences nor what is optimal in terms of infrastructure and social services provision. Land approvals are separately made by the Department of Natural Resources and Environment (DNRE) with little linkage to the Master Plan. Similarly infrastructure planning is made with little reference to the Master Plan. In addition, even for individual building and more major developments there are no specific standards or guidelines providing certainty to developers on how much Gross Floor Area (GFA) they can build or other conditions such as building set back and building form; Department of Planning and Investment investment promotion, coordination of investment including development of development assistance from IFIs and bilateral sources; and Department of Finance treasury, budget, investment planning and arrangement of sources of finance. 4.4 Key Laws National and city legislation governs the present provision of public transport services, currently mainly bus, in HCMC. The laws of most relevance to urban rail or urban MRT are: Railway Law 2005 (NA Order No. 35/2005/QH11); and HC PC Decree 119/ 2007/QD-UBND establishing the Management Authority for Urban Railways. Railway Law Within cities the Railway Law 2005 defines relevant types of urban railway as including metro or MRT using a wide variety of technologies. Authority for planning urban railway networks is given to People s Committees (Articles 14 and 15). Master Plans shall be prepared covering a detailed period of 10 years and less definitive further 10 year period. Fare setting is the responsibility of the PC. 1 Until September 2007, it was known as the Urban Railway Management Unit and was under TUPWS. 13

19 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF Decree 119/ 2007/QD-UBND establishing Management Authority for Urban Railways, HCMC The Urban Railway Management Unit (known as the Management Authority for Urban Railways) was established in September 2007 by Decree 119. The Authority replaced the previous Urban Railway Management Division under TUPWS. MAUR is also under the guidance of Central Ministries branches and Departments branches of the city. The current MAUR structure is shown in Figure 4.1. With new responsibilities for management of operations and maintenance, the number of staff in MAUR is increasing. It is also understood that it is proposed to revise the current structure of MAUR in the near future to better reflect the management and operational functions. Figure 4.1: Current Structure of MAUR HCMC PC Director Nguyen Do Luong Vice Director Nguyen Van Quoc Vice Director Tran Thi Anh Nguyet Vice Director Le Hong Ha PMU Line 1 Planning and Investment Administration PMU Lines 2 & 3 Technical Quality Finance and Accounting Procurement Organization and Training Source: MAUR 4.5 Institutional Options Given the previous discussion, the alternative arrangements for an Authority relate primarily to the scope of its functions rather than to the underlying functions themselves. On this basis, four options for improved institutional arrangements for HCMC are identified: Option 1: Strengthen the Management Authority for Urban Railways (MAUR); Option 2: Interim Public Transport Authority using increased PC level coordination between bus and MRT; Option 3: Integrated Public Transport Authority. Refer Figure 4.2. In this option the proposed Integrated Public Transport Authority would be solely responsible for ensuring the delivery and operation of a fully integrated public transport system (MRT and bus) for HCMC; and Option 4: Integrated Transport Authority. In this option, a wholly integrated Authority would plan the multi-modal network, specify the services, program the investment (including roads, MRT and bus). 14

20 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF The options are capable of progressive implementation and a summary of their features is shown in Table 4.1. A worthwhile and practical option is Option 3 which is illustrated in Figure 4.2. In addition to developing integrated bus and MRT services this option would enable all public transport ticketing and fares to be integrated as long as MRT and bus operating arrangements are consistent. Table 4.1: Improvement Options Feature Option 1: Strengthen MAUR Option 2: Interim PT Authority Option 3: Integrated PT Authority Option 4: Integrated Transport Authority Integration of public transport in HCMC (1) Inc easing Inc easing Increasing integration Introduction Transport outcome Fairly good MRT integration possible Fairly good MRT integration more likely Fully integrated PT system more probable Fully integrated public transport system Description Minimum change to current institutional responsibilities. As for Option 1 but improved direction & coordination Strong direction and purpose for PT Strong direction and purpose for transport & land use Examples from other places Hong Kong & Singapore in the 1980s Bangkok in 1990s Melbourne and Brisbane, Australia Hong Kong, Singapore Benefits for customers Ease of use of MRT with integrated ticketing and easy interchanging where MRT lines intersect possible Ease of use of MRT with integrated ticketing and easy interchanging where MRT lines intersect. Integration with buses likely. Passengers able to use the PT system as though it was a single system, with fares, tickets, marketing and presentation integrated. Physical integration good. As for Option 3 but better integration with land use and road network. Agency responsibilities Transport policy & planning (2) Urban planning DUPA DUPA DUPA DUPA Transport policy TUPWS TUPWS TUPWS Integrated Transport Authority Strategic transport planning TUPWS TUPWS TUPWS Integrated Transport Authority Financing policies DPI & DOF DPI & DOF DPI, DOF with advice of Integrated PT Authority DPI, DOF with advice of Integrated Transport Authority Fares policy and service standards MAUR for MRT; TUPWS/ MOCPT for bus MAUR for rail; TUPWS/ MOCPT for bus Integrated PT Authority for MRT and bus Integrated Transport Authority for MRT and bus Regulation (3) Safety standards Independent regulator; TUPWS for bus Independent regulator; TUPWS for bus Independent regulator; Integrated PT Authority for bus Independent regulator; Integrated Transport Authority for bus Environmental standards DNRE DNRE DNRE DNRE Economic MAUR MAUR/ Interim PT regulation (5) Authority Integrated PT Authority Integrated Transport Authority 15

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

22 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF Figure 4.2: Key lines of responsibility for Option 3 Integrated Public Transport Authority Source: Study Team 4.6 Fares and Ticketing An objective for rail mass rapid transit (MRT) in HCMC is that it be convenient to use and free of artificial barriers that could be imposed if MRT lines and their method of operations were to be done on a standalone basis. The Working Paper contained in Appendix D presents a discussion of the policy issues regarding fares and ticketing systems and recommends an approach to secure both integrated fares and an integrated ticketing system primarily for MRT, but also for other public transport, as MRT will rely on an integrated public transport system to maximize its performance. Fare policy and an associated ticketing system are essential to the success of MRT and the broader public transport system. Fare policy is vital because: financially, it affects the number of people who will use MRT, which in turn influences fare revenue, MRT operating costs and, ultimately, the viability of MRT lines; socially, the absolute level affects the affordability of public transport to people, while alternative fare structures have differential, and thus distributional, effects on the community; technically, it influences the form of operating concessions, and the design of the MRT system in general and the ticket system in particular; and for the remainder of transport system, the level and structure of MRT fares affects the use made of other public transport and the amount of private travel, with consequences for the transport system and community as a whole. A policy objective for HCMC, as it is in most cities that seek to provide an attractive public transport system, should be: 17

23 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF an integrated ticket and fare system for MRT and, ultimately, the bus system also; and uniform fares for modes of similar quality. Fare policy is therefore a matter that needs to be addressed at the outset, because it affects passenger demand, design of stations and interchanges, the financial viability of public transport, and the form and content of operating concessions. Table 4.2 shows that achievement of uniform fares and integrated ticketing is best suited to a Gross Cost form of operating contract and that both need an MRT or Public Transport Authority with ability to manage more complex concession agreements with more intricate financial arrangements. Table 4.2: Requirements for Uniform and Integrated fares Fare (1) Ticket Concession MRT Authority Uniform & integrated Must be integrated All concessions on same basis. Need revenue settlement system, perhaps with fares collected by third party. Gross cost (2) form of concession is better. Needs an Authority with ability to manage more complex concession agreements with more intricate financial arrangements (1)Uniform fare = same Fare VND/km on all lines; Integrated fare = no second or subsequent flagfall Link to cost recovery: (i) how will loss of second flagfall with integrated fares be recovered?; and (ii) how will concessionaires be compensated for different level of cost recovery for each line with uniform and integrated fares? (2) Gross cost concession all fare revenue is paid to the government with bids made for the amount the government should pay for provision of the tasks set out in the concession. Can involve some transfer of patronage risk to the concessionaire. Source: Consultant It will be exceptionally difficult, perhaps impracticable, to implement an integrated ticketing system with each public transport operator supplying their own equipment without a common approach. Accordingly, there is a universal movement towards integrated ticketing and fare systems that are managed centrally rather than by individual service providers. It is recommended that such an approach is essential for HCMC. Figure 4.3: Integrated Ticketing - Preferred Technical Option Smartcard Line 1 Line 2 Bus BRT Other Reader/Device Open Standard Card/Reader Interface Operator System Central System Open Standard Clearinghouse Interface Non-Transit Applications Central Clearinghouse Phase II Source: Study Team 18

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

25 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF Figure 4.4: Steps to Implement Integrated Ticketing & Fares Source: Study Team Finally, responsibility for developing a suitable integrated ticketing and fare policy to support an integrated MRT and public transport system for HCMC rests with the Management Authority for Urban Rail (MAUR) in the first instance. The thinking needed to develop an appropriate ticketing system and fare policy cannot be outsourced to others. 4.7 Building Technical and Managerial Capacity Depending on the option eventually chosen, with the exception of Option 4 (Integrated Transit Authority) the proposed agency will have a key role in working to efficiently and effectively connect high level transport policy and plan making done by TUPWS to detailed implementation. DPI will continue to have an important role in overseeing the performance of the transport sector in terms of fiscal monitoring, but would also benefit from having a stronger MAUR or Integrated Public Transport Authority to provide economic regulation and technical management of MRT (and/or bus) investment programming and management of annual MRT operating budgets, and desirably for other public transport. Economic regulation and oversight involves issues of pricing including fares, subsidies (and community service obligations), competition, concessioning including compliance supervision and requires skills in economics and to associated legal and financial impacts. Technical supervision of rail MRT and public transport investments and their integrated operation including ticketing requires high level knowledge and skills in: 20

26 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF interpreting transport policy and master plans prepared by TUPWS and central government s MOT and providing appropriate feedback and advice; translating these policies and plans into appropriate forward work programs that can result in timely and efficient implementation of MRT, other public transport improvements and reforms, and integrative systems; providing appropriate advice to TUPWS/ DPI/ DOF/ DUPA and other agencies as required; and appropriate coordination with the Department of Natural Resources and Environment. While the PC is acting to strengthen MAUR (under Options 1 and 2) or if it intends to create an Integrated Public Transport Authority (Option 3) or an Integrated Transport Authority (Option 4) it should be careful to match the skills and capabilities of the people to be engaged and /or transferred to the desired new organization and its structure taking full account of the needed capabilities in high level economic and technical supervision and oversight. 21

27 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF Appendix A: Issues and Options for Private Sector Participation and Concession Template Working Paper 22

28 Asian Development Bank Public Private Infrastructure Advisory Facility RSC-C71557 (VIE), TA4862-VIE Ho Chi Minh City Metro Rail System: Issues and Options for Private Sector Participation, and Concession Template April 2008

29 Table of Contents Executive Summary Introduction Background Role of the current report Terminology Factors Influencing the Structure of MRT Delivery Structuring management in the transport sector Network integration Policy control Implications of low financial cost recovery for the MRT system MRT system components Participants in MRT provision Bundling MRT components Risk transfer Forms of MRT concession Gross Cost and Net Cost Using the private sector to minimize the cost of MRT operations Potential roles for the private sector Assessing the value of private sector involvement - Value for Money analysis Identification and Assessment of Potential Concession Models Introduction Recent examples in other cities Potential implementation models for HCMC Next steps Risk Allocation for Concessioning and Financing Options Concession Template Key Factors Affecting the Concession Agreement Form of Concession Allocation of Risk Value for Money Structure of Payments to the Concessionaire Content of the Template Next Steps to Implement the Template... 37

30 6. Implementing Competitive Tendering and Concessioning Probity Market Testing Preparation of a Request for Proposals Tendering and Tender Assessment Concession Contract and Implementation Concession Management Schedule Appendix A: Bibliography Appendix B: Summary of Some MRT Concession Arrangements in Other Cities Appendix C: Additional Issues Related to Use of Net Cost and Gross Cost Concessions Appendix D: Concession Template Appendix E: Presentation and Report Summary... 81

31 Executive Summary This report considers opportunities to use the private sector in implement and operate rail mass rapid transit (MRT) in Ho Chi Minh City (HCMC). This matter is considered with a broader view than any individual MRT line in HCMC because the ultimate objective of the government is a substantial increase in the use of public transport in the city, which in turn requires an integrated public transport system. The use of the private sector is not addressed from an ideological perspective, but rather as a means for securing the delivery of high quality MRT at the lowest possible cost to the community. The report notes that the private sector has been involved in MRT in nearby countries in recent years: always for implementation of infrastructure; often for the operation of services; and to a lesser extent for investment in MRT assets. It also notes general experience that the cost of public sector operation of public transport is higher than with private sector operation, and that there is a general worldwide trend to make greater use of the private sector for the operation of public transport. Consideration is given in the report to the range of factors that affect the manner in which the private sector could be involved. These factors have two broad influences. The first is the extent to which the private sector could provide finance for implementation of the MRT. In this respect, it appears that the current approach to MRT in HCMC is likely to result in fare and related revenue that will, at best, cover operating costs and make a small contribution to capital costs. Accordingly, the government will need to eventually pay the private sector for most of the cost of any capital that the private sector might provide in the first instance to implement the project. While the cost of capital to the private sector is generally more expensive than the cost of capital for the government, the report notes that this may be offset by lower costs that result from the transfer of manageable risk to the private sector and the incentive for the private sector to better integrate assets and operations to reduce life-cycle costs. The second influence is on the form of the agreement between the government and the organization that is to operate the MRT system (called the concessionaire). It is essential that such an agreement be in place, irrespective of whether the concessionaire is a government or a private organization. It is common for such agreements to have a term of around 30 years or so, especially where the concessionaire contributes capital investment. There is also a need for the agreement to include conditions that provide the operator with the incentive to undertake their tasks in a manner that meets the government s objectives for MRT in HCMC. There has been a tendency in the past to use a form of agreement wherein the concessionaire keeps fare and other revenue for the MRT line to which the contract pertains and uses the revenue to cover its costs. The government may need to provide supplementary financing if the revenue available to the concessionaire is insufficient to met the costs. This approach, called a Net Cost form of concession, has major limitations. In particular it does not facilitate operation of an integrated public transport system and reduces the flexibility of the government to develop the transport system and modify its urban transport policies over the term of the concession. An alternative approach, called a Gross Cost form of concession, is strongly recommended. Under it, revenue from fares accrues to the government, which in turn pays the concessionaire for the services that the concessionaire provides. The report describes how this form of concession can be implemented to give the concessionaire the incentive to provide good quality services that meet the needs of passengers at the lowest possible cost and with the least need for detailed management of the concession contract by the government. 1

32 Four possible implementation options are considered in the report. All four will be subject to value-for-money analysis under the current study to indicate the potential cost to the government of delivering Line 2 of the MRT system and the provision of services on the line over the long term. The results of this analysis will be presented in a separate report. The options are: Government financing, implementation and operation of the MRT. Government financing and implementation of all MRT assets, and engagement of a concessionaire to operate MRT services. Government financing and implementation of MRT civil infrastructure, and engagement of a concessionaire to finance and provide trains and related electrical and mechanical equipment and systems, and to operate MRT services. Private sector financing, implementation and operation of the MRT. The Gross Cost form of concession is recommended for the first three options. A Net Cost form of concession is appropriate for the last option to allow the concessionaire to manage its greater financial exposure in a way that minimizes its risks. In all four cases, the government will eventually pay for the total cost of implementing and operating MRT. However, the total cost to the government will vary. This occurs because the four options involve different ways of allocating and managing MRT responsibilities, and hence the incentive and capacity for those involved to manage the associated financial, engineering, operational and patronage risks. The report draws general conclusions about the relative merits of the four implementation/- financing options, but does not unequivocally recommend any particular approach. Rather, the intention of developing and assessing the options is to provide understanding that can help the government with its consideration of an arrangement that is appropriate for HCMC. Two other key recommendations are made. The first is that there should eventually be at least two companies involved in the operation of MRT in HCMC. This puts competitive pressure on each operator to improve its performance so that they are not seen to be inferior to the other operator(s). It also provides data that the government can use to benchmark the performance of the operators so that it can provide feedback to the operators on opportunities for improved performance. Finally, it provides the government with flexibility in the event that one operator fails to perform, with the capacity for another of the operators to take over in the short term if that should become necessary. The second recommendation is that international competitive tendering should be used to select the concessionaire, with the likelihood that a foreign party will form a consortium with a local enterprise. This will bring international experience and expertise to support the development of world class MRT in HCMC and provide a sound basis for developing domestic skills in MRT. Finally, the report presents an outline of a concession agreement and discusses the actions needed to select a concessionaire and establish and manage a contract. A detailed presentation of issues addressed in the report is presented in Appendix E. 2

33 1. Introduction 1.1 Background The People s Committee (PC) of Ho Chi Minh City (HCMC) has initiated studies to develop a rail mass rapid transit (MRT) system for the City. An MRT Master Plan was prepared as part of a Japanese funded urban transport study, HOUTRANS. An updated Master Plan with six MRT lines was approved in December A proposal for two monorail lines is also under consideration, as is the use of bus rapid transit (BRT). These systems would complement an evolving on-street bus system. Two lines (UMRT2 and UMRT3) have been proposed for Asian Development Bank (ADB) funding with another line (UMRT1) to be financed by the Government of Japan and one line by the Government of China. ADB has mobilized a Project Preparatory Technical Assistance (PPTA) to assist the government to develop UMRT2 and UMRT3 (or variations on those lines if that should be recommended termed the Project hereafter). The PPTA, which commenced in May 2007 and is to be completed in May 2008, is responsible for providing: an optimized MRT Master Plan which integrates the currently proposed MRT lines into a cohesive network with other modes, identifies required supporting policies, and develops design parameters for the two project lines; a feasibility assessment and preliminary engineering design for the Project lines - the PPTA will confirm the engineering feasibility, and identify social and environmental impacts for accurate cost estimation and financial appraisal; and a plan to support project implementation, including institutional and staffing arrangements, capacity building, financing/funding options, and implementation program. In addition, ADB has mobilized a grant from the Public Private Infrastructure Advisory Facility (PPIAF) 1 to assist the government to consider the appropriate role for the private sector in implementing and operating the Project, with a view to minimizing the cost of the project to the government on a risk adjusted basis and taking advantage of a market oriented approach to maximizing the benefits of the Project. The study will provide the following outputs: a framework for considering private sector participation in implementation and operation of the Project; a value-for-money analysis for implementation approaches that involve varying degrees of private sector participation; a more detailed financial model reflecting the preferred approach and measuring the performance of the project from the points of view of the government and private sector participants; and a stakeholder feedback and a description of necessary institutional and contractual arrangements given the preferred implementation approach. 1 The Public-Private Infrastructure Advisory Facility (PPIAF) is a multi-donor technical assistance facility aimed at helping developing countries improve the quality of their infrastructure through private sector involvement. For more information on the facility see the website: 3

34 1.2 Role of the current report The current report addresses the first of these subjects under the PPIAF study. It is noted that the objective for arrangements that are to be adopted for implementation and operation of the Project are to: minimize overall costs to the government on a risk-adjusted basis, covering initial capital costs for infrastructure; ongoing operating and maintenance costs for infrastructure and train operations; and costs incurred by the government to manage implementation and operation of the Project; and maximize the benefits of the Project, including maximizing MRT patronage. The form of construction contracts is generally well understood, and is not addressed in the current report. Rather, the focus is on: the operation and maintenance of infrastructure and provision of train services, including the role of the private sector in undertaking and financing these activities; the extent to which infrastructure provision and financing can be undertaken by the private sector; and the extent to which provision of infrastructure and its financing should be linked with subsequent operations and maintenance of the Project. Following sections of this report therefore: address some terminological matters to clarify subsequent discussion; present an overview of issues that will affect the role of the private sector with regard to the Project, including features of the Project, its potential financial performance and the structuring of government responsibilities in the transport sector; and identify a range of private sector roles and screen these to identify four models that will be subject to a value-for-money analysis (i.e. the second component of the PPIAF study). 1.3 Terminology A range of terminology can be used to describe participants in, and arrangements for, the financing, implementation and operation of an MRT line. To avoid confusion, the following terms are used in this report: The Authority is the government agency that is responsible for ensuring the delivery and operation of the MRT system. The term infrastructure contractor is used to describe the entity (or entities) that constructs infrastructure, including the supply of directly associated equipment, under a contract to the Authority. As will be described in Section 2.1, the infrastructure contractor should be entirely independent of the Authority, i.e. the Authority owns no shares in it. Equipment suppliers may provide electrical and mechanical equipment (e.g. any or all of trains, signaling and communications equipment, power supply systems, train control systems, escalators, etc.) under contract either directly to the Authority or to an infrastructure contractor or a concessionaire. 4

35 Financier who provides or arranges the provision of capital to finance the construction of infrastructure or the provision of electrical and mechanical equipment. The financier may provide the capital as a grant or loan to the Authority or a concessionaire (who would then use it to pay infrastructure contractors and equipment suppliers); the Authority or concessionaire would repay the financier on the basis of agreed terms in the case of grants, no repayment would be necessary. It is likely that a number of financiers may be involved in the Project. An operator is the organization that delivers train services. It could be part of the Authority but, as will be described in Section 2.1, it is strongly recommended that this should not be the case. The operator need not necessarily provide the civil infrastructure on which the trains operate or even the trains themselves. The operator could be a public or a private organization. A concession is a contract between the Authority and a concessionaire, where the latter is the organization that delivers train services (i.e. it includes the operator) and any other agreed activities. The additional activities could include the construction and ongoing operation and maintenance of infrastructure, the provision of trains and the provision of finance used to purchase assets. The concession should specify all conditions relating to the activities for which the concessionaire is responsible. The operator or concessionaire could be a government entity (preferably a corporatized one, i.e. owned by the government but with its own accounts and with its own board) but, as will be discussed later in this report it is recommended that it should be a substantially or wholly private company. A Net Cost concession involves a concessionaire providing train services and any assets that may be agreed, and covering the cost of these from revenue that it is able to collect from passengers and other agreed non-government sources. A Gross Cost concession involves the concessionaire providing train services and any assets that may be agreed, with the Authority paying the concessionaire the full cost of doing so and with the Authority retaining revenue that it is able to collect from passengers. Three forms of agency that undertake commercial operations (i.e. it provides goods or services and charges users for them) and in which the government has an interest are: a public enterprise is used as a general term to cover government departments that undertake commercial operations; a state-owned enterprise (SOE) is used more specifically for a commercial business that is fully owned by government and which has been corporatized, i.e. it has its own board of directors, its own set of financial accounts (with profit and loss, cash flow and balance sheet statements) and is intended to operate on a profitable basis; and a joint venture enterprise is used for a commercial business that is like a private company but in which the government has some shareholding. Public private partnership (PPP) which is a general arrangement whereby, in the case of the Project: a private sector concessionaire could provide finance, infrastructure and/or services, and would be paid for the cost of doing so either through revenue they collect from users of the infrastructure or services, from the government, or from other agreed sources; the PPP is governed by a contract between the Authority and the concessionaire; 5

36 the PPP involves the transfer of as much risk to the concessionaire as the concessionaire can manage with the objective that the concessionaire will have the incentive to avoid the risk coming to fruition and resulting in them incurring higher costs and/or lower revenue than could be the case; and with the extent of private sector participation being determined by a value-for-money analysis that assesses the extent to which the transfer of risk from the government (where it is generally less well managed) is sufficient to offset the generally higher cost of capital to the private sector. A number of other terms are used with regard to contracts. However, they are usually variations on the terms described above. Examples are: A Build Operate Transfer (BOT) contract is a form of PPP. It is generally used where the revenue from the project is sufficient to cover the cost incurred by the private sector in providing the assets and services involved, but it is possible to use it in other cases also. It is generally in the form of a net cost contract. Performance Based Contract (PBC) is to make clear that payments under a contract, and its continuation, are subject to performance meeting specified criteria. In practice, all contracts can be considered to be performance based. Leases are not unique arrangements that are different to those described above, but rather are specific arrangements relating to the financing and provision of assets. 6

37 2. Factors Influencing the Structure of MRT Delivery This chapter discussed factors that affect the way in which the implementation and operation of the Project can be arranged. The lessons from these issues are used in Chapter 3 to describe options for HCMC. 2.1 Structuring management in the transport sector The potential role of the private sector in MRT in HCMC needs to be considered in a broader context of how government should structure its activities in the transport sector. The activities undertaken by transport agencies can be categorized as: policy and planning, which involves identifying future strategic needs and developing the policies and plans required to achieve government objectives. It also includes monitoring and evaluating the performance of outcomes against government objectives, using this information to refine strategies, and identifying strategic resource needs; regulation, which involves establishing and applying technical standards for safety, security and environmental performance of public transport, and economic regulation needed in response to market failure; program development and management, which involves translating policies, strategies and regulatory requirements into specific actions such as programs and projects and providing oversight and monitoring of their delivery; and service delivery, which involves delivering, or ensuring the delivery, of transport infrastructure and services. Figure 2.1 Categorizing the Government Transport Functions Policy & Strategy Policy framework Strategic planning Regulatory policy Financing & pricing policies Performance monitoring Regulation Setting standards Registration & licensing Enforcement Effectiveness doing the right thing Reports Informs Program management Project planning Investment programming Project, financing & other approvals Design, tendering, & contracting Contract/concession management Monitoring & quality assurance Program delivery Infrastructure Services Marketing Finance Efficiency doing the thing right 7

38 These categories of activity serve two broad objectives: effectiveness, which is related to ensuring that choices are directed to achieving the things that the community values, with clear linkages from the desired outcomes to the outputs of government activities that are needed to achieve the outcomes to, in turn, the controls, services or other outputs that need to be delivered to achieve these outcomes; and efficiency, which is to provide the controls, services and other outputs that have been decided on at the lowest possible cost. This approach has a number of implications for institutional management, for example, it: identifies the need to establish clear policies and implementing strategies so that those involved in delivering transport infrastructure and services have an explicit understanding of what is expected of them; ensures a productive tension between those responsible for strategic planning, project development and delivery; reinforces the need for clear allocation of tasks to agencies to avoid ambiguity about which agency is responsible for each of them; indicates the need for performance management systems that are transparent and hold managers accountable for delivery of agreed outputs; shows a need to separate conflicting functions, in particular; to separate regulatory from operational activities to avoid the conflict of interest that arises from an agency regulating itself; more generally, to separate decisions on effectiveness from those regarding efficiency so that each area of activity is undertaken with a clear focus; and to separate commercial activities from non-commercial activities so that the former are undertaken in a businesslike way with a unmistakable commercial imperative; and with regard to the potential role of the private sector, it indicates that: the role for the private sector is program delivery, which can include a range of infrastructure, services, promotion and even finance; use of the private sector must occur within a clear framework of policy and strategic guidance, regulation and program management, with the government alone being responsible for these activities; and the choice of whether to use government agencies or the private sector for program delivery is a decision that should be based on the approach that has the lowest cost. The key consequences of this review of functions for the Project are: the need for a high level group in government that determines the strategic direction for public transport in HCMC and sets the framework within which agencies responsible for individual components of the public transport system undertake their own specialist activities as part of an integrated approach to public transport; the need to separate management and the undertaking of operational activities, with government (i.e. the Authority) responsible for arranging for the delivery of infrastructure and services and separate entities to deliver these through contracts, in particular: 8

39 the use of contractors to construct infrastructure; and the use of concessionaires to operate services (though, as will be described in later sections in this chapter, it is possible to have some infrastructure delivered by a concessionaire). As a general rule, the all contracts between the Authority and contractors and concessionaires should be based on competitive tendering to ensure that the best provider is selected (taking account of both quality and price aspects of tenders). 2.2 Network integration The MRT system will ideally be operated as an integrated system from the perspective of passengers, irrespective of which agencies develop and/or operate individual lines or parts of the system. This will require: integration of physical infrastructure, with passengers able to easily transfer between MRT lines, between bus and MRT and by walk access to MRT lines; integrated ticketing for the MRT system so that passengers can use a single ticket such as a stored value card to access any part of the MRT system and, ideally, buses and water transport also; and ideally, integrated fares so that passengers are not required to pay a second or subsequent flagfall component when transferring between MRT lines and also with other public transport modes. It is also expected that the Project will generally involve the use of trains only on lines developed under the project, but that the potential will exist for inter-operability with possible future lines, i.e. the use of trains that travel on different lines in the MRT system. None of these measures requires a single agency to construct and operate the MRT system as the desired outcome can be achieved by the Authority setting appropriate technical standards and structuring contracts appropriately to ensure the necessary level of integration. 2.3 Policy control The MRT system will have a long life, with for example some infrastructure having a life (if adequately maintained) of over 100 years and trains having a practical life of around 35 years. Over such periods, demographic and socio-economic conditions in HCMC can be expected to change substantially. Government policy priorities may also need to change. It is therefore inappropriate for the government to set up arrangements for train operations that prevent it from making essential changes, for example to add new lines or to change bus or MRT services, the quality of the MRT system, and the structure and level of fares. Equally, the government should compensate other parties if the changes in policy should adversely affect them. 2.4 Implications of low financial cost recovery for the MRT system Previous analysis of the original proposal for lines UMRT2 and UMRT3 (ADB 2007a) suggested that, after taking account of likely revenue (including fares and the limited non-fare revenue that could be collected by the operator), there will be a definite need for the government to finance the fixed infrastructure for the lines from its own sources, an almost certain need to finance rollingstock, and a 35% probability that it would also need to subsidize MRT operations on an on-going basis. While it is likely that forecasts of costs and revenue will 9

40 change in the course of ongoing work, it seems improbable that the level of cost recovery for any proposed line will change so dramatically as to change this overall picture. This general conclusion is similar to the situation in other cities in a similar situation to HCMC. For example the second MRT line in Bangkok appears to be able to generate sufficient revenue to meet its operating costs but not sufficient to also meet the cost of rollingstock. In Singapore, the government provided fixed infrastructure and an initial set of rollingstock with the concessionaire not expected to meet the full cost of replacing rollingstock when this becomes due. In both of these cities, fares are much higher relative to the cost of implementing and operating MRT than seems likely to be the case for HCMC. It will therefore not be possible for a private sector concessionaire to finance, implement and operate the Project and to meet the costs incurred from potential revenue available to the concessionaire. Any private sector participation will therefore need to occur on the basis that the government will need to make some payment to the concessionaire in addition to the fare and other revenue that may be obtained from the Project. 2.5 MRT system components The Project will involve the provision of 2 : fixed infrastructure, which includes civil works and fixed electrical and mechanical (E&M) infrastructure rollingstock, i.e. trains; train control and communications systems; a ticket system and associated fare collection and revenue management; operations and maintenance (O&M) of all infrastructure and provision of train services; and capital to finance implementation of the Project, including the supply of fixed infrastructure, fixed E&M equipment and rollingstock. These components are important in two respects: the suppliers of the components will generally be different and will have differing interests; and the components can be procured in different combinations. The arrangements for implementing and operating the Project need to take account of these differences to avoid conflicts that will reduce the effectiveness of the Project and to take 2 Drawing on ADB (2007), indicative cost components for the Project are: with regard to the initial capital costs, fixed infrastructure, E&M infrastructure, trains and ticketing systems could account for about 75%, 10%, 10% and 5% respectively of the total cost of the Project; the initial capital expenditure will be about 90% of total capital expenditure over the implementation period and 35 years of operation after allowing for expected re-investment and capacity expansion (on a present value basis using a real discount rate of 5%) and 75% of actual real expenditure (i.e. without discounting), and allowing for likely re-investment and capacity expansion over a period covering 35 years of operation, capital and O&M costs could respectively account for around 70% and 30% of the total cost of providing infrastructure and services (on a present value basis using a discount rate of 5%) and 55% and 45% in actual real expenditure (i.e. without discounting). 10

41 advantage of mutual interests that can enhance the prospects for success. These matters are discussed in the next two sections. 2.6 Participants in MRT provision Implementing an MRT system and providing services on it will require the Authority to take account of four parties whose interests many not necessarily coincide: infrastructure contractors, which are interested only in building the project at a cost ongoing maintenance needs are generally small and will generally be undertaken by smaller specialist companies; equipment suppliers for rollingstock and electrical and mechanical equipment (e.g. signaling, power supply, escalators, etc.), who will be interested in both supplying and, if possible, maintaining the equipment this recognizes the specialist nature of, for example, train maintenance and has the merit of minimizing lifecycle costs by, for example, avoiding the delivery of lower quality trains that require expensive ongoing maintenance; the operator, who with an operating concession having the correct incentives will wish to ensure that the project design will be attractive to customers and will minimize operating costs over the life of the operating concession; and financiers of fixed infrastructure and rollingstock, who may be the government if tax revenue or public debt is used, or private companies if a public private partnership (PPP) approach is taken. Developing MRT infrastructure and services requires recognition that these groups need to work together for the project to be delivered successfully, but that they have different individual interests including different time horizons and risk sensitivities. In particular, the infrastructure contractors generally have a short term perspective that covers little more than the construction period while financiers and operators have a longer term perspective covering the term over which debt is outstanding in the case of the former and the operating concession for the latter. Contracts can include any one or a mix of the four parties. If a concession encompassed the financing, implementation and operation of the entire Project, it would necessarily involve all four interests, though to different degrees at different times through the concession. This has the merit of internalizing the tensions between the four parties, including allowing them to appropriately share project risks, and potentially minimizing overall costs. However, there is a risk that the winning concessionaire may not comprise the optimal mix of four parties (i.e. the infrastructure contractor, equipment supplier, operator and financiers who are each able to offer the lowest cost) and could involve suboptimal compromises between the parties. 2.7 Bundling MRT components The activities described in Section 2.5 can be procured in different combinations to achieve the objectives for an efficient and effective Project. Some key issues that affect this bundling are: Integrating design and operations: Project design and implementation need to take account of operating and maintenance costs if the overall life-cycle cost of the MRT system is to be minimized. A single entity could be selected to develop and operate the system (i.e. the first four of the above components) and even to provide finance as well. There are no such entities in Vietnam with the skills and experience in all aspects of 11

42 MRT systems, and few in the world. The range of expertise needed to develop and operate an MRT system is so broad that they will require that the entity be a consortium that includes a number of companies with skills in various specific areas. However, when tendering a consortium may not necessarily secure the best outcome because: (i) the large size of the contract would limit the number of integrated consortia that could bid; (ii) the winning consortium will not necessarily include the best combination of individual companies with specific implementation, operation and financing skills; and (iii) the consortium may not fully separate the cost of initial development and ongoing operations in a way that provides sufficient transparency to enable the government to adequately manage the contract. These limitations are not insurmountable, and can be managed with sound tendering, tender evaluation and project management processes. Integrating rollingstock provision and associated systems with MRT operations and maintenance: It is possible to arrange for the rollingstock to be provided either: (i) as part of the infrastructure contract; (ii) as a standalone contract; or (iii) as part of the operations contract. There is merit in the last of these approaches, i.e. with operating concessionaire financing, providing and maintaining trains and related items such as train control & communications systems and depot equipment because: it ensures that the concessionaire has equipment and systems that they judge will allow them to provide services that meet their passengers needs, with this ability to hold the concessionaire more closely accountable for the quality of their services allowing the transfer of some patronage risk to the concessionaire; it allows the concessionaire to optimize the closely inter-related costs of rollingstock and train control and operations, together with other operating and maintenance costs and hence to operate efficiently; and the financier of the trains (which is likely to be a third party) will place additional pressure the operator to perform well and meet the requirements of the concession to protect the financier s investment 3. Nevertheless, it remains important that the government specify key features of the equipment (e.g. power supply) if it wishes to allow for inter-operability of trains between lines in the MRT system and to avoid excessive mixes of technology in the MRT system. A concession agreement would also need to include a clause that provides the government with the option to buy the trains in the event the operator failed (or was dismissed by the government due to inadequate performance) to ensure that it could install another operator who could continue to use the rollingstock. This approach would avoid a financier adding a risk premium to allow for the possibility that the trains could be returned to them in the event the operator failed or was dismissed. Still, some risk needs to remain with the financier if they are to be in a position to pressure the operator to perform well. Finally, linking rollingstock supply with the operating concession will require that the concession be for a period equal to the life of rollingstock (approximately years) or provide clear rules for government purchase 3 In this arrangement, the concessionaire would be a consortium that included a financier as well as an operator. The presence of a clause in the operating concession contract that allowed the financier to replace an operator that was performing inadequately would be a way to reinforce the mechanism. Notably, the use of export credit to finance the procurement of trains and other assets would not result in the desired internal pressure on the operator because this finance is based on an agreement between the export credit agency and government in Vietnam, i.e. it does not directly link the financier with the operator. If export credit is used, it is therefore necessary that the credit is not the sole source of finance for the concessionaire, i.e. the concession needs to involve the use of significant other private sector finance to bring a financier into the concessionaire consortium who is motivated to monitor and pressure the operator. 12

43 or the transfer of the rollingstock to another operator if a shorter concession period is used. Packaging infrastructure maintenance: Two practical options for the maintenance of fixed infrastructure on an ongoing basis (i.e. after the initial warranty period covered by the construction contract) are to: (i) make it the responsibility of the group who operate train services; or (ii) package it as a separate contract. The former is preferred because it avoids potential boundary disputes between the maintenance and operations contracts (e.g. with the operator claiming that limitations in their performance are due to deficiencies in infrastructure maintenance). It also draws on the self-interest of the operator to ensure that the infrastructure is sound condition so that the system is attractive to passengers and that train operations are not impeded by inadequate infrastructure maintenance. Separating the ticket system and fare collection from other MRT activities: To meet the needs of passengers, the MRT system must be seen by actual and potential customers as a seamless system that is easy to use. As an essential element of an MRT system is that people transfer between lines to reach a greater range of locations, this cannot be achieved if ticketing is undertaken on a line by line basis. The needed outcome of an integrated ticketing system can be achieved by either: (i) establishing standards for an integrated ticket system that the developer of each MRT line is required to adopt; or (ii) removing ticketing from activities undertaken for individual lines and implementing it as a separate contract that covers the entire MRT system (potentially covering ticketing and also fare revenue collection and management). The latter has the advantage that it: makes it easier to implement and operate an integrated fare and ticketing system and provides greater flexibility for future policy changes (e.g. regarding fare price levels and fare structure); allows specialization and scale economies in the ticketing and fare revenue management systems, which should reduce unit costs; facilitates introduction of ticketing products that are part of more general payment schemes (e.g. smart cards), with benefits for consumers and possibly also lower costs it requires the ticketing organization to be able to enter into commercial arrangements with financial institutions and other entities and make rapid and frequent payments to settle accounts as part of its revenue clearing operations; and permits establishment of an independent contractor (i.e. the supplier and operator/- maintainer of the ticketing system) who would amongst their other duties monitor patronage 4. Financing: The government can procure private sector capital to develop MRT infrastructure. Preliminary analysis for HCMC (see Section 2.4), and evidence from other places, indicates that MRT revenue is unlikely to make a significant contribution towards the financing of infrastructure. Hence, there are two ways in which infrastructure can be financed: (i) the government uses its own funds (including general public debt) to finance the project; or (ii) engage the private sector to both develop and finance the project in the first instance and repay them over time for the costs the 4 It is recommended later in this report that the payment to concessionaires who provide train services should be related, in part, to the patronage of their line. Having an independent organisation (i.e. the operator of the ticket system) as the source of patronage data avoids the conflict of interest associated with concessionaires providing data on patronage that in turn is used to determine the payments made to the concessionaires. 13

44 private sector incur. The logic for the latter is that government borrowing capacity may be limited, and/or the cost of private sector finance may be less than use of public sector funds when account is take for the transfer of risk to the private sector. This use of private sector capital together with risk transfer is the essential feature of what are commonly called a public-private partnership (PPP) or a private finance initiative (PFI). Means for determining if there is merit in using a PPP arrangement is considered further in Section Risk transfer An essential aspect of contracts is the specification of the responsibilities of the Authority and concessionaire. Inherent to these responsibilities is the allocation of risk, i.e. the responsibility for each party to deal with uncertainty regarding matters related to the activities (such as the precise quantity and cost of materials needed in a construction contract, likely MRT patronage and MRT operating costs). The Authority will gain the lowest price for a tender by transferring to the concessionaire) the risk that the concessionaire can manage. The consequences of transferring a different level of risk are: if the Authority transfers less risk, the concessionaire will have less incentive to manage the risk this will increase the chance that the risks will occur and will lead to higher costs, which will be passed on to the Authority; and if the Authority transfers more risk than the concessionaire can control, the concessionaire can be expected to add some allowance in their tender to allow for the possibility that events beyond their control will occur and will result in them incurring higher costs this allowance is sometimes called a risk premium. Assigning the optimal amount of risk between the Authority and the contractor/- concessionaire (and also between the various groups in a contract/concession consortium) leaves each in a position to use risk management techniques to minimize the probability that the risks will be realized and result in financial loss. Establishing the appropriate transfer of risk to contractors and concessionaires is an essential activity for the Authority, and will determine the cost that the government will eventually incur for implementation of the Project and its ongoing operations. Dealing with the latter (i.e. ongoing operations) can be difficult because it needs to consider matters that can change over time, but is also very important because the cost consequences of an unsound allocation of risk can be considerable. 2.9 Forms of MRT concession Gross Cost and Net Cost As indicated in the definition of terms in Section 1.3, there are two principal forms of contract for the provision of MRT infrastructure and services; a Net Cost concession and a Gross Cost concession. The features of these approaches are summarised in Figure 2.2 (see also Appendix C). Assessment of the options indicates that: A Net Cost form of concession has substantial limitations because the need to give the concessionaire certainty over the circumstances of their system commensurate with the revenue risk transferred to them either restricts government flexibility with regard to future MRT development and policy change or requires government to renegotiate concession agreements to take account of changes that may need to occur in the future. A Gross Cost form of concession will almost certainly be the best approach for MRT in HCMC to give the government the capacity to deliver fully integrated public transport (including integrated ticketing and a common fare system) that can also adapt to 14

45 changing circumstances over time, acknowledging that it is not possible to identify in advance all such changes that could occur over a potential 35 year concession. With a Gross Cost concession there should still be an appropriate transfer of risk to concessionaires to minimize costs, encourage good performance by concessionaires and minimize concession supervision requirements. Concession supervision needs to focus on key factors that will ensure the government achieves value-for-money. The government will gain the lowest overall cost by transferring to the concessionaire the risks that the concessionaire can manage. As an example, it is evident that an MRT operator can have some influence over MRT patronage, for example by providing good service, but that other factors beyond the control of the operator also have a substantial influence, for example the state of the economy, government policy on other transport modes, government land use policy and patronage on other lines in the MRT system. Transferring full patronage risk to an operator would result in operators, when bidding for a contract to operate the MRT, including higher costs in their tender to protect them against the uncertainty of the risks that are beyond their control. It is judged that the concessionaire may be able to influence only say 10-20% of their patronage, i.e. a concessionaire providing a poor quality of service would have patronage around 80-90% of the patronage of a concessionaire providing a high quality of service. This occurs because (a) many passengers will judge that they have no choice than to continue to use MRT because road traffic conditions are poor, (b) patronage is affected by more general social and economic conditions over which concessionaires have no influence, and (c) patronage on any individual MRT line will depend on what is happening on the other lines. Transferring this extent of risk to the concessionaire will encourage them to provide good services to customers without exposing them to excessive financial risk. This can be achieved by linking part of the payment to the concessionaire to the number of passengers that they carry on their MRT line. Infrastructure Risk sharing Figure 2.2: Summary of Net Cost and Gross Cost Concession Models Net Cost Gross Cost Government provides civil infrastructure. Concessionaire provides trains and related items such as train control & communications systems and depot equipment. Concessionaire assumes all patronage risk, and shares extra profits (if any) with the Authority. Risk is shared between the Authority and concessionaire. Optimum sharing of risk will minimise the concession cost. Revenue Concessionaire keeps revenue Fare revenue is given to the Authority Services Concessionaire determines services to be provided on the basis of profitability. Authority sets service standards and the concessionaire determines services based on these standards. Payments Authority role Source: Consultant Concessionaire meets costs from its own revenue. Additional payments may be needed from the government if concessionaire s revenue is too low. Authority invites tenders & establishes a concession; has only a small role thereafter; difficult to vary contract conditions. Authority pays the concessionaire for services provided according to rates set on the basis of competitive tendering and quantity/quality of service provided. Authority invites tenders and establishes a concession; has a continuing major role in managing the concession agreement; can vary conditions when needed. 15

46 2.10 Using the private sector to minimize the cost of MRT operations There has been a general tendency for subsidized publicly provided public transport services to become inefficient, with around half of increased subsidies for public transport being delivered to passengers through improved services and the remainder resulting in less efficient service provision, i.e. wasted (Bly et al 1980, 1985). This waste is also evidenced by international experience in recent years with the contracting out of operation of bus services that were previously operated by a government agency, with the general literature indicating that private sector operations achieved savings in recurrent costs (i.e. operating and maintenance costs) have generally been in the range of 20% to 50%, with some reports of higher savings, for example (Hensher and Wallis 2005), for example: Great Britain: 50%-55% Scandinavia: considerable spread of results (5%-34%), but most in range 20%-30% USA: 30%-46% Australia: 22% (Perth), 38% (Adelaide) New Zealand: about 40% (ex-public operators) and about 5% (private operators). Recent work on the cost of operating buses in Bangkok indicates that private sector operation would be at least 30% less than with government operation (University of Queensland 2006). That is the cost government operation of public transport services is likely to be, conservatively, around one-third to one-half more expensive than with private sector operation based on competitive tendering. There is, accordingly, a strong case to consider use of the private sector for service provision. Given that there is no agency in Vietnam with any experience in MRT operations, this has the added advantage that it avoids the high cost and complexity of attempting to establish such an organization in the first instance Potential roles for the private sector An essential task for the government is policy, planning and specification of an integrated public transport system. Failure to do this, either by neglecting the issues or by assigning excessive flexibility to concessionaires and contractors, will almost certainly lead to a suboptimal situation in which the cost of MRT and other public transport will be higher and the quality and integration poorer than need be the case. It also needs to establish the appropriate operating regime that will be implemented through operating concessions. To deliver effective and efficient MRT, the government therefore needs to: ensure adequate planning and feasibility has been carried out and that the economic and financial business case for proposed new MRT lines or other system components is understood; clearly understand the relative merits of alternative approaches to procurement (e.g. single or multiple contract, and how equipment and services should best be bundled see the discussion in Section 3.3) when embarking on procurement for construction and supply of equipment and be able to clearly specify the key functional requirements for the infrastructure and services that will apply irrespective of the procurement method used to arrange delivery of them; ensure integrated operations and policy flexibility by keeping control of: policy on fare structure and level and the instruments (including ticketing) to implement it; 16

47 key design features to ensure the system facilitates integrated public transport services, for example train specification, power supply, common train control systems to permit inter-operability, ease of transfer between stations where lines intersect, disability standards so that a disabled person who boards at one station is able alight or transfer at another, etc.); key operating parameters that govern the services to be provided, for example to allow the government to require concessionaires to provide community service obligations and to ensure MRT services integrate with other public transport services; marketing and branding of the MRT system as a whole, while also encouraging individual operators to be innovative and promote their own services within the desired framework; and provision of passenger information through published material (e.g. web sites, timetables etc.) and call centers. It is essential that government perform these functions because no other group can do them - the government s priority must therefore be with respect to these functions rather than other functions (i.e. delivering infrastructure and services) that can be undertaken by the private sector. Government in Vietnam has considerable experience using the private sector for the delivery of civil infrastructure, but much less experience using them for delivery of services. Experience in other cities in Asia (e.g. Bangkok, Singapore, Kuala Lumpur, Manila and Hongkong) shows that the private sector can implement and operate high quality and effective MRT systems. Experience also shows that the private sector can mobilize capital to finance infrastructure, even if this has not always been successful in terms of providing the private sector with an acceptable rate of return on their capital. The causes for the financial underperformance are complex, but can generally be linked to: (a) substantial optimism bias (i.e. a tendency by both government and the private sector to under-estimate the cost of projects and, even more importantly, the tendency to over-estimate passenger demand for the projects); and (b) a failure by government to adequately plan and execute projects and to implement the complementary land use and transport developments needed for the best use to be made of the MRT projects Assessing the value of private sector involvement - Value for Money analysis The decision on whether to use the private sector to undertake an activity can be based on a value-for-money (VFM) analysis that takes account of: the cost of establishing a public sector agency to undertake the task if such an agency does not already exist; differences in the cost of capital and operating efficiency of the private sector compared with the government; and the extent to which responsibility for uncertainty about future conditions is transferred to the private sector and the private sector is able to manage the uncertainty so that higher costs do not result. The cost of capital for government borrowing will generally be less than private finance because of the low risk assigned to government (i.e. sovereign) debt and the higher return on equity capital sought by the private sector. If all other matters were equal, it would therefore 17

48 be better to use government capital in association with private sector implementation of MRT infrastructure and private sector option of MRT services to minimize the overall cost of MRT. However, other matters are not equal because it is possible that the private sector can, with the appropriate transfer of capital risk to them and with a soundly based and managed contract, manage the risks to avoid them occurring and incurring financial losses that would result as may more readily occur with government financing of the assets. The private sector could also be expected to more firmly resist requests for changes in the scope of the project than would occur if a government agency was implementing the project. Hence, it may be possible to transfer sufficient risk to the private sector that offsets the higher cost of private finance and hence makes a PPP approach the lower cost option. This can be established using a value for money analysis that compares the cost to the government of implementing an MRT project using its own capital. This will be tested in financial modeling to be undertaken through the current study. 18

49 3. Identification and Assessment of Potential Concession Models 3.1 Introduction The People s Committee of HCMC, and government more generally in Vietnam, has considerable experience in the procurement of civil works through contracts. This experience has covered situations where contractors involve some form of government ownership (i.e. they are a public enterprise, a SOE or a joint venture) as well as contractors who are fully privately owned. The HCMC PC also has experience with contracting the provision of bus services to SOEs, joint ventures and private companies. Implementing MRT in HCMC will be more complex than this experience to date because of issues such as the size of the civil works involved, the cost of operations, the interrelationships between fixed infrastructure, trains and operations, and the lack of any experience with MRT infrastructure and, in particular, operations. Some of the issues that affect arrangements for the implementation and operation of the Project were discussed in the previous chapter. This chapter draws on that discussion and experience elsewhere to identify several distinct options or models that could be applied in HCMC. Several conclusions arising from the discussion in Chapter 2 help to identify some key features that need to be considered: there is a central role for government in specifying key design and operating parameters for the MRT system an example of this is where government sets the standards and specifications for signaling and communications equipment which ideally should be the same for all lines; there is a need to coordinate design and operations while this does not necessarily require that they be integrated within a single supply contract, it is likely to be more easily achieved if this is done; the provision and operation of the ticketing system should be contracted separately from other infrastructure and services to ensure integrated ticketing and fares; a Gross Cost form of operating concession allows a better integrated system with policy flexibility for government and greater certainty for concessionaires; the sustainability of the MRT system will be facilitated if the capital cost of trains, reinvestment in life-expired assets over time and MRT operating and maintenance costs can be recovered from fare and other MRT-related revenue; and the use of government or private sector financing of capital expenditure in the first instance can be assessed on its own merits, i.e. it can be addressed as a separate issue to other matters related to MRT development and operations. It also demonstrates how the use of private sector capital can be assessed to determine if it provides the government with value for money compared with use of government funds to provide the necessary capital. Firstly, though, brief consideration is given to approaches used in other cities that have implemented MRT in recent years. 19

50 3.2 Recent examples in other cities MRT lines that have been implemented in recent years and which provide insights that are applicable to HCMC include those in Bangkok, Manila, Kuala Lumpur and Singapore. While somewhat older, Hong Kong is also briefly discussed. Three models have been used to implement MRT in Bangkok to date (see also Appendix B): The first two lines, which are elevated and 23.5 km in length, was a design, build, transfer, operate and maintain concession in which a private sector consortium financed and implemented the system and have the right to operate it over a period of 30 years. The private sector gains its revenue from fares and a few other small sources, and receives no subsidy. The system has not been able to generate sufficient revenue to meet all of its costs, and investors have incurred substantial financial losses. The second line (the Blue Line subway) was implemented by the government as a design and build contract for most of the fixed infrastructure using public funds with a separate concession for the supply of trains and E&M equipment and for operation of the line for 25 years. The concessionaire gains its revenue from fares and a few other small sources, and meets its costs from this revenue, i.e. it does not receive any ongoing subsidy. Patronage for the line is much lower than forecast, and it seems unlikely that the concessionaire will be able to meet its financial obligations in the longer term. A third line (to the new Suvarnabhumi Airport) is currently under construction. The government is using a design and build contract to develop all fixed infrastructure and to supply an initial set of nine trains using public funds. The form of the concession is not yet determined, but it is notable that the provision of some trains will reduce the costs that the concessionaire will be expected to cover. Work examining the development of future MRT lines in Bangkok (ADB 2007b) has recommended that implementation and operational arrangements for future lines should be: government financing of fixed infrastructure through use of public funds with implementation of fixed infrastructure through conventional construction contracts; engagement (through competitive tendering) of a private sector concessionaire to finance and provide trains and train control and communications equipment, to maintain fixed infrastructure and to operate train services over a 35 year period under a Gross Cost form of concession with the appropriate transfer of risk; and the government to implement an integrated ticketing system using the private sector to the greatest extent and with the government retaining all fare revenue. 3.3 Potential implementation models for HCMC Models for the implementation and operation of the Project in HCMC need to address: (i) implementation of the infrastructure; (ii) operation and maintenance of the system; and (iii) financing of the system. Four integrated models for these activities, which illustrate the range of possible options and their implications, are identified. In all cases it is assumed that the government agency which is responsible for delivering the project (called the Authority) engages other entities on a contractual basis to undertake the three tasks, though the other entities could be a mix of public and private enterprises. The four models are: Public Enterprise. In this approach the Authority would use government finance to implement the Project using capital that it arranges (using government tax revenue, grants from other levels of government, and sovereign debt), would use competitive 20

51 tendering to arrange for construction of fixed infrastructure and the supply of trains and associated systems, and would establish a SOE that would operate and maintain the system under contract. As the operator would be an SOE, there is no effective risk transfer from government (i.e. it can only be transferred between different parts of government) and the concession contract would need to be based on payments to cover the costs incurred by the SOE. In this arrangement there is no role for the private sector other than as civil works contractors and suppliers of equipment. This is the broadly model recommended for UMRT1 (though it was proposed for this line that maintenance of the line would be undertaken through a separate contract see Parsons Brinckerhoff et al 2006). Public Implementation with Operating Concession (PIOC). In this approach the Authority would finance and implement project infrastructure in the same manner as the Public Enterprise model, but would engage, through competitive tendering, a private company that would provide services. A Gross Cost approach is adopted for the operating concession because of the reasons discussed in Section 2.9. (A Net Cost concession could be used, but this would reduce the integration of the network and the policy flexibility of the government.) In the PIOC approach, the Authority needs to play a firmer role in ensuring that the design of the Project takes account of ongoing O&M costs so that life-cycle costs are minimized and tries to ensure that trains meet the needs of operators. Train Supply and Operating Concession (TSOC). This model uses government funds to finance fixed infrastructure that is implemented by contractors through competitive tendering, with a separate operating concession that also involves the financing and supply of trains and related items such as train control & communications systems and depot equipment. As with the PIOC model, a Gross Cost concession is adopted. As in the PIOC approach, the Authority needs to play a role in ensuring that the design of the Project takes account of ongoing O&M costs so that life-cycle costs are minimized, but leaves responsibility for the choice of trains to the operating concessionaire. The approach draws on the potential to bundle train supply with operations so that more patronage risk can be transferred to the concessionaire. It is the approach recommended for future MRT lines in Bangkok (see Section 3.2). Build Operate Transfer (BOT). This model involves the Authority engages a consortium to finance, implement and operate the Project through a competitive tendering process. In keeping with the greater extent of risk transferred to the consortium in this approach, it is likely that a Net Cost approach would be more appropriate than a Gross Cost approach, with the tendering process involving the bidding consortia indicating the amount that the government would need to pay them to finance, implement and operate the Project over the concession period. Inherent to these options are: (i) the last two options involve some provision of finance from non-government sources, which necessarily requires that the group undertaking the task must be either wholly private or a joint venture; and (ii) options that require private sector finance for capital investment must transfer related risk to the private sector and allow the private sector to manage the risk so that they can be held accountable for outcomes. Features of the four procurement models are described in Figure

52 Delivery of: Civil Infrastructure and Fixed Equipment Trains, train control and communications, and depot equipment Train services and infrastructure maintenance Risk Transfer Finance Civil Infrastructure and Fixed Equipment Trains, train control and communications, and depot equipment Train services and infrastructure maintenance Fare revenue Source: Consultant Figure 3.1: Features of Delivery and Financing Models Public Enterprise Public Implementation with Operating Concession (PIOC) Delivered through competitively tendered contracts to the government. Delivered through competitively tendered contracts to the government. Contract negotiated with an SOE. Transfer of risk from the government is limited to the extent allowed in construction and equipment supply contracts. The government retains risk associated with operations through its ownership of the operator. Competitively tendered Gross Cost contract. As for the Public Enterprise option but can transfer operating risk to the concessionaire. Some patronage risk can be transferred through the Gross Cost concession. The government retains operating risk related to mismatch between trains it provides and concessionaire needs. Capital provided by the government. Capital provided by the government. The government pays all costs incurred by the SOE, including working capital The government retains fare and other revenue (or pays SOE the difference between costs and revenue if the SOE retains the revenue). The government pays for operating and maintenance costs as specified in the contract. Train Supply and Operating Concession (TSOC) Delivered through a competitive tendered Gross Cost concession. The government transfers more risk to the concessionaire than in the PIOC option because the concessionaire purchases trains and can therefore bear more risk for operations because they have more control over service quality. Capital provided by the government. Capital provided by the concessionaire. The government pays for costs as specified in the contract (to cover both capital and O&M costs). Fare revenue accrues to the government. Build, Operate & Transfer (BOT) Delivered through competitively tendered Net Cost contract to the government. Transfers the greatest amount of risk from the government, but the government loses flexibility for change in policy and for public transport network integration. Capital provided by the concessionaire. The government will need to pay for costs as specified in the contract (to cover both capital and O&M costs net of fare revenue, where fare revenue will be much less than the costs). Concessionaire retains fare and other revenue. It would be possible in all of the models for ticketing to be part of the operating concession for the Project or for ticketing to be implemented separately for the entire MRT system. It would be a little more complex to separate ticketing from the concession in the case of the BOT approach or with net cost approaches to concessions because the concessionaires in these cases will wish to control all aspects of operation of their line. 22

53 An initial indicative assessment of the models is summarized in Figure 3.2 using a system whereby three ticks is the highest possible score and a cross means that the model does not allow the criterion to be met 5. Features of the assessment are: Minimizing overall costs. None of the options is a perfect means for minimizing overall costs. The BOT model may be best placed to minimize costs, but is scored only two ticks because tenderers are likely include risk premiums to allow for risks (e.g. full patronage risk) that they cannot manage but which they would be required to assume under the model. While the Public Enterprise model might in theory allow costs to be minimized, the lesser level of financial discipline that occurs in public enterprises and the difficulty in imposing sanctions on a government agency are likely to diminish the potential benefit in practice. The PIOC model will perform less well than the TSOC model because train supply and financing is separated from operations, which increases the chance that the trains will not be as well suited to operations (thus leaving more operating risk with the government) and it does not include the added discipline resulting from the presence of train financiers in the TSOC model. Provide integrated MRT system for passengers. The BOT approach cannot meet this criterion because the line is operated on a stand-alone basis. In contrast, the TSOC model transfers patronage risk to the concessionaire to the extent that they can manage it and provides incentives for the concessionaire to meet the needs of passengers that cannot be provided to the same extent in the remaining options. It is likely that the PIOC model will result in slightly less integrated services because of the potential for a mismatch between trains selected by the government and the needs of the operating concession. The Public Enterprise model should allow a high level of MRT integration because all aspects of MRT are under the control of the government. Use of a Net Cost concession for the Public Enterprise, PIOC and TSOC approaches would result in these options performing poorly against this criterion because the concessionaire would be focused on the performance of their line alone and would resist attempts to provide a more integrated system that did not provide them with some benefit. Policy flexibility for the Authority. The BOT approach requires that the concessionaire be given protection against changes that may affect their revenue, and hence considerably limits the changes that government can make over the life of the concession in response to changes in circumstances. Conversely, the Public Enterprise model gives the government the greatest level of flexibility, with the other options giving a high level of flexibility. Use of Net Cost concessions for the Public Enterprise, PIOC and TSOC approaches would result in a similar outcome to the BOT approach, with the Authority being in the weak position of negotiating with an incumbent operator over the duration of the concession for any changes they wanted to make to the system. Transfer of civil infrastructure supply risk from the government. The BOT approach allows most infrastructure risk to be transferred from the Authority. The extent of transfer is a less with the PIOC and TSOC approaches because the Authority must coordinate contract management for the supply of fixed infrastructure and other aspects of MRT though the government can transfer most maintenance risk to the 5 Ongoing work under the current study will examine the financial performance of all four models using a value-for-money analysis. The role of the current assessment is to indicate the general strengths and limitations of the four approaches to guide ongoing development of the most appropriate model for the Project. 23

54 concessionaire 6. The transfer of risk with the Public Enterprise approach is least because it remains within government. Transfer of operating risk from the government. The Public Enterprise model merely shifts risk within government rather than transferring it from the government. The transfer of risk from the government in the other models is linked to the concessionaire s incentive to provide the best level of service (which is in turn related to the extent of patronage risk and the capacity to influence the quality and quantity of service). Amongst these, the extent of risk transfer is least with the PIOC approach because the concessionaire can blame inadequate operating performance on the trains and other M&E assets provided by the government. They would be unable to do this in the TSOC option because they would be responsible for purchasing the assets. The BOT model transfers the greatest level of operating risk to the concessionaire. Transfer of patronage risk from the government. The BOT model allows the greatest level of patronage risk to be transferred to the concessionaire because the approach gives the concessionaire most control over their system and involves a financier who would place considerable pressure on the MRT operator in the concessionaire s consortium to perform well 7. A lesser level of risk can be transferred to the concessionaire in the TSOC approach because the financier s interest is limited to train supply. The risk transfer is much less with the PIOC approach because of the absence of this pressure from a financier and because of potential mismatch between the trains selected by the government and the concessionaire s needs. There is no effective transfer of patronage risk in the Public Enterprise model because the concessionaire (an SOE) is simply another arm of government. Firm contractual basis for operations. The PIOC, TSOC and BOT approaches all involve clear and enforceable contracts. It is judged that enforcing contracts under the Public Enterprise approach will be less effective because the Authority and the SOE concessionaire are both parts of government. Ease of concession management. It is judged that the resources and skills needed by the Authority to manage concessions will be least in the case of the Public Enterprise approach because it will be the weakest in terms of contractual strictness, but will be similar for the other three models. In general, a BOT approach requires a lower level of supervision because risks and responsibilities lie primarily with the concessionaire, but the need in the Project for a considerable subsidy to be paid to the concessionaire in the BOT case would require the Authority to take a more substantial role to ensure that the subsidy was being used appropriately. 6 In the PIOC and TSOC options, the concessionaire who is to operate services could be engaged early in the project implementation process so that they can provide input on operating issue to the project design that may help reduce life cycle costs. In practice, it will be impractical to do this in sufficient time for the concessionaire to be able to substantially influence the engineering design, which will be one of the earliest activities to occur for implementation of project infrastructure (see Section 6.7 for more information on the potential time needed to engage a concessionaire). Moreover, engaging a concessionaire when the design is incomplete requires additional care because: (a) the competitive tendering process (including submission of prices for the cost of providing services) that is used to select the concessionaire must be based on a project design that is not fully specified, which is likely to result in less optimal bid prices; and (b) to ensure that the concessionaire did not use the process to vary the contract prices in their contract in their favour. On balance, it is concluded that it will be relatively better for the government to secure advice on operating needs from other sources to optimise the engineering design and to independently secure a sound concession contract. 7 In the extreme, the financier could have step-in rights to replace the operator in the event that the operator persistently fails to meet their obligations (see the concession template in Appendix D for more information on this and similar issues). 24

55 Criteria System Integration Figure 3.2: Indicative Assessment of Delivery and Financing Models Public Enterprise Public Implementation with Operating Concession (PIOC) Train Supply and Operating Concession (TSOC) Build, Operate & Transfer (BOT) Minimize capital and operating costs Provide integrated MRT system for passengers Policy Flexibility for the Government Ability for the Authority to modify MRT system Risk Transfer from the Government Civil infrastructure risk Operating risk Patronage risk Management of Operating Concession by the Government Firm contractual basis for operations Ease of concession management Incentive for contractor/- concessionaire to do the thing right Potential Value-for-Money Allowing for risk transfer, associated risk premiums and the cost of capital (1) Using a scale of up to 3 ticks, where 3 ticks indicates the best performance. A cross indicates the model cannot meet the criterion. Source: Consultants Incentive for contractor and concessionaire to meet the government s needs in the most efficient way. The TSOC approach is judged more likely to encourage the contractor and, more especially, the concessionaire to provide the most attractive and efficient service to passengers because they have reasonable control over the infrastructure and the extent of risk transfer and payment structure under a Gross Cost form of concession provides the right incentives for this outcome. The incentive is a little less in the BOT case because the concessionaire will be more focused on controlling costs and, with the transfer of patronage risk beyond their capacity to manage it, may become risk averse and hence less innovative. Similarly, the provision of trains to the concessionaire in the PIOC approach and the absence of a financier reduce the pressure and opportunity for the concessionaire to be as responsive as in the TSOC model. The incentive is even less in the Public Enterprise approach because the government will incur any costs that result from a lack of performance by the SOE concessionaire. Potential Value-for-Money (VFM). The VFM analysis has not been completed at the time of preparation of the current report. However, the judgment is made that of the TSOC approach is likely to be best because it transfers an optimum amount of control and risk to the concessionaire. The VFM for the BOT approach is reduced by the likely allowance for risk premiums by the concessionaire and the higher cost of private sector capital. The PIOC option is also likely to perform less well than the TSOC approach 25

56 because it places less pressure on concessionaires to perform well. The Public Enterprise approach is judged to perform less well again because there is little transfer of risk from government, there are considerable risks and costs associated with establishing an SOE to operate MRT services, and it is likely to be more difficult to enforce contracts between government agencies. On balance, the TSOC approach appears to perform better across all criteria than the other options, with the Public Enterprise and BOT approaches having some particular weaknesses. Placing a greater weight on MRT system integration and policy flexibility reduces the relative merit of the BOT approach. As indicated previously, the approaches will be reassessed in the course of ongoing financial modeling. 3.4 Next steps The assessment undertaken in this chapter suggests that there is potential for a private sector role in the Project. It seems that this is unlikely to involve a major role in providing finance for the Project (as occurs in the BOT approach). However, there appears to be merit in the involvement of private sector financing for acquisition of trains and related mechanical and electrical equipment. Similarly, there is a very strong case for use of a Gross Cost form of concession agreement because it allows the government greater capacity to modify MRT operation in response to future changed circumstance, more easily permits integrated ticketing and common fares, and allows the ideal extent of risk transfer to the concessionaire. The intention of developing and assessing the four options is to provide understanding that can help the government with its consideration of an arrangement that is appropriate for HCMC. Other arrangements are possible, and the results of the analysis provide guidance for establishing the features of such variations and for the approach that is eventually adopted by the government. An essential element of the structuring of the options is the appropriate allocation of risk and the use of incentives and penalties so that the concessionaire is incentivized to undertake the responsibilities allocated to them by the government at the lowest possible cost. 26

57 4. Risk Allocation for Concessioning and Financing Options Responsibility for managing risk (i.e. uncertainty or the chance that things could occur that result in a variety of problems including higher costs) needs to be allocated in a way that makes those involved in implementing and operating MRT in Ho Chi Minh City fully aware of them and able to manage them to minimize the chance of the problems occurring. Ways in which risks could be allocated for the four procurement options described in the previous chapter are described in Table 4.1. The allocation of risk is described in contracts between the government and other entities that are responsible for various MRT activities. Table 4.1: Recommended allocation of risk for each concession option Risk Concession Option (1) Public Enterprise Public Implementation with Operating Concession (PIOC) Train Supply and Operating Concession (TSOC) Build, Operate & Transfer (BOT) Project design Changes in project These changes can occur only under the direction of and with the approval of the scope government and should therefore remain the responsibility of the government. Unexpected infrastructure design issues Civil works procurement Unexpected land acquisition & resettlement issues Unexpected changes in construction activities and costs for original scope of works Changes in scope of works Latent condition for civil infrastructure Effect of delayed construction on concession commencement These risks are generally beyond the control of contractors and the private sector and so the government should bear the financial consequences of them The government can allocate most of these risks to contractors, but may need to be responsible for large unexpected changes. Most of these risks can be allocated to the concessionaire. The government should bear the consequences of any changes in the scope of works that it proposes. The government should be responsible for such uncertainty. This risk is under the direction of the government and so the government should compensate the concessionaire for additional costs that the latter incurs as a result of the delay. E&M and train procurement Changes in The risks remains with the government. technology Changes in unit costs Delay in E&M and train delivery Changes to ticketing system that are initiated by the government The ticket system is under the control of the government in these options. The concessionaire is wholly responsible for managing implementation and should bear the consequences of delays. These risks can be transferred to the concessionaire. The Net Cost concession makes risk transfer difficult. 27

58 Risk Maintenance of assets Changes in infrastructure maintenance needs Changes in unit costs for maintenance of infrastructure Inadequate maintenance of civil assets Inadequate maintenance of trains and M&E assets Service provision Service standards Train service schedules Changes in unit labor costs Changes in unit power costs Changes in unit costs of other inputs E&M and train maintenance, rehabilitation and replacement Industrial, security or emergency event off the system Concession Option (1) Public Public Train Supply and Build, Operate & Enterprise Implementation Operating Transfer with Operating Concession (BOT) Concession (PIOC) (TSOC) The risk remains with the government. Most risk can be transferred to the concessionaire. Full risk can be transferred to the concessionaire. Difficult to transfer full risk to the concessionaire because they did not chose the assets. Full risk can be transferred to the concessionaire. Full risk can be transferred to the concessionaire. The government specifies safety and security standards, but seeks to use the transfer of some patronage risk to the concessionaire to minimize the need for detailed specification of service standards. Subject to the transfer of some patronage risk to the concessionaire, responsibility for service planning can be transferred to the concessionaire, with the concessionaire seeking approval from the government for changes. Even though the risks could be transferred to the concessionaire, the concessionaire is a public company and so the risk remains with the government. Can either (a) transfer the risk to the concessionaire by using only a single escalation factor for future payments, or (b) use separate escalation factors for each item to avoid the transfer of difficult-to-manage uncertainty to the concessionaire. Government purchase of the assets means that risk associated with maintenance of them should remain with the government The government specifies only safety and security standards, with the fully transfer of patronage risk to the concessionaire avoiding the need for specification of other service standards. Full responsibility is transferred to the concessionaire. Risk transferred to the concessionaire through use of a simple cost inflation index. The risk can be transferred to the concessionaire. The risk needs to be shared between the government and the concessionaire. 28

59 Risk Patronage and revenue Changes in patronage due to poor service quality Exogenous changes affecting patronage, e.g. changes to the public transport system in HCMC, very substantial changes in fuel prices and other changes in socioeconomic conditions Change in fare policy Fare collection security Change in other revenue Concession Option (1) Public Public Train Supply and Build, Operate & Enterprise Implementation Operating Transfer with Operating Concession (BOT) Concession (PIOC) (TSOC) Even though the risks can be transferred to the concessionaire, the concessionaire is a public company and so the risk remains with the government. Concessionaire bears some risk because part of their payment is related to patronage. The changes are beyond the control of a concessionaire, but for practical reasons need to be shared. Three cases apply: (a) can transfer risk of small negative consequences to the concessionaire, (b) government should bear the negative consequences of significant changes, and (c) concessionaire gains from changes that are beneficial to them may be partially recouped though a profit cap. Can expect concessionaire to seek to protect themselves from downside risk. The government retains all fare revenue and hence bears the revenue consequences of any changes in fares policy that it initiates. The government can transfer this responsibility to a separate fare collection concession. The risk can be transferred to the concessionaire. All patronage risk is transferred to the concessionaire through a Net Cost approach The risk is transferred to the concessionaire. The government has limited capacity to change fare policy The risk is transferred to the concessionaire. 29

60 Risk Payments to/from the concessionaire Incentives to encourage concessionaire to provide good services Improper recordkeeping of services provided Cost inflation Potential for windfall gains to the concessionaire Procurement model Model is unattractive to potential tenderers Model results in productive tension between concession partners Concession Option (1) Public Public Train Supply and Build, Operate & Enterprise Implementation Operating Transfer with Operating Concession (BOT) Concession (PIOC) (TSOC) Limited capacity to transfer risk because government operator cannot be held to same contractual standard as a private company. The risk remains with the government because the concessionaire is publicly owned. Government will capture any gains. Not relevant because operator is publicly owned. Transfer of risk is limited because operators can blame poor performance on M&E assets and trains that are provided by the government. Substantial transfer can occur with concessionaire control over operating assets and patronage incentive payment. Government needs independent means for confirming services provided to provide the basis for contract payments. Risk can be transferred to the concessionaire to the optimal extent by using appropriate price indices to adjust concession payments over time. Greatest level of transfer. Government has a limited need because payments to the concessionaire are not linked to specific service provision. Risk is transferred to the concessionaire by using an average price index. Concessionaire may not be able to manage all of the risk, e.g. changes in energy prices. Potential for windfall gains from operations is very limited. Risk of windfall gains is limited by sharing profits from specific financing and development activities. May be attractive because tenderers do not need to arrange finance and they will seek to assign asset risk to the government. Not relevant because concessionaire involves an operator only. May be less attractive to tenderers because they need to arrange finance. May be less attractive to tenderers because they need to arrange finance and bear considerable risk. Deliberate tension introduced by involvement of financier partner who will monitor operator performance. 30

61 Risk Inadequate performance by concessionaire Termination of concessionaire Other financial matters Exchange rate movements Interest rate changes Changes to tax legislation affecting E&M and train assets Changes to tax legislation affecting operations Concession Option (1) Public Public Train Supply and Build, Operate & Enterprise Implementation Operating Transfer with Operating Concession (BOT) Concession (PIOC) (TSOC) Risk remains with the government because the concessionaire is publicly owned. Government can terminate the concession, though political lobbying may make this difficult to achieve. Risk remains with the government. Some risk transfer through a patronage-related payment, but the concessionaire can blame poor assets provided by the government for inadequate performance. More risk transfer because of the patronage-related payment and concessionaire selection of E&M assets and trains. Greatest transfer of risk, though there is the potential for the transfer of risk that the concessionaire cannot manage this would result in the added costs through risk premiums and risk averse behavior by the concessionaire. Government can establish conditions to terminate the concession in the case of persistent sub-standard performance by the concessionaire. Primary risk should be transferred to the concessionaire, which can use various instruments to mitigate the risk. Government bears some indirect risk through indexation of future payments to concessionaires. While the concessionaire has no influence over these risks, simplicity of management indicates that the risk for nondiscriminatory changes to tax should be transferred to the concessionaire, noting also that indexation will include some effect of tax changes. Government should bear the risk of tax changes that primarily affect only concessionaires because the consequences of the changes can be more easily identified. 31

62 5. Concession Template The provision of MRT services and any associated provision of assets and finance for the assets should be undertaken on the basis of a sound contract. A legal agreement for a concession can be expected to be perhaps a thousand pages or more in length. The purpose of the current chapter is to provide an outline (or template) for such an agreement to provide a broad understanding of the issues that need to be addressed. The template, and discussion in this chapter, is based on a model in which: the government makes available fixed MRT infrastructure to the concessionaire who has a duty of care with regard to the infrastructure over the terms of the concession; and the concessionaire finances and supplies certain assets (taken to include trains, train control and communications, and depot equipment), operate train services for a given period (taken to be years), and turn over all assets to the government at the end of the concession. The template can accommodate variations so that it can be adapted to any of the other three concession models discussed in the previous chapter or variations on these models. Taken with other discussion in this report, there is sufficient information in the template to allow a specialist legal advisors to develop the template into a complete legal agreement. This is discussed in the final section of this chapter. The template presented in this report is based on a template first prepared for use in Bangkok (ADB 2007c). 5.1 Key Factors Affecting the Concession Agreement Form of Concession The form of concession (i.e. a Net Cost or Gross Cost form of concession, and variations of each of these) will significantly alter the content of a concession agreement. As indicated in the previous section, the details of the concession agreement that vary according to the concession option are primarily related to the allocation of responsibilities and risk, and consequences of these allocations including revenue collection, payment structure and concession supervision. The template indicates where the form of concession will alter the content of the concession. Notably, the form of concession does not change the structure of the template Allocation of Risk Allocating risk to the concessionaire to the extent that they can manage it is essential to minimizing the cost of the concession. It also affects other aspects of the concession. This was addressed in Chapter Value for Money The objective of using private sector participation through a concession is to achieve costeffective provision of MRT services. Where there are choices regarding matters considered in this report, for example the form of concession, the allocation of risk or the extent of concession supervision, value-for-money (VfM) analysis can be used to determine the option that will be most beneficial to the government. 32

63 Structure of Payments to the Concessionaire The structure of payments to the concessionaire depends on whether a gross cost or net cost approach is adopted. The level of payments to the concessionaire will depend on the costs that the concessionaire incurs and, in a net cost concession, the extent to which fares and other MRT revenue covers the costs incurred by the concessionaire. Some general issues related to payments under net cost and gross cost concessions are considered in the remainder of this section. While this report recommends the use of a gross cost form of concession for the Train Supply and Operating Concession model identified in Chapter 3, a comparison of use of a net cost approach and the recommended gross cost approach is presented in Table C.1 in Appendix C to provide a better understanding of the differences. The table also provides a detailed description of the payment structure. Net Cost Concession If an MRT project was able to generate revenue that exceeded the costs incurred by the concessionaire, a competitive tendering process would result in a willingness by concessionaires to make payments to be government. However, current work indicates that revenue from fares and other sources in HCMC will not be sufficient to meet these costs. As a result, it will be necessary for the government to make payments to the concessionaire to supplement the revenue the concessionaire would collect from fares and other sources. It is then necessary to establish how the payments should be made. With a net cost concession, possible options are: Make a monthly payment subject to the simple criterion that the concessionaire provided services during the month. This is not recommended because it would be generally judged that the government had insufficient control over ensuring that its funds were used appropriately. Another option is to link payments to the provision of specific services. However, as full patronage risk is transferred to the concessionaire under a net cost concession, it is necessary to give the concessionaire considerable discretion to provide services that they judge appropriate subject to meeting safety and security guidelines. This means that the payment cannot be directly related to the provision of specific services because such services cannot be specified in advance. A third option is to link the payment to patronage, with the government paying the concessionaire an amount per passenger carried on the system. It may be necessary for the government to engage an independent patronage auditor to verify the concessionaire s estimate of patronage. An escalation factor would be needed to adjust the payment made to the concessionaire over time. It is likely that the consumer price index (CPI) or an index related to the CPI could be used. Gross Cost Concession with No Transfer of Patronage Risk A gross cost concession automatically transfers much cost management risk to the concessionaire, for example by making them responsible for keeping costs within their tendered price. However, a gross cost concession with no transfer of patronage risk differs substantially from a net cost concession. In the latter, the concessionaire needs to manage risks associated with demand so that they can secure the revenue on which their profitability depends. By contrast, a gross cost concession with no transfer of patronage risk eliminates this incentive for the concessionaire to meet the needs of passengers. In its place, it is necessary to use other means to ensure that the concessionaire provides services of appropriate quality. This can be done by 33

64 setting a central payment level to the concessionaire and using financial penalties and incentives for, respectively, substandard and superior levels of performance. Service quality criteria could include the cleanliness of stations and trains, the temperature inside trains, schedule adherence, ride quality, over-crowding, and the number of customer complaints. It is likely that this arrangement will place considerable demands on the government to monitor the criteria and to apply the appropriate penalties and incentives. It will not be effective if the incentive and penalty payments are not optimal and if it presents the temptation for inspectors to act inappropriately. The appropriate means for escalating payments over time to reflect the effect of inflation could be the same as with a gross cost concession with some transfer of risk, as discussed in the next sub-section. Gross Cost Concession with Some Transfer of Patronage Risk The alternative to using administrative controls in a gross cost concession to get the concessionaire to act in the interests of passengers is to transfer some patronage risk to the concessionaire. This can be achieved by linking part of the payment from the government to the concessionaire to the number of passengers carried on the MRT line. This considerably reduces the need for the government to monitor service quality because the concessionaire has a financial incentive to provide good quality services. It is not necessary to transfer all patronage risk to the concessionaire (as occurs in a net cost contract) as the desired outcome of high quality services that meet passenger needs can be achieved with the transfer of only some patronage risk. In particular it is noted that: The effect of even a modest transfer of risk can be substantial because the marginal passengers attracted to MRT (or lost from MRT) will be those most sensitive to its cost and quality of service. The concessionaire must therefore maintain a higher level of service than might otherwise be necessary to gain or protect those users who might otherwise choose some other option. It is only necessary that sufficient risk be transferred to ensure that the concessionaire will face financial difficulty if they were to lose the patronage-related payment. Ensuring that concessionaires gained say part of their revenue through the patronage-related component achieves this objective 8. A failure by the concessionaire to carry the potential patronage for their line would substantially, if not completely, cut their profits. The transfer of too much patronage risk can result in a perverse outcome if it makes the concessionaire risk-averse, wherein the concessionaire does not implement improved and innovative practices because they do not wish to take the chance the changes may not generate increased revenue that exceeds additional costs associated with the changes. With regard to escalation of costs over time, it is noted that concessionaires face two major cost components that are beyond their control and which will not rise in line with general price inflation: The cost of energy, which can vary substantially over time and which may be substantially affected in the future by actions directed to reducing greenhouse gas emissions. 8 For example, if it is judged that the concessionaire can influence 15% of their patronage, the remuneration structure could be set so that the total payment to them from the government was, say, 10% less if patronage was 15% less than expected. This variation can be modified as judged appropriate for HCMC, and can include bonuses for higher than expected patronage as well as penalties for lower patronage. 34

65 The cost of labor, which can be expected to rise faster than general price inflation and which cannot always be offset by productivity gains. As a result, there is merit in using a weighted price escalator that takes account of changes in energy costs, labor costs and general price inflation and the relative share of costs that can be related to each of these factors. 5.2 Content of the Template A review of available concession agreements for the contract provision of public transport in a number of other places was been examined for previous work undertaken in Thailand (and reported in ADB 2007c). There is considerable variation in the general form of the agreements, both in a general structure (e.g. should the provision of government assets to a concessionaire be presented in a separate asset lease agreement or treated as a section of a single agreement) and the manner in which the content is structured. It is also noted that many agreements are subject to copyright. The previous work in Bangkok judged that it was simpler to have a single legal agreement covering all aspects of the concession. Following examination of various arrangements of the content of concession agreements, it recommends the following general structure: Part I: Introduction This part addresses general issues, describes the context for the concession, and defines the parties to the contract and other terms through the following sub-sections: Name of the Agreement Date of the Agreement Parties to the Agreement Preamble to the Agreement Definitions The Concession MRT Network and Links Coordination Committee, Representatives and Related Parties Part II: Pre-Service Activities This part addresses issues that are to occur prior to the operation of MRT services by the concessionaire, using the following sub-sections: Conditions Precedent Company Systems Pre-Service Implementation Protection Against Late Service Commencement Part III: Services to be Provided This part describes the train and related services that the concessionaire is to provide, through the following sub-sections: Initial Services Standard of Services 35

66 Changes in the MRT System Changes in MRT Services Part IV: Finance and Insurance This part addresses financial matters related to the concession, including payments to be made by the authority and the concessionaire, management of fare revenue, and other matters, through the following sub-sections: Payment and Payment Mechanisms Payment Escalation Fare Policy and Revenue Routine Non-fare Revenue Special Non-fare Revenue Refinancing Taxes and Duties Insurance Part V: Early Termination This part addresses issues that could result in early termination of the concession and treatment of the consequences of such early termination, through the following sub-sections: Conditions for Early Termination Process of Termination Consequences of Termination Part VI: Special Events This part addresses special events that could affect the concession, through the following subsections: Force Majeure and Exceptional Events Consequences of Force Majeure and Exceptional Events Power of Authority Part VII: Assets This part addresses issues related to assets provided by the government and the concessionaire through the following sub-sections: Civil Infrastructure Assets of the Concessionaire Asset Titles and Transfers Lenders Direct Agreement Asset Transfer Values 36

67 Part VIII: Miscellaneous This part addresses remaining general contractual issues through the following sub-sections: Rights and Duties Transfer Change of Ownership Dispute Settlement and Resolution Confidentiality Change in Law Authority Step-In Due Diligence Over Contracts and Financing Documents Alternatives and Variants of Project Finance Other Standard Provisions The template is presented in Annex D. Each of the above sub-sections is elaborated on to provide information that can guide the preparation of a detailed legal contract. Completion of the template will need to draw on other information presented in this report, in particular Annex 1 and Table Next Steps to Implement the Template While some sections of the agreement are unaffected by the form of the concession, it is recommended that the agreement needs to be developed in an integrated form. Accordingly, it is recommended that work to detail the agreement should await a decision on the form of concession and the financial performance of the line(s) for which it is to be used. Sufficient information will then be available to allow detailed text to be prepared for each of the identified sub-sections. Five matters need to be considered with regard to the preparation of the concession agreement: The agreement is a legal document that requires specialist legal drafting expertise for its preparation. It is inappropriate for the concessionaire or anyone associated with the concessionaire to undertake any drafting of the document. This will require the government to engage the necessary legal experts to draft the agreement. The agreement will contain considerable detail on financial and other technical matters. It will therefore be necessary for the government to engage specialist financial, engineering, transport operations and similar advisors to support the legal drafters. The agreement will be a substantial document. It is expected that it could take 6-12 months to prepare the full concession agreement. The agreement is to support the implementation of MRT that meets the community s interests as identified by the government. There will be a need for continuing involvement by a senior person who can drive and take responsibility for ensuring the preparation of the concession agreement does not, albeit with the best of intentions, alter the concessioning approach in a way that compromises it. Tendering requires that potential bidders clearly understand what they will be obliged to provide and the conditions of their engagement. This necessitates that the concession 37

68 agreement be drafted prior to commencement of tendering so that a draft form of the concession can be issued as part of the tender documents. The last two of these matters are addressed further in the next section in the context of an examination of matters related to seeking, engaging and managing concessionaires. 38

69 6. Implementing Competitive Tendering and Concessioning This chapter gives brief consideration to the steps needed to implement MRT concessioning, covering the steps of ensuring a sound probity system, market testing, preparing tenders, calling tenders, assessing tenders and negotiating contracts, and managing concessions. It is not intended to provide a comprehensive program of activities, but rather to note issues that will be critical to the successful implementation of projects. An essential element of seeking and engaging concessionaires is to have a person with sufficient authority and motivation to drive and take responsibility for ensuring the process achieves the objectives for the MRT project. This chapter also draws substantially on ADB (2007c). 6.1 Probity An independent Probity Adviser should be engaged to ensure fairness and equal opportunity for all parties involved in tendering, tender assessment and contract negotiation activities. The person is likely to be a lawyer, and would be present at all meetings with potential bidders and 6.2 Market Testing The ultimate objective of competitive tendering and concessioning (CTC) is to obtain the services of the consortium best able to undertake the task at the lowest practicable cost. This will be facilitated by maximizing the level of competition, which in turn requires concessions that will be attractive to potential bidders. A high level of competition will ensure that the government has the largest possible choice of tenders to consider. This will also increase price competition. The role of market testing is to identify factors that may make a significant difference in attracting market interest in tendering for concessions. It involves informal discussions with potential bidders to outline the general features of the intended tender to identify: (i) their general interest in tendering; and (ii) the factors that they consider will most affect their inclination to bid and the quality of their bid. It is a task that needs to be undertaken with care to avoid implications that the tender is being adjusted to favor any particular potential bidder. Discussions with at least several potential bidders can alleviate this risk, and should allow those undertaking the market testing to identify changes suggested by potential bidders that are in their self-interest and those that could serve the government s interest. The outcome of market testing is identification of changes to the proposed concession and tendering arrangements that could attract more bidders and result in improved value-formoney outcomes for the government. It should be unlikely that major changes to the concession and tendering arrangements should be necessary for this to occur would suggest that preparation for concessioning had been severely deficient. However, small changes that could reduce bid prices even marginally without compromising the services to be delivered can provide financial savings to the government. 6.3 Preparation of a Request for Proposals An invitation to tender for a concession would describe all matters that will eventually be included in a concession agreement. The Request for Proposals (RFP) should include a draft concession agreement to provide potential bidders with certainty regarding the conditions that they would need to meet and to indicate that the government has clarity over what it seeks and 39

70 is well prepared to follow through. It is essential that the government indicates in the RFP its resoluteness to enforce the conditions of the concession agreement to reduce the risk that a tenderer submits an unsustainably low bid price in an attempt to win the contract with the intention of subsequently reducing the services they offer or of seeking additional payments from the government. Some key issues to be addressed in a RFP are: The context to the concession: Objectives. The tender would indicate the desired effect on the transport system, quality of life outcomes, social objectives and domestic capacity building. Urban and transport development plans. The tender would need to describe the development context for the project, including forecasts of population, land use, and economic activity, and proposed transport infrastructure development plans, including giving particular attention to those features that could affect the performance of the proposed project. Public transport network context. Describe the current and anticipated operational context for the proposal, including strategic roles of various public transport modes, routes and service schedules, fares policy, the level of fares and ticketing arrangements, integration of public transport services, and facilitation of transfers between MRT lines and with other modes of public transport. Facilities to be provided to the concessionaire. The tender would need to explain matters such as the access to land, the scope and quality of physical MRT infrastructure that would be provided to the operating concessionaire, the ticketing system if it is to be provided by under a separate concession, and the schedule for provision of this infrastructure. Other. Any other matters that provide the context to the operating concession, including special privileges, taxation, law, and other such matters. Services to be provided by the concessionaire: MRT assets. Description of any assets that are to be provided by the concessionaire. MRT services. Relevant matters include the train services that are to be provided and the responsibility of the concessionaire for service planning and the manner in which this would be implemented. MRT infrastructure. Description of the responsibility of the concessionaire for providing assets, ownership of assets provided by the concessionaire, maintaining assets it provides and those that are provided by the government, replacing aged assets at the end of their economic lives and returning assets to the government at the end of concessions. Duration of the concession. The period over which the concession will apply and any milestones during the concession such as concession reviews and renewal. Performance measures. Describe all indicators of performance that will apply to the concession. Ideally, performance indicators should relate to contract payments and contract renewal. Other. A range of other issues will need to be addressed, including insurance, security, safety, substitution, MRT industry development, etc. 40

71 Financial and performance arrangements: Payment basis. The tender needs to specify the payment structure. It also needs to indicate the amounts that the government will specify and those for which tenderers need to submit bids. The structure of the financial arrangements and ease of assessing bids will be facilitated if the government specifies as many of the variables, leaving the tenderer to indicate a minimum number of variables and preferably only a single variable. For example, with a gross cost concession with some transfer of risk, the tender should specify the patronage related component and the level of bonus and penalty payments, with tenderers indicating how much they need to be paid for the fixed monthly payment component. Payments would be linked to key performance indicators. Performance bonds. The role, size, timing and reimbursement of performance bonds need to be specified. Failure to perform. Describe procedures for advising concessionaires of inadequate performance, allowing them to improve performance and sanctions in the event of continued non-performance. Information to be provided by the tenderer: General competence. General corporate and financial competence. Demand and service planning. Expected demand and train services to be provided under the concession, and plans for working with various stakeholders on an ongoing basis to further develop services. Customer and community care. Customer service, safety and security plans. Infrastructure. Plans for infrastructure maintenance and reinvestment in life-expired assets Finance. Financial proposal. Implementation. Plans for initiating the concession, including staff recruitment and training, trialing and commencement of services, etc. Most of these matters mirror issues addressed in the concession agreement. It is also common to require: a conforming tender (i.e. a tender that is consistent with the terms and conditions set out in the request for tender) from bidders to allow a straightforward comparison between the tenders; and to allow tenderers to also submit a non-conforming bid where they believe they can offer better value-for-money by varying some aspects of the request for tender. 6.4 Tendering and Tender Assessment The government has well established processes for public tendering that are appropriate to tendering of MRT services. The tenders will be more complex than in common for most government contracts because it involves a complex and inter-related mix of finance, asset and service provision with both the quality and quantity of service being important. Consideration could be given to innovative ways of assessing such a multi-dimensional project. One such way is a silo approach in which specialists in various pertinent areas (e.g. passenger demand, infrastructure provision, service provision, finance, etc.) assess the performance of each tender 41

72 only with respect to their area of expertise, with a higher level of people drawing together the various components to determine the tender that offers the best value-for-money. There is also a need to ensure that there are reasonable prospects that the preferred tenderer can deliver the promised outputs at the nominated amount to avoid the potential for a tenderer to underbid in order to secure the contract. Table 1: Example of an Organization Chart for Proposal Assessment Reporting Approving Authority Advice Tendering Authority Probity Advisor Competitive Tendering and Contacting Project Management Team Tender Evaluation Committee (representing interests in law, finance and passenger transport interests) Proposal Opening Committee Project Advisory Group (from various agencies) Technical Support (Staff in the Tendering Authority etc) Evaluation Teams one for each evaluation area Service Design Customer Service & Safety Infrastructure Implementation & Management Finance & Corporate Capability 6.5 Concession Contract and Implementation The government has considerable experience with contract negotiations and initiating contracts. For an MRT concession, it may be expected that, in the course of contract negotiation, the contracting party will seek to re-allocate as much risk as possible back to the government to improve their own financial situation. The government will need to be vigilant in this regard. 6.6 Concession Management The agency responsible for concession management needs to blend two approaches to concession management. The first is to enforce a performance-based contract that has conditions for payments between the government and the concessionaire. The second approach is to recognize that the government and the concessionaire need to work in a partnership so that MRT can adapt to various changes metropolitan land use and transport that can be expected to occur over the duration of the concession. 42

73 6.7 Schedule A considerable period is needed to arrange for the contracting and implementation of operations. Indicatively, allowance needs to be made for the following: a) 12 months to draft and approve a concession Agreement; b) 12 months to prepare for, invite and assess tenders for a concession contract and to negotiate and initiate the contract; c) 12 months to draft bidding documents for the purchase of trains and electrical and mechanical assets and services, to prepare for, invite and assess tenders for their delivery and to negotiate and initiate the contract; d) Around months for the supply of trains and electrical and mechanical assets and services; e) 6 months for a concessionaire to prepare for operations; and f) 6 more months following receipt of trains and electrical and mechanical assets and services for the concessionaire to trial operations. Hence, arranging for operations could require: For the Public Implementation with Operating Concession approach (see Section 3.3), a total of 3 years, i.e. a) + b) + e) + f). Train Supply and Operating Concession approach, the process would need to commence 5.5 to 6 years before the commencement of operations, i.e. a) + b) + c) + d) + f). In either case the process to purchase trains and associated assets needs to commence around 3.5 to 4 years before the commencement of services. 43

74 Appendix A: Bibliography Asian Development Bank (2006) Integrating Mass Rapid Transit in Bangkok: Options Report, ADB TA 4676-THA. February Asian Development Bank (2007a) HCMC MRT: Strategic Financial Model Update TA RSC-C61011 (VIE): Ho Chi Minh City Metro Rail System Project, Viet Nam, March Asian Development Bank (2007b) Integrating Mass Rapid Transit in Bangkok Phase II: Final Report, ADB TA 4904-THA. July Asian Development Bank (2007c) Integrating Mass Rapid Transit in Bangkok - Phase II: Concession Template Working Paper, ADB TA 4904-THA, May Bly, P. H., Webster, F. V. and Pounds, S. (1980) Subsidisation of Urban Public Transport, Supplementary Report 541, Transport and Road Research Laboratory, United Kingdom Bly, P. H. and Oldfield, R. H. (1985) Relationship Between Public Transport Subsidies and Fares Service Costs and Productivity, Research Report 24, Transport and Road Research Laboratory, United Kingdom Hensher, D. A., & Wallis, I. P. (2005). Competitive Tendering as a Contracting Mechanism for Subsidising Transport: The Bus Experience, Journal of Transport Economics and Policy, 39(3), Parsons Brinckerhoff International and Japan Railway Technical Services (2006) SAPROF: Special Assistance for Project Formulation for Ho Chi Minh City Urban Transportation Improvement Project Urban Mass Rapid Transit (UMRT) Line 1, Eastern Section, September University of Queensland (2006) Bus Contracting Reform in Thailand: A Bus Cost Model for Bangkok, May. 44

75 Appendix B: Summary of Some MRT Concession Arrangements in Other Cities Feature Table B.1: Summary of features of existing MRT concessions in Bangkok Total project capital cost (Baht bn) Bangkok Transit System (BTS Green Line) MRTA Initial System Project (Blue Line subway) Year opened December 1999 August 2003 Type of concession BTO for civil works BOT for the electrical and mechanical works BOT for operating equipment and rollingstock MRTA invested in the civil works Concessionaire Bangkok Mass Transit System Public Company Limited (BTSC) Bangkok Metro Company Limited (BMCL) Concession description BMA was responsible for: land acquisition & utility diversions; BTSC for financing & constructing all other project components including operations. Civil works transferred to the BMA on a build-transferoperate (BTO) basis after construction & the electrical & mechanical works to be transferred to BMA at the end of the concession. Little land incl. in concession except Right-of-Way. BMCL was awarded a 25-year BOT concession in 2000 to furnish and install this equipment and operate the system. The concession agreement requires BMCL to make payments to MRTA from fare revenue: a lump sum payment of Baht billion to be paid in annual installments from years 11 to 25 of revenue service & a % of fare revenues annually over the 25 year concession as follows, 1% years 1-14, 2% year 15, 5% years 16-18, and 15% from years In addition, a lump sum of Baht 930 million is due for revenues derived from commercial development to be paid in annual installments plus an annual 7% of revenues from commercial development. In addition, an (access charge) to the MRTA for use of the route is required to be paid to hold the overall concessionaire s rate of return on equity to not more than 14.75% pa. Land for commercial - Lat Phrao park & ride site development Public / Private Ownership 100% private investment. Government paid for civil works (78% of cost). BMCL owns operating infrastructure and rollingstock (22%). Government has option to purchase 25% of the shares in BMCL at par value. Length of Concession 30 years including construction period. 25 years after construction period. As reported ADB (2006) 45

76 Table B.2: Comparison of Melbourne & Singapore concession models Melbourne Net Cost approach Public transport demand mature & revenue largely known Operators accept risk of change in government. transport & land use policy Operators take some revenue risk & keep revenue Revenues only cover some costs (remainder of income from fixed payments set at the bid stage plus incentive payments) Franchisees required to invest to maintain the infrastructure Some major investment decisions locked in at franchise bid stage (e.g. new rollingstock) Others made during the franchise term as State Funded Works ( no-net gain, no-net-loss ) Investment decisions subject to normal budget process Franchises short (5-7 years) All standards/deliverables made explicit Partnership approach as well as contractual Source: Consultant Singapore Gross Cost approach Demand mature & revenue largely known. Government takes revenue risk which is low Operators paid on passenger-km basis Government supplies rail infrastructure & first time rollingstock at own cost including ticketing equipment & may give grants for subsequent rollingstock replacement Operators carry operations, maintenance & administration risks & the difference in financing cost for asset replacement, between actual and historic costs All revenues centrally collected & then service fee paid to operators Quality & safety criteria part of bidding Investment decisions subject to normal budget process Franchises 10 up to 30 years All standards/deliverables made explicit Partnership approach as well as contractual 46

77 Appendix C: Additional Issues Related to Use of Net Cost and Gross Cost Concessions C.1 A comparison of the features of Net Cost and Gross Cost Concessions Table C.1 illustrates how the Train Supply and Operating Concession model discussed in the main part of this report could be implemented using net cost and gross cost forms of concession. The gross cost concession is strongly recommended by the current study, but the comparison is provided in the table to more clearly illustrate the differences between the two approaches and to provide more information on the gross cost approach. Table C.1: Features of Net and Gross Cost Forms of Concession with the Train Supply and Operating Concession Model OVERVIEW Brief description of concession arrangements Risk transfer TSOC approach with a Gross Cost concession Government finances and implements civil infrastructure delivery using private sector contractors. Government engages the private sector to provide trains and E&M (electrical and mechanical equipment and systems) and to undertake O&M (operations and maintenance, including operation of train services and maintenance of all MRT infrastructure) through a concession. Government leases civil infrastructure to the concessionaire. Government sets safety & service standards, service levels, and fare structure & level. The government pays the concessionaire an amount that covers the costs the concessionaire incurs in providing agreed services as established through a competitive tender, and with part of the payment to the concessionaire is linked to the number of passengers carried. The government retains all fare revenue. Concessionaire bears some risk related to its investment in E&M and trains, patronage risk that is within its control, and the risk that agreed price escalators do not accurately reflect changes in future costs. Government bears remaining patronage risk and the risk that risk that it does not increases fares over time. The government bears the risk of poor public transport integration. TSOC approach with a Net Cost concession Government finances and implements civil infrastructure delivery using private sector contractors. Government engages the private sector to provide train and E&M, and to undertake O&M through a concession. Government leases civil infrastructure to the concessionaire. Government sets safety standards & fare structure. The concessionaire determines services to be provided & retains fare and other revenue. Additional payments may need to be made by the government to the concessionaire to cover revenue shortfall, or the reverse if revenue exceeds costs. Concessionaire bears all risks associated with their investment and O&M costs and future patronage, and is vulnerable to the risk that government does not approve fare increases. In the event that the concessionaire fails, the government bears the cost of securing a replacement concessionaire and incurs reputation risk associated with allegation of a poorly conceived concession. Community bears risk and consequences of poor MRT integration. 47

78 Concession management Key issues Comment DETAILED FEATURES Concession Term Term Termination arrangements TSOC approach with a Gross Cost concession Assignment of some patronage risk to the concessionaire encourages them to provide good service and reduces the need for government administrative control of concessionaire performance. Need to monitor concessionaire service supply & performance as the basis for making contract payments. No need for concessionaire to include a significant risk premium into bid price, which will reduce costs to the government. Assigning manageable patronage risk to the concessionaire encourages them to maximize patronage. Government has full control over future transport policy & systems. Reasonably simple to manage provided some patronage risk is transferred to the concessionaire. Stronger incentive for good performance by concessionaire. Will ensure good MRT integration. Allows government policy flexibility over time. The concession must be for a sufficient period to allow the concessionaire to make best use of their investment and trained staff. A period of years, which is similar to the life of trains, is appropriate. The term could be for a series of automatically renewable periods subject to adequate performance by the concessionaire though this would require complex arrangements to address the concessionaire s financing of assets. Concessionaire provides all system assets to the government at the end of the concession with appropriate government compensation for them. Need arrangement to transfer concessionaire s assets to the government if the concessionaire should fail or their contract not renewed (with appropriate compensation). The concession can be terminated in the event of inadequate performance by the concessionaire. TSOC approach with a Net Cost concession Limited need to manage concessionaire s performance given their collection & retention of fare revenue and exposure to risk. Simple payment arrangements between government & concessionaire, but limited capacity for government to influence the performance of the concessionaire. Concessionaire likely to build premium into contract to protect against exposure to risk that is beyond their control. Limited ability for government to change transport policy & systems during the concession except that to the extent conditions are anticipated and specified in the concession. Simple to manage. A need to make a payment to a concessionaire so that they achieve costrecovery may be seen to conflict with a model that requires only limited government involvement in concession management. Results in poor MRT integration. Government cannot make further changes to MRT delivery & operations over time in response to policy or other needs not anticipated in the concession agreement without re-negotiating the agreement. The concession must be for a sufficient period to allow the concessionaire to recover the cost of their investment. A period of years, which is similar to the life of trains, is appropriate. Concessionaire provides all system assets to the government at the end of the concession with appropriate government compensation for them. Need arrangement to transfer concessionaire s assets to the government if the concessionaire should fail or their contract not renewed (with appropriate compensation). 48

79 Notes TSOC approach with a Gross Cost concession An obligation for the concessionaire to hand over viable assets without compensation will encourage the concessionaire to avoid investment in life-expired assets and system expansion and improvement in later years of the concession. Indicates a need for the government to pay compensation for assets on the basis of predetermined depreciation schedule. Renewable concession terms would each be a division of the total contract term of 30 years, e.g. say 10 years each. Technical complexity of MRT operations suggests it is preferable to encourage an incumbent concessionaire to improve their performance, with replacement a last resort. Asset Financing, Implementation and Management Fixed infrastructure provision Initial fixed civil works assets Network expansion Electrical & mechanical assets and trains Government prepares design, calls tenders, finances and supervises project implementation. The Government: Leases fixed infrastructure to the concessionaire, at zero rent. Establishes conditions for any necessary replacement of life-expired fixed assets during the concession term. Monitors infrastructure in accordance with the lease and ensures hand-back conditions are met. The concessionaire: Maintains the infrastructure. Replaces life-expired assets. Hands back infrastructure in good condition at the end of the concession. The government finances expansion of fixed infrastructure. The concessionaire maintains infrastructure and provides additional services with payment made on the basis of unit cost rates and inflation indices set in the original tender. The concessionaire: Finances, purchases, operates and maintains the assets and any additional assets procured during the concession. Hands over all assets in good condition and at the end of the concession with appropriate compensate(set in accordance with pre-established contract conditions) from the government. The Government: Monitors the condition of assets and ensures hand-back conditions are met. TSOC approach with a Net Cost concession An obligation for the concessionaire to hand over viable assets without compensation will encourage the concessionaire to avoid investment in life-expired assets and system expansion and improvement in later years of the concession. Indicates a need for the government to pay compensation for assets on the basis of predetermined depreciation schedule. As for Gross Cost concession. As for Gross Cost concession. Government is in a poor position to negotiate network and service extensions with the concessionaire except to the extent that unit rates were agreed in the original tendering and the variations are in the form of a gross cost arrangement. An existing concessionaire has the advantage of incumbency. As for Gross Cost concession, though compensation might not be paid, depending on financial arrangements. 49

80 Notes TSOC approach with a Gross Cost concession Concessionaire provision of trains gives them more control over service quality and brings the financier of the trains into the concession to provide another source of pressure on the concessionaire to perform adequately. Concessionaire provision of fixed M&E assets should encourage them to optimize life-cycle costs. Transfer of some patronage risk will further encourage the concessionaire to provide services to meet customer needs. There is a risk that a concessionaire will avoid making investments towards the end of the concession if the assets must be handed over without compensation. Government payment for assets at the end of the concession would remove this disincentive. Need would arrangements to set compensation value for concessionaire assets in the event of termination of a concession during its term. Service Specification and Development Initial service specification for tender bids Service planning Service approval Government specifies expected conditions at the time of opening of the MRT line. Bidders indicate initial service plan and conditions for responding to changes in demand over time, e.g. when additional services would be added. Concessionaire primarily responsible for service planning for their MRT line, under the guidance of the government. Government must approve all service changes because they will affect payments to the concessionaire. Fares, Ticketing System and Non-Fare Revenue TSOC approach with a Net Cost concession As for the Gross Cost approach. Bidder is responsible for assessing potential demand and establishing appropriate services as the basis for their tender. Government needs to provide precise guidance on factors within its influence that could affect future demand, e.g. other MRT lines, other public transport services, and road development. Concessionaire is responsible for service planning for their MRT line. Other concessionaires are independently responsible for service planning for other MRT lines. Government is responsible for service planning for other public transport services that may affect MRT, possibly constrained by conditions in the concession that prevent them from doing anything that may adversely affect the concessionaire. Concessionaire does not need approval for changes in services. Initial fares Set by the government. Determined by the concessionaire at the time of tendering and written into the concession agreement (or could be specified by the government, with additional payments made to the concessionaire if the fares do not generate sufficient revenue, or the reverse if applicable). 50

81 TSOC approach with a Gross Cost concession TSOC approach with a Net Cost concession Fare escalation Determined by the government periodically. Determined by the concessionaire at the time of tendering and written into the concession agreement. Ticketing system Fare revenue management Commercial development Contract Payment Concession payments Base payment formula (Note: illustrative option described other options exist) Determined by the government at the time of tendering. Determined by the concessionaire at the time of tendering. Determined by the government periodically. The responsibility of the concessionaire, who collects and retains all revenue. Could be the responsibility of the concessionaire, with a revenue sharing arrangement with the government. Likely to be very limited opportunities. Government pays on a periodic basis (say monthly): A fixed amount that is related to assets provided by the concessionaire; plus A fixed amount that is related to the quantity of train service provided; plus An amount that is related to the number of passengers carried would be paid. Penalties or incentives as appropriate to ensure the concessionaire provides a satisfactory level of service. Exposure to patronage risk considerably reduces the need for penalties or incentives to ensure service quality. An alternative is to provide a single unitary charge related to the quantity of service provided (e.g. per passenger place-km) subject to agreed quality of service conditions though this may incur risk premium because service quantity is not entirely under the control of the concessionaire. Payment from the government to the concessionaire could be: VND b /month for initial assets provided by concessionaire; plus VND c 1, c 2, c 3, etc., for any additional assets to be provided by the concessionaire during the concession; plus VND d /train-km of service provided; plus VND e /passenger; plus VND f 1, f 2, f 3, etc., for incentives or penalties (i.e. which could be negative or positive). In the case of a unitary payment, b, c and d would not apply and d would be related to the quantity of service provided. As for the Gross Cost approach. Fixed periodic (say monthly) amount paid by the government to the concessionaire (or from the concessionaire to the government) as determined by competitive tender. Payment from the government to the concessionaire could be: VND a /month. a could be positive (i.e. a payment from the government to the concessionaire) or negative (a payment from the concessionaire to the government) depending on the extent to which the concessionaire expects to be able to cover their capital and operating costs from fare and other revenue they collect over the life of the concession. An alternative is to link the payment to the number of passengers, i.e. VND a /passenger boarding. 51

82 Financial amounts specified by the government at the time of tendering (for the payment structure described above) Amounts to be indicated by bidders in their tender (for the payment structure described above) Issues TSOC approach with a Gross Cost concession The government would specify: Basis for sharing property development profits. Fare structure and level. Unit value for e, i.e. the patronage incentive payment. Unit values for f 1, f 2, f 3, etc. for each incentive or penalty to be included in a concession agreement. The basis for values to change over time due to inflation, i.e. there is a need for the government to specify indexation formulae. Bidder would indicate: Amounts for b, c 1, c 2, etc., and d. An amount expected to be paid to the government from development profits. The bidder will need to ensure that the combination of c, d and e, with appropriate inflation indexation, reflect the cost of providing additional assets and services as might be required by the government in the course of the concession Alternatively with a unitary payment, the government would specify penalties and incentives and bidders would indicate the unitary payment they seek to be paid. Need to anticipate variables that could change over the term of the concession (e.g. length of line, number and quality of stations, quantity of service, number of trains, etc.). Shifting patronage risk that is within the control of the concessionaire to them removes the need for substantial monitoring of concessionaire performance. Government needs less emphasis on penalties and incentives to ensure the concessionaire meets desired performance standards. Little need for bidders to include risk premium because they bear little uncertainty. TSOC approach with a Net Cost concession The government would specify: Basis for sharing property development profits. Maximum rate of return on equity. Basis for sharing profits in excess of maximum specified rate. Bidder would indicate: An amount for a. Initial fare. Fare escalation formula. An amount expected to be paid to the government from development profits. Concessionaire likely to include some buffer in their tender to allow for risks they must carry that are beyond their control. 52

83 Concession Management Government role Routine data needed for contract management (say monthly) Periodic data (say biannually) Other data as needed TSOC approach with a Gross Cost concession Major role because: Government has considerable freedom to change the scope of the concessionaire s activities, with clear information available on the financial cost to the government of any proposed changes. Shifting patronage risk that is within the control of the concessionaire to them substantially reduces the need for substantial monitoring of concessionaire performance standard. Government needs to consider, approve and alter concession payments for necessary changes in level of service, e.g. additional services. Evidence of maintenance of assets leased from the government. Evidence of performance with regard a minimal number of incentive or penalty attributes. Evidence of the number of passengers carried. Information to indicate the need for additional services, trains and other assets. Evidence of profits from property development. TSOC approach with a Net Cost concession Minimal role because virtually all investment and operational decisions after signing the concession agreement are internal to the concessionaire. Evidence of maintenance of assets leased from the government. Evidence that maximum rate of return has not been exceeded. As for Gross Cost concession. C.2 Concession Supervision Net Cost concessions involve relatively little supervision by government because: (i) most risk is transferred to the concessionaire and they need to be given the ability to manage that risk; and (ii) they are primarily intended for use where the concessionaire uses the revenue that they collect to cover their costs, i.e. without recourse to additional financial payments from the government. Typical supervision needs with a net cost concession are to: ensure that any civil infrastructure provided by the government to the concessionaire is maintained in good condition; approve fare increases, though these should occur automatically in accordance with inflation and other provisions in the concession agreement and there should be limited technical grounds for government modification to them; monitor safety and security aspects of MRT service; and ensure that the concessionaire makes payments to the government if these are specified in the concession agreement. It would also be usual for the concessionaire to provide data on their operations for the general interest of government, e.g. the quantity of service provided and the number of passengers carried. 53

84 This form of concession can be useful where government capacity to manage complex contracts is limited and where the government is prepared to accept the limitations of net cost concessions for flexibility in urban public transport operations and policy. Consideration of five factors can help guide consideration of the ideal level of supervision of a concession agreement: Capacity to undertake the supervision. There is a need to determine that the supervising authority has the capacity to undertake the designated level of supervision or can engage and adequately supervise a private company to undertake the task for it. Using a form of concession that requires considerable government supervision capacity could be counter-productive if the capacity is not present and the concessionaire realizes that they can avoid meeting performance criteria set out in the concession agreement. On balance, there is a general risk that government supervision capacity is overestimated. Criteria to be monitored. There is a considerable range of performance criteria that could be monitored as part of a contract management system. However, data collection can be expensive and distracting. A means for reducing the need for contract management is to transfer risk to the concessionaire so that there is a self-enforcing mechanism for good performance (as occurs with a net cost concession). There is also a need for a clear link between each criterion that is monitored and the payment made to concessionaires. Safety and security regulation. It is essential that safety and security regulations appropriate for MRT be established and monitored. These standards do not relate to the quality of MRT service, but rather to specific needs to ensure public safety and security. Examples of standards include maximum loading standards to prevent crush loadings in which people might be injured and to ensure that trains can be safely evacuated in the event of an incident. Implications of a net cost concession that requires subsidy payments. As indicated above, there is limited need for monitoring a net cost concession in which fare and other such revenue is sufficient to meet the concessionaire s costs. However, a dilemma arises if the concessionaire needs a subsidy from the government because the government must make the payment while still giving the concessionaire reasonable certainty about their operating environment (e.g. by not changing government policy or taking other actions that could adversely affect the concessionaire) and leaving them free to manage risk. Thus the government must make payments to the concessionaire with limited capacity to link the payments to specific services that are provided. Other data collection. There may also be a desire or need to monitor other aspects of concessionaire performance, even though it may not directly affect payments made to the concessionaire. However, it is necessary to ensure that the role of the criteria is clear and that data is not simply collected and stored un-used in the supervising agency. C.3 Trade-offs Between Risk Transfer, Payments and Concession Supervision As shown in Figure C.1, the considerable transfer of risk to a concessionaire in a Net Cost concession reduces the need for concession management because the concessionaire has a strong self-interest in providing good service. In contrast, a Gross Cost concession with no transfer of risk requires considerable supervision to ensure that the concessionaire performs adequately. Key conclusions that emerge from this review are: Increased supervision requirements associated with Gross Cost concessions are a necessary condition for gaining the network integration benefits that they allow. 54

85 The amount of risk to be transferred to a concessionaire needs to take account of the extent that the concessionaire can manage the risk (so that the cost of the concession is minimized), a desire to use self-enforcing mechanisms that encourage the concessionaire to perform well (rather than do so because of pressure from the government), and a desire to simplify concession management (by minimizing the government s supervision obligations). Concession supervision should focus on those factors that affect payments made to concessionaires, their use of government-owned infrastructure, and more general factors (if any) that could influence a decision to terminate a concession due to inadequate performance. Concession supervision should recognize the potential for government supervision to be implemented less effectively than may be envisaged. Figure C.1: Supervision Requirements for Concession Models Extent of risk transfer Need for concession management Net cost Form of Concession Gross cost (with some transfer of risk) Gross cost (with no transfer of risk) Supervision needed as a condition of payment (1) Quantity of service (e.g. car-km of service) Not needed Essential Essential Quality of services (e.g. maximum load, comfort) Not needed Limited need Essential Number of passengers Not needed Essential Not needed Additional supervision needed for general contractual oversight Quantity of service Not needed Not needed Limited need Quality of services Limited need Limited need Limited need Number of passengers Limited need Not needed Limited need (1) Assumes no subsidy payment needed with a Net Cost concession. If a subsidy is needed, then some monitoring of, most probably, the number of passengers would be needed. Source: Consultant 55

86 Appendix D: Concession Template This concession template should be read in conjunction with the remainder of this report, and in particular Annex C. 1. NAME OF THE AGREEMENT PART I - INTRODUCTION The specific name of the agreement needs to be indicated, e.g. Agreement for [name of the project] between [Authority] and [the private sector party] 2. DATE OF AGREEMENT The date of the Agreement (signing date) should be specified and the effective date should be the same date and without the condition precedents to the extent possible. 3. PARTIES TO THE AGREEMENT a. The State Party - full and correct Name/Address/ name and title of the authorized person who signed the agreement for the procurement of infrastructure and services on behalf of the State/Government according to the documents attached ( Authority ). b. The Private Party - full and correct Name/Address/ name and title of the authorized person who signed the agreement for the provision of infrastructure and services according to the documents attached ( Company ). Provisions relating to the Company: The Company must be a Special Purpose Company whose objects are limited to the business (and any non-business) activities of the concession under the Agreement. Reason: Government has an interest in the financial health of the Company as concessionaire (and bears certain costs in the event the concessionaire fails). It goes against this interest to have the Company exposed to any non-concession risk as could occur if the Company was involved in other activities in addition to the concession. Due diligence over the Company s relevant project contracts e.g. the Company s various agreements concerning the concession project funding (including its agreement with the senior lenders), insurance, design, construction, supply and installation, system integration, operation and maintenance, consulting and other services used in the project. Reason: The Authority, while not intending to interfere with the Company s conduct of the concession business (as that would be taking back risk already allocated to the Company), needs to assess and have a good understanding of how the Company proposes to deliver the concession output. The essential reasons for this include the following: a. Compensation to the Company for early termination in most cases is a function of its outstanding debt under the terms of the financing agreements. b. The interests of the Authority and the senior lenders are often common and in such cases the Authority can rely on provisions of the loan documents as protection against certain risk (e.g. the sinking fund requirement of the lenders also protects the Authority against the risk that inadequate funding may be provided for of ongoing 56

87 asset maintenance and renewal). The Authority therefore needs to see that the financing terms reflect its proposed reliance. c. The Authority may need to consider taking over the Company s contracts with its project contractors and service providers or transferring them to another party in the event of early termination. Therefore the Authority needs to see that the terms of the relevant contracts are consistent with the Agreement in this respect. 4. PREAMBLE The preamble should provide for the clear intention of the state party and the private party. It should refer to related documents such as the Terms of Reference and Bidding documents, and indicate that acceptance of the intent is required as part of contract acceptance. Recitals incorporating the statement of the Authority s intention should include reference to the following basic concepts and principles which underlie this Agreement: The objectives of the concession project. How the concession project fits within the MRT network, and the broader public transport system, that is being implemented to provide high quality public transport services to the public, and government desire to ensure that, in implementing the project, optimal network benefits are maintained. The assets and systems that are needed to provide MRT services, which include Civil Infrastructure (i.e. civil works, train tracks and stations), Ticket System (i.e. ticket equipment and media, and operation of the system including revenue management) and electrical and mechanical assets ( E&M Assets, i.e. trains, power supply, communications and train control systems). The role of: the Authority for implementing Civil Infrastructure and Ticket System and making them available to the Company, with the Authority to directly implement Civil Infrastructure and the Authority to arrange for the Ticket System through a separate contract; and the Company for providing E&M Assets, maintaining Civil Infrastructure, using the Ticket System, and providing train services. The Authority s desire that the project be implemented and service be provided based on an approach that has been assessed as offering value-for-money, protecting consumer interest and exercising due care in preventing private monopoly of a basic infrastructure, all in accordance with fundamental state policy. That project risk be allocated between the Authority and the Company in such a way that that a risk is managed by the party able to do so most efficiently and effectively. That the determination of the respective Authority and Company roles in delivering of MRT services (including any associated delivery of assets) under the contract is based on the intention reflected in the forgoing recitals. 5. DEFINITION Definitions of a full list of terms pertinent to the concession are required. They should be in alphabetical order, and be consistent with terms used in international bidding documents. 57

88 6. CONCESSION Key features of the concession to which the agreement is to apply should be summarized and cross-referenced to relevant sections of the Agreement where they are addressed in detail. Provisions to be addressed should include: general description of the concession model; the term of the concession issues to be addressed prior to commencement of train services (Part II) services to be provided (Part III); payment and other financial arrangements (Part IV); termination conditions and arrangements (Part V); responses to special events (Part VI); provision, ownership, use and maintenance of assets (Part VII); and other general provisions (Part VIII). The term of the concession agreement will normally be fixed, as a number of years from the agreed contract commencement date. Delay in commencement of train services should generally not lead to an extension of the Agreement duration. Keeping the concession expiry date fixed increases the incentives for the Company to ensure train services commence on time, including placing pressure on the Authority to fulfill its obligations such as providing civil infrastructure. A requirement that the Authority pay compensation to the Company in the event that the Authority is responsible for the delay (see Section II) is an incentive on the Authority not to cause delay. 7. MRT NETWORK AND LINKS It should be noted that the project under the Agreement is part of an MRT network, which is itself part of the public transport system of Ho Chi Minh City, and has been designed and is to be operated as part of the network to optimize network benefits in the public interest. The Company s rights in the Agreement should be circumscribed by this network objective. It will be necessary to establish the rights and obligations of the parties in the case that government seeks changes that are in the larger public interest. Such changes could include: issues specific to the MRT network, including changes in the network, changes in service patterns, the right of access to depots, inter-operability (third party sharing the line), and the ability (or restricted obligation) to coordinate inter-connection with the network; and changes to other public transport services, the structure and level of public transport fares and fare collection, changes in land use policy and patterns, changes in public service obligations, etc. The need to so circumscribe the concessionaire s rights and obligations will have value-formoney implications for the government. Concession forms play a part in this issue of valuefor-money. Thus it is generally expected that a Gross Cost form of concession, in which concessionaires bear at most patronage risk that is within their control, will more easily allow such changes to be implemented than the Net Cost form of concession. As a result, the cost to government of retaining the system flexibility under the Gross Cost form of concession is expected to be less than in a Net Cost form of concession in which renegotiation of the concession is needed when such changes are desired. 58

89 8. COORDINATION COMMITTEE, REPRESENTATIVES AND RELATED PARTIES Management committees will be required for oversight of the concession and coordination of the concession with other public transport. There will also be representation by parties on other committees or organizations. These committees and representations, their roles and representation of Authority and Company interests need to be addressed. The committees could include: 1. Coordination Committee. There may be a need for a co-ordination committee with a public sector membership for the purpose of monitoring and supervising the concession, making periodic progress reports, and to bring any problems and their possible solution to the committee s attention. The Company is required to co-operate with the committee in order that the work of the committee can be carried out. 2. Authority/Company Joint Committee. The Company may request the setting up of a joint committee with Authority and Company membership to assist in co-ordination and interaction with third parties (such as authorities for permits, licenses etc.) in the conduct of the concession business. With such a request, care must be taken that in responding the Authority is not taking back any risk allocated to the Company (e.g. the risk of timely installation of E&M Assets). The Authority s role on the joint committee should be to help facilitate, with the responsibility for the outcome clearly resting with the Company. 3. Authority representation on Company board of directors or other management boards. This practice is sometimes proposed but is strongly discouraged. For the Authority to have such representative in the Company s management blurs the line between the parties, exposes the Authority to a potential conflict of interest in the management of the Agreement and at the very least can lead to a dilution the risk transfer to the Company. A reason sometimes cited for the practice is that it provides a channel for information about the Company s operation of the concession. But this is an undesirable way to achieve the objective. Any information necessary for the Authority to properly manage the concession should be addressed in the Agreement and made an obligation of the Company to provide. Similarly, the government or the Authority taking a direct equity interest in the Company is discouraged because as it means that the Authority cannot act as an independent supervisor of the concession. It is possible that a fully constituted state-owned company could be an equity partner in the Company. 4. Other Relevant Parties. The provision also should identify other interested parties relevant to the management of the MRT project. The relevant parties may include: a certified independent engineer (possibly pre-service phase only); and an independent monitor of the Company s performance against service standards. PART II PRE-SERVICE 9. CONDITIONS PRECEDENT Conditions precedent are matters that are central to the ability of the Company to undertake the contract but which cannot be delivered on or prior to signing the agreement. 59

90 An example of a circumstance where a condition precedent may be needed relates to the financing of the project. Lenders providing senior debt financing, which would normally be on limited recourse terms (i.e. with no collateral external to the project, particularly guarantees), may not be prepared to undergo the expense of conducting due diligence before the Company has secured the concession, which would mean the Agreement could only be signed without firmly committed financing in place. The need for such due dligence increases with the project risk as perceived by the senior lenders, with a corresponding need to conduct a more thorough due diligence investigation using costly technical advice. In this respect, the probability of conditions precedent will be higher with a Net Cost than a Gross Cost concession because of factors such as the difficulty of estimating future patronage. Working with a concession model in which risk allocation is clear and easy to assess lessens the need for this type of condition precedent. Where it is necessary for there to be conditions precedent for the contract, the Agreement must ensure that the Authority is not under its concession obligations (or the Company granted its concession rights) until the conditions have been met. The Agreement must also stipulate a date after which failure to meet the conditions means the Agreement automatically lapses. 10. COMPANY SYSTEMS Clauses under this item relate to assets that the Company is to provide that, together with assets to be provided by the Authority (addressed in Clause 31), are needed for the provision of MRT services by the Company. The following points should be reflected in this clause: 1. The Authority s request for proposals ( RFP ) (or TOR) should stipulate that the Company will be fully responsible for the design, financing, construction, procurement, installation, testing, commissioning and maintenance of E&M Assets, which are to be integrated with the civil works that are to be supplied by the Authority and which are needed to deliver the MRT service to the level and standards specified by the Authority in the RFP (and any related documents). 2. Under a carefully drawn up risk allocation plan, the following risks inherent in the management and operation of the concession is assigned to the Company: a. the risk of budget cost and time over-runs in putting the E&M Assets in place and making them ready for the provision of MRT services; b. the risk of not meeting the specified quantity and quality of service through a failure in the design, whether because of the underlying technology or because of any special design feature of the E&M Assets; c. the risk of not meeting the specified quantity and quality of service through a failure in the maintenance of E&M Assets and their replacement at the end of their effective lives; and d. the risk of not meeting the specified quantity and quality of service through a failure of the Company s management and operation of the MRT infrastructure provided by the government. 3. To ensure the integrity of this risk allocation, the Company must be allowed to design, deliver and maintain the E&M Assets and operate the line using its own inputs, processes and methods without any intervention from the Authority other than with regard to matters affecting safety, security, common ticketing and fare systems, and interoperability standards for technology and operations determined by the government. The extent of interoperability should be determined on the basis of economic evaluation 60

91 and value-for-money assessment by the government and specified before the issuance of the RFP). 4. In the process of tender evaluation the Authority (and its advisors) should conduct due diligence on a preferred candidate s detailed proposal to evaluate in detail how, in terms of approach and methods, resource inputs, time schedules, management, organization and design, maintenance and operations procedures, the candidate proposes to deliver the required service outputs. 5. The winning proposal should be incorporated in the Agreement, and included say in a schedule called Project Documents, so that the Company is bound to deliver on its proposal. The Agreement should ensure that the service output specification takes precedence over the proposed service inputs described in the Company s proposal to ensure that the Agreement does not imply approval or acceptance by the Authority that the Company s submission will deliver the outputs (and the risk transfer to the Company thereby diluted or negated). 6. In implementing the concession, the Company will not be able to depart from what is set out in the Project Documents without the prior consent of the Authority, which should be given only after the Authority is satisfied that the Company s prospects of delivery against specified service standards will not be worsened thereby. Again, this is part of the Authority s responsibility to ensure that the agreed risk transfer to the Company is not diluted or negated. 7. As a general rule it is important to be aware that if the Authority becomes involved in activities that have been contracted to the Company for the Company to carry out, the Authority will resume risk that had been transferred to the Company and will therefore assume actual and potential costs that are the obligation of the Company. 11. PRE-SERVICE IMPLEMENTATION The Company will have a considerable program of activities in the period between contract signing and the commencement of services ( Service Commencement ), including completion of any conditions precedent, purchase, delivery, installation and testing of M&E Assets it is to provide, establishment of an organization and recruitment and training of necessary staff. The Authority will want to know that the Company is going to deliver the service on time and meet the Authority s contract requirement. The Company will want to be assured that what it is developing will meet the Authority s requirements and that it will have the necessary access to the project site and civil works assets. It is necessary to consider to what extent the Authority should be involved during this phase and what rights the Authority should have to approve or monitor the Company s progress prior to and on Service Commencement. The Authority s participation should not involve over-stepping a limit beyond which it will both be taking back the project management risk it had transferred to the Company. In particular, it would not be appropriate for the Authority to adopt the supervisory role it would expect to have with regard to the design and procurement of civil works infrastructure. This clause should articulate the following matters: 1. Activities and Access Activities should be listed, and linkages with activities of the Authority identified. 2. Critical dates The payment mechanism is designed to encourage Service Commencement to occur as planned to avoid the loss of revenue to the Authority and a shortened operational period for 61

92 the Company. However where the consequences of a delay beyond a critical date becomes more serious, the Authority will need to have some contingency measures, though termination should be the last resort (see clause 12). 3. Permitted design changes A mechanism should be specified for the Company to submit design changes that do not affect cost or services and which are within permitted parameters of design development that the Authority can accept. 4. Quality management systems The Company should have a quality management system to ensure the delivery of its contracted responsibilities. The Authority should retain the right to audit the Company s quality management system, including the right to inspect works or activities on or off site to test the accuracy and adequacy of the system documentation. The Agreement should provide for an appropriate enabling mechanism including provision for the Company and any relevant Company party (e.g. contractor etc.) to respond to recommendations arising from an audit but no right of termination should result from it. The audit is to be a due diligence tool only, since the risk of a poor quality system is part of what is being transferred to the Company. 5. Acceptance of readiness for service commencement There should be an obligation for the Company to demonstrate prior to Service Commencement (and where significant service changes occur, e.g. upon the introduction of a new asset or procedure) that the Company has procedures (including tests) in place to ensure that service specifications in the Agreement will be met. In order not to dilute risk transfer, the Authority should not accept stages of work before the Service Commencement date and full service delivery. 12. PROTECTION AGAINST LATE SERVICE COMMENCEMENT The objective of this provision is to address the consequences of late commencement of services, which may occur because: the Authority has not provided Civil Infrastructure and the Ticket System to the Company on the agreed schedule; or the Company has not undertaken pre-service activities in accordance with the agreed schedule. The clause needs to set out the financial compensation that would be paid to the Company in the case of the former situation, but excluding the situation where the delay is sufficient to result in termination of the Agreement (which is addressed in Clause 25). In the case of the Company being the cause of the delay, it is necessary to ensure that the Authority is protected against late service commencement in a way that gives value-for-money, taking into account the loss the Authority may suffer from the delay and the necessity and cost of contingency measures needed to deal with it. It is important to consider the matter in its proper context, i.e. taking account of: the payment mechanism, whereby the Company receives no revenue from the Authority until service commencement, means that the Company has a financial incentive not to delay; the Company s senior debt financing, which generally on limited recourse terms (i.e. there is no collateral external to the project), which means that the interest of the senior lenders is the same as the Authority s; 62

93 the Company will be using Authority assets (Civil Infrastructure and Ticket System), for which the Authority incurs an opportunity cost and hence specific protection beyond the regular payment mechanism could be needed; and the Company will include financial allowances in its tender for excessively onerous obligations, and which thus will accrue to the Authority, i.e. the Authority will pay for such excessive transfer of risk to the Company. The usual mechanisms for protection against late service commencement are liquidated damages, performance bonds and parent company guarantees. When there are grounds for the Authority to look for specific protection, value-for-money should be considered taking into account the costs and benefits of the protections required by the Authority. The following specific points need to be deal with in the Agreement. 1. Liquidated damages If, as is usual with limited recourse debt financing, senior lenders require contractors to the Company who are involved in the pre-service phase to cover debt service for the duration of a delay through liquidated damages, the contractors may price this into their contracts with the Company but are more likely to be conservative in estimating time to complete their work. The Company will pass the cost of such delay to the Authority through their bid price and a longer project implementation schedule. For the Authority to require liquidated damages that would be paid to itself, when the senior lenders are already applying the same mechanism, would result in additional costs being passed on to the Authority via the payment mechanism. In general terms this would be like the Authority paying twice for the same specific protection, and hence should be avoided. 2. Performance bonds It is usual in a construction project for the Company and the senior lenders to require performance bonds from contractors as a guarantee of satisfactory completion of the contractors work. Contractors will pass on the cost of these bonds though their contracts with the Company, which will in turn pass on the cost to the Authority. An Authority requirement for an additional performance bond from the Company will lead to extra cost. The Authority s need for performance bonds from the Company needs to be considered in a similar manner to liquidated damages. 3. Parent company guarantees Parent company guarantees are not a recommended method of protection against late service commencement. Fundamental to the risk transfer mechanism of the Agreement is the careful separation of the Company s financial risk from those of its shareholders arising out of any other business activities in which they are involved. The key benefit is that every party involved is careful in the analysis and management of project risks. In doing so the action of each of them benefits others. For example the senior lenders careful evaluation and management of their project risk exposure under limited recourse financing also automatically benefits the Authority. By contrast, for example, if the lenders relied on the guarantee of a substantial shareholder, they could easily pay less attention to the project risk. (There is also a value-for-money issue if, for example, the Company already requires its contractors to provide parent company guarantees.) 4. Conclusion The forgoing discussion under this Clause highlights the importance for the Authority of having a clear understanding of the contractual relationships among the various Company parties in order to make a sound value-for-money based decision on specific protection 63

94 against late service commencement that it might seek against the Company. This underlines the importance of the Authority s due diligence review of the Project Documents. 13. INITIAL SERVICES PART III SERVICES This clause should specify the obligations and rights of the parties with respect to: MRT services to be provided by the Company, covering train services, marketing, safety and security systems, complaints management, etc.; use of the Ticket System that is implemented by the Authority; and maintenance of Civil Infrastructure that the Authority makes available to the Company. Risk associated with the provision of MRT services and management of life-cycle costs is to be borne by the Company using a system specified by the Company. This requires that the concession be in the form of a performance-based contract. The system, its operation and services should be described in the RFP in output terms (e.g. train capacity to carry X number of passengers per hour during a peak hour). The RFP will require that tenders submit a detailed description of planned operations, resource inputs and delivery methods to be used. The Authority and its technical advisors need to a conduct a careful due diligence review of a submission to assure themselves that the resource inputs, designs and methods are capable of delivering the required services. The selected bidder s submission should be attached to the Agreement as one of the Project Documents. 14. STANDARD OF SERVICES This clause needs to describe the standard of services to which the Company must adhere. A key issue is the extent to which responsibility (i.e. acceptance of risk) for service standards is shared between the Authority and the Company. The balance will depend on the approach taken to the concession. There is a need to address: Service standards that are set by the Authority, which will include, at a minimum, standards to ensure public safety and security (which will include maximum loading standards of trains). They can also include more detailed measures that affect the quality of service provided (e.g. schedule adherence, passenger comfort, etc.). The transfer of patronage risk to the Company reduces the need for more detailed specification of service standards because the Company will have the incentive to provide the quality of service needed to meet passenger needs. How and by whom the service standards will be monitored and how the Company will be formally advised by the Authority of any failure to meet the standards. The consequences of a failure by the Company to comply with the standards need to be specified, which may in turn comprise: Financial penalties (as described in Part IV) Non-financial consequences, e.g. termination of the Agreement if there is an accumulation of failures to meet specified threshold service quality standards. The Authority will need technical advice from professional advisors with experience in designing output MRT service standards. The concession agreement should seek to transfer the optimal extent of risk to the Company so that the Company has the incentive to provide 64

95 the appropriate quantity and quality of service without excessive intervention and management of standards by the Authority. 15. CHANGES IN THE MRT SYSTEM This clause needs to describe how changes in the initial MRT system under this Agreement initiated by or through the Authority would be accommodated. Changes could include extensions to the MRT network, through-running of trains between different concessions, changes in other aspects of public transport that have an effect on MRT, changes in MRT ticketing systems, etc. The clause needs to focus on: processes such as how the Company would be informed and how the Company would be expected to respond and how financial implications of the changes would be addressed, with reference to Part IV. The clause would need to be sufficiently broad to be able to accommodate both anticipated and unanticipated changes. The clause could vary substantially between a Net Cost and Gross Cost form of concession. With a Net Cost concession, there is a need to provide a more certain environment for the Company because it bears full patronage risk, and so much more detailed consideration needs to be given to identifying how changes that are beyond the control of the Company but which affect the Company would be dealt with, acknowledging that this is likely to be exceptionally difficult to cover all possible eventualities and that the Authority will be in a weak position to negotiate financial compensation to the Company for events that are not fully specified. 16. CHANGE IN MRT SERVICES The following issues need to be addressed in this clause: indicate the factors that could require a change in train services (e.g. meeting specified service standards given a change in demand or other circumstance, government policy objectives, technological change, changes in the extent of the MRT network under the Agreement, etc.); who is responsible for initiating and planning service changes, noting that this could vary between Gross Cost and Net Cost forms of concession and the cause of the change; in what circumstances the Authority must either approve or simply note proposed services changes; and who will be responsible for the financial consequences of service changes and, if it is the Authority, the basis for estimating the change in payments that must be made (with reference to Part IV). In doing this, consideration needs to be given to two potential causes of a need to change services: 1. Change due to patronage growth Patronage growth is expected to occur during the term of the concession due to population growth and changes in economic, social and government policy circumstances. In the Net Cost concession, where patronage risk is fully allocated to the concessionaire, the concessionaire is responsible for making adequate additional capacity available in response to service growth, and would at most simply advise the Authority of planned changes in service. In a Gross Cost concession with the appropriate transfer of patronage risk, the Company will have the incentive to undertake planning service changes to accommodate patronage growth. 65

96 However, as the provision of additional services would result in increased payments from the Authority to the Company (see Part IV of this template), the Company should submit plans for service changes to the Authority for its review and approval. In the Gross Cost concession, service changes will be largely driven by the need to comply with service standards (in particular a specified maximum vehicle load capacity which requires that more train service be provided as patronage rises). More drafting will be needed in a Gross Cost concession than a Net Cost concession to address change in volume of service. 2. Changes due to other reasons Both parties could have other reasons to propose a change in service. The Authority may seek a change in service requirement that is not foreseeable at the time the Agreement is made (e.g. resulting from a change in MRT or public health and safety policy or a change in law). Where the Company wishes to implement changes that involve use of new methods and technology and do not have implications for concession payments, the Company should have the right to simply advise the Authority prior to implementing the changes. The exception would be in with a Gross Cost concession where no patronage risk was transferred to the Company because in this case there is no automatic incentive for the Company to consider the effect of the changes on their passengers. Changes in payments from the Authority to the Company resulting from changes in services arising from either Authority or Company initiated changes will be clear in the case of a Gross Cost concession, but will need to be established in detail for a Net Cost concession (or the uncertain financial consequences to the Authority accepted where this is not possible). PART IV FINANCE AND INSURANCE 17. PAYMENT AND PAYMENT MECHANISMS The essence of this Agreement is the procurement of a service and so payment is made for delivery of the service. How payment is made for service constitutes an important part of the structuring of risk allocation and hence the incentives for the Company to provide efficient and effective services. The clause needs to address: the structure and level of payments to be made by the Authority to the Company (or vice versa if appropriate), including: the principle payment components, including any patronage related components and any incentives and penalties for, respectively, superior or sub-standard service; the frequency and timing of payments; the source and verification of data on service quantity and quality and patronage that is needed to support the payments; payments to be made in the event of changes in the quantity of service to be provided to accommodate changes in patronage; and payments to be made for other identified potential changes e.g. in the extent of the MRT network under the Agreement, etc.; any payments that might be made between the Company and other companies providing MRT services, for example for use of track or depots; and reference the next clause regarding payment escalation to take account of cost inflation over the term of the Agreement. 66

97 The nature of payments will vary substantially between Net Cost and Gross Cost concession models. This is briefly discussed below and is described elsewhere in this report. For reasons implicit to the discussion below and elsewhere in this report, the Gross Cost concession with some transfer of patronage risk is strongly recommended. 1. Net Cost Concession Within a specified limit on the financial rate of return to the Company, this concession type can have the simplest approach to the basic structure of the payment and payment method, with the Company collecting and keeping fares and any other agreed sources of revenue initiated by the Company and either making a payment to the Authority or receiving a payment from the Authority depending on whether the Company expected the revenue to exceed or be less than its costs. The simplicity comes with serious drawbacks (in particular the loss of policy flexibility by government and the possible need for the Authority to negotiate financial changes to the Agreement from a position of weakness - see the main part of this report for a discussion of these matters). As there is a strong possibility that the expenses incurred by the Company will be greater than the revenue it can collect, a potentially substantial payment to the Company will be required. This payment would be a general subsidy and not be related to any particular quantity or quality of service (responsibility for which is under the control of the Company other than with regard to safety and security standards). It would hence be paid as a fixed amount on a monthly or similar basis, which presents problems for public accountability as it would need to be made simply on the basis that the Company provided MRT services. More complex arrangements are also needed to address the financial implications of changes in public transport or public policy that could affect the Company, with unidentifiable or speculative changes being exceptionally difficult to accommodate. As a result, the apparent simplicity of payments under a Net Cost approach may not be achievable. 2. Gross Cost concession with no transfer of risk This arrangement contrasts with the Net Cost concession by having no transfer of patronage (and hence revenue risk) to the Company other than the possible exception of revenue from advertising and commercial development. The payment structure would require that the Authority pay for MRT services to be available irrespective of the number of passengers using the services. The Company would simply carry the risk for delivering the specified quantity and quality of service. To make the Company s payment risk clear to the concessionaire and its financiers and other concessionaire parties, the following issues need to be addressed: the criteria for the quantity and quality of service to be provided; unit rates to be paid for the service provided, e.g. an amount per rail-car kilometer of service operated per month; and variations in the payment to take account of a failure to provide the specified quantity and quality of service delivered by the Company. The payment mechanism has to achieve a balance in order to achieve value-for-money. If the mechanism imposes risk that the Company is not able to manage, this is likely to result in a higher cost in terms of require payment service to the authority, reflecting financiers and contractors reaction alike. Similar to the case of service standards, the government will need technical advice based on experience of urban transit Gross Cost or similar concessions (e.g. in the United Kingdom) to draft the payment mechanism. 67

98 3. Gross Cost concession with some transfer of risk The payment mechanism in this case is similar to that for the previous option except that part of the payment would be related to patronage. This provides the incentive for the Company to provide high quality services that meet the needs of passengers without the need for the detailed monitoring of service quality that would be needed in the case above. The extent of incentive and penalty payments would be substantially reduced. 18. PAYMENT ESCALATION This clause would describe how payments to the Company would change over time due to changes cost inflation. Indexation should be with reference to a public domain, long-duration price index or indices. It may be appropriate to use a single index such as the Consumer Price Index, or to use several price indices that are applied to different elements of the Company s cost structure (e.g. with separate indexation of labor, energy and other items given the substantially different rates of cost inflation that can apply to these components) to more transparently adjust for changes in costs that are beyond the capacity for the Company to manage. Care is needed to avoid blurring risk transfer to the Company to manage its costs. 19. FARE POLICY AND REVENUE This clause needs to describe the basis for setting fares and managing fare revenue to the extent necessary for the adopted form of concession (i.e. Net Cost or Gross Cost), including: fare and ticketing policy and systems with regard to public transport in Ho Chi Minh City, the MRT system in general, and the MRT line relevant to this Agreement; policy regarding concessional fares for special social groups or special events; policy regarding the right to set special permanent or temporary fares to promote MRT use; the initial structure and level of fares; the basis, timing and frequency of changes in the level of fares over time to take account of cost inflation; whether the Authority or the Company is responsible for initiating changes in fares; any requirement for the Authority to approve changes in the structure or level of fares initiated by the Company, and the criteria on which approval will be based; responsibility for advertising changes in fares; and who will collect fare revenue, and whether fare revenue will be credited to the Authority or the Company (noting that it is recommended elsewhere in this report that the Ticketing System should be implemented as a separate contract covering the entire MRT system at a minimum in the first instance and preferably the entire public transport system). Some of the contents of this clause will depend on the concession model that is adopted, as follows: 1. Net Cost concession Under this concession model, the Company collects and keeps the fare. The Company would need to be given automatic (generally annual) indexation of fares to take account of inflation. Where integrated ticketing and fares are to be used for the MRT system, a more complex set of conditions would need to be specified to address situations where the fare revenue accruing to the Company was affected by the interests of the integrated system, for example where a 68

99 second flagfall change did not apply or where fares where not indexed in the same manner as would have applied if the Company has a single ticket system for its own line. The method of allocating revenue to the Company from an integrated ticket system would need to specified. 2. Gross Cost concession In this case, fare setting is not the responsibility of the Company and so is not part of the Agreement. However the collection is likely to require interfacing with the Company (which may be required for example to facilitate implementation of the Ticket System at stations on its MRT line). The Authority would need to set out its long term fare policy in the Agreement so that the Company could take the account of the effect of fares on patronage for long term decisions such as the procurement of trains. It will also be necessary to specify the process whereby the Authority would advise the Company of intended changes in fares and the Company would need to allow for services changes in response to changes or the lack of change in fares. 20. ROUTINE NON-FARE REVENUE This clause prescribes the rights and obligations of the parties with respect to the activities forming part of the concession that generate regular revenue from sources other than fares. The principal sources of such revenue are rental of commercial retail space at stations and advertising. The clause needs to establish who will arrange such activities and to whom the revenue will accrue taking account of who has the strongest commercial incentive to generate this revenue. 21. SPECIAL NON-FARE REVENUE This clause would address any other potential sources of revenue. The most likely such source would be profits from the development of any property that may be deemed integral to the project. Where this could occur, the Agreement should indicate the rights of the Authority and the Company to initiate and implement such projects and to share resulting profits between them. 22. REFINANCING During the initial implementation phase, there are considerable uncertainties such as events that can delay completion or have cost implications. These uncertainties cease to exist following successful completion of the initial implementation phase. This change affects the financing of the Company s activities. The financial structure and other terms agreed with the financiers at the commencement of the Agreement will take account of risk during the initial implementation period, for example through factors such as the leverage ratio, cash reserve arrangements and interest margins. When these risks are superseded at the end of the initial implementation phase, the Company can arrange a refinancing of its affairs in recognition that it now faces less uncertainty. This produces a benefit by reducing the funding cost for the Company through a combination of: reducing interest margins; reducing or releasing cash reserve accounts; releasing or returning contingent junior capital (i.e. subordinated debt or equity); extending debt maturity; and/or increasing the amount of debt and reducing the need for equity. It is important to recognize also that refinancing may not necessary be undertaken with the direct involvement of the Company but can occur in another legal entity, relying on rights 69

100 being granted in respect of cash flows, assets or contracts of the Company. Accordingly in any adequate treatment of refinancing, account must be taken of such indirect arrangements. Established international practice recognizes the need to address refinancing in the Agreement and key principles in how refinancing should be treated. These are: Given that a refinancing will normally constitute a material change in the project financial structure as original agreed between the parties, the Authority should have the right to approve any refinancing unless it is agreed as part of the original financing plan set out in the Agreement or does not lead to a gain to the investors compared to the original base case plan. The commitment made by the Authority to provide Civil Infrastructure and the Ticket System, make payments to the Company and provide certainty for financiers (e.g. with the Lenders Direct Agreement (see clause 34) forms the underlying basis for refinancing and consequent financial gains that result from refinancing. Without such contract terms it is unlikely that the Company could obtain the improved financing term especially in regard to leverage and pricing. Therefore the Authority has a right to a share in any benefits from refinancing. An equal sharing of the refinancing gain between the Authority and the Company is accepted in the UK as standard for Private Finance Initiative contracts. In the case where a project performs below the level projected in the Company s proposal and incorporated in the Agreement at the end of the implementation phase, refinancing benefits are first applied to restore the expected base case performance before the sharing of the benefits. The government will need financial specialist technical advice in the drafting of the Refinancing clause, particularly with regard to: the coverage of the clause; methods for calculating, sharing and paying benefits; and detection of financial structuring designed to bypass refinancing provisions. 23. TAXES AND DUTIES There is financial risk due to possible changes in general taxes and duties over the duration of the Agreement. In normal private sector businesses the financial consequence of such changes are passed on to consumers. The indexation of rises in concession payments for inflation (clause 18) provides an indirect means for passing on general rises in taxes and duties. This is reinforced by indexation of fares (clause 19) in the case of a Net Cost concession. This indexation provides a risk mitigation mechanism for the Company and hence allows the risk of changes in general taxes and duties to be transferred to the Company. Discriminatory change (i.e. any change that specifically affects the business of the Company) would be a risk retained by the Authority that would require compensation to be paid to the Company in respect of the change. 24. INSURANCE The provision should specify the obligations of the Authority and the Company with respect to insurance necessary under the Agreement. The following matters should be taken into account in the drafting: significant risk transfer to the Company is built into the Agreement; financing arrangements and the need for the Company to ensure a continuity of service means that the Company needs extensive insurance coverage; 70

101 while the lenders will placed extensive insurance requirements on the Company, these are for lenders exclusive protection and the Authority cannot rely on the lenders action; and the Authority should seek profession insurance advice on key issues, such as: what insurance requirements it should impose on the Company as a means of managing certain risk; what should happen if certain risk becomes uninsurable; and insuring that proceeds of claims are correctly applied by the Company. In general, it is expected that the Company should be responsible for ensuring it has extensive insurance with regard to matters affecting its activities and those affected by its activities. More detailed consideration is needed to determine the extent of insurance cover required with regard to civil infrastructure for matters that are beyond the control of the Company, recognizing that the Company would have claims against the Authority if Civil Infrastructure and the Ticket System were not available (e.g. due to some engineering or natural failure). PART V EARLY TERMINATION 25. CONDITIONS FOR EARLY TERMINATION The clause should prescribe how early termination can be caused. Five possible causes of termination should be addressed: termination on Authority default; termination on Company default; termination on Force Majeure; termination at Authority initiative; and termination for fraud and corruption. Termination of the Agreement is an event with substantial consequences. Therefore two general principles should underlie the clauses relating to termination: termination should be used as a last resort with remedial measures including mediation used to avoid the need for it to occur; and the act and process of termination should be structured to cause the least impact on the continuity of MRT services to the public. Following subsections address each of the five conditions for termination: 1. Termination on Authority default The basic principle is that the Company should have the right to terminate the Agreement where the Authority acts in a way that makes the agreed relationship impossible or completely frustrates the Company s ability to perform the services specified in the Agreement. In specifying the events constituting Authority default giving the Company the right to terminate the Agreement, it should be noted that: The Authority s and the Company s principal obligations in the Agreement are not symmetrical. The Authority makes payments and exercises approval rights with few detailed performance and financing related obligations, whereas the Company has 71

102 substantial obligations. Accordingly, there are fewer issues that can trigger an Authority default. Authority failure to comply with the Agreement provisions before service commencement in most cases can be handled as a Compensation Event and any failure to make payment when due can be handled in other ways (e.g. late payment interest). The Authority should have an opportunity to rectify any defaults in its performance within a reasonable period. 2. Termination on Company default The over-riding principle here is to find a balance between the Authority s desire to be able to change a contractor when service provision is inadequate regardless of the degree of seriousness and the Company s and its financiers interest in restricting termination to severe defaults and then after all reasonable alternatives have been tried, including Lender s Step-in rights and a rectification period mechanism. From a value-for-money perspective termination should be the Authority s last resort. The specification of the events of Company default should include treatment of the following situations: Company breach of any obligations materially and adversely affecting the services provided; the Company being placed in statutory insolvency process; failure to provide the agree services and cumulative poor performance in service provision according to an agreed measurement regime when incentives provided through the transfer of risk and payment mechanism fail to produce the desired services; non-permitted replacement of Company contractors; and non-permitted refinancing. 3. Termination on Force Majeure The Agreement should specify a time period (i.e. x months) under a force majeure event beyond which failure to agree to a solution allows either party to terminate the Agreement. The Authority should have the right (for a fixed period indicted by the Authority in the RFP) to prevent termination of the Agreement under a force majeure event by paying the Company as if the services specified in the Agreement were being fully provided. 4. Termination at Authority Initiative The Authority may wish to terminate an Agreement when circumstances (e.g. a policy change) render the contracted relationship untenable and should have the right to do so. The conditions for such termination should be specified, including the obligation of the Authority to pay compensation to the Company if termination should occur. 5. Termination for fraud and corruption Fraud and corrupt acts involving of the Company, any contractor and the Authority or government personnel in respect of the Agreement should constitute grounds for termination of the Agreement. However the treatment of this clause needs also to address the financiers understandable concern regarding the security of their financing for reasons beyond their control due to the actions of the Company or third parties and their employees. Consideration needs to be give to situations where the fraud or corrupt act has been perpetrated by a contractor or a contractor s employee or even a Company employee without the Company s 72

103 knowledge. In this case, the Company should be allowed to prevent termination by replacing that offending party within a specified period (e.g. 30 days). 26. PROCESS OF TERMINATION This cause should describe the process whereby the Agreement would be terminated and associated actions. It may involve the financier or lender step-in (to avoid the need for the Authority to pay compensation to the Company). The clauses should clearly identify processes, notices and time schedules for actions associated with the process of termination. Two key issues need to be addressed: 1. Process of termination In the case of termination due to Authority default, there should be a mechanism for the issue of a notice of default and rectification period leading to automation termination upon failure to rectify and a following short grace period. The Authority s desire to avoid having to pay compensation to the Company is an incentive for the Authority to meet its obligations. In the case of termination due to Company default, there should be a mechanism for the Authority to serve a notice of termination that allows a reasonable rectification period (if rectification is appropriate) for the Company to propose and implement a program of remedial measures. 2. Continuity of service The continuity of MRT services during any termination process should be protected, i.e. users of the MRT system should be protected from actions of the Authority and the Company to the greatest extent possible. This requires that the Authority and Company make the necessary arrangements for the continuing provision of services while they seek to resolve the cause of the initiation of the process of termination and undertake the process of termination if necessary. This may require the Authority to require that the Company continue to operate services throughout the termination period or at least until the Authority can arrange an alternative service provider to take over from the Company. 27. CONSEQUENCES OF TERMINATION The drafting of this provision should observe the following principles in determining the consequences of termination under different conditions. The principles address the issues of a) the rationale for making compensation and b) the approach and method to calculate the compensation amount. 1. Rationale for compensation a) On Termination on Authority Default Where the Authority defaults, the Company should be compensated in full for losses that it incurs. b) On Termination on Company Default In general compensation is not generally paid by the Authority where termination is due to Company default. However, compensation should be paid for Company s assets that are required by the Authority for continuing provision of services (e.g. M&E Assets). However, the trouble associated with determining and paying such compensation serves to encourage financiers to exercise step-in rights that they would have negotiated with the Company to try to make the concession work in preference to allowing termination of the Agreement. 73

104 c) On Termination for Force Majeure events A Force Majeure event is the fault of neither the Company nor the Authority. It is generally considered that the parties share in the financial consequences of such an event. However the concern of the Company s financiers not to lose their financial arrangements and right to assets following a Force Majeure event is reasonable and should be addressed by the Authority. d) On Termination by Authority Initiative The reasoning is similar to the case of termination on Authority default and should lead to the same approach to compensation. e) On Termination for Fraud and Corrupt Acts The Company s senior lenders should be protected from losing their financing due to an act beyond their control. However the providers of junior capital (i.e. subordinated debt or equity) should acknowledge that its relationship to the Company confers a responsibility for the Company s acts and their margin of equity return in principle covers the risk involved. f) On Termination for Breach of the Refinancing Provisions The Agreement needs to cover breach of refinancing provisions and the recommended approach is that the consequences of termination for this cause should have a similar treatment as that for Fraud and Corrupt Acts. 2. Determining the compensation amount The approach for each cause for termination should reflect the reasons for termination as summarized under 1. above. The calculation of the proper compensation amount in each case and the care that needs to be taken to ensure that no more than proper compensation is identified is complex because of the need to allow for events such as possible refinancing and other causes whereby senior debt and the Authority s termination liability is increased, or again the need to establish a market value or other methods for agreeing the compensation to be paid on termination for Company default. The government will need to obtain specialist financial and legal technical advice to draft the calculation of compensation on termination. PART VI SPECIAL EVENTS 28. FORCE MAJEURE AND EXCEPTIONAL EVENTS This clause should specify the scope of events that are considered as Force Majeure or exceptional where the parties cannot carry out their obligations set forth in the agreement. The approach to Special Event should take into account the following considerations: risk should be borne by the party best able to mitigate it, however the risk event occurs; termination is not always the solution to a Special Event (e.g. a replacement concessionaire will still not be able to provide a full operation in the event of say inadequate service from an electricity authority) and should be a last resort measure; and where termination may be an appropriate measure is in the rare case in which a Special Event has a severe effect on the ability of the Authority or the Company to fulfill their obligations, neither party is better able than the other to mitigate or manage it and the event is likely to be prolonged. In particular Special Events should be distinguished in a manner similar to the following. 74

105 1. Compensation Events Such events are those that occur as a result of an action by the Authority, its representatives or the government. In these events, compensation should be paid to the Company. It covers situations that differ from an Authority Default. Compensation Events for which the Authority should provide compensation are: Authority breach of an obligation (including any breach by a third party for which the Authority is responsible) an example is where agreed actions during the pre-service stage that are the Authority s responsibility and which prevent the Company from meeting its service commencement obligation and/or increase the Company s costs do not occur; Authority-initiated changes in service requirement or constraints on inputs; and discriminatory or specific changes in law. 2. Relief Events They are events that prevent the Company from performing its obligations at any time and for which it is agreed that the Company bears the financial risk of an increased cost or reduced revenue but is given relief from termination for providing the full service required. The risk is to be borne by the Company not necessarily because it is within the Company s control but because the Company is in a better position than the Authority to mitigate and manage the consequences, for example through a combination of insurance and careful planning. Examples of Relief Events are fire, explosion, lightning, earthquakes, riots, strikes and similar action, power or other utility failure or shortage, accidental damage or loss to the work being carried out. Termination is not an appropriate remedy because any replacement for the Company upon termination would be similarly affected and the Authority would not be better off. Relief Events are distinguished from Force Majeure Events by being less severe in their effect. 3. Force Majeure Events These are events likely to have a catastrophic effect on either party s ability to perform its obligation (and hence are rare), neither party is in a better position than the other to mitigate either the occurrence or effect of the events, and the events could be prolonged. Examples include war, civil war, terrorism, nuclear or biological or chemical contamination. 29. CONSEQUENCES OF FORCE MAJEURE AND EXCEPTIONAL EVENTS The drafting of this provision should consider the consequences of each type of Special Event separately, such as. 1. Compensation Events Since the Authority bears the risk, it should compensate the Company. Termination is not appropriate because compensation is an acceptable solution for the Company but is not for the Authority (as occurs with a Compensation Event that occurs in the pre-service stage). In the case of a commencement of service delay resulting from a Compensation Event, the recommended approach is not to compensate the Company by extending the Agreement period but rather to keep to the original term and to compensate for the losses (such as additional finance charges). An appropriate method of calculating the compensation needs to be specified. 2. Relief Events No compensation is paid in this case because the Company bears the risk by agreement but there is relief from termination. To qualify for this relief requires the Company to pass a test 75

106 of reasonable endeavors to rectify and mitigate the consequences, and failing this test could lead to termination. The Authority should not therefore expect to exercises step-in rights. Extension of the Agreement owing to a Relief Event is discouraged as this is likely to dilute the incentive for the Company to manage the events and restore normalcy. At the same time the extension of the Agreement expiry exposes the Authority to any risk it bears under the Agreement. 3. Force Majeure Events See Termination on Force Majeure in Part III - Early Termination 30. POWER OF AUTHORITY As the consequences of the Termination and Special event provisions both involve Authority Step-In, this provision should specify the scope of power of the Authority regarding the stepin process. PART VII - ASSETS 31. CIVIL INFRASTRUCUTRE The provision should specify that title to Civil Infrastructure remains with the Authority but that rights of use of the assets are assigned to the Company for the term of the Agreement (unless early termination occurs) and that the Company has a duty of care with regard to the assets but is not responsible for any latent conditions associated with the assets (such as design, construction or similar faults). The Company s obligations to maintain Civil Infrastructure are covered under Part III - Services. Other matters to be addressed in this clause include the Authority s rights to inspect Civil Infrastructure during the Agreement, a monitoring program to be implemented by the Company and to be monitored by the Authority, refurbishment, rehabilitation and reinvestment in life-expired Civil Infrastructure during the term of the Agreement and matters related to the return of Civil Infrastructure at the end of the Agreement. 32. ASSETS OF THE CONCESSIONAIRE The provision should specify the assets that the concessionaire is providing for the project, distinguishing those which remain its property, which may removed from the project site at the Company s convenience, and those to be transferred to the Authority. The time at which ownership of assets that are purchased by the Company and which are to become the property of the Authority should be specified, e.g. whether ownership transfers to the Authority at the time of purchase of the asset by the Company or at the end of the Agreement (the former is recommended). The provision should also specify the Company s rights of use of the assets, maintenance obligations, any obligations with regard to refurbishment, rehabilitation and re-investment in life-expired assets, and the transfer of assets to the Authority at the end of the Agreement. The clause should also specify compensation to be paid to the Company for assets that are to be transferred to the Authority at the end of the Agreement, covering both assets purchased prior to service commencement and those purchased over the term of the Agreement. Such compensation is needed so that the Company does not need to meet, over the duration of the concession, the full cost of assets that have economic lives that extend beyond the end of the concession. A failure to do this would discourage the Company from investing in such assets, which will include trains to meet continuing growth in MRT patronage. The clause should also provide for survey by the Authority of all project assets except the Company s property on expiration and termination. 76

107 33. ASSETS TITLES AND TRANSFER The provision should detail the ownership or title of the project assets and user rights during and on expiration of the Agreement. It should specify the time when the transfer of the assets titles would occur and the procedure for such transfer. The clause should also provide for co-operation by the Company with regard to the project assets in the event of a lenders or Authority step-in to operate to provide service in place of the Company and the need of a step-in party to find the required assets present and in a fit state for operation. 34. LENDERS DIRECT AGREEMENT A Lenders Direct Agreement is an agreement between the financier of the Company s assets and the Authority with regard to assets purchased and financed by the Company under the Agreement. Provision should be made for such an Agreement because: The Authority needs to have the right to the assets provided by the Company in the event of a termination of the Company s activities. The senior lenders will have financed the project on the basis of the project cash flows. If the Agreement is terminated the lenders will only have the rights against the contractors and to cash amounts in accounts of the Company, and have no rights to sell the assets. In many projects financed under such debt security arrangement, the cash in the Company accounts and the amounts recoverable by senior lenders making claims against the contractors will not be sufficient to allow full repayment of the claims. Hence, the senior lenders have an interest in an opportunity to step-in to rescue the project in the event a termination is brought about or even threatened by Company default of the Agreement. For the public sector, a senior lenders step-in can be of benefit as it means there is the potential for the project to be restored with minimum disruption to the service, which is in line with the principle of continuity of service, and without the Authority needing to become involved in the rescue operation. This mutuality of interest between the senior lenders and the Authority forms the basis of the Lenders Direct Agreement providing for parties rights and obligations in a Lenders Step-in. The step-in process is to be initiated by a Lenders proposal to the Authority for the latter s approval. The key issues to be considered in drafting a Lenders Direct Agreement are: the time when the Lenders should be permitted to step-in; the extent to which they should be obliged to assume liabilities that have been or being incurred by the Company; the extent to which they are given the opportunity to rectify a breach on behalf of the Company; and the ability for the Lenders to substitute a new concessionaire. The drafting should take into account the following considerations: The Company always remains liable under the Agreement, and if a new breach occurs during step-in, termination can still occur. 77

108 A balance must be stuck between giving the opportunity to the Lenders to step-in and for the Lenders to have seriously considered the likelihood of their mounting a successful rescue of the project (to avoid unnecessarily postponing an inevitable termination). Accordingly: The opportunity to step in should have a time limit (e.g. 30 days from notice of termination of the Company, which should be copied to the Lenders). Requiring that the Lenders pay the Authority for any existing liability under the Agreement of the Company at the time of step-in provides this necessary test of the Lenders seriously. However requiring as a pre-condition for step-in that the Lenders duplicate the Companies Agreement liabilities has a disincentive effect and would be priced into the Lenders and ultimately the concessionaire s pricing, and is not recommended. During step-in the Lenders should not have any liability for losses to the Authority. The justification for the approach in the last two points is that if termination occurs due to the action of the stepped-in Lenders any damage or claim will be reflected in the compensation amount for Termination on Company default. 35. ASSET TRANSFER VALUES In the event that a concession is terminated, the Authority needs to ensure that train services can continue. If the Authority needs to pay compensation for these assets, there is a need to have a pre-established means for valuing the assets given that there is no ready market for most of the assets. Such a value will also be needed to determine the compensation to be paid for the remaining value of assets transferred from the Company to the Authority at the end of the concession. This clause would set out the basis for setting the value of assets at any time during the Agreement. PART VIII MISCELLANEOUS 36. RIGHTS AND DUTIES TRANSFER The provision should specify the period when the rights and duties of each parties would be transfer during and on expiration of the Agreement. 37. CHANGE OF OWNERSHIP An Authority may be concerned about changes in the Company s shareholders, particularly where such changes lead to a change in ownership which gives cause for concern for particular, agreed reasons. If this is the case then it may seek to impose restrictions on the ability of shareholders to transfer their shareholdings in the Company. Shareholders will usually object to such restrictions other than restrictions on transfers of equity prior to the date of Service Commencement. As a general rule, it should not be necessary for the Company to contain other restrictions on the transferability of equity other than a need to inform the Authority. The provision should specify that in case there is change of ownership of the Company, the Company must notify the Authority within a specific timeframe. 38. DISPUTE SETTLEMENT AND RESOLUTION In the event where there is a dispute between parties in any circumstances, this provision should specify the method of dispute settlement and resolution. 78

109 39. CONFIDENTIALITY The Company will be concerned to protect its confidential business information and the Authority should allow for that. At the same time, as a public project, it is necessary that public auditing can be undertaken. The provision should specify that the Company must disclose any information regarding the project for financial auditing and an indication that any trade secrets accessed in this manner remain confidential. Any other matters related to confidentiality and public release of information should be specified. 40. CHANGE IN LAW This clause need to address the types of change in law that can have a specific impact on the Company s cost that are not foreseeable prior to Agreement signing. Principles to be observed in the drafting of this clause, which deals with potential changes in law during the concession, are: The cost impact of the change in law in not of a nature that can be passed on through automatic changes in payments from the Authority to the Company (e.g. through cost indexation). The Company may not be able to manage efficiently a particular change in law impact on its cost, in which circumstance transferring the risk to the Company may not provide value-for-money to the government. A distinction between a discriminatory change in law (i.e. one specifically affecting the project, or the Company or the type of concession) and a general change, which can be used to guide how the risk of the consequences of a change in law should be allocated. Value-for-money remains the ultimate test in how the change in law risk is allocated between the Company and the Authority, with no more risk transferred to the Company than the Company can reasonably manage. 41. AUTHORITY STEP-IN The provision should prescribe the conditions and process for an Authority step-in, which in principle should occur under the following circumstances: at the Authority initiative under a (rare) circumstance in which state power is more effective than ordinary business operation (e.g. a civil war or another Force Majeure event); and during the process of termination of the Company for a cause under the which the Authority would prefer not to have the Company continuing to operate (such as e.g. under termination for fraud or corrupt acts or breach of the Refinancing provisions). 42. DUE DILIGENCE OVER CONTRACTS AND FINANCING DOCUMENTS Due diligence of the Project Documents is less of a provision in the Agreement than a requirement in the pre-agreement stage. The Authority should stipulate the nature and form of documents to be submitted with proposals to aid the due diligence process. The need for the Authority and its MRT technical, financial and legal specialist advisors to conduct a thorough due diligence of the preferred bidder s proposal is explained in earlier parts e.g. Part II Pre-Service. 43. ALTERNATIVE AND VARIANTS OF PROJECT FINANCE Alternatives and innovations in financing are a legitimate business means for a Company in carrying out a project. This is a specialist subject and it is recommended that the government 79

110 obtain financial specialist and also legal specialist technical advice in the drafting of this provision, which should be made standard across the MRT concession contracts. 44. OTHER STANDARD PROVISIONS The concession contract also needs to include appropriate clauses that deal with general issues such as the following: Intellectual Property Rights Amending the agreement (terms) Governing Law Governing language Land interests Third party rights and obligations (if any) 80

111 Appendix E: Presentation and Report Summary 81

112 HCMC Metro Rail System 1 ISSUES FOR PRIVATE SECTOR PARTICIPATION 6 March 2008 Focus Structure of this presentation Assumes that the government will use private sector (including joint venture) contractors to construct works. Focus is therefore on use of the private sector for provision of finance & for MRT operations. Part A Introduction to PPIAF technical assistance Part B Experience in other places Part C Key issues for MRT institutional arrangements Part D Principal technical issues related to private sector participation in MRT in HCMC Part E More detailed features of a concession agreement for the operation of MRT in HCMC Part F Outline template for a concession agreement 2 6 March 2008

113 Part A 3 PUBLIC PRIVATE INFRASTRUCTURE ADVISORY FACILITY (PPIAF) TECHNICAL ASSISTANCE 6 March 2008 Role & Scope of PPIAF Technical Assistance 4 PPTA: engineering design & feasibility PPIAF: options for private involvement The Project Uses detailed information on costs, patronage & revenue prepared by PPTA Integrates with PPTA to ensure complete business case to manage implementation and operations 6 March 2008

114 Four objectives for PPIAF Technical Assistance 1. Identify options for private sector participation in MRT 2. Assess benefits of each option 3. Financial analysis & financial model 4. Recommend implementation approach contractual & institutional for whole MRT network 5 6 March Framework for Considering Private Sector Participation (PSP) Options Development PSP options will be identified after considering factors that influence MRT delivery: Transport system management principles Policy control: fares, ticketing, MRT & bus network integration etc Low financial cost recovery Participants in MRT provision including contractors, equipment suppliers, concessionaires/ operators, & financiers Bundling MRT components achieve internal synergies (e.g. operations & maintenance) & productive tensions (financier interest in efficient ops.) Risk transfer identifying what risk an operator can control and what it cannot to ensure costs are minimized Forms of MRT operating concession Potential roles for the private sector Output: Working Paper 6 6 March 2008

115 2. Risk and Value for Money (VfM) Analysis Financial analysis will be undertaken to estimate the VfM of each private sector participation option: To determine if the private sector can deliver infrastructure and services at lower cost than the public sector To help the government to choose from amongst a range of possible procurement options balancing cost, benefits and risks Identification of a risk matrix by stakeholder for effective risk management: Project design Project implementation and capital assets Maintenance and operations Revenue Procurement model Other financial Output: Working Paper 7 6 March Financial Analysis: Financing Plan & Financial Model A financial model will be developed to: Present the financial projections from the perspectives of: (a) the MRT operator/concessionaire; and (b) the government Cover a period of about 30 years (to be defined) Allow for easy entry of input data Include clear and detailed assumptions To the extent possible with available data, indicate the performance of individual lines and combinations of lines Present projected financial statements (i.e. income & expenditure, cash flow and balance sheet) for the HCMC MAUR & for potential private sector or corporatized government participants Output: Working Paper & financial model (spreadsheet) 8 6 March 2008

116 4. Stakeholder Feedback & Implementation This activity centers on the interests and needs of stakeholders during implementation & operation: Capacity of relevant government agencies to administer public & private partnerships in urban transport Institutional arrangements propose options for future Steps needed to introduce integrated fares and ticketing Institutional & financing responsibility implications Tender procedures (broad) Ticketing system supply arrangement Outline content of possible operating concession agreement Responsibilities related to management of private sector Comment on legal issues that must be considered Other procurement issues Output: Various 9 6 March 2008 Financing MRT in HCMC 10 Initial capital cost Lines 1, 2 and 3 could be around US$3 4 billion The cost for all MRTlines will be much more Sources of initial capital Government grants Loans Government domestic borrowing Government international borrowing, e.g. Asian Development Bank & export credit agencies Private sector capital Need to make effective use of all sources if full MRT system is to be built Sources of funds to repay government borrowing & private sector capital Fare revenue Non fare MRT revenue Property development Other non MRT sources, e.g. existing govt. revenue and new (hypothecated) taxes 6 March 2008

117 Indicative distribution of MRT costs Share of Initial Capital Expenditure 11 5% 10% 10% Fixed infrastructure (values do not include discounting of future costs) 75% E&M infrastructure Trains Ticketing Share of Capital and O&M Costs over 35 Years Share of Initial Capital and Ongoing Capital over 35 Years 25% Capital Expenditure for initial project implementation 45% 55% Capital cost (excl. Interest) O&M 75% Capital expenditure for re investment and capacity expansion over 35 years 6 March 2008 Part B 12 EXPERIENCE IN OTHER PLACES 6 March 2008

118 Examples of MRT experience in other Asian cities 13 Sources of finance for initial investment Government only (Singapore, Hong Kong, Manila) Private sector only (Bangkok, Kuala Lumpur, Manila) Mix (Bangkok) Provision of services and infrastructure maintenance Government corporation (Hong Kong, Manila, Singapore) Private sector (Bangkok, Kuala Lumpur, Manila, Singapore) Some insights General shift over time from public sector operators to private sector operators Fare revenue generally meets O&M costs, sometimes train costs, but rarely other capital costs Non fare MRT revenue is very small (in range of 2 8% of fare revenue) Income from property development significant only in Hong Kong a special case Can use the private sector to operate services and maintain infrastructure (O&M) and also to finance some assets Use of the private sector need not be limited to activities where cost recovery is possible they can undertake activities through conventional payment for service contracts 6 March 2008 Four lessons from Bangkok 1 14 Patronage and revenue have been well below expectations Results from optimism bias, i.e. basing plans on ideal and hopeful outcomes Green line (elevated) Concessionaire pays for all capital and operating costs and expected to recover these costs from fares and other sources of revenue Revenue appears to meet operating costs, cost of trains, but not all fixed infrastructure costs Blue line (underground) Government paid for fixed infrastructure, and concessionaire for trains and other electrical and mechanical equipment Appears that revenue is insufficient to meet the concessionaire s costs Potential cost recovery for future lines likely to be less than for the first two lines 6 March 2008

119 Lessons from Bangkok 2 15 Poor physical integration: - of MRT lines - with bus - with urban environment Inconvenient & unsafe travel 500 metres transfer between MRT lines 6 March 2008 Lessons from Bangkok 3 Separate ticket system and fare structure for each line Confusing for passengers Must buy separate tickets for each line More expensive for passengers who transfer (see example below) Bht 25 on BTS 16 Bht 22 on Blue Line Bht 32 for BTS & Blue Line Bht 30 for Blue Line & BTS 6 March 2008

120 Lessons from Bangkok smart card ticketing systems are NOT compatible Card A Not compatible Card B 6 March 2008 Integration General lessons from MRT in other cities 18 Integration is essential for the system to be attractive to passengers. Achieving physical integration of infrastructure should be simple, but is surprisingly difficult. Fare, ticket and service integration is not given sufficient importance. Integration problems increase as new MRT lines are added. Optimism bias General experience is that costs are under estimated and patronage is over estimated. Can lead to concession contracts that are unrealistic and unsustainable because revenue from fares and other sources is less than expected. Financial viability Substantial government financial subsidy is needed. Government management Government should retain policy control over the MRT system this does not require the government to operate services. Use the private sector for operations O&M and capital where this provides value for money Poor decisions in the past are difficult to change. 6 March 2008

121 Part C 19 KEY ISSUES FOR MRT INSTITUTIONAL ARRANGEMENTS 6 March 2008 H i s t o r i c General evolution in public transport management in other places Dispersed public transport service provision - Limited role by government for service planning & integration. - Services provided by the private sector, and sometimes infrastructure also. - Limited or no government subsidy. Alternative, direct route for change Objective: avoid poor service and high cost of centralized approach 20 Typical development approach in the past Objective: improve and integrate public transport Centralized public transport operator - Government agency. - Integrated service planning and provision. - Services and infrastructure t provided d by the government agency. - Increasing costs & decreasing service quality. Trend in 1990s, e.g. Europe, S. America, NZ & Australia Objective: better services and reduced unit costs through effective use of the private sector Public transport management government - Government agency. - Integrated fares, ticketing and services. - Services provided by private operators under contract to the government. - Government pays contractors for services using performance based contracts with appropriate incentives and penalties. 6 March 2008

122 Ideal structure for management in the transport sector Need separate high level strategic direction Separate management from the actual undertaking of operational activities Government to arrange for the delivery of infrastructure and services Separate entities to deliver infrastructure and services through contracts Policy & Strategy Policy framework Strategic planning Regulatory policy Financing & pricing policies Performance monitoring 21 Regulation Setting standards Registration & licensing Enforcement Effectiveness doing the right thing Reports Informs Program management Project planning Investment programming Project, financing & other approvals Design, tendering, & contracting Contract/concession management Monitoring & quality assurance Program delivery Infrastructure Services Marketing Finance Efficiency doing the thing right 6 March 2008 Key issues for government policy direction and control Issues related to the structure of a concession to provide services Same general issues apply whether operator is government or private Possible concession period dlikely l to be around 35 years Equal to the life of trains Over this period Demographic and socio economic conditions will change substantially Government policy priorities may also change Cannot foresee all changes that might occur Government therefore needs to establish concessions so that it can make essential changes in the future, for example to Add new lines Change bus or MRT services or the quality of the MRT system Change the structure and level of fares Accommodate other economic and social changes that might occur 22 6 March 2008

123 Key issues for MRT integration An effective MRT system requires Integration of public transport services With bus routes and other public transport services supporting the MRT system Integration and good design of physical infrastructure With passengers able to easily transfer between MRT lines, and between bus & MRT With passengers able to easily walk to and from MRT stations with passengers able to park motorcycles and transfer to MRT Integrated ticketing for the MRT system So that passengers can use a single ticket such as a stored value card to access any part of the MRT system and, ideally, buses and water transport also Ideally, integrated fares So that passengers are not required to pay a second or subsequent flagfall component when transferring between MRT lines and also with other public transport modes Operation of trains between lines is not essential but can be useful 23 6 March 2008 Part D 24 PRINCIPAL TECHNICAL ISSUES RELATED TO PRIVATE SECTOR PARTICIPATION IN MRT IN HCMC 6 March 2008

124 General arrangement for implementing and operating MRT Full private sector involvement Possible arrangement 25 Private sector finances and implements the MRT line Operates the MRT line and retains revenue from it for a term (say years) Transfers the MRT system back to the government at the end of the term Low cost recovery for MRT lines in HCMC would require the government to also make payments to the private sector so that the private sector can meet its costs As discussed in Part E, this arrangement is not favoured Better approach will be for the government to Finance and implement most infrastructure It is assumed that implementation will use private companies selected through competitive tendering and undertaking works through sound contracts Use a separate entity to operate MRT services (and possibly provide some assets) Requires a contract to manage the provision of MRT services on each line this is the focus of the rest of this presentation 6 March 2008 A contract (a concession) to operate MRT services Features of the contract: 26 The contract is commonly called a concession and the holder of the contract is called the concessionaire. It would be between the government (e.g. represented by the Management Authority for Urban Railways or a similar agency) and the operating company. The company could be a government agency or a private company, where the latter could include joint ventures between a fully private company and a government enterprise. It describes the responsibilities of the government and the concessionaire with regard to the provision of services, management of infrastructure and financial matters. The concessionaire could be involved in infrastructure design and provision. It would be for a period of time. It would transfer from the government financial risk (i.e. uncertainty) that can be better managed by the concessionaire. Issues related to ticketing and management of fare revenue also need to be considered. Issues related to payment arrangements to the concessionaire and other contractual conditions are addressed in Parts E and F of this presentation 6 March 2008

125 Fifteen questions that can help establish the general features of a concession agreement Is it possible to deal with infrastructure delivery now and address operations later? 2. Should a single agency develop and operate the MRT, or should these activities be separated? 3. Should there be only one operator for all lines in the MRT system, a separate operator for each line, or something else? 4. If the concessionaire is a government agency, should it be a department or a state owned enterprise? 5. Is it better that the concessionaire be a government owned enterprise or a private company (including a joint venture between a private company with a government enterprise)? 6. Should the concessionaire be selected on the basis of domestic or international competitive bidding? 7. Should the concessionaire be involved in the design & implementation of fixed infrastructure? 8. Should the concessionaire select trains and related equipment & systems? 9. Shouldthe concessionaireselect select and finance trains and related equipment & systems? 10. Should the concessionaire finance fixed infrastructure? 11. Should the concessionaire maintain fixed infrastructure? 12. Should a MRT operating concession be for a long or short period? 13. How much financial risk can be transferred from the government to the concessionaire? 14. Should ticketing be implemented as a single contract for the entire MRT system? 15. Should concessionaires keep fare revenue or give it to the government? The questions are addressed on following slides 6 March Is it possible to deal with infrastructure delivery now and address operations later? Some reasons in favour 28 Some against Infrastructure is a large ageand dcomplex matter that will absorb all government resources for the immediate future It will take longer to arrange and implement infrastructure than to do the same for operations Need eedto consider operational ato a issues ssuestogether e with infrastructure so that the project design ensures total MRT costs are minimized Need to consider if any assets and their financing should be combined with operations to determine infrastructure works packages Will take longer to arrange operations if some assets are involved in the concession Project preparation for the ADB loan needs to cover both infrastructure delivery and operations Conclusion: Operating arrangements need to be determined at the same time as infrastructure planning. 6 March 2008

126 2. Should a single agency develop and operate MRT, or should these activities be separated? A single agency that both develops and operates MRT might allow better integration But this does not occur in practice Slide 21 shows best practice is to separate functions Separation ensures decision making is more transparent, and avoids conflict of interest and inefficiency that occurs within a single agency Conclude that should separate service management from service operations Establish a contractual relationship Sometimes called purchaser provider or regulator operator approach Need an government to Set technical standards Structure the contract for train operations and infrastructure maintenance so it achieves integration, service quality and other desired outcomes Also need an agency to enforce safety standards It is usual for this to be a separate rail safety government Future slides assume MRT operations are provided through a concession The concessionaire is the business that is responsible for meeting the conditions of the concession The concessionaire includes the entity that operates services 29 6 March Should there be only one operator for all lines in the MRT system? Some reasons in favour 30 Some against Easier ase to expand operations ato sto new lines by Attracting existing operators from other places drawing on skills and resources in the existing will bring more diverse and better skills agency Limited evidence for economies of scale in Economies of scale (i.e. unit costs decline as public transport the organisation gets bigger) will result in lower Single operator (i.e. a monopoly operator) will costs become inefficient Very difficult for the government to replace the operator if it performs inadequately Several operators (say 2 3) Allows comparisons to be made Allows flexibility and protection in case problems emerge Can only have one operator on any individual line Conclusion: Having 2 3 operators for the system provides flexibility and assists management of the system. 6 March 2008

127 4. If the concessionaire is a government agency, should it be a department or a state owned enterprise? Some reasons in favour of a department 31 Some against A department e t can be more oeeasily controlled o by the government A department might have lower costs because government salaries are low A department e t does not have strong incentives es to behave in a commercial manner The close link between government and a department Reduces transparency in decision making Introduces conflicts of interest A state owned enterprise has an incentive to minimize overall costs A state owned enterprise can be more easily equitized at some future time Conclusion: If publicly operated, the operator should be an arm s length commercial enterprise. 6 March Is it better that the concessionaire be a government owned enterprise or a private company (including a joint venture with a govt. enterprise)? Some reasons in favour of a government operator A government e operator can be more oeeasily controlled by the government A government operator may have lower costs because government salaries are lower 32 Some against Control is exercised through a contract in both cases, so direct control is not an issue Lower government salaries are likely to be offset by larger numbers of employees and other higher costs International experience shows that government operators are typically 30% 50% more expensive than private sector operators The private sector is better at managing risk and controlling costs Can draw on private sector specialist skills and experience Modern practice is to use a private sector operator Conclusion: Use of a private sector company to operate services will almost certainly be better than use of a government operator. 6 March 2008

128 6. Should the concessionaire be selected on the basis of domestic or international competitive bidding? Some reasons in favour of domestic competitive bidding A government e may feel it has more control o over the concessionaire A concessionaire may have lower costs because it does not have to pay international costs 33 Some reasons in favour of international competitive bidding There is no current domestic enterprise with skills in MRT operations A foreign company is likely to form a consortium with local companies to reduce costs and meet government objectives A consortium will be a more effective means for developing domestic skills in MRT operations than external training because it will occur in a more programmed and sustained manner A consortium is especially important if trains and related equipment and services are to be provided by the concessionaire Conclusion: The concessionaire should be selected on the basis of international competitive bidding to obtain the best combination of skills and lowest cost. 6 March Should the MRT concessionaire be involved in the design and implementation of fixed infrastructure? Some reasons in favour 34 Some against It is more oelikely eyto result in lower life long gcosts because both initial capital costs and ongoing costs are taken into account It is difficult cuttoto arrange a gebecause the eoperator must be selected at the same time as the infrastructure design engineers It is more difficult to get sound financial tenders from potential operators when the project design is not finalised Conclusion: It is not essential subject to use of international standards for infrastructure design and taking account of operational issues in the design of fixed infrastructure. 6 March 2008

129 8. Should the MRT concessionaire select trains and related items such as train control & communications systems and depot equipment? Some reasons in favour 35 Some against It gives esthe eoperator better control o oe over the quality of service that they provide It allows the operator to minimize train capital costs and other O&M costs It prevents the operator blaming the equipment provided to them by the government for poor service provided by the operator Itallows somepatronage risk to be transferred to the concessionaire this reduces the need for use of administrative measures in contract management and hence simplifies contract management The operator may select ect the most epes expensive e trains rather than the trains that offer the best value Note: It is usual for there to be a separate depot for each MRT line. This reduces dead running and increases the accountability of the operators. Conclusion: Trains & related infrastructure are essential to operator performance. Operators should be responsible for choices regarding them so that operating risk and some patronage risk can be transferred to the operators. 6 March Should the MRT concessionaire select and finance trains and related items such as train control & communications systems and depot equipment? Some reasons in favour 36 Some against Four reasons s pese presented tedon the epe previous oussde slide It also introduces a new potential source of capital for investment in the project It brings a financier into the concession, with the financier able to put pressure on the operator to perform well over the life of the concession to protect the financier s interest It ensures that the concessionaire will seek the trains that will enable it to minimize it overall costs The concessionaire will seek to reduce the high cost of trains provided through export credit finance It may reduce the number of potential t operators if they have trouble raising capital Conclusion: Best for the concessionaire to both select and finance trains so that costs can be minimised and the transfer of risk to the concessionaire can be maximised. 6 March 2008

130 10. Should the concessionaire finance fixed infrastructure? Some reasons in favour 37 Some against The concessionaire cess o e can take geate greater responsibility for ensuring the success of the entire project It could provide a net financial benefit to the government if the higher cost of private sector capital can be offset by the transfer of more financial risk to the concessionaire It may limit the epool of possible concessionaires by eliminating those who cannot raise the necessary capital The government may not get the best consortium of infrastructure and finance providers and MRT operator The concessionaire may seek greater certainty to protect their investment, which will compromise the transfer of risk and/or reduce network integration and policy flexibility for the government Conclusion: It is unlikely that private sector capital will provide a lower cost outcome, but this can be tested with a value for money analysis. 6 March Should the concessionaire maintain fixed infrastructure? Some reasons in favour The concessionaire cess o e will contain the people e who will be most aware of problems with infrastructure because they use it every day The concessionaire has an interest in fixing infrastructure problems so that their services are not disrupted or their costs increased 38 Some against The concessionaire cess o e only has an interest est in the infrastructure for the term of the concession, and may not take a long term view Conclusion: The concessionaire should maintain fixed infrastructure. 6 March 2008

131 12. Should an MRT operating concession be for a long or short period? Reasons for a short period (say up to 10 years) 39 Reasons for a long period (say 35 years) A concessionaire can be more certain of costs over The concessionaire can take a long term view, e.g. a shorter rather than a longer term, and so need they can develop staff skills and invest in not include risk premiums to allow for uncertainty worthwhile equipment and services that have a over future costs payback period that is longer than the concession A concessionaire can be replaced sooner if they term do not perform well A combination of suitable contract conditions and The concession can make arrangements to use of price indices will allow costs to be adjusted compensate the concessionaire for assets they over the term of a longer concession have purchased that have an economic life that is A concession can include terms for early dismissal longer than the concession term of a concessionaire i if they do not perform well A longer term concession avoids the cost of selecting a new concessionaire more frequently A longer term is more consistent with provision and financing of trains by the concessionaire Conclusion: A longer term concession is preferred, especially if trains are provided and financed by the concessionaire. A 35 year concession would be similar to the life of the first set of trains. 6 March How much financial risk can be transferred from the government to the concessionaire? 40 Meaning of financial risk transfer Financial risk is the uncertainty about how costs might turn out in practice Transfer of financial risk means making the concessionaire responsible for the costs, i.e. they cannot ask the government for more money if costs turn out higher than expected Overall costs of MRT will be higher if too much or too little risk is transferred to the concessionaire If transfer too much risk The concessionaire will become risk averse (i.e. very cautious), which will reduce innovation and responsiveness by them to market needs Bidders for a concession will include risk premiums (i.e. extra allowances) in their bids to protect them against higher costs that result from risks that they cannot manage If transfer insufficient risk The concessionaire will not manage the uncertainty as well as they might because they can pass on cost increases to the government Objective is to transfer to the concessionaire i risk that they can manage and hence avoid occurring examples Transfer operating cost risk, but protect the concessionaire from longer term uncertainty by using indices to adjust contract payments for changes in unit costs (e.g. energy prices, labour costs, etc) Transfer some patronage risk to make concessionaire response to consumer needs. But recognise that the concessionaire may be able to influence only about 10% or so of their patronage (the remainder is attributable to factors such as what happens elsewhere in the network and socio economic conditions) Addressed in more detail in a separate paper 6 March 2008

132 14. Should ticketing be implemented as a single contract for the entire MRT system? Some reasons in favour 41 Some against A single gesystem avoids odsinterface problems obe between lines Allows the best technology to be used for the entire MRT system rather than the technology selected by those bidding for each line Makes it easier to expand the system to include more lines, the bus system and ferries when appropriate Allows the technology to be more easily updated Establishes an independent contract that makes revenue management & patronage data more transparent Gives esconsiderable e responsibility s to a single ge contractor, with greater risk if the system is not optimal An additional contract that needs to be managed Could be managed by coordination between various public transport operators Not essential if government does not wish to havean an integrated public transport system Conclusion: Integrated fares and ticketing is essential for a successful public transport. A single ticket system implemented through a single contract is likely to provide the best outcome. 6 March 2008 Some reasons for concessionaires keeping fare revenue 15. Should concessionaires keep fare revenue or give it to the government? 42 Some reasons for the fare revenue to be paid to the government The concessionaire cess o e can use the fare aerevenue eeueto It is likely eythat atthe fare aerevenue eeuewill be meet their costs insufficient to meet concessionaire costs, so Requires an accounting system to transfer there will still be a need for a means for the funds between concessionaires where government to pay additional funds to the passengers transfer between MRT lines concessionaire Best suited to situations where fare revenue is The ratio of fare revenue to cost will vary sufficient to meet the costs incurred by a between lines, requiring different levels of concessionaire and where a gross cost form government payment to concessionaires of concession is used (see slide 30) Works well where an integrated ticketing system is used, and revenue is collected by the enterprise that operates the ticket system Best suited to a net cost form of concession (see slide 30) Conclusion: See later discussion of forms of concession. 6 March 2008

133 Question 1. Is it possible to deal with infrastructure delivery now and address operations later? 2. Should a single agency develop and operate the MRT, or should these activities be separated? Conclusions to these fifteen questions Conclusion Operating arrangements need to be determined at the same time as infrastructure planning. 43 These activities should be separated, with operations undertaken through a concession contract. 3. Should there be only one operator for all lines of the MRT system? Having 2 3 operators for the system provides flexibility and assists management of the system. 4. If the operator is a government agency, should it be a department or a state owned enterprise? 5. Is it better that the concessionaire be a government owned enterprise or a private company (including a joint venture with a government enterprise)? 6. Should the concessionaire be selected on the basis of domestic or international competitive bidding? 7. Should the MRT operator be involved in the design and implementation of fixed infrastructure? 8. Should the MRT concessionaire select trains and related equipment & systems? 9. Should the MRT concessionaire select and finance trains and related equipment & systems? If publicly operated, the operator should be an arm s length commercial enterprise. Use of a private sector company to operate services will almost certainly be better than use of a government operator. The concessionaire should be selected on the basis of international competitive bidding to obtain the best combination of skills and lowest cost. It is not essential subject to use of international standards for infrastructure design and taking account of operational issues in the design of fixed infrastructure. Trains and related infrastructure are essential to operator performance. Operators should be responsible for choices regarding them so that operating risk and some patronage risk can be transferred to the operators. Best for the concessionaire to both select and finance trains so that costs can be minimised and the transfer of risk to the concessionaire can be maximised. 10. Should the MRT operator finance fixed infrastructure? It is unlikely that private sector capital will provide a lower cost outcome, but this can be tested with a value for money analysis. 11. Should the MRT operator maintain fixed infrastructure? The concessionaire should maintain fixed infrastructure. 12. Should the MRT operating concession be for a long or short period? A longer term concession is preferred, especially if trains are provided and financed by the concessionaire. A 35 year concession would be similar to the life of the first set of trains. 13. How much financial risk can be transferred from the government to the concessionaire? 14. Should ticketing be implemented as a single contract for the entire MRT system? Transfer an optimal amount of risk so that concessionaires do not include risk premiums in bids and effectively manage costs and revenue they can control. Integrated fares and ticketing is essential for a successful public transport. A single ticket system implemented through a single contract is likely to provide the best outcome. 15. Should concessionaires keep fare revenue or give it to the government? Will be linked to the ideal form of a concession considered in more detail in Part E. 6 March 2008 Implications of these conclusions 44 Seems likely that a good arrangement will be that The concessionaire should be a private company selected through international competitive bidding The concessionaire should provide and finance trains and related equipment and systems, as well as operating train services and maintaining fixed infrastructure The concession should be for a reasonably long period Operating risk and some patronage risk should be transferred to the concessionaire A single ticketing system should be used for the whole MRT system, and it should be implemented as a separate contract But There is a need to confirm these matters through a value for money analysis There are a number of more detailed matters that need to be considered in designing a concession for the provision of MRT services this is addressed in the next part of the presentation 6 March 2008

134 Part E 45 MORE DETAILED FEATURES OF A CONCESSION AGREEMENT FOR THE OPERATION OF MRT IN HCMC 6 March 2008 Infra structure Risk sharing Introducing two forms of concession agreement Net Cost concession 46 Gross Cost concession Government provides civil infrastructure. Concessionaire provides trains and related items such as traincontrol & communications systems and depot equipment. Concessionaire assumes all patronage risk, but shares extra profits (if any) with the government. Risk is shared between the government and concessionaire. Optimum sharing of risk will minimise the concession cost. Revenue Concessionaire keeps revenue Fare revenue is given to the government Services Concessionaire determines services to be provided on the basis of profitability. Government sets service standards and the concessionaire determines services based on these standards. Payments Concessionaire meets costs from its Government pays the concessionaire for services own revenue. Additional payments may provided according to rates set on the basis of be needed from the government if competitive tendering and quantity/quality of service concessionaire s revenue is too low. provided. Government role Government invites tenders & establishes a concession; has only a small role thereafter; difficult to vary contract conditions. Government invites tenders and establishes a concession; has a continuing major role in managing the concession agreement; can vary conditions when needed. 6 March 2008

135 Assessment of net cost and gross cost concessions Net cost concession Best suited where ee Concessionaire can recover their costs from fares and other such sources The concessionaire has a high level of control over their costs and revenue Where there the concessionaire has the potential for major property development The government can accept limited policy control over the MRT line for the duration of the concession The government wishes a form of contract that requires only limited oversight 47 Gross cost concession Best suited where ee Concessionaire cannot recover costs from their own revenue sources The concessionaire has only a limited level of control over their costs and revenue, such as a single line in an MRT system The government wishes to retain policy control over the MRT system The government has the capacity to manage a performance based contract Conclusion: To give the government policy control and to take account of low cost recovery and limited property development opportunities in HCMC, a gross cost form of concession is strongly recommended. 6 March 2008 Putting it together four possible concession approaches Delivery of: Civil Infrastructure and Fixed Equipment Trains, train control and communications and depot equipment Train services and infrastructure maintenance Risk Transfer Public Enterprise Public Implementation with Operating Concession (PIOC) 48 Train Supply and Operating Concession (TSOC) Delivered through competitively tendered contracts to the government. Delivered through competitively tendered contracts to the government. d Contract negotiated with an SOE. Competitively tendered d Gross Cost contract. Transfer of risk from the government is limited to the extent allowed in construction and equipment supply contracts. The government retains risk associated with operations through its ownership of the operator. As for the Public Enterprise option but can transfer operating risk to the concessionaire. Some patronage risk can be transferred through the Gross Cost concession. The government retains operating risk related to mismatch between trains it provides and concessionaire needs. Delivered through a competitive tendered Gross Cost concession. The government transfers more risk to the concessionaire than in the PIOC option because the concessionaire purchases trains and can therefore bear more risk for operations because they have more control over service quality. Build, Operate & Transfer (BOT) Delivered through competitively tendered Net Cost contract to the government. Transfers the greatest amount of risk from the government, but the government loses flexibility for change in policy and for public transport network integration. Finance Civil Infrastructure and Fixed Capital provided by the government. Capital provided by the Capital provided by the Equipment government. Trains and Train Control and Capital provided by the government. Communications Equipment Train services and infrastructure maintenance Fare revenue The government pays all costs incurred by the SOE, including working capital The government retains fare and other revenue (or pays SOE the difference between costs and revenue if the SOE retains the revenue). The government pays for operating and maintenance costs as specified in the contract. Capital provided by the concessionaire. The government pays for costs as specified in the contract (to cover both capital and O&M costs). Fare revenue accrues to the government. concessionaire. The government will need to pay for costs as specified in the contract (to cover both capital and O&M costs net of fare revenue, where fare revenue will be much less than the costs). Concessionaire retains fare and other revenue. 6 March 2008

136 Criteria Indicative assessment of concession options* Public Enterprise 49 Public Implementation with Operating Concession (PIOC) Train Supply and Operating Concession (TSOC) Build, Operate & Transfer (BOT)** System Integration Minimize capital and operating costs Provide integrated MRT system for passengers Policy Flexibility for the Government Ability for the government to modify MRT system Risk Transfer from the Government Infrastructure supply risk Operating risk Patronage risk Management of Operating Concession by the Government Firm contractual basis for operations Ease of concession management Incentive for contractor/- concessionaire to do the thing right Potential Value-for-Money Allowing for risk transfer, associated risk premiums and the cost of * capital * It is currently planned to subject all options to a full financial value-for-money analysis. The present analysis is intended to be indicative. ** The BOT option may allow moderate value-for-money, but does not provide the government with the flexibility to meet other public interests. 6 March 2008 Further information on two key approaches to Project implementation 50 Public Enterprise Model Implementation of: Civil infrastructure & fixed equipment Delivered through h competitively Trains and train tendered contracts to the government. control equipment Train services & infrastructure maint. Risk transfer A state owned enterprise is established and a concession negotiated with it. Private Sector Participation Model (TSOC) Delivered through competitively tendered contracts with the government. Delivered through a competitively tendered concession contract between a concessionaire and the government. Transfer of risk from the government is limited to the extent allowed in construction and equipment supply contracts. The government can transfer some project integration risk, most operating risk and some patronage risk to the concessionaire. Source of finance for project implementation ti Civil infrastructure & fixed equipment Trains and train control equipment Train services & infrastructure maint. Fare revenue Capital provided by government through grants and loans. The government pays for O&M costs as specified in the contract. Fare revenue accrues to the government. Capital provided by government through grants and loans. Capital provided by the concessionaire. The government makes payments to the concessionaire to cover both capital and O&M costs. 6 March 2008

137 Recommended features of a private sector participation model payment arrangements Payment from the government to the concessionaire 51 Primarily related to the quantity of service and assets provided by the concessionaire, but also linked to the quality of service and to patronage Patronage and service quality related payment should transfer manageable risk to the concessionaire and incentivize them to provide high quality services Allows for cost escalation May need separate escalation for energy, labor and other items Allows for anticipated and unexpected transport developments Unit costs to pay for variations that might occur, e.g. line extensions and changes in MRT services and other public transport services Concession management In addition to providing the incentive for concessionaires to minimize costs and meet passenger needs, transferring appropriate risk has the benefit of Reducing supervision needs by incentivizing the concessionaire to perform well without the need for direct government supervision 6 March 2008 Payment structure for a gross cost operating concession Contract payment could be equal to the sum of the following two components that cover the cost of providing agreed services: 52 a fixed payment (F) for a given quantity of service (which could include a payment to cover the cost of assets provided by the concessionaire such as trains, or these could be paid as a separate item); plus a demand, i.e. patronage related, payment (D); plus a service variable component (S) to allow for changes in the quantity of service that might be required over time; plus a bonus payment (B) if to reward performance in excess of an agreed level; less a penalty (P) for inadequate performance against agreed criteria; less additional revenue (O) that the concessionaire might be able to generate from non operational activities, e.g. from property development, advertising, etc. Total payment = F + D + S + B P O For bidding the government would specify D, B and P tenderers would indicate F, S and O 6 March 2008 ** March 2008

138 Summary of recommended approach with a private sector participation model 53 Role of government Ensuresdesign of infrastructure takes account of operations Finance and manage implementation of fixed infrastructure Select operating concessionaire and ticket supply and fare management concession Manage concessionaires and make payments according to their respective contracts Role of the private sector Private sector consortiums bid for operating concessions (including supply of trains etc.) and a ticket/fare collection concession Concessionaires coordinate with fixed infrastructure contractors to install their respective assets Ticket/fareconcessionaire concessionaire paysfare revenue to the government Concessionaires provide services in accordance with their contracts and are paid accordingly by the government 6 March 2008 Part F 54 TEMPLATE OF A CONCESSION AGREEMENT AND STEPS TO IMPLEMENT A CONCESSION 6 March 2008

139 Contents of a Concession Agreement 1 Part I: Introduction Addresses general issues and the parties to the contract: Name of the Agreement; Date of the Agreement; Parties to the Agreement; Preamble to the Agreement; Definitions; The Concession; MRT Network and Links; Coordination Committee; Representatives and Related Parties Part II: Pre Service Activities Addresses issues that are to occur prior to the operation of train services: Conditions Precedent; Company Systems; Pre Service Implementation; Protection Against Late Service Commencement; Part III: Services to be Provided Addresses the train and related services that the concessionaire is to provide: 55 Initial Services; Standard of Services; Changes in the MRT System; Changes in MRT Services 6 March 2008 Contents of a Concession Agreement 2 Part IV: Finance and Insurance Addresses general issues and the parties to the contract: 56 Payment and Payment Mechanisms; Payment Escalation; Fare Policy and Revenue; Routine Non fare Revenue; Special Non fare Revenue; Refinancing; Taxes and Duties; Insurance; Part V: Early Termination Addresses issues that could result in early termination of the concession and treatment of the consequences of such early termination: Conditions for Early Termination; Process of Termination; Consequences of Termination; Part VI: Special Events Addresses special events that could affect the concession: Force Majeure and Exceptional Events; Consequences of Force Majeure and Exceptional Events; Power of government; 6 March 2008

140 Part VII: Assets Contents of a Concession Agreement 3 57 Addresses issues related to assets provided by the government and concessionaires : Civil Infrastructure; Assets of the Concessionaire; Asset Titles and Transfers; Lenders Direct Agreement; Asset Transfer Values; Part VIII: Miscellaneous Addresses remaining general contractual issues, e.g.: Rights and Duties Transfer; Change of Ownership; Dispute Settlement and Resolution; Confidentiality; Change in Law; government Step In; Due Diligence Over Contracts and Financing Documents; Alternatives and Variants of Project Finance; Other Standard Provisions. 6 March 2008 Establish a probity process Implementing a concession To ensure transparency in the preparation and conduct of tendering, assessment of tenders, andcontract negotiation Use market testing to identify modifications that will increase market interest Ensure that changes do not compromise public interest Objective is to get good competition that should result in lower tender prices Prepare Request for Tender Clearly set out roles and responsibilities of the Authority and the concessionaire Set out payment arrangements Indicate information to be provided by bidders Require consistent information for a conforming tender Encourage bidders to submit innovations as variations or alternatives to the conforming tender Design tender evaluation process Invite tenders 58 6 March 2008

141 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF Appendix B: Financial Modeling Working Paper 23

142 ASIAN DEVELOPMENT BANK AND PUBLIC PRIVATE INFRASTRUCTURE ADVISORY FACILITY RSC-C71557 (VIE), TA4862-VIE: Ho Chi Minh City Metro Rail System MRT FINANCIAL MODEL and VALUE FOR MONEY ANALYSIS Technical Paper July 2008

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144 1. INTRODUCTION 1.1 The PPIAF Technical Assistance 1. ADB has mobilized a grant from the Public Private Infrastructure Advisory Facility (PPIAF) to review the options for private sector participation and public-private partnerships for the Ho Chi Minh City (HCMC) Metro Rail System Project. The assignment is with a view to minimizing the costs on a risk-adjusted basis, optimizing institutional arrangements, and taking advantage of a market oriented approach to maximizing the benefits of the Project. This work supplements an ADB Project Preparatory Technical Assistance (PPTA) to advise HCMC People s Committee on the integrated development of the first two MRT lines in HCMC. 2. The objectives of the PPIAF study, which has been implemented in co-ordination with the PPTA work, are addressed in the following key study outputs: (i) a framework for considering private sector participation in implementation and operation of the Project; (ii) a value-for-money analysis for implementation approaches that involve varying degrees of private sector participation, (iii) a detailed financial model reflecting the preferred approach and measuring the performance of the project from the points of view of the government and private sector participants; and (iv) a stakeholder feedback and a description of necessary institutional and contractual arrangements given the preferred implementation approach. 1.2 The present report 3. Outputs (i) and (iv) are described in three companion working papers: Issues and Options for Private Sector Participation and Concession Template ( Issue and Options paper); Stakeholder Feedback and Implementation Arrangements Institutional Options; and Fares and Ticketing. The present report, the final of the series, describes study outputs (ii) a value-formoney analysis for implementation approaches that involve varying degrees of private sector participation, and (iii) a detailed financial model reflecting the preferred approach and measuring the performance of the project from the points of view of the government and private sector participants. 4. A financial model for the HCMC MRT is provided along with the present report. The model has been developed keeping in view the following requirements. The financial model will: (i) present the financial projections from the perspectives of (a) the unit operating the HCMC project assets in a ring-fenced manner and (b) the government and potential private sector participants, international financing institutions (IFIs) or corporatized government participants involved in sponsoring the project; (ii) cover a period of about 30 years, the approximate lifecycle of rolling stock, a key operating asset; (iii) allow for easy entry of input data and include clear and detailed assumptions worksheets which may be modified easily to allow for data updating and the sensitivity testing of implementation schedule, capital and operating and maintenance cost, fare tariff and patronage; (iv) present projected financial statements (balance sheet, income and cash flow statements) for the HCMC operating unit and for potential private sector or corporatized government participants; and (v) to the extent possible, comment should be provided on the total cost and revenue, the bankability of the proposed MRT project and possible subsidy requirements, with necessary sensitivity analysis. 5. The present working paper describes the model and its use in MRT network planning and project preparation. Using the model, a detailed analysis was made of the performance of the HCMC MRT project selected and planned under the PPTA. A report of the analysis appears

145 in the PPTA feasibility study final report. Again with the use of the model, section 3 of the present report presents a value-for-money analysis to determine the potential for the lowest cost among four major alternative approaches to project delivery and financing. The alternatives are: (i) a state owned enterprise or conventional public sector model where government takes all the responsibility and risk; (ii) government provides all the infrastructure and equipment, with a concession for operation and maintenance by the private sector; (iii) government provides fixed infrastructure but a private sector operator provides trains and train related equipment such as train control, signalling etc; and (iv) the private sector provides all the project assets in addition to providing operation and maintenance. The rationale for the alternatives is discussed in detail in the Issues and Options paper. 1.3 Glossary 6. In this paper certain words are used with a defined meaning indicated below. External support payment by government towards the cost of an undertaking in which the compensation from direct beneficiaries is insufficient. This term is preferred to subsidy. External support a) highlights the interventional nature of the payment, and so raises the question of the goal and purpose of a public sector intervention, and b) is free of the popular connotation of inefficiency that surrounds the word subsidy. Finance to finance an undertaking means to provide resources for use during a period of an earnings shortfall (or in the extreme case nil earnings), in the expectation and against a promise of repayment out of surplus cash earnings. Debt financing means a loan or a similar arrangement, involving a principal sum to be paid back with interest. Equity financing refers to money invested against expected compensation in the form of a dividend or capital appreciation. Financier a party engaged in financing an undertaking for a risk-weighted compensation. The term financier can refer either to a creditor or an equity investor. Fund to fund an undertaking means to pay for the cost of carrying it out. A private sector undertaking (eg a restaurant business) usually has its cost paid for by its direct beneficiaries (the diners). MRT is an example of an undertaking where, with very few exceptions, direct beneficiaries (principally the travellers) cannot afford to carry the whole of the funding. However the external or indirect social benefits are seen to be such that they are considered sufficient justification for external support. Private sector participation (PSP) see under public-private partnership. Project this word may be used in context to refer specifically to a line or a collection of lines in an MRT network. Public-private partnership (PPP) an arrangement formalised in a legal agreement between government and a private sector entity for sharing the responsibility and risk in implementation and operation in a specific project. The private sector enters into the arrangement expecting to be compensated for its effort and risk; the government should do so in order to incur the least cost, risk taken into account, in comparison with alternative approaches to the undertaking (see value-for-money). The term PPP usually implies that a significant share of the project risk is borne by the private partner: it will be used in this sense throughout this report. In MRT, this level of risk sharing is usually demonstrated by the private sector operator financing eg the trains 4

146 and related equipment, and being exposed to the project risk in doing so. In this paper an arrangement whereby the public sector provides financing for all infrastructure and equipment and the privates sector plays a pure operating role is not considered a PPP but is referred to by the more general term private sector participation (PSP). Value-for-money (VfM) analysis an analysis to identify and compare from the perspective of the government on behalf of the community, the net cost, risk taken into account, of alternative ways of carrying out the key activities of design, construction and procurement, financing and operation. The alternative ways are distinguished by how the public and private sector share the responsibility and with that the risk in each key activity. The conventional public sector financing and delivery option is the one in which the public sector is wholly responsible and carries all the risk in the project. This alternative is sometimes called the Public Sector Comparator. The alternative indicated by the analysis to incur the least cost is said to be valuefor-money or VfM. Considerations relating to achieving VfM in MRT projects are also looked at in its qualitative aspects in the Issues and Options paper. 2. FINANCIAL MODEL 2.1 The aims of MRT financial modelling 7. In the logical framework of MRT programme development and project design, two main aims in financial modelling can be distinguished. 8. For MRT network development. The goal here is an effective and efficient MRT service network, among other qualities meeting the required net social benefits criteria 1. The outcome is a strategic plan to develop an MRT network of this description, with indications of lines to be implemented, investment and operation phasing, and prospective requirement for external support. 9. For MRT project preparation. The goal is an effective and efficient project, ie a line or a collection of lines in an optimised MRT service network, where preferably the project itself meets the required net social benefit criteria used to evaluate the whole network. The outcome is (i) a funding plan for an effective and efficient project, with identification for any prospective requirement for external support and its delivery; and (ii) a basic financing plan for the same project. Proceeding from this, the outcome of a value-for money (VfM) analysis is a combination of government and private sector involvement in project financing and delivery expected to incur the least cost to government. Where more than one level of government is involved in the project, the plans identify the role of each government in the financing and delivery and in sourcing the external support. 2.2 The model 10. The financial model developed under the present assignment is contained in two spreadsheets, each of which can be operated independently of the other. The first (the strategy model ) is designed for use in HCMC MRT network development planning. The second (the project model ) is designed for use in Line 2 project preparation. They differ in detailed features reflecting the different intended impact and outcome as described in 2.1, but share the same basic logical structure. 1 This evaluation is the subject of an economic analysis, which is addressed in the PPTA report. 5

147 2.3 Model logical structure Figure 2.1. MRT financial model logical structure Outcome Outputs MRT network development plan; or project plans for investment, financing & funding (including external support) Performance indicators: eg FIRR, external support needs, operating/fare box ratio, credit ratios, investment yield rates etc Projected financial statements (balance sheet, income & cash flow ) Calculations Revenue O&M Investment Financing model cost model model model Patronage Strategy Rolling stock Capital model inputs* capital cost structure Fare tariff Inputs Project Infrastructure Finance cost Non-fare model inputs* capital cost & other terms revenue Investment Financiers' External schedule roles support *Data vary depending on different method of O&M cost modelling used. Source: this Study 11. The financial model has four core elements, namely a revenue model, an operating and maintenance (O&M) cost model, an investment model and a financing model. These four core elements receive input data and calculated outputs, such as pro forma financial statements and quantitative indicators of financial viability and operating performance for individual lines or collection lines in an MRT network option, or for a project scenario. The input data can vary according to the scenario being considered. 12. For transparency and amenability to model audit, the model has been developed on a spreadsheet programme. The model makes use of the organizational and management tools available in the programme for greater user convenience. Among other things the model employs a system of colour-coding of cells and contents: (i) a data input cell is signalled by red font and yellow highlight; (ii) blue font signals active linkage to other places in the spreadsheet in one of two ways: through cell-naming, and under a book-marking hyperlink function (to enable a jump to the cell being bookmarked); (iii) the remaining cells are in the default font and cell colours. A guide to the model page in the strategy model is shown in Table Strategy model a. Strategy model input 13. Overview. The Strategy model has to facilitate evaluation of strategy options (or scenarios) for MRT network development. This type of analysis can involve many different alternative sets of input data and assumptions, corresponding to the options being examined. The input sets comprise data on patronage, fare and non-fare revenue, operation and 6

148 Table 2.1 Guide to the strategy model HCMC MRT Project Guide to Financial Model Notes: 11/06/08 (1) Contents Worksheet Name: Description Function and/or contents: 1_Control Control page To select required Scenario (segment combination) or line segment. 2_Capital_cost_input Project Capital Cost: Input Page Project base capital cost input in year 2008 prices; by line segment, with break-up into land acquisition, depots, civil works, fixed electrical and mechanical systems, rollingstock. 3_Scen_input Scenario: Input Page To define Scenarios and other segment combinations and input construction start and finish dates. 4_Passenger_input Passenger Demand: Input Page Passenger demand input by segment and by Scenario/other segment combination, for the years 2011 and This includes daily passenger boarding, daily passenger kilometres, and peak passenger per hour per direction (pphd). 5_Train_op_input 6_Other _input Train Operation Parameters: Input Page Other Financial Model Assumptions: Input Page Input train operation parameters (e.g. line length, number of stations, capacity per car, spare rollingstock, peak, off-peak operating hours, headway etc). Assumptions for the financial model other than those covered by the above input pages. This includes a selection of concessioning options. 7_ INTENTIONALLY LEFT BLANK INTENTIONALLY LEFT BLANK 8_Schedule Construction Schedule and Cost Worksheet outputting annual distribution of project capital cost Distribution Worksheet 9_Rollingstock_plan Rollingstock Capacity Plan Rollingstock capacity plan 10_OM_cost Annual O&M Cost Calculation of annual O&M cost 11_OM_unit_cost O&M Cost Model Model of O&M unit cost by MRT resource 12_Financials Main Financial Model Work sheet Proforma financial statements (income statement, statement of cash flow, and balance sheet) with supporting schedules, return on investment calculations and other analytical results. 13_Results Summary of Results Summary of investment and financial plans and return on investment and other key results. 14_Sensitivity Sensitivity Analysis Worksheet This worksheet collects the results of sensitivity tests. Note (4) of this Guide explains how to carry out a sensitivity test. 15_Tables Summary of Tables Tables containing highlights of the financial analysis 16_Index Index Aid to spreadsheet search. Index gives name box reference(s). Source: this Study maintenance (O&M) cost, investment cost for infrastructure (ie civil works and related electrical and mechanical (E&M) equipment and fixtures) and for trains and train-related E&M. The model has separate data input page(s) organised with this need in mind. Furthermore, an O&M cost model which derives annual cost from quanta of parameters recognised as having influence on O&M cost, and a standard cost rate per unit of parameter quantum, is sued to generate the O&M cost data for the strategy model. The model structure accommodates and accepts alternative project implementation schedules and disbursement plans; downstream incremental investment in the rolling stock fleet and other equipment; and renewal capital spending (ie refurbishment and other major periodic maintenance, and replacement of life-expired equipment). The model has a study time horizon beyond the construction period of 25 years during which an individual segment of the MRT network is serving passengers. The strategy model is also designed, given appropriate input data, to generate output for the VfM analysis. Taking all into account, other required parameters include cost of capital, economic life cycles and depreciation periods by category of assets, price escalation factor, parameters relating to concession payment structure etc. 14. Specific input information. Scenarios. Scenarios are defined in the worksheet 3. Scen_input in terms of MRT line segments they contain, by the presence of the digit 1 against the selected segments. The same 7

149 page also contains input data for line lengths and date of start and completion of the construction period. See Table 2.2 for illustration. HCMC MRT Project Scenario: Input Page Line/Segments Table 2.2 Scenarios samples Scenario 9 Scenario 10 HCMC MRT Trend Case Selected Construction Selected Construction Selected Construction Segments Length (km) Start End Segments Length (km) Start End Segments Length (km) MRT1 : Ben Thanh - Suoi Tien 1 MRT MRT MRT MRT2 : Ben Thanh - Thamluang 1 MRT MRT MRT MRT3 : Highway13 - Tan Kien 1 MRT MRT MRT MRT4 : Sai Gon Bridge - Can Giuoc 1 MRT MRT MRT MRT5 : Ben Cat - Nguyen Van Linh 1 MRT MRT MRT6 : Ba Queo - Phu Lam 1 MRT Source: this Study Capital cost and implementation schedules initial capital investment. The input data on estimated base capital cost are in five categories: land acquisition and resettlement, civil works, depot, E&M systems, and rolling stock. These are input into the worksheet 2. Capital_cost_input. See Table 2.3. The capital cost estimate for rollingstock investment is dependent on a rollingstock capacity plan, which is aimed at meeting the requirement of the anticipated peak-hour demand, when passenger traffic is at a maximum. The capacity plan is worked out in the worksheet named 9_Rollingstock_plan using train operation parameters from the page 5_Train_op_input. Table 2.3 Base capital cost estimate Start End HCMC MRT Project Project Capital Cost: Input Page (USD million, at year 2008 prices) Segment Code Line/Segment (excluding rollingstock) Total Capital Costs Local Foreign Land acquisition Depots Civil works E&M systems Local Foreign Local Foreign Local Foreign Local Foreign MRT1 Ben Thanh - Suoi Tien 1, MRT2 Ben Thanh - Thamluang MRT3 Highway13 - Tan Kien 1,876 1, MRT4 Sai Gon Bridge - Can Giuoc MRT5 Ben Cat - Nguyen Van Linh 1, MRT6 Ba Queo - Phu Lam Source: this Study Using construction dates data from the worksheet 3_Scen_input, the allocation of initial base capital cost to estimated annual disbursements appears in the worksheet 8_Schedule, as shown in Table 2.4. Capital cost and implementation schedule subsequent capital investment. The model calculates from the initial capital cost data the required subsequent investment, such as additions to the rolling stock fleet, and replacement or major refurbishment of exhausted assets. Capital cost and implementation schedule downstream capital cost. The downstream costs, including project management consulting and project development cost, price escalation 8

150 and interest during construction, are calculated in the model using data and parameters in the worksheet 6_Other_input. Table 2.4 Base capital cost estimate HCMC MRT Project (USD million, at year 2008 prices) Construction Schedule and Cost Distribution Worksheet (excluding rollingstock) Case: 11 HCMC MRT Trend Case Sub-case: 0 All line segments in HCMC MRT Trend Case Segment Length Construction Year Line/Segment Code (km) Start End MRT1 Ben Thanh - Suoi Tien MRT2 Ben Thanh - Thamluang MRT3 Highway13 - Tan Kien MRT4 Sai Gon Bridge - Can Giuoc MRT5 Ben Cat - Nguyen Van Linh MRT6 Ba Queo - Phu Lam Source: this Study Patronage. Data are input at the page 4.Passenger_input. The current data on this page come from the Trend Case of the Master Plan Study 2, except for Line 2, which uses the most recent update for the PPTA study. Table 2.5 Train operation parameters HCMC MRT Project Case: 11 HCMC MRT Trend Case Train Operation Parameters: Input Page Subcase: All line segments in HCMC MRT Trend 0 Case Train system resources Line Length (km) Total Under ground Elevated & at- Grade % of UG to total line length (%) Under ground No. of Stations Elevated & at- Grade Total Train operation 2015 Avg. speed Headway (km/h) (min) Car/train (cars/train) MRT1 : Ben Thanh - Suoi Tien % MRT2 : Ben Thanh - Thamluang % MRT3 : Highway13 - Tan Kien % MRT4 : Sai Gon Bridge - Can Giuoc % MRT5 : Ben Cat - Nguyen Van Linh % MRT6 : Ba Queo - Phu Lam % Spare 1 : n/a - n/a % Spare 2 : n/a - n/a % Total Off-peak-hour headway 1.49 times peak headway Total week-day operating hours (05: hours / day 24:00) Operation hours (peak) 4.50 hours / day Operation hours (off-peak) hours / day Week-end & holiday operating hours hours / day (assuming service on week-end & holiday will be as all day off-peak, with no peak hours) Source: this Study Train operation parameters. Parameter inputs in worksheet 5_Train_op_input, together with the patronage data, influence the rolling stock capacity plan and the operating and infrastructure resources required for delivery of an MRT service. These in turn generate the 2 See PPTA technical paper HCMC Master Plan Ridership and Revenue Forecast Study, January 2008, by MVA- Systra. 9

151 additional rolling stock investment and the ultimately the operating and maintenance recurrent cost. A section of the worksheet 5_Train_op_input appears in Table 2.5. Unit operation and maintenance cost, by MRT service resource. For the strategy model, in order to project O&M cost for projects while dispensing with the need for detailed estimates of energy consumption, manpower planning etc, a model of the unit O&M cost for each of six MRT service resources is used. The O&M cost model 3 is shown in Table 2.6. The model unit costs are given for each of two limiting cases, namely: a) a pure underground line and b) a line with an all elevated or at grade vertical alignment. The higher average cost per train-hour for an underground line is largely accounted for by a need for greater security-related spending on manpower and insurance. At the same time air-conditioning (a non-tractive power requirement) is largely responsible for the greater unit cost per underground station. For lines with a mix of vertical alignments, the two unit costs are modelled as a weighted average of the two limiting cases. The model unit costs reflect the best judgement of current operating costs for the Bangkok operating MRT systems 4, adjusted for the lower Vietnamese labour cost for station HCMC MRT Project O&M Cost Model Description of cost Table 2.6 O&M cost model Distribution of cost Resource Train- hours Car- hours Car- km Peak cars Station Line Length Total Unit (m hrs./year) (m hrs./year) (m km./year) (traincars) (stations) (km.) Manpower - Train drivers 100% 100% Manpower - Other operatives 100% 100% Manpower - Station staff (incl. security) 100% 100% Energy - Traction power 67% 33% 100% Energy - Other power (Depot, stations, and others) 10% 10% 80% 100% Other service operations - Control room staff 100% 100% Other service operations - Coin handling 50% 50% 100% Other service operations - Shuttle bus service 100% 100% Repair and maintenance - Management staff 50% 20% 30% 100% Repair and maintenance - Maintenance contract 50% 50% 100% Admin. and general - Divisional HO staff 25% 75% 100% Admin. and general - Utilities and others (incl. Marketing) 25% 75% 100% Admin. and general - Insurance 25% 25% 25% 25% 100% Train- Car- hours Car- km Peak cars Station Line Length hours (X1) (X2) (X3) (X4) (X5) (X6) Y(O&M cost) = a1x1 + a2x2 + a3x3 + a4x4 + a5x5 + a6x6 Coefficient values (2008 USD ') a1 a2 a3 a4 a5 a6 Elevated and at-grade (EL & G) m 0.3 m m Underground (UG) m 0.9 m m Source: this Study security staff and other position not requiring specific MRT skills. The annual O&M cost is obtained by summing the six products a i X i (i=1,..,6) of unit cost and annual MRT service resource quantity. 3 The idea of the O&M unit cost model comes from ADB Bangkok Mass Rapid Transit Public Company (BTS) operates a wholly elevated system, Bangkok Metro Public Company (BMCL) a wholly underground transit. Both are private sector organizations. 10

152 Other parameters. Model parameters beside the MRT-specific information input such as patronage and capital and O&M costs are located in worksheet 6_Other_input. These parameters include an annual price escalation factor of 5%, and parameters relating to alternative concession forms, costs of different types of capital (eg loan and equity), for both public and private sector. The parameters determining the concessionaire s remuneration are intended to simplify its modelling. With the Gross Cost Concession, for example, in which the concessionaire s charge to the government may be structured to remunerate delivered service quality, which bears on patronage levels, as well to provide available quanta of MRT operating resources, and perform maintenance, the contract fee may be designed to vary eg with both the quanta of passenger-kms and car-kms. For simplicity of treatment this is done in the model by specifying a unit charge generator as a single number. This in conjunction with an input percentage split generates one unit charge to be applied to passenger-kms and another one to car-kms to calculate the concessionaire s annual charge revenue. In actual practice design of concession payment schemes in MRT and generally in public transport is a complex subject in which governments should seek specialist technical advice. b. Strategy model output Table 2.7 Public sector project entity projected financial statements (In USD million unless otherwise indicated) HCMC MRT Project Financial Projections Case: 11 HCMC MRT Trend Case 11/06/08 Sub- 0 All line segments in HCMC MRT case: Gross Cost Trend Case Con.0 Con.1 Con.2 Con.3 Con.4 Con.5 Con.6 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Public sector FINANCIAL STATEMENTS INCOME STATEMENT Revenue Fare revenue Non-fare revenue Concession fee Total revenue Expense Unit charge generator expense Pure O&M cost Revenue-related cost Total expense Gross earnings (68) (147) (118) (124) (130) (135) (140) Less: Depreciation and amortization Earnings before interest and (219) (327) (329) (335) (342) (350) (357) tax Less: Interest expenses Less: Installment paid by Gov.(interest portion) Profit before tax (355) (463) (460) (460) (462) (464) (465) Less: Corporate tax 0% Net profit after tax (355) (463) (460) (460) (462) (464) (465) Earning before interest, tax, depreciation (EBITDA) (68) (147) (118) (124) (130) (135) (140) 11

153 Table 2.7 (Cont d) HCMC MRT Project Financial Projections Case: 11 HCMC MRT Trend Case 11/06/08 Subcase: 0 All line segments in HCMC MRT Trend Case (In USD million unless Gross Con.0 Con.1 Con.2 Con.3 Con.4 Con.5 Con.6 Y1 Y2 Y3 Y4 Y5 Y6 Y7 otherwise indicated) Cost Public sector FINANCIAL STATEMENTS BALANCE SHEET Assets Current assets Cash and short-term investments (204) (679) (1,124) (1,575) (2,032) (2,495) (2,963) Accounts receivable Total current assets (204) (679) (1,124) (1,575) (2,032) (2,495) (2,963) Operating assets ,101 2,156 3,662 5,556 6,558 7,551 7,551 7,602 7,656 7,712 7,712 Less : Accumulated depreciation (141) (311) (513) (714) (917) (1,121) (1,328) Net operating assets ,101 2,156 3,662 5,556 6,416 7,240 7,038 6,888 6,739 6,591 6,384 Net capitalized expenses Total Assets ,124 2,220 3,797 5,803 6,450 6,789 6,132 5,521 4,905 4,284 3, Liabilities & Equity Liabilities Current liabilities A/C payable and current liabilities Long-term debts Long-term loans ,941 3,296 5,000 5,000 4,809 4,612 4,410 4,202 3,989 3,770 Government Bonds Total long-term debts ,941 3,296 5,000 5,000 4,809 4,612 4,410 4,202 3,989 3,770 Other liabilities - Installment - payables Total liabilities ,941 3,296 5,000 5,000 4,809 4,612 4,410 4,202 3,989 3,770 Equity Government equity ,805 2,799 2,799 2,850 2,904 2,960 2,960 Retained earnings (355) (818) (1,278) (1,739) (2,201) (2,665) (3,130) Total equity ,450 1,980 1,520 1, (170) Total liabilities & equity ,124 2,220 3,797 5,803 6,450 6,789 6,132 5,521 4,905 4,284 3,600 12

154 Table 2.7 (Cont d) HCMC MRT Project Financial Case: 11 HCMC MRT Trend Case Projections 11/06/08 Sub- 0 All line segments in HCMC MRT Trend Case case: (In USD million unless Gross Con.0 Con.1 Con.2 Con.3 Con.4 Con.5 Con.6 Y1 Y2 Y3 Y4 Y5 Y6 Y7 otherwise indicated) Cost Public sector FINANCIAL STATEMENTS STATEMENT OF NPV Total CASH FLOW Earnings before (219) (327) (329) (335) (342) (350) (357) interest and tax Less: corporate tax Add: depreciation and amortization Cash flow before (2,204) (68) (147) (118) (124) (130) (135) (140) capital requirements Less: Installment principal portion Movement in working capital Capital expenditures NPV Total Rollingstock Civil works 2,893 3, ,052 1, E&M systems Land acquisition Depots Total initial capital 4,430 5, ,056 1,506 1, expenditure Interest during construction Additional rollingstock 3,191 6, Refurbishment of rollingstock Replacement of E&M 777 2, equipment Additional land acquisition Additional depots Additional civil works 1,376 2, Additional E&M equipment Total capital 10,800 19, ,096 1,577 2,006 1, expenditures Free cash flow (13,004) (25,743) - (118) (189) (816) (1,096) (1,577) (2,006) (1,070) (1,140) (118) (175) (183) (192) (140) Debt service: Interest paid Debt principal repayment Total debt service Less: Installment interest portion Cash flow after debt - (118) (189) (816) (1,096) (1,577) (2,006) (1,206) (1,468) (445) (503) (511) (519) (468) service Cash shortfall Initial Total funded by: Long-term loans 5,000 5, ,355 1, Government Bonds Government cash , , support Total funding 19, ,096 1,577 2,006 1, Net cash flow (204) (474) (445) (451) (457) (463) (468) Cash balance (204) (679) (1,124) (1,575) (2,032) (2,495) (2,963) Source: this Study 13

155 Table 2.8 Private sector project entity projected financial statements HCMC MRT Project Financial Projections Case: 11 HCMC MRT Trend Case 11/06/08 Subcase: 0 All line segments in HCMC MRT Trend Case (In USD million unless Gross Con.0 Con.1 Con.2 Con.3 Con.4 Con.5 Con.6 Y1 Y2 Y3 Y4 Y5 Y6 Y7 otherwise indicated) Cost Private Sector FINANCIAL STATEMENTS INCOME STATEMENT Revenue Fare revenue Non-fare revenue Unit charge generator revenue Total revenue Less: Concession fee Operating revenue after concession fee Operating and Maintenance cost Pure O&M cost Revenue-related cost Gross earnings (11) 47 (28) (27) (25) (24) (21) Less: Depreciation and amortization Earnings before interest and (11) 47 (28) (27) (25) (24) (21) tax Less: Interest expenses Add: Installment paid by Gov.(interest portion) Profit before tax (11) 47 (28) (27) (25) (24) (21) Less: Corporate tax 28% Add: Subsidy Net profit after tax (11) 37 (28) (27) (25) (24) (21) Earning before interest, tax, depreciation (EBITDA) (11) 47 (28) (27) (25) (24) (21) 14

156 Table 2.8 (Cont d) HCMC MRT Project Financial Projections Case: 11 HCMC MRT Trend Case 11/06/08 Subcase: 0 All line segments in HCMC MRT Trend Case (In USD million unless Gross Con.0 Con.1 Con.2 Con.3 Con.4 Con.5 Con.6 Y1 Y2 Y3 Y4 Y5 Y6 Y7 otherwise indicated) Cost Private Sector FINANCIAL STATEMENTS BALANCE SHEET Assets Current assets Cash and short-term investments Accounts receivable 0.00% Inventory 0.00% Total current assets Other assets - Installment - Receivables (net) Operating assets Less : Accumulated depreciation Net operating assets Net capitalized expenses Total Assets Liabilities & Equity Liabilities Current liabilities A/C payable and current 0.00% liabilities Long-term debts Long-term loans Total long-term debts Total liabilities Equity Paid-in capital Cash deficit support Legal reserves Retained earnings (11) 24 (4) (32) (57) (81) (101) Total equity Total liabilities & equity

157 Table 2.8 (Cont d) HCMC MRT Project Financial Projections Case: 11 HCMC MRT Trend Case 11/06/08 Subcase: 0 All line segments in HCMC MRT Trend Case (In USD million unless Gross Con.0 Con.1 Con.2 Con.3 Con.4 Con.5 Con.6 Y1 Y2 Y3 Y4 Y5 Y6 Y7 otherwise indicated) Cost Private Sector FINANCIAL STATEMENTS STATEMENT OF CASH NPV Total FLOW Earnings before interest and (11) 47 (28) (27) (25) (24) (21) tax Less: corporate tax (10) Add: depreciation and amortization Cash flow before capital (11) 37 (28) (27) (25) (24) (21) requirements Add: Installment Movement in working capital Capital expenditures NPV Total Rollingstock Civil works E&M systems Land acquisition Depots Total initial capital expenditure Interest during construction Additional rollingstock Refurbishment of rollingstock Replacement of E&M equipment Additional land acquisition Additional depots Additional civil works Additional E&M equipment Total capital expenditures Free cash flow (11) 37 (28) (27) (25) (24) (21) Debt service: Interest paid Debt principal repayment Total debt service Cash flow available for (11) 37 (28) (27) (25) (24) (21) dividend Dividends Cash flow after debt service (11) 37 (28) (27) (25) (24) (21) and dividends Cash shortfall funded by: Initial Total Long-term loans Paid-in equity Total funding NPV Total Add: Subsidy Cash deficit support Net cash flow (11) 65 (1) (2) (2) (3) (5) Cash balance Source: this Study 15. Table 2.7 shows a sample of the strategy model output of public sector project entity projected balance sheet, income and cash flow statements. Table 2.8 shows a sample of 16

158 projected private sector project entity financial statements. These are not necessarily generated under the same concession payment assumptions as for Table Testing project performance. Using the strategy model, five of the six HCMC MRT lines identified in the Master Plan Study 2008, but not studied in detail under the PPTA, have been tested for indicative performance. Line 2, being the subject of detailed study and evaluation under the PPTA, is not included in this initial test of performance. The patronage forecast for the five lines tested is sourced from the Master Plan Study 2008, as described in paragraph 14, which assumes a fare of VND 4,000 per boarding. The capital cost estimates for the lines have been sourced from an ADB March 2007 review 5 of the HCMC MRT network plan; the review provides the unit project cost by main category shown in Table 2.9. The O&M costs have been generated using the O&M cost model. The line lengths are as indicated in Table , with Line 1 assumed to have a 2.6 km total underground section (or sections), Line 3 to have 11 km underground, while lines 4,5 and 6 are assumed to be all elevated. 17. Table 2.10 show the five lines indicative performance. Their negative net present value (NPV) of free cash flow confirms the need for external support, in line with common international experience of MRT. The fact that adding Lines 5 and 6 in 2025 is consistent with a subsequent improvement of the farebox ratio for all the lines indicates that the lines are mutually supportive, or are (for example) at least without overlaps between lines so as to cause new lines to take away passengers from existing lines. The results shown in Table 2.1 should be recognised as outputs of an initial analysis making use of readily available data; their value lies rather more in the suggestions they make for examination in a more refined study and analysis. Table 2.9 Estimate of unit capital cost for testing HCMC MRT lines performance (Year 2006 constant prices) Land acquisition cost Fixed infrastructure -elevated Fixed infrastructureunderground Rolling stock Per line km Per line km Per line km Per train car US$2.34 million US$40 million US$ 100 million US$ 2 million Source: ADB 2007 MRT Line Table 2.10 Indicative HCMC 5 MRT lines performance NPV(5%) of free cash flow (US$ million) Estimated farebox ratio : Ben Thanh - Suoi Tien (19.7 km) (3,484) : Highway13 - Tan Kien (24 km) (3,861) : Sai Gon Bridge - Can Giuoc (17 km) (2,041) : Ben Cat - Nguyen Van Linh (24 km) 1 (1,929) : Ba Queo - Phu Lam (6 km) 1 (682) Source: This Study Assumed roll-out date Project model 18. Overview. The project model has been developed for the financial evaluation of HCMC MRT Line 2. As planned in the feasibility study and preliminary engineering design under the 5 ADB TA RSC-C61011 (VIE): Ho Chi Minh City Metro Rail System Project, HCMC MRT Strategic Financial Model Update, March 2007, by Bray D and Sayeg P. 6 Source: Vietnam News Agency 2008, press releases. 17

159 PPTA 7, this is an MRT service with a km long service track, including 8.46 km underground, with 11 station stops between Ben Thanh and Tham Luong. The model input data from the study include the passenger demand forecast, fare assumption, investment cost, operating and maintenance cost, financial structure, pricing and other terms of the financing, financiers roles, project delivery (eg concessioning) approach, applicable tax and duty rates, physical and price contingency factors, construction term, analysis period slightly over 30 years in the present study), economic life-cycles of project assets and depreciation rates. Unlike the strategy model, the Line 2 project model O&M cost data are from engineers estimates. These are built up from detailed calculations of, for instance, traction and non-traction consumption rates and prices of energy, work force requirement and payroll rates, material and consumable usage and prices 19. The project model is specifically constructed to distinguish and analyse the possible difference of roles between the Government of Vietnam (GOVN) and HCMC in project financing and funding, as provided in the Railway Law and the Law and Decree on the State Budget The Line 2 financial model input data, outputs, and outcome in terms of the project plans for investment, financing and funding (including the sourcing of external support), are described in Chapter 8 of the PPTA Study report. 2.6 Model operation and management 21. Generally, an MRT financial model may be found useful in three areas: financial evaluation, financial budgeting, and in procurement and concessionning. Appendix 1 touches on practical aspects in operation and management of the model in each of these three applications. 3. PROJECT VALUE-FOR-MONEY (VFM) ASSESSMENT Introduction 22. Doing what the community rationally considers to be desirable at the least cost to is acting in the public interest and is therefore an imperative for governments. In the present context a VfM assessment addresses the question of choosing, from among identified alternatives, one likely to be the least cost method of delivering an MRT project in HCMC. 23. The VfM assessment was introduced into the international practice of PPP for the purpose of making an informed decision between a conventional public sector and a PPP undertaking of an infrastructure project. However, once clearly understood its methods can be seen to have broader application in choosing among many kinds of options involving different risk characteristics. The key objective is simple: to select from several project development options the most efficient, ie one incurring the lowest cost to the public. However, complications arise because of uncertainty in the cost and revenue or benefit streams of an infrastructure project, which has characteristically long gestation (usually more than 10 years). Additionally, in land transport, studies have found a tendency for pronounced negative variance 7 See ADB TA 4862-VIE: Ho Chi Minh City Metro Rail Study, Final Report 2008 ( PPTA Study ) 8 Railway Law 2005 No. 35/2005/QH11, Chapter V (on urban railways), and Law on the State Budget 2002 No 01/2002/QH1 and Decree No 60/2003/ND-CP especially Article 5. 9 This section draws on ADB 2007a and ADB 2007b. 18

160 between forecast and outturn. The objective then has to be restated as finding from among alternative modes of project delivery one that offers the least cost, risk taken into account. Table 3.1 Alternative approaches for VfM testing: summary of approach features Responsibility and risk Financing Civil works and fixed equipment Trains with related systems & equipment Passenger service with maintenance of civil works & equipment Delivery Civil works and fixed equipment Trains with related systems & equipment Passenger service with maintenance of civil works & equipment Payment/funding Fare revenue Other revenue Payment from government Risk Investment cost-civil works and fixed equipment Investment cost-trains & related systems & equipment Service operating cost & all maintenance costs Revenue State owned enterprise (1) Government sourced working capital Private sector operating concession (2) Government sourced capital Concessionaire sourced working capital Government procures by competitive tender Via SOE s contract with government Revenues collected under a separate arrangement Gross Cost contract style payment Government transfers some risk to the private sector via the design, construction and equipment supply contracts Contracting transfers some risk to SOE but state ownership means ultimate recourse to government Risk transfer to SOE for a similar purpose as in (2)-(3) seems less effective, perhaps because it is realised that government is not likely to let an SOE fail financially Through Gross Cost a contract by competitive tender Private trains E&M supply w/operating concession (3) Government sourced capital Concessionaire sourced capital Concessionaire sourced working capital Government procures by competitive tender Through Gross Cost contract by competitive tender Paid to government Paid to government Paid to government/ Paid to government/ shared shared Concessionaire receives competitively bid payment from government. Government transfers some risk to the private sector in the design, construction and equipment supply contracts Transferred to private sector, except what is retained through indexation b plus the risk of government provided trains not matching operator needs Government transfers some risk to the private sector in the design, construction and equipment supply contracts Transferred to private sector Transferred to private sector, except what is retained through indexation Some patronage risk is transferred to private sector linked to an incentive payment to keep up service quality standards Build-operatetransfer (BOT) (4) Concessionaire sourced capital Concessionaire sourced working capital Through Net Cost contract by competitive tender Concessionaire retains Competitively bid external support Transferred to private sector, except for agreed indexation Transferred to private sector, except for any agreed fare indexation Source: adapted from Figure 3.1 in Issues and Options paper, this Study Notes: a For a description of the Gross Cost and Net Cost concession forms see Section 2.9 Issues and Options paper, especially Figure 2.2. b In the context of a concession agreement, indexation embodies the principle of allowing the price of a good or service to be adjusted upward or downward to keep its original purchasing power parity. 24. This section reports on a VfM assessment carried out on the four alternatives identified in the Options and Issues paper 10. Their key features are summarized in Table 3.1. They range 10 See Issues and Options paper Section 2 for a detailed discussion. 19

161 from a state-owned enterprise (SOE) approach (1), in which government plays the maximum role in the project financing, delivering and funding, taking consequently the full investment, operating and revenue risk; through increasing levels of private sector participation from a Gross Cost operating concession (2), to a Gross Cost concession, with operator supplied rolling stock along with train-related E&M systems and equipment (3), to a full build-operate-transfer (BOT) role under a Net Cost operating concession (4), in which government retains little more involvement in the project than contract monitoring and evaluation. In the analysis a common assumption of an integrated public transport system is made for all the options. Accordingly, in the SOE option, ticketing is assumed to be under a common ticketing authority separate from the SOE, and an arrangement similar to a Gross Cost contract with a private sector concession aire is assumed to be in place. The methodology for carrying out the VfM analysis is set out in Section For the analysis, risk is understood to refer to a probability distribution, or in practice a range of probability ratios, for an occurrence with variable possible financial impact, usually adverse, quantifiable in monetary terms. The data for the analysis should include not only estimates for risk but also how it is priced, meaning how in a contested market one side would be willing to remunerate and the other side to be remunerated for parting with or respectively taking on a given risk. In consequence, robust market competition to undertake a task with a specific risk becomes a fundamental assumption in the analysis. The outputs of the analysis are presented and discussed in Section 3.2. Section 3.3 draws conclusions. 3.2 Methodology 26. Overview. A VfM analysis is carried out to evaluate from the government s (ie the community s) perspective the net cost, risk taken into account, of alternative approaches for carrying out the key project activities of design, construction and procurement, financing and operation. As shown in Table 3.1, the options are distinguished by the way the public and private sectors share the responsibility together with the risk in each key project task. The VfM analysis is carried out as far as possible using a quantitative method, supplemented by a qualitative assessment where a quantitative approach is not possible. The analysis is based on forecast cash flows expressed in nominal values. For each option, the output of the analysis is an expected net present value of the cost to government of ensuring the delivery of the Line 2 service for the duration of the concession, including the valuation of risk retained by the government. 27. Financial modelling of the PSP options including PPP. The forecast cash flows for each option are obtained from projected financial statements balance sheet, income and cash flow statements calculated for each year of an approximate 30 year concession period covering implementation plus service provision and maintenance activities. Except in the SOE option, two sets of projected financial statements are generated for each option, one set to report the government s financial position in the project and the other the private sector participant s. In carrying out the analysis for the PSP options including PPP, the following principles have been observed: (a) By either receiving financial payments from the government or else by paying excess revenue to government, the private sector concessionaire achieves an acceptable rate of return at a minimum cost to government. (b) The private sector concessionaire s financial plan is based on a limited recourse arrangement (ie the lenders cannot rely on any loan security in particular shareholder guarantees beyond that provided in the project), with a proportionate share of debt and equity in the total capital employed (as measured by a debt-to-equity or a leverage ratio), 20

162 an average interest rate and a rate of return on equity that reflect the opportunity costs of the lenders and equity sponsors, taking into account the project risk of each option. (c) The analysis presents the total cost to the government for each option. 28. Base project costs and revenues. The VfM analysis carried out makes use of the best estimates obtained from the PPTA study of the Line 2 fare and non-fare revenues, investment and O&M cost, and also the assumed life-cycles and depreciation rates of categories of civil works and equipment 11. In considering the various options, the analysis treats the effects of the different concession forms on the concessionaire s cash flows in the following way: (a) Under a Net Cost concession there is a payment from the government to the concessionaire in consequence of the project s funding shortfall. (b) Under a Gross Cost concession, the project fare and non-fare revenues, being separate from the concession, are treated as revenues of the government; the concessionaire s revenue is made up of payment from the government for the concessionaire s share of the cost and risk in delivering the project. (c) The different concession forms have variable effects on (i) the financing costs of the concessionaire, including the capital structure and the costs of debt and equity; and the incentive for the concessionaire to maximise patronage. These variable effects relate to the perception of different levels of risk embedded in each concession form. 29. The private sector financing and delivery arrangements. The private sector concessionaire is assumed to be organised as a special purpose vehicle (SPV), with a legal and financial standing separate from its lenders, equity sponsors, and subcontractors. In particular, its assets and liabilities wholly derive from the concessionaire s role and responsibility in the project; this is necessary in order to exclude any risk that is not project risk. The concessionaire s relationship to other parties having an involvement in the project is illustrated in Figure 3.1. In Figure 3.1, the role, responsibility, rights and remuneration of the concessionaire or SPV are formalised in a concession agreement (1) 12. Under (2), with the government s express recognition under the terms of the concession agreement, the concessionaire s system design, construction and operation and maintenance responsibility and risk are allocated to subcontractors with expertise in each field. In (3), under the project financing agreement, the financing responsibility and risk are allocated among senior lenders (the senior debt will be on limited recourse terms), any subordinated lenders, and equity sponsors (ie shareholders). In practice, the senior lenders exercise strong control over the concessionaire s fund flows until the senior debt is repaid. For example, disbursements are made by lenders direct to the design, construction and/or equipment subcontractors; during the service phase, the concessionaire s remuneration is held in a reserve account, from which payments may be made only under the lenders supervision, and so on. Finally, under (4), the concessionaire, through the operation and maintenance subcontracts, provides service on Line 2 to the travelling public. 11 See PPTA study Final Report. 12 The Issues and Options paper elaborates the underlying principles of a concession agreement. 21

163 Figure 3.1 Private sector concessionaire financing and delivery arrangements (3) Government (2) Senior lenders Subordinated Debt & equity (1) SPV project company (4) Design, build subcontractors Operating subcontractor Users/ the public Others eg insurers Source: adapted from S Gawlic, UNESCAP undated 30. Financing assumptions. The financing assumptions for the private sector concessionaire, such as leverage ratio, cost of borrowing and equity are shown by concession type in Table 3.2. In the present study, it is judged that the experience of PPP concessions in MRT and other infrastructure in Thailand provides a meaningful comparison and may be drawn on for assumptions relating to financing cost for a hypothetical private sector MRT Table 3.2 VfM Analysis Financing Assumptions Private sector financing Net Cost Concession Gross Cost Concession Debt-to-equity ratio (times) Loan terms -Grace period Construction period plus 2 years 3 -Term including grace period 15 years 3 -Interest rate 6.95% 4 Return on equity 13.5% % 6 Public sector financing Loan terms -Grace period 7 years 7 -Term including grace period 27 years 7 -Interest rate 3.95% 8 Cost of public sector equity 5% 9 Source: this Study, drawing on ADB 2007a Notes: 1 Based on a comparison with Bangkok Blue Line concessionaire s current capital structure 2 Based on a comparison with UK light rail transit (LRT) concessions eg Nottingham Express Transit. 3 Based on a comparison with Bangkok financial market indications for projects in Thailand 4 For an equivalent US Dollar currency borrowing. The interest rate is based on average market rate for government borrowing plus a 3% risk premium 5 At a premium of 8.5% above the cost of municipal bond financing, this is comparable with the Blue Line concessionaire s cost of equity 6 Based on a comparison with market rates of 12-13% for Thailand IPP projects (PPP power generation concessions, which have similar relevant features to MRT Gross Cost concessions with respect to the sharing of usage or demand risk). 7 Average ODA terms 8 Lowest ODA US Dollar equivalent loan interest rate. Raising the rate to the middle range does not alter the analysis results. 9 Cost of US Dollar commercial borrowing rate. 22

164 concession in the HCMC context. 31. Discount rate. A rate of 4% is used for the common discount rate to obtain the cost to government of the project development options. 32. Risk and optimism bias. Risk impacts the expected net financial cost to government of an MRT or another infrastructure project through a variance of the outturn from what was anticipated when the decision was made to go ahead by any combination of the following: (i) capital cost overrun through actual cost and/or construction time exceeding plan; (ii) operation and maintenance cost overrun; and (iii) revenue underperformance. By establishing statistics of capital and O&M cost overruns and revenue shortfall in a particular sector of infrastructure on projects implemented by the conventional SOE approach, it is possible to take into account the risk of pure public sector implementation, in addition to the basic net financial cost of a project. For example, a 2002 review commissioned by UK Treasury of large British public sector procurements found clear evidence for the phenomenon known as optimism bias, in a pronounced tendency for capital cost (and construction time or work duration ) to exceed what was anticipated the time of the decision in each of the project types as shown in Table Table 3.3 Optimism bias in UK Treasury 2002 review of large public projects Project type Works duration overrun Capital cost overrun Non-standard buildings 1 39% 51% Standard buildings 4% 24% Non-standard civil engineering 15% 66% Standard civil engineering 34% 44% Equipment/developmemt 54% 214% Source: UK Treasury 2002 Note: 1 Non-standard means more complex, difficult or innovative, when compared to standard projects. Based on the study results, the UK government has made it a rule that optimism bias be explicitly recognised in the business case preparation and review, a requirement institutionalised in UK Treasury issued guidance on appraisal and evaluation of public projects Optimism bias in land public transport projects. In land transport, international studies of project development have found rigorous statistical evidence of the same optimism bias. Figure 3.2 illustrates this tendency with respect to capital cost for a sample of 58 international rail projects, where the average cost escalation is 44.7% 15. A similar tendency has been statistically established for rail transport demand forecasting. In analyses involving 25 projects, 72% of the sample are found to show more than 40% shortfall in outturned traffic compared to the forecast current at project approval time. Meanwhile the overall average actual traffic is 51% below forecast The UK experience is instructive because Britain has been among the most active countries employing PPP to deliver infrastructure and public services since the mid 1990s. By March 2006, Britain had over 700 PPP projects (USD 91 billion equivalent in total value), compared to eg Korea, another active PPP practitioner, with 64 projects (USD 24 billion equivalent) by December See ADB 2007b. The published evidence on optimism bias has mostly been associated with public sector projects. Limited disclosure has inhibited attempts at finding rigorous evidence on optimism bias in the private sector. 14 UK Treasury Flyvbjerg et al, Flybjerg et al,

165 34. With service operation, sound evidence from comparative international studies of public transport supports an expectation of greater cost efficiency with private sector provision compared to public ranging between 30% and 50%. Details are reported in Section 2.10 of the Issues and Options paper. 35. Optimism bias parameters. Specific details have not been found on the extent of optimism bias in Vietnam but anecdotal reports show a familiarity with the phenomenon. The parameters for optimism bias used in the present analysis are set out in Table 3.4. For capital cost, the statistics for the public sector is based on the international studies of rail transport public works reported in 32. For operating and maintenance cost, the statistics are based on the relative cost of public and private sector operation quoted in 33, with an assumed minimum optimism bias of +10% for the private sector O&M cost. The statistics imply an expectation of Figure 3.2 Optimism bias on capital cost in rail transport projects 40 Frequency (%) RAIL PROJECTS Cost escalation (%) Source: Flyvbjerg et al a substantially larger propensity to cost overrunning in implementation and operation of a public transport project, when compared to the private sector. This is consistent with a difference in approach to resource allocation and management of activities as between government and the private sector. The commercial approach needed in service delivery and financing appears to Table 3.4 Allowances for optimism bias in MRT projects (% difference from the best estimates) Public sector implementation or operation Private sector concessionaire implementation or operation Gross Cost Net Cost Cost Capital cost +45% +15% +15% Operation and maintenance cost +40% % +20% Patronage For operating years 1&2-55% -50% -50% For operating year 3 and after -33% -30% -30% Source: based on international studies on delivery of public transport projects 24

166 thrive on incentives that appeal to self interest, which is how the private sector operates. It has been rarely seen to sit well within government, whose principal goals are defined by the public interest. The difference in relative optimism bias is much less in demand forecast, although some can still be expected. Government and private sector concessionaires both make use of specialist transport demand modelling services. At the present state of the discipline, forecasting transport demand is recognised to be a difficult exercise in assessing a multiplicity of complex influences on a traveller facing trip choices. The size of the optimism bias allowance being assumed reflects the statistical record of the performance in forecasting summarised in The optimism bias parameters in Table 3.4 are the same as those suggested in a recent ADB technical assistance (TA) to the Government of Thailand on standardisation of feasibility study methods to assess financing and delivery options for Bangkok MRT extension projects Other uncertainty. Other uncertainty unrelated to optimisms bias includes unexpected changes concerning prices, law and regulations, tax, and early termination of a concession. This will need to be assessed qualitatively for its potential effects on the cost to government of the project development options. The qualitative assessment is based on considerations taken up in the Issues and Options paper, especially in the elaboration of the concession contract standardisation in Section 5 and Appendix D. The considerations indicate that the other uncertainties can be managed so that their impact is invariant across the options, at least from an initial perspective, and can therefore be ignored for the purposes of the current analysis. 3.3 Analysis results 38. VfM analysis results. The analysis results are highlighted in Table 3.5. The base cost Table 3.5 Highlights of the VfM analysis (US$ million, NPV discounting at 4%) SOE (1) Private sector O&M only (2) Private sector train equipment supply & O&M (3) Base cost Government concession payment ,563 3,137 Fare and non-fare proceeds (1,148) (1,148) (1,148) 0 Government debt service Government non-debt financing Government non-debt financing cost Total base cost ,058 3,137 Adjustment for corporate income tax (43) (43) (222) (912) Base cost, tax-adjusted ,225 Adjustment due to risk Capital cost overrun O&M cost overrun Revenue shortfall years 1& Revenue shortfall years Total risk adjustment 1,320 1, Expected cost to the community 2,016 1,881 1,822 2,996 Source: this Study to government is taken net of the proceeds from fare collection and non-fare revenue. The base cost includes the variable concession payment ( the SOE option is included under this term) BOT (4) 17 ADB 2007a 25

167 depending on each option. The net base cost is the same in the SOE option as in Option (2), in which a private sector operating concessionaire delivers service on Line 2 under public financing of all capital cost. Meanwhile, with a BOT concession, the government collects no revenue and makes only the one payment to the concessionaire (on account of the Line 2 funding gap). The adjustment for tax is to eliminate transfer payments; for simplicity, taxes other than corporate income tax payable by the concessionaire have been ignored in the analysis. The risk adjustment is added to the base cost to arrive at the expected cost to the community. 39. A comparison of the expected cost to the community across the four options ranks the SOE alternative above the BOT and below the other two PSP options. Looking at the base cost only, the substantially lower SOE cost compared to the BOT reflects a lower public sector financing cost in both project investment and O&M working capital. By comparison there is a maximum transfer of the project risk from the government to the private sector concessionaire which saves the community a substantial amount of optimism bias the risk adjustment in the SOE case is almost double that of the BOT option. But further comparison shows that the BOT has an expected cost that is almost 50% above the SOE: the higher financing cost of BOT make the risk transfer not VfM. Option 3, in which the concessionaire supplies its own train and associated systems in addition to operating the service, shows a higher base cost compared to Option 2 and the SOE alternative. This is a reflection of the higher private sector financing cost for the equipment supplied. When risk is taken into account, Option 3 shows a lower expected cost to the community compared to Option 2, that is, it is indicated to have the better value for money. 40. Sensitivity test. The analysis assumes the public cost of debt to be a middling US Dollar equivalent ODA loan rate (approximately 4%). A test carried out shows that if instead the lowest end of US Dollar equivalent ODA loan interest rates, ie approximately 3%, is used, the relative ranking of the four options remains unchanged (Table 3.6). The discount rate used for the latter scenario is 3%. Table 3.6 VfM analysis sensitivity test: outputs at 3% public debt cost (US$ million, NPV discounting at 3%) SOE (1) Private sector O&M only (2) Private sector train equipment supply & O&M (3) Base cost ,103 3,847 Base cost, tax-adjusted ,707 Total risk adjustment 1,533 1,368 1, Expected cost to the community 2,130 1,965 1,952 3,623 Source: this Study 3.4 Assumptions and contingencies 41. It is necessary to understand more precisely under what assumptions and contingencies are the VfM test results valid. These assumptions and contingencies are as follows. 42. Market competition. In the analysis, the level of government payment to the private sector concessionaire is assumed to be obtained in a competitive market for the concession and for all sub-contracts, including the provision of financing. This is the rationale for modelling the government payment in all the options at no more than cost recovery, represented by the best estimates of capital and O&M cost and fare and non-fare revenue, plus the indicated private BOT (4) 26

168 sector financing costs under different options in Table 3.2. VfM requires a competitive tender market for the concession and for related sub-contracting of the technology (eg design, construction, systems integration and installation, and operation and maintenance in MRT service provision) and in addition financing services. The reason is to ensure that payment of concessionaires and sub-contractors is not in excess of a normal risk-weighted remuneration for effort. Now an option which has cleared a VfM test could at the procurement stage be facing a market failure (eg only one bidder), threatening its ability to deliver the anticipated VfM. Thus, transition and emerging countries in particular often cannot count on a reliable international supply of private sector financing. The threat of market failure in a specialised field such as MRT concessioning and sub-contracting should not be dismissed lightly. It will be important to have alternatives at hand, which means having the ability to switch for example to a PSP concession for a private sector O&M concessionaire only, should a market sounding suggest that only one candidate would tender for a private sector concession in train and related E&M systems supply and operation. 43. Financial and services market distortions. Here are some examples of distortions that can threaten to dilute VfM. (a) Limited recourse financing of a PPP concession promotes VfM because the senior lenders, usually financial institutions regulated by a central bank, will for as long as the debt is outstanding have in the project an interest that is aligned with the authority granting the concession, and will bring professional skill to the monitoring of the concessionaire s performance. However the lenders incentive to monitor that performance is diluted with the lenders use of credit risk transfer (CRT) products or similar instruments for insure lenders against project risk. This practice can significantly reduce the benefit the government gains in transferring to the senior lenders a part of its risky exposure to the concessionaire s performance. (b) Bilateral ODA financing can also introduce distortions in the sub-contracting markets. The tying of an ODA loan to the supply of goods and services of a national origin restricts the competitive tendering for the procurement of MRT consulting and construction services and systems supply. An opportunity can be created for vendors to use the concessionary pricing of a loan to build in an additional margin on goods and services. In the long term, the practice can create a situation where, in a narrow field, the potential suppliers tacitly agree to live and let live instead of competing, with adverse effect on supply prices and therefore VfM. (c) Partnering developed over time among financiers and sub-contractors while having a potential to be an effective project risk management tool for a concessionaire can be abused if allowed to develop into a collusive arrangement, which in the end threatens VfM. 44. PPP procurement capability. Ability to procure well is important for realising VfM. The balance of opinion, if not of evidence, is that a greater capability is required of the public sector in the procurement of a PPP concessionaire than in a conventional public works procurement. Ad hoc outsourcing for the required skills leads to limited results. For example, legal firms skilled in PPP contracting, forced to make a choice through conflict of interest rules, can tend to opt for working for the concessionaire side rather than government. Institutional capability building is required. 45. Conclusions. Under normal competitive market conditions and assuming a government adequately provided with PPP procurement capability, the value-for-money (VfM) test on the four development options for Line 2 ranks as the best value the concession for private sector operation and maintenance with concessionaire supply of trains and train-related equipment. In 27

169 order of preference based on VfM, the other options are ranked as follows: the private sector O&M concession with government supply of infrastructure and train equipment and systems comes second; the SOE option third; and the BOT option last. It is emphasised that this result assumes that competitive markets are in place for the private sector concessionaire, subcontractors and financiers. The government procuring authority is recommended to take precautionary measures in preparing a concession contract for bidding. For instance, options should be kept open and market soundings be taken for any sign of potential market failure (only one bidder) in the lead up to tendering. Finally, having adequate PPP procurement capability is crucial to success. 28

170 REFERENCES Asian Development Bank, 2006, Integrating Mass Rapid Transit in Bangkok (TA 4676-THA), 2007a, Integrating Mass Rapid Transit in Bangkok Phase II: Final Report (TA 4904-THA), 2007b, Promoting PPP in Bangkok Mass Transit and Other Infrastructure (TA 4676-THA) Flyvbjerg B, Skamris Holm M, Buhl S, 2002, Underestimating Costs in Public Works Projects, Journal of American Planning Association, 68:3, 2005, How Accurate Are Demand Forecasts in Public Works Projects?, Journal of American Planning Association, 71:2 HM (UK) Treasury, 2002, Review of Large Public Procurements in the UK, study by Mott MacDonald, 2003, The Green Book: Appraisal and Evaluation in Central Government. 29

171 APPENDIX 1. MODEL OPERATION AND MANAGEMENT 1. The model will be found useful in three main areas: in financial appraisal, in financial planning and budgeting, and in procurement/concessioning. How the model can be operated and managed is best explained in the context of its application in each of the three areas. I. The Model and Financial Appraisal 2. Financial appraisal is a part of the set of activities making up the public sector Table A1. Using the model for financial appraisal Element Description Comment Data input The key input data are the following. 1. Definition of scenarios and constituent lines and line segments; 2. Forecast of patronage and revenue; 3. Estimated capital costs and investment schedules; and 4. Estimated O&M costs. A first-order forecast or estimate of the key model input variables is sufficient for the strategic and development programming purposes. However, patronage impacts MRT capacity planning besides revenue; so demand forecasting error has a potential multiplier effect. Model output/results Model operating steps The following are the key indicators. 1. Financial internal rate of return (FIRR) calculated on the free cash flow projection, some times called the project FIRR ; 2. Present value (discounting at the social time preference rate) of the projected free cash flow steam this measure of viability is indispensable when the FIRR measure cannot be obtained (which happens for instance when the free cash flow series is all negative); and 3. The projected time series of free cash flow or some form of proxy (such as EBITDA earnings before interest, tax, depreciation and amortisation) for detail such as a time-profile of the viability gap or cost-recovery shortfall. 1. See that the model is populated with the correct input data (if the factory-default set of input, supplied with the model, is not being used); 2. Select Scenario and Case; 3. Select the SOE concessionning option in the 6_Other_input worksheet; 4. Go to the 13_Results worksheet, Public Sector column, to look up the financial viability indicators. Financial appraisal involves the revenue, O&M cost and investment models but not the funding model (financial appraisal preceeds considerations of funding). Source: ADB 2006 strategic planning and development programming and preparation of the MRT network. In financial appraisal the aim is to obtain quantitative indicators of the financial viability (or self- 30

172 sustainability or ability to recover cost) of an element of a contemplated MRT network. These indicators are contrasted and compared across network scenarios, or across elements of a single scenario, to help assess potential financial impact, including implications for public funding, and in this way supply information to the process of strategic decision-making and shaping of the MRT network programme. To serve the purposes outlined above, the required characteristics of the financial model key data input and the input itself, the model results or output and the steps in operating the model are shown in Table A1. II. The Model and Financial Planning 3. Whether as a part of the business case preparation, which can take in a ten- to thirtyyears time horizon, or of a medium term five-year forward view, or whether for institutionalised budgetary purposes, effective financial planning for an MRT project depends on a clear view of the complex inter-relationships among many factors. The financial model provides a structured framework for viewing the quantitative aspects of these complex inter-relationships. It sorts the factors involved and their relationships into four groups, under the designations: revenue model, O&M cost model, investment model and funding model. The output of the four main models supply the exogenous or input lines to the pro forma financial statements. a. Revenue model 4. Relationships. Revenue is made up of the proceeds of fare collection and rental of space for advertising and other commercial purposes. The non-fare revenue is modeled as a simple percentage of fare revenue. Daily fare collection is the product of forecast daily boarding passengers and the fare tariff. Typically the forecast is based on a working day. With integrated fare (only one flagfall is paid regardless of the number of transfers between lines), the fare collection consists of a flagfall fare element and a distance-related element. Flagfall fare collection is the flagfall fare times the number of boarders net of transfer passengers. The flagfall fare collection may be distributed or shared between lines in the network in proportion to each line s share of passenger-kilometres out of the network total passenger-kms. Distance fare collection is distance(km)-related fare times the average trip length in km times the number of boarders. Annual fare revenue is the daily fare collection annualised across the number of working-day equivalents in a year (typically, fewer passenger trips are expected on non-working days). The model takes 330 days as the annualisation factor. 5. Model input. Daily boarders, the subset boarders transferring from another line, average trip length (passenger-kms i.e. kilometres travelled by boarding passengers divides by the number of boarders), fare tariff distinguishing flagfall and distance-related fare elements, annualisation factor (330), non-fare revenue percentage (7%). 6. Model output. Daily and annual fare and non-fare revenue. b. O&M cost model 7. Relationships. Operation and maintenance cost is the sum of the costs to provide the six MRT operating and infrastructure resources shown in Table 6, where an individual resourcerelated cost is modelled as the annual cost to provide one unit of the resource in question times the resource quantum. The unit costs are explained in 3.2. The operating resources, namely the train- and car-hours, and train- and car-km, ultimately depend on certain parameters set in the train-operating plan. The parameters are: (i) operating speed (km per hour) during peak, offpeak hours; (ii) daily operating hours broken up into peak and off-peak; (iii) frequency of trains per one peak, off-peak hour, usually expressed as the time in minutes between two successive 31

173 trains going in one direction ( headway ); (iv) Line length (km). Daily train-hours respectively car-hours are daily train-kilometres respectively daily car-km divided by the train operating speed, the car-km being the train-consist (e.g. three cars per train) times the train-km. Daily train-km are the sum of the daily round-trip distance i.e. two times the line length travelled by peak or off-peak trains, where the number of peak, off-peak trains are the number of peak, off-peak trains per hour multiplied by the respective number of peak, off-peak hours. The number of e.g. peak trains per hour is 60 (minutes) divided by the peak headway. Given a daily service, the quanta of daily operating resources are annualised at 365 days. 8. Model input. Unit O&M costs per MRT operating or infrastructure resource, number of stations, line length, operating speed peak/off-peak hour, daily operating hours peak/offpeak, headway peak/off-peak, annualisation factor 365 days. 9. Model output. Daily and annual O&M cost. c. Investment model 10. Relationships. The engineers estimate of the cost to create the MRT infrastructure and operating assets including any necessary land acquisition, given as a constant price number (e.g. in years 2005 Baht), together with input on the construction schedule, yields the basis for forecast capital spending during the construction period. Conversion from constant to current prices makes use of an assumed 3% annual price escalation factor. The model utilises the engineers estimate for all categories of assets except rollingstock, for which it makes use of just the engineers price estimate and specification of car passenger carrying capacity. The acquisition schedule for units of rail cars is generated by the model using peak passenger demand data from the patronage forecast, car pacity, and parameters from the train operating plan. The model is constructed to allow for construction scheduling variability. To specify a construction schedule, input (in worksheet 8_Schedule) construction start and completion dates and an estimated progress of work/disbursement pattern. The engineers cost estimate covers the hardware. An allowance is made for the project software cost project development and project management consulting service as a percentage (typically 5%) of the estimated hardware cost. Interest during construction, a capitalised expense, is also a capital cost in private sector projects. Within the typical time horizon of a business case, more capital cost is incurred to replace exhausted E&M systems including intelligent transport systems or ITS, refurbish used rail cars (after 15 years at a cost equal to one-third of the acquisition cost) and augment the rollingstock fleet to serve a growing patronage. The model generates a depreciation schedule for all categories of capital assets, based on their economic life (typically, 50 years for civil works including trackwork, 30 for rollingstock and depot and 15 for fixed E&M systems) using the straight line method. The software cost is combined with the cost of hardware by category and depreciated together. 11. Model input. Engineers estimate of capital cost during the construction period, detailing at least the cost for each of the asset categories of civil works (viaduct and/or tunnelling and stations and trackwork), fixed E&M systems including ITS, depot, and rail car price and passenger capacity (worksheet 2_Capital_cost_input); construction start and completion dates and disbursement schedule; peak passenger demand (4_Passenger_input); train operation plan key parameters (5_Train_op_input); economic life of assets by category and depreciation policy. 12. Model output. Projected annual capital expenditure and annual depreciation. d. Financing model 32

174 13. Relationships. What roles are decided on for the public and private sectors in an MRT project have a bearing on the way the project is financed At one end of the spectrum is the role combination in a Gross Cost Concession approach, which implies government direct funding for all the assets, while at the other extreme there is the total private funding of all the assets consequent upon a Build-Operate-Transfer or its variant Build-Transfer-Operate concession (such as the BTS situation). In between would be a DBOM (Design-Build-Operate-Maintain) concession, which implies some form of delayed payment by the public sector for assets designed and built and initially financed partly or wholly by a private sector concessionaire. The model also includes a pure public sector investment and operation typical of a state owned enterprise (SOE) as a technical option. Through the worksheet 6_Other_input, the model is configured to accept any one of a selection of five concession forms as an input. The model generates debt-servicing schedules (i.e. annual interest payment and repayment of principal) given an input interest rate and debt repayment structure. For the private sector, inputting a leverage ratio (i.e. debt as a percentage of value of assets being funded) for the initial project investment (respectively investment during the operating stage) automatically determines the amount of debt funding for investment. Meanwhile, in terms of working capital, accounts receivable are based on a 60-day collection time, accounts payable are based on a thirty-day payment period for expenses connected with O&M cost, and an allowance for stocks (spare parts principally) is made equal to 0.25% of gross fixed assets value. 14. Model input. Key concession forms and associated method of funding MRT assets; interest rate and debt amortisation structure; private sector leverage ratio and collection and payment periods as well as a stocks/gross fixed assets ratio and corporate income tax structure. 15. Model output. Annual debt servicing schedule (both interest and principal payments); private sector debt principal and input equity, accounts receivable, accounts payable, stocks, annual tax payment. III. The Model in Procurement/Concessioning 16. Suppose that some element of the MRT network has been approved for implementation under a chosen concession type and that the time has come to address the question of procurement of the MRT capital assets and operation and maintenance. Here, too, the model can find useful application. The model has been developed to simulate the implementation of MRT network elements under four broad types of concession: (i) Gross Cost Concession; (ii) Design-build-operate-maintain (DBOM) Concession; (iii) Net Cost Concession; (iv) Designbuild-operate-transfer (DBOT) Concession. Fare and non-fare revenues do not figure in the concession in the first two concession types, the concessionaire being compensated directly by the government. With the remaining two concession types, the concessionaire finds its compensation out of its fare and commercial revenue collection plus government viability gap funding to meet any shortfall. The model incorporates pro forma financial reporting for the different concessions as highlighted in Table A2. To select the concession form with which to operate the model, enter the appropriate concession code in the worksheet 6_Other_input. Use the Index to navigate among the public/ private sector pro forma financial statements and supporting schedules in the worksheet 12_Financials. 17. Table A3 illustrates the model s potential application in the main stages of procurement/ concessioning of an MRT line or larger network element. 33

175 Table A2. Illustrative MRT financial reporting under four concession types Public sector financial statements Gross Cost DBOM Net Cost DBOT MRT Assets BSA 1 Fare and nonfare revenue ISR 3 Concessionaire operating charge ISE 4 MRT Assets BSA Liability under HP contract BSL 2 Fare and non-fare revenue ISR Concessionaire operating charge ISE MRT Assets BSA Concession fee receipt ISR, or Viability gap compensation paid ISE MRT Assets BSA BOT concession liability BSL Concession fee receipt ISR, or Viability gap compensation paid ISE Private sector (concessionaire) financial statements Concessionaire operating charge ISR O&M cost ISE Claim on public sector under HP contract BSA Concessionaire operating charge ISR O&M cost ISE Fare and non-fare revenue ISR O&M cost ISE Concession fee payment ISE, or Viability gap compensation ISR Project capital cost BSA Fare and non-fare revenue ISR O&M cost ISE Concession fee payment ISE, or Viability gap compensation ISR Notes: 1 Balance sheet asset; 2 balance sheet liability; 3 income statement revenue; 3 income statement expense Source: ADB

176 Table A3. Using the financial model in MRT procurement/concessioning Illustrative objectives and tasks Financial model application Source: ADB 2006 Preparation and issue of request for proposal 1. Set procurement objectives: required MRT network element at best value for money (VfM); government control of fare policy; consistency with MRT network-wide integrated fare and ticketing arrangement. 2. Determine bid variable(s) which would best secure objectives in Determine bid evaluation method to secure objectives in Prepare bid terms of reference, scope of work and associated documentation to go out with request for proposal 1. In the VfM review, use the model (with updated input) to determine the base-case, or most probable cost, of e.g. turnkey MRT capital assets; operation and maintenance in a Gross Cost Concession; singlepackaged capital assets and operation and maintenance in a DBFOM (design-buildfinance-operate-andmaintain) concession etc. (N.B. the financial model alone cannot complete the VfM review, which further requires analysis and pricing of the risks under alternative public-private risk allocation scenarios.) 2. The TOR should require that proposals include submission of a financial model, in both electronic and hard copies, of a specified format, to support the financial bid. Procurement/concessioning stage Proposal evaluation 1. Evaluate and rank proposals using the chosen evaluation method*. 2. Short-list highest-ranked proposals. * The potential VfM of a proposal depends on these key factors: qualification (capability and experience) of concessionaire; risks transferable to and incentives of concessionaire. For each proposal the model (with suitably updated input) can help to answer the following questions. 1. Is the bid supported by sound financial planning? 2. Are the bidder s model input data reasonable/realizable? 3. How are the bidder s prospective returns on investment (and therefore its incentive to help produce the VfM)? Negotiation of concession contract Negotiate with shortlisted proposals, starting with the highest ranked, in order to better achieve the set procurement objectives. At each step of the negotiations, through appropriate input updating, the model can be used to work out the financial implications for each side of the negotiating table. 35

177 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF Appendix C: Stakeholder Feedback and Implementation Arrangements: Institutional Options Working Paper 24

178 Asian Development Bank Public Private Infrastructure Advisory Facility TA 4862-VIE: Preparing the Ho Chi Minh City Metro Rail System - PPIAF Study - Working Paper Stakeholder Feedback and Implementation Arrangements: Institutional Options March 2008

179 Table of Contents Summary... i 1. Introduction Background and Purpose Development Context Current Institutional and Regulatory Arrangements National and Local Responsibilities National Local Current Funding Arrangements Key Policies and Regulatory Provisions Policy Key Laws Laws Governing Involvement of the Private Sector in Urban MRT Operations and Related Investment Other Relevant Laws and Decrees Transport Agencies and Functions in HCMC A Framework for Analyzing Institutional Functions A Hierarchy of Transport Organization Structuring Transport Activities Diagnosis Factors Affecting the Role & Structure of an Apex Public Transport Agency and Relevant Functions Policy Framework Hierarchy and Structure Key Public Transport Management Functions Other Issues Potential Institutional Arrangements for Delivering Integrated Public Transport Institutional Options Assessment of Options Building Technical and Managerial Capacity Legal Basis for Integrated Transport or Integrated Public Transport Some Lessons on Organizational Structure for Efficient MRT Overview of Lessons from Other Cities Guidance for HCMC s MAUR...39 Appendix A: Trends in the Management & Provision of Public Transport...44 Appendix B: Review of Other Arrangements for Management & Provision of Public Transport...46 Appendix C: Scoping of the Possible Content of an Integrated Public Transport Law...59 References and Bibliography...63 i

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

181 Summary Si

182 PPIAF TA for HCMC MRT Summary 1 WORKING PAPER STAKEHOLDER FEEDBACK & IMPLEMENTATION ARRANGEMENTS: INSTITUTIONAL OPTIONS 4 Objectives for PPIAF TA 1. Identify options for private sector participation in MRT 2. Assess benefits of each option 3. Financial analysis & financial model 4. Implementation approach contractual including PPP & institutional for whole MRT network 2 9 March

183 Problems if MRT is not treated as a Network 3 Poor physical integration: - of MRT lines - with bus - with urban environment Inconvenient & unsafe travel long transfer between MRT lines 9 March 2008 Problems 4 Bangkok MRT fares differ for each line Bht 25 on BTS Bht 22 on Blue Line Bht 32 for BTS & Blue Line Bht 30 for Blue Line & BTS 9 March

184 Problems 2 smart card ticketing systems are NOT compatible 5 Card A Not compatible Card B 9 March 2008 Principles for Integration & Efficient Operations MRT is a network of services not separate MRT lines O&M of MRT is just as important as the infrastructure Whole of life cost of O&M will be equal to initial infrastructure cost Common ticketing and fares In London, Hong Kong and Singapore etc ticketing and fares are separated from the O&M for each line Common approach for MRT O&M on all lines in the network To ensure integration, accountable operations & policy control A standard contract/concession type for any operator (private, public or JV) O&M concession should exclude ticketing system Integration of MRT and other public transport Need a coordinating authority at PC level eg Singapore LTA, London TfL Need legal basis for integrated public transport 6 9 March

185 Provision and Management of Public Transport recent experience 7 H i s t o r i c Dispersed public transport service provision - limited role by government for service planning & integration - services & sometimes infrastructure provided by the private sector - limited or no government subsidy Development approach in the past Objective: Improvement & integration of public transport Centralized public transport authority - government agency - integrated service planning & provision - services provided by the authority or other government agencies - substantial subsidies needed Trend in 1990s, eg Europe, S. America, NZ & Australia Objective: innovation & reduced unit costs through effective use of the private sector Alternative direct route for change Public transport management authority - government agency - integrated service planning (with operators and others) - services provided by private operators under contract to the authority - various forms of payment arrangements between the authority and contractors 9 March 2008 Structuring Authority Functions Level of Government 8 Strategy Level Function Agency For the city Of the city In the city Based on World Bank (2002) National roads Public enterprise Tax levels Intergovernmental transfers Regulation & competition policy Vehicle registration & safety Urban structure planning Strategic transport planning Local road management Public transport planning & procurement Traffic management Law enforcement Road safety Public transport operations Road construction & maintenance National ministries Local / regional government Local government/ Private 9 March

186 Diagnosis GVN s agencies undertake those for the city functions such as national railway lines and highways as is desirable HCMC PC is very heavily involved in of the city as is considered desirable by Figure 2.2 dealing with essentially local functions for HCMC citizens Local HCMC firms and agencies are also extensively involved in in the city functions as is desirable Conclusion: HCMC is fortunate that the PC has a fair degree of autonomy for key local functions 9 9 March 2008 Structuring Authority Functions - Institutional Focus is on clear separate policy, regulation, system management & operations (ie service delivery) 10 Policy & strategy Policy framework Strategic planning Regulatory policy Financing and pricing policies Performance monitoring Regulation Setting standards Registration & licensing Enforcement Effectiveness doing the right thing Reports Informs Program management Project planning Investment programming Project, financing & other approvals Design, tendering, contracting Concessioning Monitoring & quality assurance Service delivery Infrastructure Services Information Efficiency doing the thing right 9 March

187 Diagnosis Policy and strategy can be strengthened and more closely linked to budget processes Regulatory functions can be improved. The capacity/authority of public regulatory agencies need to be strengthened Program management can be improved eg bus subsidies are growing rapidly Regulatory and service delivery functions are compromised by involvement of the PC in both Service and other contracting delivery can be improved 11 9 March 2008 Structuring Authority Functions - Policy Needs 12 Key policy needs that influence the role and nature of institutions in the transport sector are: Defining desired outcomes Linking land use and public transport development Coordinated, multi-modal transport planning Public transport service standards and planning Integration of public transport services Investment planning and decision-making Role of the private sector 9 March

188 Key Public Transport Management Functions 13 Core functions for an Authority that includes MRT are: project planning and programming, including preparation of business case for projects, coordinating projects, and budget programming coordinating requests for funding for infrastructure development and, where needed, subsidies for service provision infrastructure delivery, which will includes establishing financing arrangements, the manner for delivering projects, and taking account of lifecycle costs and management public transport services delivery through concessions (to private sector or other) or other business-like arrangements fare policy, ticketing, and revenue management, which would be a minor activity if there was no integrated fares and ticketing but is otherwise more complex passenger information and marketing 9 March 2008 Other issues 14 Level of government. HCMC PC &other provincial governments in the region could be involved in the Authority through an advisory committee. Community involvement. Can be achieved through, for example, their involvement in various advisory committees of a Authority. Metro rail ie MRT expertise. Special expertise is needed to manage the development & operation of MRTbecause of its special characteristics Funding policy. Government will need to continue finance fixed infrastructure for future rail lines in HCMC. Fare revenue will be inadequate to recover all operating and maintenance costs Extent of public transport integration. The effectiveness of an MRT system will be maximized through integration with other public transport services and integration of ticketing and fare systems for public transport. Achieving this adds technical and institutional challenges, and requires the Authority to have a broader capacity than simple delivery of rail mass rapid transit lines with private or public delivery of rail services. 9 March

189 4 Institutional Strengthening Options Option 1: Strengthen MAUR 15 Option 2: Interim Public Transport Authority Option 3: Integrated Public Transport Authority Option 4: Integrated Transport Authority Increasing integration 9 March 2008 Option 1: Strengthen MAUR 16 Advantages: MAUR exists Has breadth of powers needed Transport policy set by TUPWS Clear delineation for MRT policy setting & service procurement Disadvantages Linkage with bus & other policy can be strengthened 9 March

190 Option 2: Interim Public Transport Authority 17 Features: Same as Option 1 Except improved outcome possible through PC level coordination 9 March 2008 Option 3: Integrated Public Transport Authority 18 Features: Similar to Option 1 but MAUR converted to a Public Transport Authority Improved coordination outcome likely 9 March

191 Option 4: Integrated Transport Authority 19 Features: Completely integrated transport authority 9 March 2008 Closing Comment HCMC PC has a single Authority for MRT already 20 The PPIAF team will work with the HCMC PC including MAUR staff to refine the proposed options for effective & efficient MRT development 9 March

192 1. Introduction 1.1 Background and Purpose The People s Committee (PC) of Ho Chi Minh City (HCMC), Viet Nam has initiated studies to develop a rail mass rapid transit (MRT) system for the City based on the current MRT Master Plan (as approved in January 2007). Two lines (MRT2 and MRT3) have been proposed for Asian Development Bank (ADB) funding with another line (MRT1) to be financed by the Government of Japan. The Government of China, is a developing a proposal for an MRT line, there are other proposals including one from China for MRT, Malaysian interests to develop a monorail, and for a French consortium to develop a tram route. ADB has mobilized a PPTA and selected a firm for the following components of the project preparation for MRT Lines 2 and 3. The PPTA study, which commenced in May 2007 and is to be completed in May 2008, is responsible for providing: An optimized MRT Master Plan which integrates the currently proposed MRT lines into a cohesive network with other modes, identifies required supporting policies, and develops design parameters for the two project lines. A feasibility assessment and preliminary engineering design for the two project lines. The PPTA must confirm the engineering feasibility, and identify social and environmental impacts for accurate cost estimation and financial appraisal. A plan to support project implementation, including institutional and staffing arrangements, capacity building, financing/funding options, and implementation program. In parallel, ADB is mobilizing a grant from the Public Private Infrastructure Advisory Facility (PPIAF 1 ) to optimize private sector participation in MRT 2 and 3, and to assist the HCMC PC to develop appropriate short term and longer term implementation and management arrangements for MRT in the context of wider urban transport. The scope of the PPIAF technical assistance (TA) therefore covers developing (i) a framework for considering private sector participation in implementation and operation of the Project; (ii) a value-for-money analysis for implementation approaches that involve varying degrees of private sector participation, (iii) a detailed financial model reflecting the preferred approach and measuring the performance of the project from the points of view of the government and private sector participants; and (iv) a stakeholder feedback and a description of necessary institutional and contractual arrangements given the preferred implementation approach. This PPIAF TA draws on detailed information on project costs, patronage and revenue prepared by consultants undertaking the PPTA. The results of its work will be presented in conjunction with the work of the PPTA to ensure an integrated and complete business case that the HCMC PC and ADB can use to direct implementation and ongoing operations. 1 The Public-Private Infrastructure Advisory Facility (PPIAF) is a multi-donor technical assistance facility aimed at helping developing countries improve the quality of their infrastructure through private sector involvement. For more information on the facility see the website: < 1

193 While the MRT system will be developed by the PC, the GVN will also be involved through various approval processes and possibly financing also. It is therefore necessary to establish in detail the roles for various agencies of these governments for project approval and implementation, and the manner in which integrated MRT development in HCMC will be managed. This Working Paper presents the initial proposals for appropriate institutional arrangements in HCMC based on identified needs, and an analysis of the strengths and weaknesses of the current situation. The focus of the work is on the institutional arrangements for the development and operation of optimal MRT in the long term taking into the needs for integration with other public transport and land use developments. The appropriate institutional arrangements need to be planned at the same time the possible modalities for financing and operation are being considered. Hence, this Working Paper on institutional arrangements was prepared in conjunction with the separate but complementary paper on Private Sector Participation Options. 1.2 Development Context With a population of approximately 6.1 million in 2004, HCMC is the largest city in Viet Nam and its economic hub. HCMC has a total administrative area of 2,095 km2 covering 19 urban and five suburban/rural districts. The average population density is about 2,900 inhabitants per square km with a central area density of around 45,000 inhabitants per square km (JICA 2004). Approximately 2.3 million people were estimated to live in the three adjoining provinces of Dong Nai, Binh Duong, and Long An which make up the Greater HCMC region which is illustrated in Figure 1.1. Population grew at a rate of 2.5% pa from 1989 to 2001 to reach a population of million in Annual growth appears to have accelerated from 2001 to 2004 as shown in Table 1.1 but it appears the apparent quickening is due to possible definitional changes over time and differences between data sources. In this regard, MVA Asia (2005) stated that: Over the last few years, HCMC population growth has increased from 2.18% in 2000 to 8.65% in 2004 Natural growth has been reducing over the years while migration growth has increased. A large part of the Year 2004 apparent growth might be due to data being collected from different data sources explaining the large increases between Year 2003 and Year

194 Figure 1.1: Greater HCMC Area Source: JICA (2004) ie HOUTRANS Table 1.1: Historic Ho Chi Minh City Population Population Average population ( 000) 5,175 5,285 5,449 5,630 6,117 Overall growth rate % pa with components of: 2.18% 2.13% 3.10% 3.32% 8.65% Natural growth 1.37% 1.3% 1.27% 1.15% 1.1% (est) Migration growth 0.82% 0.77% 0.90% 1.20% 1.4% (est) Other growth 0.00% 0.06% 0.93% 0.97% 6.15% (est) Source: MVA Asia 2005 Population in the three adjoining provinces which in addition to HCMC make up Greater HCMC grew from million in 1995 to million by 2002 according to HOUTRANS (JICA 2004) which represents a growth rate of 2.0% pa. Residential developments and industry are spreading from the northern and northeastern parts of HCMC in the southern areas of Binh Duong province and in and around Bien Hoa City of Dong Nai province. Population for the region was forecast to reach 13.5 million by 2020 with 10 million in HCMC by HOUTRANS (JICA 2004). MVA Asia (2005) for TEWET s 2005 demand and revenue update took a more pessimistic view assuming the 2020 HCMC population would likely reach 7.7 million up from the estimate of 7.2 million for the region in the 2003 study. Currently, the HCMC region spreads out over an area roughly 50km in radius with development beyond the central area concentrated along major road corridors with large areas of agricultural or low intensity use in-between. The current dispersed structure has been made possible by the relatively high level of motorization, specifically motorcycle ownership as described below. The PC s plan for HCMC is to formalize and intensify the current mono-centric urban structure into a poly-centric arrangement with several activity or business centers located 3

195 around the central area along key corridors. Major expansion of the current road network is also proposed: 46 km of elevated urban expressways are intended to strengthen accessibility of the city center; The primary arterial network would be extended from 206 km (within HCMC) to 476 km forming the backbone of the urban area road network. Projects comprise construction and improvement of three ring roads, widening of existing primary roads, and construction of new roads; and The secondary road network would be greatly improved overall in order to form a basic traffic distribution network. These road projects without major travel demand management measures are considered likely to disperse land use, and make private travel more necessary and more attractive. Current trends are for continuing rapid growth in incomes and motorization, increased urbanization, and associated traffic congestion, and related pollution (local and global) and crashes, which will to some extent reduce the productivity of region s, and therefore, Viet Nam s economy. Addressing this considerable challenge requires as its foundation appropriate institutional and regulatory arrangements to coordinate land use and transport development management, formulation and implementation of transport policies and infrastructure, and the delivery of efficient integrated, multi-modal transport services. 4

196 2. Current Institutional and Regulatory Arrangements Central and local government policies on transport infrastructure provision, in some cases its operation of services, and its regulation of transport infrastructure and services undertaken by the private sector have an important influence over transport outcomes. Authoritative plans with realistic financing, sound institutional and regulatory arrangements, and adequate resources (human and financial) are therefore important for obtaining a well planned transport system that is constructed to a high standard, is operated and maintained efficiently, and provides attractive services that are financially sustainable. This section of the Working Paper provides a review of current relevant laws, policies and plans and a description and analysis of current institutional and regulatory arrangements. 2.1 National and Local Responsibilities Vietnam has a unitary system of government characterized by dual subordination 2. Central government has decentralized considerable responsibilities to provincial and local governments over the last decade. Hence, HCMC has considerable powers for developing policies, plans, making investments, raising finance and regulation and operation of transport services. Nevertheless, while considerable power is subordinated to local governments moving decisions and outcomes closer to local communities, there remains the need to refer back to central government for comment and often approval for key decisions. People s Councils (PC) are elected at the provincial, district and commune levels with the last elections held in April The People s Council is the highest state institution at the regional and local levels and is responsible to the electorate at each level and the National Assembly at the national level. The People s Council elects a People s Committee to serve as the executive institution. People s Councils have formal practical oversight over People s Committees (TI, 2006). Ho Chi Minh City is a municipality that exists at the same level as Vietnam's provinces. It therefore has a similar political structure to its provinces, with a People's Council of 95 elected deputies, and a People's Committee (PC) of 13 members chosen by the council, being the principal local governmental entities. The relevant roles and responsibilities for planning of transport and so on of national and HCMC and other local agencies is described below based on World Bank (2005): National MOT prepares long term transport strategies, five year plans for inclusion in the Public Investment Program (PIP) and one year plans for inclusion in the annual State Budget for national transport infrastructure. MOT s Transport Development Strategy Institute (TDSI) develops the long term transport sector strategies and plans. These plans typically identify investments and total costs for the next five to ten years and are prepared to meet the development goals without much attention to budget constraints. Provincial and city governments participate in the identification and definition of national projects in their provinces. The long term transport strategies and plans are used as a basis for preparing 5 year investment programs that also include annual projected expenditures and potential sources 2 Oversight and accountability function according to a system of dual subordination. Ministerial departments and agencies at each level of government report horizontally to the associated People s Council and vertically to the parent agency, depending on the particular sector in which they operate (TI 2006). 5

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

198 Table 2.1 summarizes the key agencies related to land and in particular urban transport and the roles they play. Table 2.1: Policy, Regulatory and Oversight Responsibilities Sector Ministry/Administration Responsibility Ministry of Transport (MOT) Through its different modal administrations and departments (a) plans, manages and maintains national infrastructure through its different departments and administrations; (b) assists local governments in developing transport plans and selecting transport projects; and (c) manages public bus transport plans by approving cities master plans Transport Develops long and medium term transport sector strategies Transport Development Strategy and plans (in collaboration with modal administrations) Institute (TDSI)-under MOT Urban Transport: HCMC Department of Planning and Investment (DPI)-under MOT People s Committees Transport and Urban Public Works Services (TUPWS) Transport and Industry Management Department (TIMD); and the Management and Operations Centre for Public Transport (MOCPT). Integrates investment plans prepared by modal administrations for submission to MPI for inclusion in the PIP and to MOF for inclusion in the State Budget. Approves key issues such as fares, opening and closing of routes, schedules and subsidies. Develops cities transport strategies; Plans and manages construction; Maintains urban transport infrastructure; Manages bus transport; Coordinates planning and implementation of traffic management with Police Railways National roads Traffic Police under the Public Security Department HCM City Management Authority for Urban Railways Vietnam Railways Administration (VNRA) under MOT Vietnam Railway Corporation (VRC) Vietnam Expressway Corporation (VEC)-under MOT Vietnam Road Administration (VRA) under MOT VRA operates through 4 Regional Road Management Units (RRMUs) Designated Provincial Departments of Transport (PDOTs). Enforces traffic management including the operation of traffic signals in coordination with TUPWS Plans / implements rail-based mass transit plans and has responsibility for managing and arranging for operations and maintenance. Plans and manages the development of the sub sector Regulates the sub-sector including national and other rail systems including metro or MRT in cities and provinces. Provides oversight of City and Provincial rail and MRT Master Plans and is charged with approval of technical standards and safety of rail and MRT systems. Sole provider of rail services on national rail network Manages enterprises that carry out construction and maintenance activities, and other commercial activities unrelated to rail Mandated by MOT: (a) develop, finance, manage and maintain expressways; (b) collect toll revenues; and (c) invest in off road construction and services (such as rest areas) Plans and manages the development of the national road network. Maintains the national road network Mandated by MOT/VRA to manage half of the national road network Local roads: (Provincial, District and Commune) VRA Provincial Departments of Transport (PDOTs), Performs a central planning and advisory role for the local road network. Develops provincial, district and commune transport strategies. Plans and manage the construction of provincial road networks. Maintains provincial road networks. Supports district and commune governments in planning the maintenance of their networks Approves provincial transport strategies and plans. Provincial People s Committees (PPC) District Departments of Transport Approves district and commune transport plans. (DDOTs), and Communes Peoples Committees (CPC) Support Vietnam Land Administration Approves Category B and C projects (less than VND 400 bil- 7

199 Sector Ministry/Administration Responsibility (VLA) lion) before MOT submission to MPI if land falls under its management. Ministry of Natural Resources and the Environment (MNRE) Reviews and approves Environmental Impact Assessments of national transportation projects. Ministry of Planning (MPI) Approves Category B and C projects (less than VND 400 billion) for inclusion in PIP and State Budget. Ministry of Finance (MOF) Implicitly approves maintenance budgets of MOT s modal administration (except for VRC) before inclusion in the State Budget. Prime Minister s Office Approves Category A projects (more than VND 400 billion) Administrative authority over VAC, Vinalines, VRC, Vinashin. National Assembly Approves projects of national importance such as national security and defense projects. Implicitly approves all national transport investments included in the annual State Budget. Source: Edited from Table 2, Annex 1 of World Bank (2005). 2.2 Current Funding Arrangements More generally the capacity of HCMC PC to meet recurrent obligations is of interest. All taxes and all charges are administered at national level including property and fuel taxes. There are no local taxes. Provincial and City tax departments are responsible for collecting taxes. Initial enquiries indicate that information relating to the HCMC PC s capacity to meet ongoing financial obligations is currently sparse: The PC has four main sources of income: (i) grant allocations from central government which represent its share of national tax collection 4 according to agreed formula (ii) own source revenues, including (a) profits from its own business activities, and (b) bonds etc that it raises and which it must in time repay; (iii) grants from the national government (which will include some IFI finance); and (iv) loans from IFIs to the national government that are on-lent to the PC and which the PC must repay. Business activities (Item (ii)a) may include development or auction of underutilized lands but the potential to raise significant income from this source appears to be limited as considerable land holdings are under the control of State-owned enterprises and 80% of revenue that can be realized from such activity must be remitted to MOF which is likely to reduce the enthusiasm for such projects. The City may also develop or participate in commercially-oriented projects such as toll roads which if successful may generate returns. The Ho Chi Minh City Infrastructure Fund for Urban Development (HIFU) 5 managed the first municipal bonds (Item (ii) b) issued by the HCMC PC. In a loan approved in June 2007 the World Bank will provide a line of credit to HIFU to invest in cost recovery 4 The revenues from some taxes are retained 100% at the central level, some other taxes are assigned 100% to provinces, and revenues of remaining taxes are shared between the central government and the provincial governments where the taxes are collected. District and commune governments can collect certain fees such as waste collection and school tuition fees, but there are no local taxes. It is understood that around 15% to 17% of all taxes collected in HCMC are assigned to the PC for funding of local administrative costs and maintenance activities. 5 The Ho Chi Minh City Infrastructure Fund for Urban Development (HIFU) was established in 2003 to aggregate and managing funds from a variety of sources, to finance a range of infrastructure projects and to provide a legal structure for organizing joint ventures with private investors (Coulthart et al, 2006). 8

200 oriented municipal infrastructure investments in partnership with the private sector. In identifying potential investments HIFU will work with the Department of Planning and Investment (DPI) and other departments to identify investment needs in HCMC, as described in HCMC master plan, which can be financed via public private partnerships. HIFU will then work with the city departments to put in place effective project structures and then invite private investors to participate in the projects (World Bank 2007). In November 2007, the Chairman of HCMC PC requested HIFU to be the key City Agency responsible for arranging finance for MRT Line 2. Other sources of income include revenue from equitization of State Owned Enterprises. The amount of revenue received from this source by HCMC is unknown but in general for Viet Nam the amount of revenue is low. Information on budgeted income and expenditure appears to be available for the PC either from MOF or the PC. Budgeted or actual historic outturn expenditure by type may also be available but at the time of writing the PPIAF team has not sighted this information. What is missing is a reliable forward program of committed funding of all types (administration, recurrent expenditure and planned investment) to enable reliable financial planning. This information gap has significant consequences for any reliable assessment of the City s capacity to meet recurrent obligations of MRT or any other equally important project or program. This apparent significant weakness at PC level was described by World Bank (2006) as existing at national level also. This is due to there being no reliable process of forward recurrent expenditure and investment programming (nor the ongoing operating and maintenance liabilities of this investment) at national or local government levels. Further complicating these problems is (a) an identified high need for future urban infrastructure several orders of magnitude higher than in the 1990s (Coulthart et al 2006); (b) lack of realistic integrated sectoral planning, spatial and project planning caused by fragmented responsibilities between and among national and local agencies (c) project feasibility studies of inadequate quality leading to unreliable cost estimates and inadequate prioritization; and fragmented responsibilities for investment versus maintenance and operations. Consequently, Coulthart et al (2006) identified the need for cities and provinces to reduce their reliance on the state budget and to start the transition away from concessional donor financing for urban infrastructure services. This would involve diversification of the financing sources for infrastructure development focusing on increasing the role of the private sector. Detailed analysis of this issue is not within the scope of the PPIAF work. ADB is proposing to carry out a TA on the City s Socio-Development Framework which will include a component on municipal finance. It is noted that as at early 2008, the Ministry of Finance had embarked on preparation of the future investment, funding and implementation plan for MRT in Vietnam. ADB and JBIC have both proposed to Ministry of Finance that IFI lending for MRT infrastructure be given as grants to local governments but finance for trains etc be on lent. 9

201 2.3 Key Policies and Regulatory Provisions Policy As described above, HCMC (and Hanoi) have major responsibilities for city level urban transport although the central (ie national) government retains great influence through its role as the approving authority for major plans and investments. At a national level the Transport Sector Development Strategy (TSDS) to 2020 has been developed to support the ten year ( ) Socio Economic Development Strategy (SEDS) and the Comprehensive Poverty Reduction and Growth Strategy. World Bank (2005) states SEDS strongly endorses the development of public transport services and long term transport planning in large cities and cites the rising rate of traffic accidents as a concern. World Bank (2005) reports that TSDS lists the following policies that govern the implementation of the development strategy including: Targeting domestic and foreign sources of finance, both private and public, and charging users for the construction and maintenance of infrastructure whenever possible. Encouraging private sector participation by speeding up the equitization of stateowned enterprises and separating state management from operations and business. Ensuring transport safety and environmental protection in all transport related business. Utilizing new technologies and processes in construction and operations. For both HCMC and Hanoi a key focus is to promote and develop public transport, and to develop road infrastructure to alleviate congestion, and as appropriate open up new areas for urbanization (World Bank 2005). The city s master plan focuses on bus system development through 2010 and significant investments in urban rail by 2020 and has set the goal of raising the public transport mode share to 20% by 2010 and 44% by rising from around a 5% share in Both cities aim to limit to limit the ownership and use of motorcycles but despite some steps in this direction the overall impact of this policy is likely to be muted. Current transport policies for HCMC are contained in a variety of documents and decrees. MVA (2006) amplified their understanding of current policies of the HCMC PC in relation to public transport: to very significantly increase the number of trips served by public transport, to contain the growth in public subsidies to the public transport system to an acceptable level, to avoid the city having to purchase buses from its own funds in future to encourage the participation of private companies in the provision of urban bus services, and protect the most vulnerable social groups from the adverse impacts of any fares increases. 6 Current demand modelling by the PPTA Team indicate likely mode split may be around 20-25% at

202 Noting that some of the policies were contradictory MVA (2006) concluded that an appropriate compromise will be needed to meet future needs in HCMC Key Laws National and city legislation governs the present provision of public transport services, currently mainly bus, in HCMC. These are described in more detail in the next section. The laws of most relevance to urban rail or urban MRT are: Railway Law 2005 (NA Order No. 35/2005/QH11); and HC PC Decree 119/ 2007/QD-UBND establishing the Management Authority for Urban Railways. Railway Law Within cities the Railway Law 2005 defines relevant types of urban railway as including metro or MRT using a wide variety of technologies. Authority for planning urban railway networks is given to People s Committees (Articles 14 and 15). Master Plans shall be prepared covering a detailed period of 10 years and less definitive further 10 year period. Article 15 states The Provincial People s Committees shall assume the responsibility to formulate urban railway infrastructure development plans after submitting to People s Council of the same level for initial approval and then submit to the Minister of Transport for approval. The authority, which approves railway infrastructure development plans. shall have right to amend the plans when necessary. Ultimately the Prime Minister shall approve the Master Plan. Article 16 on urban railway policies recognizes that urban rail is a key urban public transport mode, that central government will support the total investment for approved railway projects with State budget and each year the Government shall extract an amount from the State Budget to support expenses for public transport services in cities including urban railway transport. Article 58 on basic requirements for construction of urban railway infrastructure reinforces urban railways will be constructed according to technical standards stipulated by the Minister of Transport, that urban railways will ensure the connection to other urban public transport modes and the national railway for easy transit of the passengers. This confirms Article 9 which gives the Inspectorate of the Ministry of Transport responsibility for inspection of railway activities (implies certification of both technical standards and standard of safety). Article 61 on urban railway infrastructure management and maintenance states that people s committees shall stipulate the management, maintenance of the urban railway infrastructure invested by organisations and individuals and that the urban railway enterprise shall be responsible to maintain state financed infrastructure through public tender or public service orders by provincial people s committees. Article 74 on railway transport controlling provides the power to sign to sign contracts with railway infrastructure operators on using railway infrastructure for railway transport; to sign contracts with railway transport operators on supplying controlling and other services related to railway transport. 11

203 Article 83 defines railway business activities as covering railway transport operation and supplying services supporting railway traffic and Article 84 provides for a level playing field to be provided for all operators. Article 85 defines railway infrastructure business as the activity to invest, manage, and maintain infrastructure for selling, giving concession of, leasing or collecting fee from using railway infrastructure system and to provide railway supporting services and other services on the base of exploiting their managed railway infrastructure capacity and that organisations and individuals using railway infrastructures owned by the State or other organisations for their business activities must pay fees or charges for such usages, and further that railway infrastructure invested by the State shall be allocated to enterprises through tender, orders or plans. Article 93 on railway transport fare, price of ticket states that fares for passenger transportation on railways are set by railway transport enterprises thus (railway transport enterprises are interpreted to be operators refer Article 91 on Passenger Transportation Contracts). Where the operator is operating on the urban rail network then to ensure policy control is retained by the PC, the operating contract or agreement between the PC and the operator will need to clarify that the PC sets fares. The review by the PPTA s legal team has since confirmed that fare setting control is retained by the PC. Decree 119/ 2007/QD-UBND establishing Management Authority for Urban Railways, HCMC The Urban Railway Management Unit (known as the Management Authority for Urban Railways) was established in September 2007 by Decree 119. The Authority replaced the previous Urban Railway Management Division under TUPWS. MAUR is also under the guidance of Central Ministries branches and Departments branches of the city. The Decree provides that the Authority is an administrative unit which has to ensure by itself a part of its operation cost; has legal entity; has its own stamp and is entitled to open bank account at the City Treasury according to provisions of law. Key responsibilities assigned to the Authority are: 1. To provide the city People s Committee with consultancy regarding the master plan for construction, operation and exploitation of urban railway lines of the city; the development of the urban railway network according to the transport planning up to To be Investor and to manage, operate urban railway lines of the city. 3. To carry out the role and function of a direct partner to foreign partners in transactions relating to the project. 4. To prepare documents, materials, contents of negotiation and together with related agencies to help the city People s Committee negotiate treaties and other agreements with sponsors relating to projects constructing urban railway lines of the city. 5. To develop detailed programmes, plans and implementation schedule of component projects; to organize the effective management, operation, use of sources of the project and to deal with problems arising during projects implementation. 6. To guarantee adequate data according to requirements of foreign partners for the management, operation phase of the project following the programmes, plans approved by competent authorities. 12

204 7. To fully execute legal provisions of the State during the management and operation of the investment project and related issues according to international practice and provisions of Vietnamese laws. 8. Strictly execute the financial report regime, regimes on accounting, statistics, auditing, balancing according to current provisions and requirements of foreign partners in compliance with the signed contents. 9. To ensure the cooperation with functional agencies and other related projects of the city in order to effectively carry out the project. 10. To import, export materials, equipment for construction and operation of approved projects. 11. To prepare annual plan for capital use, disbursement (domestic capital and loan source from foreign countries) following requirements of project schedule and in compliance with the domestic financial mechanism and requirements of foreign partners in order to guarantee project implementation schedule. 12. To ensure full compilation and implementation of contents, processes in the fields of train operation, exploitation management after construction phase is completed. 13. The Urban Railway Management Unit is allowed to establish Project management units and subordinates to manage and operate projects when they are brought into use or to employ qualified organizations which have experiences and financial capability for management, operation of urban railway lines when construction is completed. 14. To associate with or join domestic or foreign organizations or to employ experienced experts in order to train, improve professional knowledge in the fields of project management and operation, exploitation organization. 15. To co-operate with local authorities, related individuals, organizations to settle issues relating to compensation, assistance, resettlement, relocation. 16. To ensure the implementation of the archive information, confidentiality and report regime according to provisions. 17. To carry out other tasks authorized or assigned in writing by the Chairman of the city People s Committee. It is noted that Decree 119 provides the Authority with wide powers but creates unusual incentives in that: It has to find a portion of its operating cost; It can carry out the role and function of a direct partner to foreign partners in transactions relating to the project; and It can be both an investor, regulator and operator of MRT services and a partner to foreign investors. According to a HCMC PC regulation the current MAUR structure is shown in Figure 2.1. With new responsibilities for management of operations and maintenance, the number of staff in MAUR is increasing. It is also understood that it is proposed to revise the current structure of MAUR in the near future to better reflect the management and operational functions. Guidance and suggestions on how a new structure may be derived is provided in Section 5. 13

205 Figure 2.1: Current Structure of MAUR Source: MAUR Laws Governing Involvement of the Private Sector in Urban MRT Operations and Related Investment MVA (2006) identified the following national legislation that requires any organization or individual wishing to carryon business in public passenger transport must satisfy the requirements of the following national legislation, whichever is appropriate to the status of the applicant: Law on Enterprises, 1999; Law on Foreign Investment in Vietnam, 2000; Law on Cooperatives, 2003; and Law of State-Owned Enterprises The approval is specific to the business of public passenger transport. Foreign investment is permitted through Business Cooperation Contracts or Joint Venture with a Vietnamese Partner. The rules of investment are administered by the Ministry of Planning and Investment who are the licensing authority. National and municipal legislation governing public transport (ie bus) services and also the role of the authority also comprises both national and municipal legislation: Decree of the Government No.92/2001/ND-CP of December 11, 2001 Conditions for Carrying on the Motor Vehicle Transport Business ; Government Decree 24/2000/ND-CP of 31 July 2003 Regulations on Foreign Investment in Vietnam ; Government Decree No. 27/2003/ND-CP of 19 March 2003 providing amendments and additions to Decree 24/2000; and Government Decree No. 31/2005/ND-CP of 11 March 2005 on The Manufacture and Provision of Goods and Services for Public Utilities' (including buses). 14

206 MVA (2006) also reports that the HCMC PC has also enacted the following decisions to manage and regulate bus services: Saigon Bus was established by Decision 5350/QD-UB of HCMC PC of 1 October 1997; Decision No. 4196/QD-UB-NC Establishment of MOCPT (under TUPWS) ; Decision No. 355/1998QD-UB-NC, Approval for organization and activity regulations of MOCPT (TUPWS) ; Decision No. 321/2003/QD-UB of 30 Dec 2003 Issuing the Regulation for Management of Public Passenger Transport by Bus in Ho Chi Minh City; and Decision 49/2005/QD-UB of HCMC PC Amendment of Decision No. 321/2003/QD-UB of 30 Dec These laws and decrees would appear also to be largely relevant to the approval of an urban MRT operator even if they invest in some of the equipment such as trains, as bus operators also invest in the buses they operate. A law with apparent, but little practical relevance to the participation of the private sector in urban railways, where there is investment contemplated is the (Draft) Decree on Investment in the Form of Build-Operate-Transfer (BOT), Build-Transfer-Operate (BTO) and Build- Transfer (BT) Contracts New BOT Decree, dated 11th May 2007 The new BOT decree does not address social services such as those that have limited scope for cost recovery such as MRT. That is, it does not obviously cover PPP possibilities in MRT. The law also allows for government to invest in a project delivery organization which creates a conflict of interest. Chiplunkar (2006) in his review of the then draft BOT Law concluded: there is a need to review basic philosophy in BOT Approval mechanism by govt. for design and construction inputs, supervision during construction etc. must be appropriate to risk transferred eg if design risk is with private sector, monitor the performance not approve the design... Risk transfer to private sector not efficient due to above... And that:...that options for PSP to be need to be made more flexible to include variations of BOT. 7 Proposed to replace (a) Decree 77/CP dated June 18, 1997 of the Government issuing Regulations on investment in the form of Build-Operate-Transfer (BOT) contracts applicable to domestic investments (b) Decree 62/1998/ND-CP dated August 15, 1998 of the Government issuing Regulations on investment in the form of Build-Operate-Transfer (BOT), Build-Transfer-Operate (BTO) and Build-Transfer (BT) Contracts applicable to foreign investments in Vietnam; and (c) Decree 02/1999/ND-CP dated January 27, 1999 of the Government on amendment of and addition to a number of articles of the Regulations on investment in the form of Build-Operate-Transfer (BOT), Build-Transfer-Operate (BTO) and Build-Transfer (BT) Contracts applicable to foreign investments in Vietnam. 15

207 Other Relevant Laws and Decrees Other generally relevant laws are: Law on Procurement. No. 61/2005/ QH11 regulating procurement activities to select bidders for the provision of consulting services, goods and civil works of amongst others things investment projects using State funds of 30% or more and for major reconstruction and maintenance; Law on Construction which took effect July 1, 2004; Draft Unified Enterprise Law to ensure a level playing field between any type of operator (eg State or private); and Draft Law on Management and Use of State Assets (in Vietnamese language) the PPTA s legal team have been requested to review this Draft Law to check the relevance in relation to use of a possible Gross Cost / availability style operating contract for MRT. Table 2.2 summarizes the main legal and regulatory provisions governing the transport sector in Viet Nam. Table 2.2: Main Legal and Regulatory Provisions Governing the Transport Sector Sector Legal Provision Purpose Transport Transport Sector Development Strategy To 2020 (PMD No.206/2004/QD-Ttg) Responsibilities of Ministry of Communication and Transport (Gov. Decree No.34/2003/ND-CP) Articulates Vietnam s transport policies, set priorities and defines some targets for transport infrastructure, services and industries. Specifies functions, responsibilities, and organization of Ministry of Communication and Transport. Road Transport Plans To 2010 and Orientation to 2020 (PMD No.162/2002/QD.TTg) Sets out government policy for national, provincial, urban and rural roads. Roads Railways Urban Transport Road and Traffic Law (NA Order No. 26/2001/QH10) Management of Road Infrastructure (Gov. Decree No.186/2004/ND-CP) Establishment of Vietnam Investment and Expressway Development Corporation (VEC) (MoT Decision No. 3033/QD-BGTVT, October 2004) Vehicle inspection -nationwide (Ministry of Transport Decision No. 4134/2001/QD- BGTVT) Establishment of Vietnam Railway Corporation- VRC (PMD No.34/2003/QÐ-TTg) Establishment of Vietnam Railway Administration-VNRA (Decree No. 34/2003/ND-CP) Railway Law (NA Order No. 35/2005/QH11) Mass Transit Master Plan to 2025 (Approved January 2007) Public (Bus) Transport (Decisions No. 02/2001/CT-UB, No. 45/2002/QD- UB and Official letters No. 89/UB-DT and No. 16 Establishes traffic and road safety rules, defines six classes of roads and the responsibilities for their financing and administration. Establishes technical standards for the definition of the different road classes; and defines procedures for infrastructure planning and project approval. Specifies the broad responsibilities for VEC. Organizational and operational charter of the company to be established by the Board of Directors. Defines rules and procedures for 4-wheel motor vehicles to undergo regular vehicle inspection for technical safety and environment protection Establishes the corporation as the operator of rail services. Places policy, development and regulatory functions in VNRA. Regulates railway activities, including investment, construction, and management of infrastructure, management of vehicles and participants on train operations including 3 rd party operators, railway traffic, safety. Delegates rail and MRT responsibility to Cities and Provinces. Master plan that lays out investment strategy including a focus on bus development until Plan to promote public transport. Describes Model Bus scheme on pilot routes with increased frequencies new (government subsidized) buses and associated

208 Sector Legal Provision Purpose 1637/UB-DT) improvements in infrastructure. Establishing the Management Authority for Urban Railways (HC PC Decree 119/ 2007/QD-UBND). Decision 5350/QD-UB of HCMC PC of 1 October 1997 Decision No. 4196/QD-UB-NC Urban rail and MRT preparation, construction, and arrangement of operations and maintenance. Updating of Urban Rail including MRT Master Plan. Establish Saigon Bus Establishment of MOCPT (under TUPWS) Decision No. 355/1998QD-UB-NC Decision No. 321/2003/QD-UB of 30 Dec 2003 Decision 49/2005/QD-UB of HCMC PC Decision No: 101/ QD-TTg of 22 January 2007 Approval for organization and activity regulations of MOCPT (TUPWS) Regulations for Management of Public Passenger Transport by Bus in Ho Chi Minh City Amendment of Decision No. 321/2003/QD-UB of 30 Dec 2003 Mass Rapid Transit master plan Urban traffic congestion prevention program Decision No. 72/2005/QD-TTG 5 point program on urban traffic congestion prevention. Includes enhancing public transport while restraining private vehicle ownership and use. Source: Updated from Table 1, Annex 1 of World Bank (2005). MVA (2006) provided information on various decisions affecting bus transport 2.4 Transport Agencies and Functions in HCMC The HCMC PC is the key agency responsible for planning and delivery (ie here referring to regulation, purchasing of services and oversight, and construction of infrastructure) of public transport (bus) and mass rapid transit and supporting land use and transport management functions. Within the PC the following agencies have key roles for urban transport: Transport and Urban Public Works Services (TUPWS) which is responsible for preparation of city transport strategies, the planning and management of construction, maintaining urban transport infrastructure, planning and managing bus transport; and coordinating planning and implementation of traffic management with Police. For planning and regulation of urban public transport (bus/ other) the Management and Operations Centre for Public Transport (MOCPT) of TUPWS is the most important agency; Management Authority for Urban Railways (MAUR) 8 plans and implements rail based mass transit infrastructure and responsible for operations refer Section 2.2.2; Urban Planning and Architecture Department (DUPA) Land Use Master Plan preparation and approval of developments. The process of planning is normative and appears not to reflect market preferences nor what is optimal in terms of infrastructure and social services provision. Land approvals are separately made by the Department of Natural Resources and Environment (DNRE) with little linkage to the Master Plan. Similarly infrastructure planning is made with little reference to the Master Plan. In addition, even for individual building and more major developments there are no specific standards or guidelines providing certainty to developers on how much Gross 8 Until September 2007, it was known as the Urban Railway Management Unit and was under TUPWS. 17

209 Floor Area (GFA) they can build or other conditions such as building set back and building form; and Department of Planning and Investment investment promotion, coordination of investment including development of development assistance from IFIs and bilateral sources; Department of Finance treasury, budget, investment planning and arrangement of sources of finance. There are a further 19 Departments within the HCMC PC and these are: Department of Industry; Department of Tourism; Department of Natural Resources and Environment; Department of Education and Training; Department of Science and Technology; Department of Labor, War Invalid and Social Affairs; Department of Foreign Affairs; Department of Agriculture and Rural Development; Service of Trade; Department of Justice; Department of Culture and Information; and Department of Construction. Department of Health; Department of Physical Culture and Sports; Department of Post and Telecommunication; HCMC Customs Bureau; HCMC Tax Bureau; HCMC Statistics Bureau; and HCMC Department of Fire Brigade. The key functions of national and local government with respect to transport are mapped by the main transport agencies responsible for rail MRT, bus and other public transport, roads and traffic and street management and shown in Table 2.3. This table confirms the important role of the HCMC PC for urban transport in the city. While further comment is made later in Section 4 of this Working Paper on the appropriateness of the allocation of functions, it can be seen that at present, the regulatory (including service specification) and operational arrangements for urban mass rapid transit are defined as belonging to the newly created MAUR thus confirming the important role of this PPIAF financed TA in providing appropriate advice on how best to establish appropriate arrangements. 18

210 2.5 A Framework for Analyzing Institutional Functions A Hierarchy of Transport Organization World Bank (2002) provides a helpful means for ensuring a coherent approach to transport planning and management, noting that urban transport strategy operates at three levels (refer Figure 2.2): Strategy for the city which is the concern of the GVN and HCMC PC and other local governments in the region, which have the responsibility for formulating regional development policy, for allocating intergovernmental funding transfers, and for establishing the legal framework within which lower-level authorities and agencies operate; Strategy of the city which is the concern of HCMC and other local governments as they are responsible for determining their own internal priorities, supplementing the resources available from local sources, and allocating the resources at their disposal to achieve city objectives it is also the concern of citizens who may not be well heard or represented through the local political process; and Strategy in the city which is the concern of implementing agencies, both private and public sector, who have the responsibility for performing tasks for which they are responsible, and who may have some degree of technical autonomy in undertaking these duties. 19

211 Table 2.3: Current Main Transport Agency Functions in HCMC Functions Rail (interurban) MRT Transport sector agencies Other Public Transport Roads & Road Vehicles Traffic & Street Management Policy and Planning Policy and Planning VNRA MAUR TUPWS with advice of its Management and Operations Centre for Public Transport (MOCPT) Program development and management for infrastructure provision TUPWS local VRA national VEC expressways TDSI/ MOT Design VNRA, consultants MAUR, consultants TUPWS TUPWS, VRA, VEC, consultants Construction preparation & management including land acquisition VNRA, contractors MAUR, consultants TUPWS TUPWS, VRA, VEC, contractors Delivery of works VNRA, contractors MAUR, contractors TUPWS TUPWS, VRA, VEC, contractors Maintenance VNRA, contractors MAUR, contractors TUPWS TUPWS, VRA, VEC, contractors Financing Government budget / private finance HCMC budget/ IFIs/ bilateral sources/ private finance/ MAUR investment Service delivery, including operations & maintenance Provision of services VRC MAUR to arrange and can participate in operations by Decree 119; other private or foreign partners anticipated Ticketing/ tolls and marketing PC Budget / MOCPT investor role Saigion Bus Company, (SGB 100% Stateowned)/ Saigon Star JV of SGB & overseas investors, Citranco a private company with shareholding by SGB, and many Cooperatives (private) PC / national budget, tolls/ private finance for BOT expressways UPWS, VRA, VEC, contractors VRC MAUR to arrange MOCPT plus operators TUPWS, VRA, VEC Service specification & fares VRNA/ VRC MAUR to arrange TUPWS/ MOCPT VEC for tolls Na Contracting VRNA/ VRC MAUR to arrange MOCPT TUPWS, VRA, VEC Contract compliance VRNA/ VRC MAUR to arrange MOCPT TUPWS, VRA, VEC Financing Government budget/ user fees MAUR to arrange Government subsidy and revenue from passenger fares Private for BOT expressways/ government budget Regulation & enforcement VRNA/ VRC MAUR to arrange MOCPT/ Police PC Police for for vehicle registration & MOT/ TUPWS for driver licensing Certification and safety MOT Inspectorate MOT Inspectorate Nil As above Na Source: Table 2.2 (JICA 2004); Table 2.1 (above), MVA (2006) and consultant interviews; Na means Not Applicable. TUPWS & its Urban Transport Management Division (UTMD) TUPWS & UTMD TUPWS & UTMD Saigon Traffic Management Company Saigon Traffic Management Company Government budget PC Police / TUPWS Public Benefit Enterprise Na Na Na Na PC Police 20

212 These general principles are observed in a general sense with the current split of responsibilities in HCMC PC and Central Government (ie GVN). Further discussion is provided in the next section dealing with diagnosis. Figure 2.2: Allocation of Strategic Functions Strategy Level Function Agency For the city Of the city In the city National roads Public enterprise Tax levels Intergovernmental transfers Regulation & competition policy Vehicle registration & safety Urban structure planning Strategic transport planning Local road management Public transport planning & procurement Traffic management Law enforcement Road safety Public transport operations Road construction & maintenance National ministries Local / regional government Local government/ Private Source: World Bank (2002:154) Structuring Transport Activities In addition to consideration of the vertical distribution of transport functions between levels of government, the horizontal distribution of functions within any given level will have a substantial impact on the effectiveness and efficiency of activities in the transport sector. The activities undertaken by transport agencies can be categorized as (see also Figure 2.3): policy and planning, which involves identifying future strategic needs and developing the policies and plans required to achieve government objectives. It also includes monitoring and evaluating the performance of outcomes against government objectives, using this information to refine strategies, and identifying strategic resource needs; regulation, which involves establishing and applying technical standards for safety, security and environmental performance of public transport, and economic regulation needed in response to market failure; program development and management, which involves translating policies, strategies and regulatory requirements into specific actions such as programs and projects and providing oversight and monitoring of their delivery; and service delivery, which involves delivering, or ensuring the delivery, of transport infrastructure and services. 21

213 Figure 2.3: Categorizing Government Transport Functions Policy & strategy Policy framework Strategic planning Regulatory policy Financing and pricing policies Performance monitoring Regulation Setting standards Registration & licensing Enforcement Informs Program management Effectiveness doing the right thing Reports Project planning Investment programming Project, financing & other approvals Design, tendering, contracting Concessioning Monitoring & quality assurance Service delivery Infrastructure Services Information Efficiency doing the thing right Source: Study Team These categories of activity serve two broad objectives: effectiveness, which is related to ensuring that choices are directed to achieving the things that the community values, with clear linkages from the desired outcomes to the outputs of government activities that are needed to achieve the outcomes to, in turn, the controls, services or other outputs that need to be delivered to achieve these outcomes; and efficiency, which is to provide the identified controls, services or other outputs that have been decided on at the lowest possible cost. This approach has a number of implications for institutional management, for example, it: identifies the need to establish clear policies and implementing strategies so that those involved in delivering transport infrastructure and services have an explicit understanding of what is expected of them; ensures a productive tension between those responsible for strategic planning, project development and delivery; reinforces the need for clear allocation of tasks to agencies to avoid ambiguity about which agency is responsible for each of them; indicates the need for performance management systems that are transparent and hold managers accountable for delivery of agreed outputs; shows a need to separate conflicting functions, in particular; o to separate regulatory from operational activities to avoid the conflict of interest that arises from an agency regulating itself; 22

214 o o more generally, to separate decisions on effectiveness from those regarding efficiency so that each area of activity is undertaken with a clear focus; and to separate commercial activities from non-commercial activities so that the former are undertaken in a businesslike way with a unmistakable commercial imperative; and indicates that the private sector can be used to deliver services within a clear framework set by government, and that the choice of whether to use government agencies or the private sector to deliver services is a decision that should be based on the approach that has the lowest cost. 2.6 Diagnosis Figure 2.2 shows a general allocation of functions that supports transport integrity, minimizes the overlap between levels of government and community institutions, and which draws on the respective strengths of these institutions. Comparing current participating agencies with the allocation of functions in Figure 2.2: GVN s agencies undertake those for the city functions such as national railway lines and highways as is desirable; HCMC PC is very heavily involved in of the city as is considered desirable by Figure 2.2 dealing with essentially local functions for HCMC citizens; Local HCMC firms and agencies are also extensively involved in in the city functions as is desirable. Although approvals or comment need to be made from the centre (ie national level) what is proposed and the execution of of the city and in the city functions is local. Provincial and city government transport authorities prepare their plans that are then approved by the People s Committees and Councils and are then submitted to MPI. These transport authorities request and receive recommendations on their plans from MOT but are not obliged to follow them. World Bank (2005) confirms this analysis while noting some problems by stating that the decentralization of the last decade has been a positive step in moving decision making closer to those most affected by their outcomes. Not unexpectedly, decentralization has resulted in difficulties in coordination across different levels of government. While subject to dual subordination, decentralization has afforded local governments considerable autonomy in decision making At present there is no coordinating mechanism to ensure consistency between national and local plans, and the adherence of local plans to broad planning guidelines. Problems also exist in the vertical distribution of effectiveness functions (policy and strategy, regulation) and efficiency functions (program management, service delivery): Policy and strategy is weak. World Bank (2005) identifies that the inadequate policy and planning framework is a major deficiency. At the planning level, there tends to be a gap between broad government strategies and detailed sectoral plans, as well as a fragmentation in the responsibilities for developing plans often resulting in long lists of wish lists many of which are not consistent, viable or have the required financing. Some of the projects that get implemented were not in the plan. The basis for the selection of the projects that end up being implemented is not clear. Agencies at PC level do not appear to get involved in early formal coordination with each other but do so at the PC level where scope for optimization is limited. Feasibility studies are 23

215 excessively focused on technical matters and not on demand or pricing matters. The planning process can also be characterized by suboptimal resource allocation at various levels with misallocation between new investment and maintenance, among modes and among different investments within each sub sector. The separation of planning and budgeting decisions creates a disconnect between planning for new investment and maintenance. Section 2.2 confirms these observations of the World Bank Regulatory functions need to be improved. The capacity/authority of public regulatory agencies in Ho Chi Minh City needs to be strengthened (World Bank 2005). Program management is poor. Bus routes are allocated to operators in an ad-hoc manner even though operators receive significant subsidies which are likely not sustainable nor audited (World Bank 2005). Regulatory and service delivery functions are compromised by involvement of the PC in both. For example, some bus operators providing bus services are directly owned by the PC. Construction firms also are units of the PC competing for contracts procured by the PC. Project Management Units responsible for implementation on behalf of PCs and donor agencies are weak and resultant construction quality is poor as is time performance. This comment also potentially applies to the new Management Authority for Urban Railways under Decree 119 of HCMC PC. Service eg bus and other contracting delivery is of less than desirable efficiency and quality. Overall, World Bank (2005) summarizes the main challenges facing the transport sector in Viet Nam as (1) how to increase efficiency in both resource utilization and service delivery, (2) how to achieve adequate and sustainable financing and (3) how to facilitate growth for future urbanization. These challenges are formidable given the rapid growth of the economy, associated motorization and related congestion, emissions and crashes. Other problems noted by World Bank (2005) and JICA (2004) relevant to urban transport are: Rigid planning process, lack of cross boundary coordination between local governments, unstructured peri-urban growth, distorted land markets; Poor traffic organization as a result of a lack of a traffic management culture and fragmentation of responsibilities between different elements of the PC s Public Works Department (responsible for planning, designing, implementation and some elements of enforcement) and the traffic police (responsible for operations and most enforcement); and Resettlement is a major source of implementation delay in transportation projects due to (a) lack of sufficient resources (b) inadequate capacity for managing resettlement policies (c) limited awareness and lack of transparency leading to inequity in resettlement, may delay implementation; and (d) the differences in resettlement regulations between GVN and donors. 24

216 3. Factors Affecting the Role & Structure of an Apex Public Transport Agency and Relevant Functions 3.1 Policy Framework The development and provision of public transport in HCMC needs to be guided by clear, sound policies. This needs to occur within a hierarchical framework of an urban transport strategy for the metropolitan region, which in turn fits within an urban development strategy. It is not the role of the current review to review or establish these policy frameworks. However, it is noted that ambiguity in them will almost certainly result in unclear and probably conflicting public transport policies, and hence in public transport that fails to achieve its potential. As it is generally difficult to attract people from car or motorcycle travel to public transport, deficiencies in the provision and management of public transport will have long lasting, if not permanent, detrimental effects on the economic, social and environmental performance of HCMC. Some key policy needs for public transport that influence the role and nature of institutions in the transport sector are: Defining desired outcomes. Above all other things, it is necessary to be clear about the outcomes that the government wishes with regard to the provision of public transport. The outcomes should to be defined with reasonable preciseness and prioritized so that those charged with managing public transport are able to make decisions on investment and services needed to achieve them. Linking land use and public transport development. Public transport needs to respond to the travel needs of people, and hence be closely linked to the locations to and from which people need to travel. Land use also needs to be sufficiently flexible that it can respond to the improved accessibility offered by, in particular, new MRT facilities. There is a need to monitor the patterns and rate of urban development to ensure that the proposed extensions remain pertinent and to assist in re-prioritizing the network development program. There is also a need for explicit policies with regard to land use controls and development to ensure that property developments make best use of the improved accessibility offered by the rail lines. Coordinated, multi-modal transport planning. The future MRT lines will gain some of their demand from walk-in patronage. Their full potential will, however, only be achieved if they are supported by complementary transport services such as feeder buses and motorcycle and car access. Even so, the rail lines can meet only a part of public transport travel demand, and there will remain a major need for buses and more local forms of public transport to serve travel needs that cannot be met by the MRT lines. Public transport service standards and planning. Many cities in developed countries have had a single public transport agency that has been responsible for planning and providing public transport. The trend in many countries in the last decade or two to contract out public transport service provision suggests that there is a worthwhile role for service providers in the planning of services (eg routes and schedules) in association with communities and their representatives (eg Larwin 2005, Preston 2005, van de Velde 1999, Wallis and Lupton 1999). This allows operators to shift resources so that services are both cost-effective and meet passenger needs. If service planning is to be dispersed, be it somewhat or substantially so, there is a need for a central authority to establish minimum standards to which operators and others must comply, for example 25

217 locations to which feeder bus services should be provided, hours of service operations, and the location of bus stops. Integration of public transport services. A rail line can only provide direct services to people traveling between locations along the line. This will be a relatively small share of total travel. Even in cities with a dominant Central Business District (CBD) and hence a greater ability for people to travel directly, it is common for up to about one-quarter of trips by public transport to still involve a transfer, eg Singapore about 25% of trips involve a transfer, while the share is 33% in Adelaide and 40% in Melbourne. In cities such as London, New York and Tokyo where land use is more distributed and the public transport system more complex, an even higher share of people need to interchange to undertake their journey. The ease of these interchanges can do much to improve the attractiveness of public transport to people and hence attract patronage. Three factors support this: improved physical linkages; a common ticketing system; and an integrated fare system. Investment planning and decision-making. There is a need to ensure that proposed investment projects represent the best value to the community. This requires that problems be clearly identified and alternative approaches to address the problems be considered. The estimation of project benefits needs to take account of network effects in the public transport system and externalities such as reduced environmental impacts. Role of the private sector. World Bank (2007) identified the need for, and recognition by GVN that, an increased role for private sector finance and operations of infrastructure including transport is needed in future. At the same time the need to reduce the proliferation of State Owned Enterprises engaged in all aspects of infrastructure delivery and operations or at the least to enhance their efficiency is warranted. The new BOT law is a sign of this recognition as is the current partial role for private firms to operate bus services in HCMC. 3.2 Hierarchy and Structure The identified framework for analyzing institutional functions set out in Section 2.5 can also be used to assign the key public transport including MRT functions defined below. 3.3 Key Public Transport Management Functions One conceptual arrangement for an Authority is to be responsible for all aspects of public transport, from policy through to being the agency that operates services. This approach of a public monopoly is an arrangement that no longer represents good practice because of the lack of separation of conflicting responsibilities and because monopoly provision of services results in higher costs and reduced quality than is possible with other delivery mechanisms. Accordingly, this model is rejected from the outset. The focus is instead on arrangements that more clearly separate policy, regulation, system management and operations and which seek to make best use of the private sector to reduce unit costs and improve service quality and innovation. Taking account of the discussion in previous sections, the responsibilities of an Authority most clearly relate to the provision of efficient public transport. On this basis, the core functions for an Authority that includes MRT are: project planning and programming, including preparation of business case for projects, coordinating projects, and budget programming; 26

218 coordinating requests for funding for infrastructure development and, where needed, subsidies for service provision; infrastructure delivery, which will includes establishing financing arrangements, the manner for delivering projects, and taking account of life-cycle costs and management; public transport services delivery through concessions 1 arrangements; or other business-like fare policy, ticketing, and revenue management, which would be a minor activity if there was no integrated fares and ticketing but is otherwise more complex; and passenger information and marketing. The effectiveness function needs to be the responsibility of a different and independent agency probably located at City or Regional Level to provide the policy direction and strategic planning framework for public transport development in HCMC that the Authority is to deliver in the most efficient manner. 3.4 Other Issues Other issues that assist in defining the scope of the activities, and hence the form, of an Authority include: Level of government. HCMC s geographical area of authority is less than the entire region of Greater HCMC. While local government involvement in an Authority is important, looking to the long term, it may not be appropriate for this reason for the HCMC PC to be the level of government to which the Authority should be responsible. It is common in other countries for an Authority to be responsible to a level of governments with a broader responsibility than the city (eg to state governments in Australia or regional groupings of local government in the USA) where there is no local government authority for the city as a whole. In the first instance, HCMC PC and other provincial governments in the region could be involved in the Authority through membership of an advisory committee. Community involvement. Gaining cooperation and insights from a range of groups in the community, for example, business, disabled, environmental and others, can improve the effectiveness of public transport (eg Booth and Richardson 2001). This can be achieved through, for example, their involvement in various advisory committees of a Authority. 1 The general experience is that provision of public transport services by the private sector under contract to an Authority results in lower costs than provision of services by the Authority and other government agencies. Wallis and Hensher (2005) reports that competitive tendering for the provision of bus services resulted in unit cost reductions mostly in the range of 20% to 50%. It is noted that the extent of these savings is influenced both by the cost efficiency of the previous monopoly) service provider, and by numerous factors relating to the design and management of the competitive process and the existence of a strong market of potential suppliers. There has been only limited experience with the competitive tendering of former government provided train services, with no known studies reporting on cost savings. Various contractual arrangements between an Authority and the private sector can be used to provide services, including gross cost service contracts, net cost service contracts, management contracting, franchising and concessions (World Bank 2002). The principal differences between these contractual arrangements relate to the allocation of responsibilities for provision of assets, planning of public transport services, and payment arrangements. The allocation of financial risk between the Authority and contractors can vary within each of these contracting arrangements. 27

219 Metro rail ie MRT expertise. Special expertise is needed to effectively manage the development and operation of mass rail transit because of its special characteristics, including high frequency of service, technology and safety standards that reflect the intensity of human activity associated with them, and integration with other public transport modes and urban activity in general. The expertise is also different to that pertinent for other types of railway operations such as freight and commuter or regional passenger services. Seeking to develop this expertise in more than one agency is both wasteful and likely to result in no agency having effective capacity for some time. There is no agency in Viet Nam currently involved in urban rail MRT. Funding policy. The initial financial analysis of this PPIAF study and experience and from other places, indicates that the Government will, with little doubt, need to continue finance fixed infrastructure for future rail lines in HCMC. Fare revenue is needed to finance other infrastructure and provision of services but is likely to be inadequate to recover all operating and maintenance costs. There may be some, though limited, opportunity to develop land or air-rights associated with rail lines. Thus, the capacity for an Authority to generate revenue that can be used to service debt will be limited to modest property prospects and any additional hypothecated taxes that government might impose and assign to the Authority. The latter could include betterment taxes (ie a tax on the increase in property values attributed to rail projects) or charges for use of roads along which rail lines are located though these are difficult to apply in practice - or more general taxes such as an annual property tax or surcharges on vehicle registration fees or fuel tax. The capacity for the Authority to independently borrow will depend on the extent to which it can gain secure and significant revenue from these sources. But at present these taxes or charges are specified by national laws and any revision would apply nationally, and would be equally be to all infrastructure types and programs, in every local government. Even if this was possible, the question remains as to whether it is worthwhile developing the high level of expertise in Authority needed for it to gain independent access to capital markets. In the end it may be simpler and more cost-effective to leave fund generation to PC s HIFU and /or DPI with MOF equivalent other than with respect to development of land and air-rights that are assigned to the Authority and which it may be able to develop in a way that is supportive of the rail system. Extent of public transport integration. The effectiveness of an MRT system will be maximized through integration with other public transport services and integration of ticketing and fare systems for public transport. Achieving this adds technical and institutional challenges, and requires the Authority to have a broader capacity than simple delivery of rail mass rapid transit lines with private delivery of rail services. 28

220 4. Potential Institutional Arrangements for Delivering Integrated Public Transport 4.1 Institutional Options Given the previous discussion, the alternative arrangements for an Authority relate primarily to the scope of its functions rather than to the underlying functions themselves. On this basis, four options for improved institutional arrangements for HCMC are identified: Option 1: Strengthen the Management Authority for Urban Railways (MAUR). Refer Figure 4.1. Currently, the MAUR is solely responsible for coordinating all proposals for urban rail system development, including those by potential donors. To date, however, MAUR has taken what appears to be a somewhat passive role regarding rail line proposals in which all are welcomed irrespective of investment cost, operating and maintenance cost characteristics, ability to meet demand and cost recovery. MAUR is also responsible for planning and implementing rail based mass transit infrastructure, and arranging MRT operations, but requires strengthening in these yet to be performed functions as it will in specifying and procuring an appropriate MRT operator or operators to provide integrated MRT services. Land acquisition and resettlement problems delay many projects and require specialist expertise. Given the planned volume of new MRT lines in future, the current dedicated land acquisition and resettlement function within MAUR may need to be strengthened. This Option 1 therefore requires a strengthened MAUR that goes beyond treating MRT as a series of construction projects ie an Authority for MRT or Metropolitan Transit Authority (MTA). In this option, MAUR would be responsible for ensuring the planning and arrangement of operation for a fully integrated passenger rail system for HCMC. As an Authority MAUR would (a) plan effectively by seeking to meet demand (b) consider the whole of life attributes of proposed MRT; (c) arrange construction and operations (d) procure contractors for construction of civil works; (e) procure services to be operated so that they are all on the same basis; and (f) plan and program works and budgets in a disciplined manner. It would take overall transport policy and transport guidance from TUPWS of which its predecessor organization was a part. This option would enable MRT ticketing and fares to be integrated as long as MRT operating concessions are consistent. An independent rail safety regulator is also envisaged as required by the Railways Act. A revision to the current Decree 119 establishing MAUR does not appear to be required except where the Decree authorizes fundamental conflicts of interest between regulator and operator functions and so on. Future operators whether private, joint venture (between government and private) and wholly government should be kept at arms length and operate under a clearly defined contractual structure. This option is similar to the Mass Rapid Transit Authority in Bangkok, Thailand although in Bangkok two other agencies also provide similar functions thus hampering network integration. It is understood that MAUR is currently proposing to revise its organizational structure and comment and recommendations on an appropriate revised organizational arrangement are provided below. Option 2: Interim Public Transport Authority. Refer Figure 4.2. This option builds on Option 1 (Strengthened MAUR) and proposes also a high level permanent committee at the PC level most likely chaired by the Chairman of the PC (or the Vice Chairman) to provide strong direction from the top and improve coordination horizontally between TUPWS and MAUR and with other important departments such as Department of Planning and Investment, Department of Finance and Department of Urban Planning and Architecture. This arrangement has existed in the past in Bangkok, 29

221 Thailand, through the standing Committee for Management of Land Transport, chaired by the Prime Minister. While currently inactive the Committee s function was more important when fragmentation of various agencies under different ministries existed. Currently, almost all relevant agencies including two agencies responsible for urban rail or MRT are under the authority of the Minister of Transport. A third MRT authority is the Bangkok City government which although under the purview of the Minster of Interior, is largely independent. Option 3: Integrated Public Transport Authority. Refer Figure 4.3. In this option the proposed Integrated Public Transport Authority would be solely responsible for ensuring the delivery and operation of a fully integrated public transport system (MRT and bus) for HCMC. This option would enable all public transport ticketing and fares to be integrated as long as MRT and bus operating arrangements are consistent. The proposed new Authority would take overall transport policy and transport guidance from TUPWS as for previous options. It would create a new formal structure in which civil works design and procurement and services would be arranged by new Engineering Design and Procurement and Operations Divisions respectively. Care would be taken to ensure that in a single organization (as for Option 1) that policy and operational functions are sufficiently separated to avoid a conflict of interest. Under this option, close links would be developed with TUPWS (as for Options 1 and 2) and with the Department of Planning and Investment, Department of Finance and Department of Urban Planning and Architecture. [Under this option TUPWS would give up its responsibility for bus service planning and contracting and construction and maintenance of bus facilities, but would retain its road planning and construction functions]. As a true apex organization the proposed Authority would be staffed by very senior and respected official to direct the organization and cultivate the needed relationships for the new organization to fulfill its potential. This is a common arrangement for public transport system management around the world eg Brisbane, Australia and Stockholm, Sweden. An independent rail safety regulator and possibly a new bus safety regulator is also envisaged the rail safety regulatory functions are a Ministry of Transport responsibility but the bus safety regulation function could be developed as a new skill at PC level within the proposed Integrated Public Transport Authority. Option 4: Integrated Transport Authority. Refer Figure 4.4. In this option, a wholly integrated Authority would plan the multi-modal network, specify the services, program the investment (including roads, MRT and bus) in conjunction with the PC and Department of Planning and Investment and Department of Finance, and procure the services to be operated so that they are all on the same basis, thus enabling integrated fares and ticketing and integrated investment according to overall need. A close coordinating role with the Department of Urban PLanning and Architecture is also envisaged to coordinate land use developments at MRT stations and in conjunction with new road developments. As for Option 4 it is envisaged that very close coordination between DPI and the Authority would exist. This is a common arrangement for transport system management (eg Singapore, Hong Kong, London ) around the world. An independent rail safety regulator is also envisaged. The nature of each of the improved institutional options and the allocation of the responsibilities of proposed agencies are elaborated in Table 4.1. Linkages with other agencies are shown in Figures 4.1 to 4.4 respectively. 30

222 Table 4.1: Improvement Options Feature Option 1: Strengthen MAUR Option 2: Interim PT Authority Option 3: Integrated PT Authority Option 4: Integrated Transport Authority Integration of public transport in HCMC (1) Increasing Increasing Increasing integration Introduction Transport outcome Fairly good MRT integration possible Fairly good MRT integration more likely Fully integrated PT system more probable Fully integrated public transport system Description Minimum change to current institutional responsibilities. As for Option 1 but improved direction & coordination Strong direction and purpose for PT Strong direction and purpose for transport & land use Examples from other places Hong Kong & Singapore in the 1980s Bangkok in 1990s Melbourne and Brisbane, Australia Hong Kong, Singapore Benefits for customers Ease of use of MRT with integrated ticketing and easy interchanging where MRT lines intersect possible Ease of use of MRT with integrated ticketing and easy interchanging where MRT lines intersect. Integration with buses likely. Passengers able to use the PT system as though it was a single system, with fares, tickets, marketing and presentation integrated. Physical integration good. As for Option 3 but better integration with land use and road network. Agency responsibilities Transport policy & planning (2) Urban planning DUPA DUPA DUPA DUPA Transport policy TUPWS TUPWS TUPWS Integrated Transport Authority Strategic transport planning TUPWS TUPWS TUPWS Integrated Transport Authority Financing policies DPI & DOF DPI & DOF DPI, DOF with advice of Integrated PT Authority DPI, DOF with advice of Integrated Transport Authority Fares policy and service standards MAUR for MRT; TUPWS/ MOCPT for bus MAUR for rail; TUPWS/ MOCPT for bus Integrated PT Authority for MRT and bus Integrated Transport Authority for MRT and bus Regulation (3) Safety standards Independent regulator; TUPWS for bus Independent regulator; TUPWS for bus Independent regulator; Integrated PT Authority for bus Independent regulator; Integrated Transport Authority for bus Environmental standards DNRE DNRE DNRE DNRE Economic MAUR MAUR/ Interim PT regulation (5) Authority Integrated PT Authority Integrated Transport Authority Public transport program management (4) Program coordination & direction Project planning & feasibility studies MAUR MAUR Integrated PT Authority MAUR MAUR Integrated PT Authority Integrated Transport Authority Integrated Transport Authority Investment programming & financing approval MAUR/ DPI/DOF/ PC MAUR/ DPI/DOF/ PC Integrated PT Authority / DPI/DOF/ PC Integrated Transport Authority / DPI/DOF/ PC 31

223 Feature Option 1: Strengthen MAUR Option 2: Interim PT Authority Option 3: Integrated PT Authority Project design MAUR MAUR Integrated PT Authority Environmental & other approvals MAUR/ DNRE MAUR/ DNRE Integrated PT Authority/ DNRE Tendering MAUR MAUR Integrated PT Authority Contract management Infrastructure maintenance MRT service design Concession preparation and management Service delivery Rail services MAUR MAUR Integrated PT Authority MRT operators/ concessionaires (for operations) MRT operators/ concessionaires (for operations) MRT operators/ concessionaires (for operations) MAUR MAUR Integrated PT Authority MAUR MAUR Integrated PT Authority Operators/ Concessionaires Operators/ Concessionaires Operators/ Concessionaires Option 4: Integrated Transport Authority Integrated Transport Authority Integrated Transport Authority/ DNRE Integrated Transport Authority Integrated Transport Authority MRT operators/ concessionaires (for operations) Integrated Transport Authority Integrated Transport Authority Operators/ Concessionaires Bus services Operators Operators Operators Operators Ticketing and fare collection Single contract under PC Single contract under PC Single contract under Integrated PT Authority Marketing Operators Operators Integrated PT Authority and operators Single contract under Integrated Transport Authority Integrated Transport Authority and operators (1) All options cover the provision of formal public transport in Greater HCMC. (2) Covers setting of policies within which agencies do detailed project planning & implementation & provision of services. (3) In the case of public transport, regulation relates primarily to safety. Vehicle registration and driver licensing, which are applicable for bus services, are not addressed because they are the same for all options. Economic regulation needs to be treated as an integral part of the Transport Policy and Planning function, though some aspects such as anti-monopoly regulation will be managed by other government agencies. (4) Includes activities to put strategies into practice strategies, including development and implementation of projects and arranging for the delivery of public transport and ancillary services. (5) Includes control over entry to the market (eg how many buses and companies are allowed) and control of fares. Source: Consultant 32

224 Figure 4.1: Key lines of responsibility for Option 1 Strengthen MAUR Source: Study Team Figure 4.2: Key lines of responsibility for Option 2 Interim Public Transport Authority Source: Study Team 33

225 Figure 4.3: Key lines of responsibility for Option 3 Integrated Public Transport Authority Source: Study Team Figure 4.4: Key lines of responsibility for Option 4 Integrated Transport Authority Source: Study Team 34

226 4.2 Assessment of Options For the purpose of evaluating these options, the following criteria are judged to best reflect the outcomes that are desired from changed institutional circumstances are: Clarity of public transport management, eg ability to ensure consistent direction and priorities for public transport, a focus on core functions, involvement of transport users, and the risk of BITA reverting to inertia given its comprehensive role. Appropriateness of the institutional structure, eg clear allocation of responsibilities, accountability for outcomes, separation of potentially conflicting functions, links with key partners, and ease of implementation. Ability to deliver projects and services, eg businesslike, prepare programs, secure funding, tender, award and supervise concessions. Ability to meet passenger needs, eg integration of fares and services, provision of information on services, integration with land use. An assessment of the options with respect to these criteria is shown in Table 4.2. While the assessment unavoidably involves judgment, it is intuitively evident that Option 3 (Integrated Public Transport Authority) is the most appropriate in for ensuring integrated public transport including MRT and bus system development and services for HCMC. Option 4 (Integrated Transport Authority) carried Option 3 a step further and integrates all transport including roads. All options assume use of one or more private sector operators or a corporatized government operator (not proposed by us) to efficiently deliver MRT services, with continued use of the private sector for delivery of bus services. As a practical matter in the first instance a strengthened MAUR (Option 1) is an important first step for institutional improvement and is documented below. 35

227 Clarity of strategic direction Ensure consistent directions & priorities Table 4.2: Comparison of Institutional Options Existing arrangements Option 1: Strengthen MAUR Option 2: Interim PT Authority Option 3: Integrated PT Authority Option 4: Integrated Transport Authority - Focus on core functions Involvement of transport users - - Risk of inertia Appropriateness of the institutional structure Clear allocation of responsibilities Accountability for outcomes - Separation of conflicting functions - Links with key partners - Pace/extent of change Na Ability to deliver projects and services Businesslike arrangements - Ability to prepare and manage programs - Secure funding - Project implementation - Concession management - Ability to meet passenger needs Ticket and fare integration - Marketing and information - Integration of public transport and land use Conclusion Change needed Fair for Integrated MRT Fair for Integrated Bus and MRT Good for Integrated Bus and MRT Good for Integrated Transport Source: Consultant 4.3 Building Technical and Managerial Capacity Depending on the option eventually chosen, with the exception of Option 4 (Integrated Transit Authority) the proposed agency will have a key role in working to efficiently and effectively connect high level transport policy and plan making done by TUPWS to detailed implementation. DPI will continue to have an important role in overseeing the performance of the transport sector in terms of fiscal monitoring, but would also benefit from having a stronger MAUR or Integrated Public Transport Authority to provide economic regulation and technical management of MRT (and/or bus) investment programming and management of annual MRT operating budgets, and desirably for other public transport. Economic regulation and oversight involves issues of pricing including fares, subsidies (and community service obligations), competition, concessioning including compliance supervision and requires skills in economics and to associated legal and financial impacts. Technical supervision of rail MRT and public transport investments and their integrated operation requires high level knowledge and skills in: 36

228 interpreting transport policy and master plans prepared by TUPWS and central government s MOT and providing appropriate feedback and advice; translating these policies and plans into appropriate forward work programs that can result in timely and efficient implementation of MRT, other public transport improvements and reforms, and integrative systems; providing appropriate advice to TUPWS/ DPI/ DOF/ DUPA and other agencies as required; and appropriate coordination with the Department of Natural Resources and Environment. While the PC is acting to strengthen MAUR (under Options 1 and 2) or if it intends to create an Integrated Public Transport Authority (Option 3) or an Integrated Transport Authority (Option 4) it should be careful to match the skills and capabilities of the people to be engaged and /or transferred to the desired new organization and its structure taking full account of the needed capabilities in high level economic and technical supervision and oversight. The ADB/ PPIAF and PPTA team will later identify the scope of capacity building activities for the future. 4.4 Legal Basis for Integrated Transport or Integrated Public Transport An important complementary measure to a preferred institutional arrangement to achieve integrated transport or public transport only would be a new law 1 to mandate that all agencies are responsible for achievement of an integrated transport or public transport system. In Appendix C we have identified the possible outline content of a new law to achieve integrated public transport. This is not to say achievement of integrated transport is not desirable however. 1 This is a development of the concept recommended by MVA in 2006 for BRT in which they recommended the need for a White Paper ie a high level policy on public transport. 37

229 5. Some Lessons on Organizational Structure for Efficient MRT 5.1 Overview of Lessons from Other Cities A review was undertaken of institutional and delivery arrangements for public transport in other cities. Tables B.1 and B.2 summarize institutional and delivery arrangements for public transport in other cities that either have some similar arrangements to key Asian cities eg Singapore, Hong Kong), where private sector finance and organizations are used to delivery public transport) or are similar in character to HCMC in jurisdictional terms (eg London, which is a dominant city in a unitary state and has also used a mix of delivery mechanisms for public transport). The review indicates there to be a wide variety of possible institutional arrangements. Indeed, each city has characteristics with regard to the management and delivery of public transport that differentiates it from other cities. This reflects historic, constitutional, political, financial, social and other factors. In some cases the arrangements have changed little over time, while in others change has occurred more frequently. Nevertheless, key lessons that are evident are: All cities except Kuala Lumpur and Bangkok have an apex organization (eg an Authority) that is responsible for managing all public transport. Of the Authorities (or equivalent organization) in the 12 cities reviewed in detail, 6 are government departments (ie directly responsible to the minister for the department), 4 are government authorities (with a board), and two are corporatized government agencies. Most organize transport across their entire metropolitan region. All Authorities are responsible for the tactical (ie not long term) planning of urban public transport and ensuring the delivery of services. Some also undertake strategic planning. As far as can be established, the policy framework for public transport is determined by higher levels of government. The general dependence on subsidies requires Authorities to operate within the fiscal discipline of government finance agencies. Only one Authority (New York) both manages public transport and provides all services using its own employees (through subsidiary companies). In contrast, Stockholm, Bogota and Melbourne engage private companies to provide all services (with the companies generally selected through competitive tendering, though there are negotiated contracts for some bus services in, for example, Melbourne). Other agencies, to varying extents, provide services using their own resources, or engage corporatized government operators and public and private companies to provide services (either with competitively tendered or negotiated contracts). That is, use is made of the full possible range of means for providing services. Two Authorities (London and Singapore) are also responsible for roads as well as public transport while not responsible for all roads, the Authority in New York is in charge of toll bridges and tunnels. Six Authorities have boards to direct their activities (ie the four that are statutory authorities and the two corporatized government agencies). It appears that members of the boards are appointed by government in all cases. Boards range from entirely nongovernment directors in the case of London to government representatives in Bogota. Interest groups (labor and community) are represented on the board in New York and Athens. Authority executives are generally not members of their boards, though there are exceptions (eg Athens). 38

230 Authorities are responsible to local government in only three places (London, Bogota and New York) and the same, in effect, in the city-states of Singapore and Hong Kong. Local government is represented on the board in Athens. The remaining 6 Authorities are responsible to national or state governments. Where services are provided by a number of agencies or companies, ticketing, marketing and branding is usually centralized within a division of the Authority or by a government owned corporation. Only two cities have an Authority that can issue bonds (New York and, in the case of Hong Kong, the MTR, which is an arm of the Government that is now listed on the stock market). In these cases, the Authorities are able to issue bonds because they have their own sources of income that can support borrowing, eg property income and, for New York, hypothecated taxes. Two Authorities are explicitly funded by a share of fare revenue (2% of fare revenue in Athens, and 4% in Bogota). The higher share in Bogota may reflect the role that the Authority has in developing a bus rapid transit system for the city as well as provision of established public transport services. Railway infrastructure is always owned by government in one form or another. In Hong Kong the railway operators develop infrastructure and provide services within a framework set by government. New York is similar. In Singapore and other cities, a central agency plans, funds and builds the rail fixed infrastructure and contracts out operations through concessions. In Bangkok, the two MRT concessions were BTO form. Hong Kong is the only city where rail companies come close to securing sufficient revenue to meet the entire capital and operating cost of trains. It also appears that railways in Tokyo are able to recover operating costs and a significant share of capital costs from fare revenue. The TransMilenio busway system in Bogota involves government finance of fixed infrastructure, with all other costs recovered from fares. Within the limits of available information, it appears that governments finance most if not all fixed infrastructure and rollingstock, and often subsidize operating costs, especially in wealthier countries. 5.2 Guidance for HCMC s MAUR Three cities in the Asian region reviewed in Table B.1 provide useful lessons good and bad for HCMC. These cities are Bangkok, Singapore and Hong Kong. From Bangkok both good and bad lessons can be learned. The bad lessons are that: Having three agencies responsible for MRT (ie SRT, BMA and MRTA) leads to duplication in the MRT network and poor prioritization as each agency wants its lines developed at any cost. Refer Figure 5.1; and Each line is developed separately with its own ticketing systems and fare structures with little hope of integration. The good lessons are that: The private sector can be used to provide expertise and capital and develop into world class operating entities in a relatively short time (Allport 2004). 39

231 Thailand s Mass Rapid Transit Authority (although one of three agencies responsible for MRT) is the closest to a reasonably well functioning Authority for MRT. In the past MRTA focused principally on engineering but it is recognized that operations, finance and their management are just as important. MRTA as does the other two MRT agencies operates within the overall transport policy and planning advice of government. MRTA s structure is also shown in Figure 5.1 and shows that its three key groups are: Engineering; Administration; and Operations including concessioning and management. Hong Kong and Singapore provide similar but contrasting lessons (Refer Figure 5.2). Both developed their MRTs in the late 1970s to mid 1980s and initially created a special government MRT organization (department of government). In Hong Kong there was an existing government regional rail operator the Kowloon Canton Railway. They were both corporatized in the 1990s and have since been listed on the stock market. (In October 2007 their shareholders agreed to a merger). These MRT operators are essentially private firms today but operate within the policy framework of government. Hong Kong has private bus operators also and an integrated smart card-based ticketing system. Ticketing is provided by a separate organization under the guidance of the Transport Department and ticketing is not provided as part of operational agreements. Singapore s history is somewhat similar but differs in an important respect. In the 1995, the Singapore Government prepared its transport policy for integrated transport. This White Paper on transport laid out the basis for creation of the Land Transport Authority and corporatization of the Singapore Mass Transit organization to become SMRT Corp. (a government-owned corporation). LTA sets the policy framework, invests and the SMRT operates agreed services on a gross cost basis. In the late 1990s, the Singapore government decided to develop two multi modal (ie MRT and bus) operators. It merged SMRT and the government-owned TransIsland Bus Services to create one operator and allowed SBS Bus Services to develop into an MRT operator by awarding it the concession (after competitive tender) for the North East Light MRT project. SBS Transit provides these services on a gross cost basis. As a result Singapore has an integrated bus and MRT network and integrated fares and ticketing. The key lessons for HCMC are: All MRT and bus service provision takes place within the government s determined policy eg on fares; Two MRT (and bus) operators exist a Government owned corporation and a new private operator. The private operator was permitted to develop for benchmarking and strategic reasons; MRT and bus services are provided on a gross cost basis and all fares collected from passengers are remitted to government; and Ticketing is provided by a separate organization under LTA and ticketing is not provided as part of operational contracts. 40

232 Figure 5.1: MRT Arrangements in Bangkok, Thailand Source: Study Team Source: MRTA, Thailand 41

233 Figure 5.2: Integrated Transport Arrangements in Hong Kong and Singapore Source: TD, Hong Kong Source: LTA, Singapore 42

234 Figure 2.1 showed the current broad structure of the MAUR HCMC. Advice was sought by MAUR staff on some principles for revising the current organizational structure to better carry out its new responsibilities. The challenge in any re-structure is how to observe key functions and the creation of formal business-like relationships within the conventions of the current governmental norms. Consequently, a simplified suggestion on how important MRT functions may be structured in future is shown in Figure Key points are: Policy advice to the PC determined by the MAUR board based on the advice of their technical departments (general transport policy framework jointly determined with TUPWS); Management of MRT operations clearly separated from operational entities whether government-owned or not; Ticketing operations done as single contract for the entire MRT network; and All functions appropriately resourced. Figure 5.3: Possible Revised Structure for MAUR Source: Study Team 1 This suggested structure is consistent with Option 1 Strengthened MAUR discussed in Section 4. 43

235 Appendix A: Trends in the Management & Provision of Public Transport The way in which public transport has been provided has changed over time. This is not immediately apparent from the comparison of current institutional arrangements presented in the previous section. A common development pattern for public transport has been, in the first instance, for it to be provided by the private sector with only a modest role for government. This included rail infrastructure, though it has been common over time for the infrastructure to be taken over by government when the private sector failed to achieve expected financial returns. Examples include development of the initial lines of the London Underground in the later 19 th and early 20 th century, and street-car (ie tram) lines in the USA in the 1930s. Changing economic and social conditions in developed countries made bus services unprofitable by the late 1960s. Together with other changes such as a reaction against urban freeways, rises in fuel prices and a desire for improved public transport, the trend in developed countries in the 1970s was for governments to take full responsibility for urban public transport. This usually involved establishing a government agency that was responsible for ensuring the provision of integrated public transport for a city. Commonly, the agency also owned public transport assets and provided services. The now collapsed State-owned bus operators in HCMC and Hanoi may be seen as a product of this era. These changes enabled major improvements, in particular integration of routes, services, fares and ticketing across all modes of public transport. However, there were also disadvantages, in particular decreasing productivity that resulted in rising unit costs. To varying extents, quality of service and innovation also declined. Ground-breaking reforms by the government in the United Kingdom in the early to mid- 1980s, the substantial, and sometimes radical, economic and regulatory policy reform that followed in New Zealand, microeconomic reform in Australia in the early 1990s, and related trends in South America and Europe have resulted in a new model for provision of public transport (eg see van de Velde ). While there is considerable variation in the models used, general features are: government is responsible for ensuring the provision of an integrated public transport system; the private sector deliver public transport services (and infrastructure projects selected by government) through contracts with the government that are awarded on the basis of competitive tendering; and government meets the difference between the cost of providing services and revenue collected from passengers. This model has not been adopted everywhere, but it represents the current trend and is considered best practice (eg World Bank 2002). The trend is illustrated in Figure A.1. HCMC has the opportunity to move more directly to this model, which allows improved, integrated public transport to be delivered at lowest possible cost. 1 The biannual International Conference on Competition and Ownership in Land Passenger Transport initiated in 1987 has followed the subject see 44

236 Figure A.1: Development Patterns for the Provision and Management of Public Transport H i s t o r i c Dispersed public transport service provision - Limited role by government for service planning & integration. - Services provided by the private sector, and sometimes infrastructure also. - Limited or no government subsidy. Typical development approach in the past Objective: improve and integrate public transport Centralized public transport operator - Government agency. - Integrated service planning and provision. - Services and infrastructure provided by the government agency. - Increasing costs & decreasing service quality. Alternative, direct route for change Trend in 1990s, e.g. Europe, S. America, NZ & Australia Objective: better services and reduced unit costs through effective use of the private sector Objective: avoid poor service and high cost of centralized approach Source: Study Team Public transport management government - Government agency. - Integrated fares, ticketing and services. - Services provided by private operators under contract to the government. - Government pays contractors for services using performance based contracts with appropriate incentives and penalties. 45

237 Appendix B: Review of Other Arrangements for Management & Provision of Public Transport A review was undertaken of institutional and delivery arrangements for public transport in other cities. Tables B.1 and B.2 summarize institutional and delivery arrangements for public transport in other cities that either have some similar arrangements to key Asian cities eg Singapore, Hong Kong), where private sector finance and organizations are used to delivery public transport) or are similar in character to HCMC in jurisdictional terms (eg London, which is a dominant city in a unitary state and has also used a mix of delivery mechanisms for public transport). Table B.3 provides additional information. 46

238

239 Table B.1: Examples of institutional arrangements for public transport in selected Asian and Australian cities Feature General introduction Region covered Area (sq. km) Kuala Lumpur, Malaysia Similar operating environment. Malaysian MoF bought back two existing MRT operators in Government developing an integrated ticketing multi-modal ticketing & payment system in Klang Valley centered on KL. 243 (excludes Klang Valley) Singapore Hong Kong, China Tokyo, Japan Melbourne, Australia Strong unitary government with clear policy framework. Multi-modal operators being encouraged with area franchises and integrated ticketing system implemented in Strong unitary government with clear policy framework. Two rail and several bus operators being promoted. integrated ticketing system implemented in Integrated public transport under direction of the Ministry of Land, Infrastructure, and Transport (MLIT) with highly marketbased incentives. Individual operators are responsible for marketing, fares and ticketing with MLIT s permission. Integrated ticketing system implemented in ,098 2,200 (Tokyo metropolitan city). 7,850 (Suburban) State government management of public transport system in Melbourne, by agency (DOI) which is also responsible for the road system. Train, LRT & bus services provided by private operators within an integrated framework. Informal coordination with local government. Brisbane, Australia State government management of public transport system. Train, bus & ferry services provided by corporatized state government agencies, a major local government & private bus operators within an integrated framework. Informal coordination with other local governments. 8,800 2, Bangkok, Thailand Similar operating environment. Regional train and bus services by State Enterprises ie State Railways of Thailand and Bangkok Mass Transport Authority respectively. Two MRT lines provided by different combinations of private finance and are operated by private firms. A third line to new Airport under development. Three agencies currently have MRT responsibilities. Population (m) (Tokyo m. city) (regional) 11 (regional) Public transport system features Length of fixed track line Rail 56 km (Star LRT & Putra MRT) & 58 km Express Rail Link to KL International Airport. 150km electrified suburban rail system (KTM). 9 km monorail. 128 km including 19 km of LRT MTRC (119 kms incl. 35 km Airport Express) and KCRC (34 km East Rail, 36 km Tsuen Mun LRT and 31 km West Rail) Suburban (1,431 km for JR-East, and 1,650 km for private railways including subway); 13,827 km bus 336km rail 245 km tram (double track) 300km metropolitan part of South East Queensland 44 km MRT 27Km Airport MRT (construction) Over 150km more planned Busway None None None None None 18.4 km First line under construction by local government, the BMA 48

240 Feature Rollingstock Kuala Lumpur, Malaysia Singapore Hong Kong, China Tokyo, Japan Melbourne, Australia No. trains/lrv NA NA NA NA 158 train sets, 480 trams Brisbane, Australia Bangkok, Thailand 100 train sets 55 MRT 3 car train sets approx; further 9 Airport Line train sets being procured No. buses 2,000 3,700 19,000 NA 1,500 1,000 10,000 Other Passenger boardings/- weekday (m, circa 2004)) Private Sector Involvement Approx 0.26m per day on STAR and PUTRA, 0.045m on monorail and 0.07m on KTM Private STAR and PUTRA rail concessions taken back into a public asset corporation & merged after financial failure. Airport Express & monorail operated separately. KTM operates nationwide. Two major nation-wide bus companies. 2.5m on MRT and bus 3.2m on MRT Tokyo city 27m Suburban 43m Government funding of MRT infrastructure & rollingstock. Two 2 multimodal operators created. SBS Transit operate North East Line (20km) and bus services & SMRT the remainder (now incorporating Trans Island Bus Services) Five private sector companies bus services. Former govtowned MTRC now listed on stock exchange. MTRC has issued bonds for railway development. Regional railway (KCRC) is government owned. Suburban: JR-East has the largest share (34%). 21 private sector companies. Tokyo metropolitan city owns Tokyo metropolitan subway and bus. 0.37m (rail), 0.37m (tram) & 0.26m (bus) Train: franchised to 2 operators in 1999 but re-franchised to 1 operator in 2004 Tram: franchised to 2 operators in 1999 Refranchised to 1 operator in Buses: several private operators 0.13m (rail), 0.2m (bus & water) 15 private bus operators server outer suburbs. All other public transport services provided by corporatized state government agencies 0.60m on MRT; 7.0m on bus and other public modes 35 private bus companies under contract to BMTA State Enterprise urban bus operator plus some 1,500 owners of small vehicles involved in urban transport; 2 MRT concessionaires: Bangkok Transit System Corp for Bangkok Metropolitan Administration s elevated 24km BTO Skytrain project (1999 opening) & Bangkok Metro Corp Ltd for MRTA s BTO Blue Line Subway Operations and E&M concession (2004 opening) 49

241 Feature Kuala Lumpur, Malaysia Features of the MTA (or equivalent) Name Organizational form No formal MTA at present. National government through PM department has dominated. All concessions under MOT. Concessions and SPNB regulated by MOT. Proposal for a KL Urban Transport Authority under Authority under PM Dep t (Allport 2004) Singapore Hong Kong, China Tokyo, Japan Melbourne, Australia Land Transport Authority (LTA) Statutory authority under the Ministry of Transport. LTA responsible for all modes of transport (incl roads). LTA has the structure of a govt department. Board None 7 members drawn from govt and private sector. Local government involvement KL City Government represented on KL transport committee in absence of an integrated authority None some consultation with District Councils Transport Department (TD). Reports to Transport Advisory Committee (CTA) & Transport Policy Coordination Committee. Railway Corporations regulated by TD s Transport Branch. Government department. No formal authority. Ministry of Land, Infrastructure, and Transport (MLIT) supervises public transport system. MLIT has a Railway Bureau and a Road Transport Bureau. Also, under MLTI are local bureaus such as Kanto Regional Development Bureau for the larger suburban area. Department of Infrastructure s Director of Public Transport is the State of Victoria s Administrator of Public Transport Government department establishes arrangements with infrastructure & service providers through contracts. Brisbane, Australia TransLink (a division of Queensland Transport or QT) Government department establishes arrangements with infrastructure & service providers through contracts. None None None Translink is a part of a government department and has no board None None except Tokyo metropolitan subway and bus subsidized by Tokyo metropolitan city. None some consultation with District Councils State Government & Brisbane City Council (BCC), agree to cooperate through Capital City Transit Group (CCTG) Bangkok, Thailand No formal MTA. 2 MRT agencies (ie SRT and MRTA) under supervision of Ministry of Transport and one Bangkok Metropolitan Administration for under Minister of Interior. Largely independent agendas but share common MRT Master Plan prepared by MOT s Office of Transport & Traffic Policy & Planning (OTP). BMA is a local government & SRT and BMTA are State-Enterprises. BMTA and SRT have boards. Local government (ie Bangkok) involvement in Skytrain only. No coordination with other local governments in region. 50

242 Feature Institutional responsibilities Policy & strategy Infrastructure provision and financing Kuala Lumpur, Malaysia There is a holistic strategy for national development & an urban transport strategy. Not fully effective (Allport 2004) All new MRT lines were built & funded by private sector. KTM is national railway operator. Singapore Hong Kong, China Tokyo, Japan Melbourne, Australia Comprehensive multimodal strategy established in 1996 and regularly updated. Strong integration with land use and other sectors (eg Info Communications Technology) All MRT lines funded by Government. Comprehensive multimodal strategy & modal strategies regularly updated. KCRC & MRTC develop, operate & maintain MRT infrastructure. Until recently a property based MRT financing avoided the need for public subsidy of development of MRT. MTRC can issue bonds in own right since has revenues from property & railway operations. Strong market-based operations by individual operators are encouraged by MLIT. Strategic decisions are made by individual operators with MLIT s approval. Individual operators are expected to earn fare revenues to cover not only direct operating costs but also indirect costs including infrastructure costs. JR was owned by MLIT, but was privatized in Since then it has received no subsidy from MLIT. State government transport department establishes transport policy and an implementing strategy within broader urban strategy. Financed by state government grants and implemented by government agencies using private contractors. Investment decisions subject to normal budget process with priorities determined by policy priorities. Brisbane, Australia State government transport department establishes transport policy and an implementing strategy within broader urban strategy. Financed by state government grants and implemented by government agencies using private contractors. Investment decisions subject to normal budget process with priorities determined by policy priorities. Bangkok, Thailand MOT s OTP Financed by national budget and loans from IFIs. Usually implemented by government agencies using private contractors. Investment decisions subject to normal budget process with priorities determined by policy priorities. Private finance in 2 MRT concessions. 51

243 Feature Operation and services Provision Ticketing and marketing Kuala Lumpur, Malaysia Individual operators for rail & bus see above. Current focus is to restructure based on: (1) A new Urban Transport Authority to be established under PM (2) an assetowning Company SPNB (PUTRA, STAR, Intrakota, Park May) who would contract OpCo to operate all services (Allport 2004). KL s common payment system (tolls, parking as well as public transport fares) system was implemented in using a cashless card (Touch n Go). System for public transport was developed by the 7 major public transport operators who formed a joint ticketing company known as Uniticket. Singapore Hong Kong, China Tokyo, Japan Melbourne, Australia 2 multi-modal operators under concession to govt. Concessions usually start at 10 years and can be extended to 30 years. Standards for services set by an independent Public Transport Council established in Council members are drawn from distinguished community leaders. Ez-Link, an integrated fare system using smart cards, was implemented in Ez-Link is a company and a subsidiary of the LTA. Individual operators established a jointly owned company to integrate marketing, information provision & physical integration. See above. The merger of KCRC and MTRC is planned to integrate their networks & services and lead to better future provision. Creative Star supplied & operated integrated ticketing system since Government owned. In principle, individual operators are responsible for provision of services, as well as maintenance of assets and infrastructure. MLIT supervises and provides guidelines where necessary. In some cases, local authorities provide supports or directly intervene, to maintain specific services. Integrated ticketing system implemented. In 2000, a prepaid Passnet Card, which is valid for 22 private railway and subway companies in Tokyo, was introduced. In 2001, an IC Suica card was introduced by JR-East. In 2006, a new integrated IC card will be introduced. Good voluntary coordination among individual operators exists. Government provides services through contracting. Operational planning is the responsibility of franchisees within the terms of franchises that specify a minimum service standard & an Operational Performance Regime (OPR). Rail operators financially rewarded or penalized according to OPR performance against an agreed benchmark. Integrated ticketing system implemented for several years. New integrated ticketing system recently contracted. Networkwide services provider (passenger information & marketing) is provided by Metlink Victoria Pty Ltd which is owned by the operators & the Bus Association of Victoria Brisbane, Australia TransLink developed new contractual arrangements between the state government and bus operators. Queensland Transport s Rail, Ports & Freight Division oversee urban and state-wide rail services & pay subsidy. TransLink is implementing & managing the new integrated ticketing system. It also provides centralized marketing & provision of information to the public. Bangkok, Thailand BMTA operates bus services & subcontracts least profitable bus services to private sector. MRTA concessisoned operations and maintenance and E&M investment incl. trains and depot to BMCL, a private consortium. BMA arranged BTO concession for all investment to BTSC in early 1990s new BMA lines to be for operations and some E&M investment only. Currently separate MRT concessions with own ticketing systems and fare structures. Desire to develop integrated ticketing and fares but w/o concession contract revision this will not be possible. Ditto for bus. 52

244 Feature Financing Kuala Lumpur, Malaysia Fare revenue plus specific payments (eg PUTRA/STAR) or general budget support from national government. Singapore Hong Kong, China Tokyo, Japan Melbourne, Australia Government requires MRT projects to fund incremental operating costs and asset replacement costs from incremental farebox and ancillary revenues Until recently no public subsidy was required in rail operations. Change in the property market & two poorly performing projects have led to government finance becoming necessary (Allport 2004) Basically individual operators are expected to earn fare revenues to cover not only direct operating costs but also indirect costs. Revenues only cover a proportion of costs (the remainder of income coming from fixed payments set at the bid stage plus incentive payments). Franchisees required to maintain condition of infrastructure. Brisbane, Australia TransLink collects all revenue for operators. Pays operators on basis of the services they provide (on a per-km basis or on the basis of purchasing a basket of services for a set fee). Bangkok, Thailand MRT concessionaires retain all revenues. BMTA deficit financed by government. Sources: ADB (2006a) with original sources cited as follows Kuala Lumpur (consultant ie ADB 2006a); Singapore (consultant and Allport 2004); Hong Kong (consultant); Tokyo (Ms. Rika Yuasa, Researcher, Japan Bank for International Cooperation); Melbourne (consultant); Brisbane (consultant); and Adelaide (consultant). Information for Bangkok from PPIAF study team. 53

245 Table B.2: Examples of institutional arrangements for public transport in selected cities in the UK, Europe & Americas Feature London, UK Stockholm, Sweden Athens, Greece New York, USA Bogota, Colombia General introduction Region covered Powerful, metropolitan transport agency responsible to the city s Mayor. Responsible for most public transport in London (& for roads also). Agency of the Greater London Authority. Not responsible for trains using national rail network. Little direct involvement by the national government. Each county is required to have a Passenger Transport Authority no involvement of the national government. PTA s provide centralized services and tender / outsource all operations & services but develop & fund major infrastructure. Public company responsible for planning, coordination, monitoring and provision of public transport in Athens metropolitan region. Uses subsidiary, government-owned companies to provide services. Comprehensive Metropolitan Transit Authority for the City of New York that carries out planning, operations (through subsidiaries) for all public transport and tolled bridges and tunnels and also raises finance for infrastructure and manages & implements a major capital works program. Area (sq. km) 1,580 6,500 1, ,590 Population (m) Public transport system features Length of fixed track line Rail 408km underground (the Tube, with 275 stations); 57km LRT (788km national rail) na Metro line 1 (23 stations), 2 nd and 3 rd line open. 494 (New York City Transit NYCT)) TransMilenio established by city s Mayor to develop and operate a busway system for the city. Provides fixed infrastructure, & arranges for the provision of services by private companies through contracts. One minor line only Busway None None None 53 (NYCT) 84km (with 116 stations, by end-2006). 388km total length planned. Rollingstock No. trains/lrv 3,980 Not known Not known 6,195 (NYCT) Minor No. buses 6,200 Not known 1,800 diesel and gas; 400 trolley bus Other Passenger boardings/- weekday (m) 5m (bus), 3m (Tube), 1.4m (rail), 0.2m (LRT) 0.78m (u/g), 0.18m commuter rail, 0.68m (tram) & 0.7m (bus) 1.6m (bus), 0.4m (metro line 1) For NYCT, 5.7m (rail) and 3.0m (bus) 4,457 (NYCT) 1,186 buses for 2006 system, including 381 feeder buses. 1.4m on 2006 busway system 54

246 Feature London, UK Stockholm, Sweden Athens, Greece New York, USA Bogota, Colombia Private Sector Involvement 26 companies (mostly private) provide bus services, and one operates some LRT services. Private companies operate national rail services and maintain Tube infrastructure. Features of the MTA (or equivalent) Private sector operated rail (3 operators), tram & bus services (3 operators). Name Transport for London (TfL) Passenger Transport Authority (PTA) for Stockholm & 21 other counties required by law. In Stockholm the PTA is called SL - AB Storstockholms Lokaltrafik. Organizational form Board Local government involvement Statutory body established under Greater London Authority Act. 12 member Board chaired by Mayor of London. Members are not executives of TfL, and have academic, technical and community-based backgrounds. Entity of the city government. Statutory authority Representatives of local & county councils & other respected persons Direct involvement of local & county councils Negligible involvement Secondary involvement Government built fixed infrastructure. Private sector purchase buses and provide services. Private company contracted to provide and operate fare collection system. OASA (Athens Urban Transportation Organization) Public company, owned by the national government. Financed with 2% of public transport fare revenue 11 member board, appointed for five years: 7 members represent the government, 2 employees, one from the Economic and Social Committee (OKE - a government advisory board), and one from the Union of Prefectural Administration of Greece (ENAE). Metropolitan Transit Authority (incorporates New York City Transit) A public-benefit corporation chartered by New York State in person Board. Members are nominated by the Governor, with some recommended by New York City's mayor & the county executives of Nassau, Suffolk, Westchester, Dutchess, Orange, Rockland, and Putnam counties. The Board also has six rotating non-voting seats held by representatives of organized labor and the Permanent Citizens Advisory Committee (PCAC), TransMilenio Public company, owned by city government agencies. Financed with 4% of public transport fare revenue. 70 staff. City government representatives, selected by the Mayor. National government representation due to onlending of World Bank funds to TransMilenio. One member of the Board See above Leadership from city Mayor and ownership by city agencies. 55

247 Feature London, UK Stockholm, Sweden Athens, Greece New York, USA Bogota, Colombia Institutional responsibilities Policy & strategy Infrastructure Provision Financing Operation and services Provision Responsible to Mayor for London and London Assembly, within framework of Greater London Authority Act. Operational activities undertaken separate companies owned by TfL. Private companies maintain the Tube under contract to TfL company. Service providers maintain other infrastructure as part of service contract with TfL. TfL finances infrastructure, mostly directly, but some instances of financing through PPPs. Funding is provided from local and national government sources. TfL operates Tube services, some LRT, and a few bus services. All other services are provided by private companies under contract to TfL, or private companies for other rail services. Other agencies within county and local governments SL provides financing & development of the total system Local public transport is financed both by the county & the local governments within the county - ie not by the state. SL decides about structure, standards, fares & service levels. SL contracts out all operational & station services & outsourced the operating subsidiaries from the SL group. Tendering was made districtwise. Bus operators supply their own buses Train operators rent the rollingstock from SL. Joint Ministerial Decisions of Ministers of Economy and Transport. By associated public companies. Government Services provided by public companies: ETHEL SA (internal combustion engined buses owned by OASA); ILPAP SA (trolley buses owned by OASA and municipal government); ISAP SA (local electric railway owned by OASA); ATTIKO METRO SA (metro owned by the national government); TRAM SA (trams owned by ATTIKO SA); and PROASTIAKOS SA (suburban railways owned by the national government). Responsible to State of New York Governor for multi-modal planning, design & construction & maintenance of infrastructure. MTA s Capital Construction Company formed in July 2003 responsible for funding, design & construction. Other operating entities of MTA provide rollingstock & operations. Capital projects are funded from a combination of bond sales and federal, state, and local allocations. MTA has large property holdings & revenues from property. Operating wholly owned entities of MTA include; New York City Transit; MTA Metro-North Railroad; MTA Long Island Rail Road; MTA Bridges and Tunnels; & MTA Long Island Bus. Currently being reorganized. Operates within policy framework established by city authorities. TransMilenio plans and arranges for delivery and maintenance of fixed infrastructure. City government agency arranges construction. Buses provided by service contractors. 15% tax on petrol sales in Bogotá, supplemented with national government grants, is used to finance TransMilenio fixed infrastructure. Seven private companies currently provide buses and services through contracts to TransMilenio selected through competitive tendering. TransMilenio plans services and operates a central busway management system. 56

248 Feature London, UK Stockholm, Sweden Athens, Greece New York, USA Bogota, Colombia Ticketing and marketing Financing Some tickets usable only within a single mode, but shifting towards integrated ticketing for all modes and services. A private company (Transys) has been contracted to develop and implement the new ticketing system. Fare revenue less than public transport operating costs. Subsidy needed for some operating costs and all capital costs. Finance from local and national government. SL provides all marketing, branding & ticketing Fare revenue less than public transport operating costs. Subsidy needed. Finance from county & local government. Maintenance of vehicles by operators. Operated by OASA. Provided by MTA. Private company contracted through competitive tendering to provide and manage ticketing and fare collection. A separate company manages the fare revenue. Fare revenue less than public transport operating costs. Subsidy needed for some operating costs and all capital cost. Financed by government. Funded by fares & other funding as above. Cost of bus services, ticketing and TransMilenio covered from fares. Source: ADB (2006a) with original sources cited as follows: principal Sources: London ( Stockholm (Nordstrand 2004)); New York ( Athens ( Taxiltaris and Spandou 2005); Bogota ( and consultants ie ADB 2006a) 57

249 Table B.3: Authority ie MTA functions in other cities Source: Wallis and Lupton (1999) 58

250 Appendix C: Scoping of the Possible Content of an Integrated Public Transport Law An important complementary measure to a preferred institutional arrangement to achieve integrated transport or public transport only would be a new law 13 to mandate that all agencies are responsible for achievement of an integrated transport or public transport system. In this Appendix we have identified the possible outline content of a new law to achieve integrated public transport. This is not to say achievement of integrated transport is not desirable however. Such a law should be applied in all cities throughout Vietnam. But for the purposes of this Appendix the law has been assumed to apply to HCMC only. Key concepts related to achievement of an integrated public transport system would be: A) Key questions Why is government involved in MRT and public transport at all? Answer: MRT particularly involves a large investment with mainly non monetary benefits to users and urban traffic and environment it would not be provided if not for government involvement. Why does government need to regulate MRT and public transport? Answer: Government involvement is needed to provide financial support for investment and future operations, facilitate safe and convenient travel and ensure that public transport maximizes external benefits. There is an identified need for a new legal instrument specifically to ensure development of an integrated HCMC public transport (including MRT system) for the public interest. B) Key MRT Stakeholders & Objectives Users Stakeholder Objectives Demand responsive services that are convenient and affordable and maximize external benefits Services that are punctual (refer to standard) MRT services that are integrated with bus and other modes Comfortable, clean and safe vehicles (refer to possible standard ) Integrated and affordable fares Access for persons with disabilities 13 This is a development of the concept recommended by MVA in 2006 for BRT in which they recommended the need for a White Paper ie a high level policy on public transport. 59

251 Stakeholder Government/ community/ tax payers Public Transport Authority Public transport operators/ concessionaires Objectives according to community expectations Improved mobility Changing needs accommodated Value for Money (VfM) External benefits (eg environment, economic) maximized Appropriate infrastructure, systems and facilities provided to consistent standard to permit essential long term needs for integration of lines and use of common assets (eg depots) to ensure value for money for the community Facilitate investment and operations to minimize life-cycle cost & maximize VfM by appropriate risk transfer ie don t transfer demand risk to a concessionaire where it cannot be controlled Ensure systems are inter-operable and open where beneficial Ensure safety and security of users etc Concessionaires to be responsive to government policy Fair financial return in stable, predictable operating framework C) Specific Issues to Address in a New Law (i) Objectives A new law possibly entitled HCMC Public Transport Integration Act would aim to: Permit development of an integrated public transport system for the benefit of the public in HCMC Public Transport should refer to both rail MRT, Bus Rapid Transit (BRT), other public bus services and water transport services. Integration means as a minimum: Physical integration of MRT lines and stations. Integrated fares meaning a common fare structure comprising a single flagfall plus a common distance-based charge for all MRT will apply ie a person transferring from 60

252 one MRT line to another will not have to pay a second flagfall when entering the new MRT line. Integrated ticketing system whereby a single ticket can be used on all MRT lines and ultimately all modes of public transport. Integrated planning and concessioning of MRT lines to operate as a network of services for the convenience of the public irrespective of which agency is the owner of a particular MRT project. (ii) Role of Administrator of the Law The law should be promulgated by the relevant person in the PC who would be the Administrator of the law. The law should give the Administrator the power to set standards and regulations to achieve the purposes of the law including: To achieve greater standardization and integration of feasibility studies; and Specifically recognize, and be consistent with, current and proposed laws on PPP. (iii) HCMC Integrated Public Transport Authority An integrated HCMC Integrated Public Transport Authority will be established. (iii) Role and Composition of HCMC Integrated Public Transport Authority The Administrator will prepare the structure and duties of the new HCMC Integrated Public Transport Authority. Secretary to the Committee could be the XXXXX. The Authority should meet frequently and not less than every three months. Agencies ie project owners should report on concessionaire and/or operator performance to the Secretary of the Committee on a monthly basis. The Secretary should be charged with the responsibility of informing the Authority of any significant breech of concession terms. (iv) Relationship to Existing Legislation and Administrative Procedures Where existing laws and administrative procedures conflict they shall be superseded by the new Act. (v) Single MRT Infrastructure and Services Plan The Authority would prepare and update (on 5 year basis) the integrated long term public transport infrastructure and services plan that presents an integrated view of the entire public transport network. An important focus of the Masterplan would be to examine how public transport would operate as a network, with integrated services (coordinated with rail and bus) linking the individual sub-regions of HCMC The public transport infrastructure and services plan shall define service desired standards for connecting the principal origins and destinations within HCMC (eg 90% of households to 90% of jobs, educational opportunities etc) in terms of proximity to stations, waiting times, and overall travel times, associated priorities and budgetary needs. This public transport infrastructure and services plan would be used to inform planning, financing and budgeting by other agencies. 61

253 (vi) Integrated Ticketing Integrated ticketing should be provided by or for all public transport systems. (vii) Integrated Fares Integrated fares should be provided for MRT, bus and water transport services. Fares should be set taking into account the quality of service provided, affordability to passengers and the cost-recovery of the MRT system, as well to maximize usage of MRT. (viii) Common Marketing and Branding Even though MRT and other public transport services are to be operated by various different companies or agencies, a common approach to marketing, branding and provision of information on public transport is needed. (ix) Inter-operable and open systems The ability for trains on one MRT line to operate on another is desirable to permit establishment of common depots and workshops to serve more than one MRT line. Ultimately, inter-operable revenue services should be able to be operated from one MRT line to any other, where it is beneficial to do so. (x) Common Approach to Concessions The gross cost concession model shall be applied to all future MRT lines recognizing that the different cost-recovery characteristics of individual MRT lines, the need for an MRT system that is integrated from the perspective of users and under the policy control of government, and allocation of risks associated with MRT lines to the concessionaire and the Government according to the party best able to manage them. These concessions will specifically prohibit exclusivity and first right of refusal for extension of concession contracts. (xi) Rail MRT Safety A common approach to rail and MRT rail safety throughout Vietnam is needed. VRNA have this responsibility but in view of the specialist nature of MRT safety, and the lack of specific experience on this subject in Vietnam, the Decree should foreshadow a national MRT and rail safety and workplace health regulator to be established in a defined time frame 62

254 References and Bibliography Asian Development Bank and the Government of Thailand (2006a) Integrating Mass Rapid Transit in Bangkok: Options Report, TA 4676-THA: Small Scale Technical Assistance for Infrastructure Investment Advisory Assistance, Thailand. February. Asian Development Bank and the Government of Thailand (2006b) Integrating Mass Rapid Transit in Bangkok: Summary of Resource Papers, TA 4676-THA: Small Scale Technical Assistance for Infrastructure Investment Advisory Assistance, Thailand. July. Asian Development Bank and the Government of Thailand (2007) Integrating Mass Rapid Transit in Bangkok: Phase II, Final Report, TA THA: Technical Assistance for Infrastructure Investment Advisory Assistance (Phase II), Thailand. July. Asian Development Bank (2007), HCMC Metro Rail System Project, Strategic Financial Model Update, TA RSC-C61011 (VIE). March. Allport R (2004) A Tale of Three Cities: Urban Rail Concessions in Bangkok, Kuala Lumpur and Manila., prepared by Halcrow Group Ltd for World Bank as part of ADB-JBIC-World Bank East Asia and Pacific Infrastructure Flagship Study. Astris Finance and Systra (2005), Hanoi LRT Pilot Line Feasibility Study, Executive Summary, Ocober. Booth, C. and Richardson, T. (2001) Placing the public in integrated transport planning, Transport Policy, 8(2) Chiplunkar, A (2006), Presentation on Public Private Partnerships (PPPs) Framework for Infrastructure Development in Vietnam. Dr Chiplunkar served as ADB Staff Consultant on PPP in GMS. Finlayson, R (2007), Viet Nam Case Studies on Private Sector Development and Operations A Case Study from the 2007 Special Evaluation Study on Private Sector Development and Operations: Harnessing Synergies with the Public Sector, Prepared for ADB Operations Evaluation Department. June. Fouracre P R, Allport R J, Thomson J M (1990) The Performance and Impact of Rail Mass Transit in Developing Countries, Transport and Road Research Laboratory, Research Report 278, UK. HCMC PC Web site: < Accessed October 24. Japan Bank for International Cooperation, Japan (2006) Terms of Reference for Special Assistance for Project Formation (SAPROF) for Japanese Line, HCMC. Japan International Cooperation Agency (2004) Study on Urban Transport Master Plan and Feasibility Study in Ho Chi Minh Metropolitan Area (Houtrans) undertaken for the Ministry of Transport and the Ho Chi Minh City People's Committee with support from the Japan International Cooperation Agency. Prepared by ALMEC Consultants, Japan. Japan International Cooperation Agency (2006) Integrated Urban and UMRT Line 1 Development Strategy in HCMC draft Final Report. Prepared by ALMEC Consultants, Japan. Larwin, T. F. (2005) Transit Planning for the 21st Century, ITE Journal, 75(8) MVA Asia (2006), Task 3 Report, Institutional Recommendations for Involvement of the Private Sector Involvement, Technical Assistance for Consolidation and Development of a Bus System in Ho Chi Minh City, Viet Nam for World Bank with PPIAF funding, April. 63

255 Parsons Brinckerhoff International and Japan Railway Technical Services (2006) Special Assistance for Project Formation for Ho Chi Minh City Urban Transportation Improvements Project Urban Mass Rapid Transit (UMRT) Line 1, Eastern Section, September. Policy Appraisal Services Pty Ltd and Economic and Policy Services (2001) Bangkok Mass Transit (Skytrain) Externalities Study, prepared for the International Finance Corporation (June). Preston, J. (2005) Contracting out public transport planning: options and prospects, 9th International Conference on Competition and Ownership in Land Passenger Transport, Lisbon, Portugal, 5-9 September. Transparency International (2006), National Integrity Systems: Country Study Report, Viet Nam. Transport East West Expert Team GmbH (2003), Feasibility Study: MEtropolitan RAil System (METRAS), Ho Chi Minh City. Transport East West Expert Team GmbH (2005a), Addendum to the Feasibility Study: MEtropolitan RAil System (METRAS), Ho Chi Minh City, September. Prepared by MVA Asia. Transport East West Expert Team GmbH (2005b), METRAS, Metropolitan Rail System HCMC, Financing Report, Berlin, November. van de Velde, D. M. (1999) Organisational forms and entrepreneurship in public transport: classifying organisational forms, Transport Policy, 6(3) Wallis, I. P. and Hensher, D. A. (2005) Competitive tendering for urban bus services - cost impacts: international experience and issues, 9th International Conference on Competition and Ownership in Land Passenger Transport, Lisbon, Portugal, 5-9 September. Wallis, I. and Lupton, D. (1999) Metropolitan Public Transport Policy and Planning: Institutional Development in a Multi-Operator Environment, 6th International Conference on Competition and Ownership in Land Passenger Transport, Cape Town, September World Bank (2002) Cities on the Move: A World Bank Urban Transport Strategy Review, Washington DC. World Bank (2005), Vietnam Transport (Draft) World Bank (2006), Infrastructure Strategy Cross Sectoral Issues, Vietnam. World Bank (2007), Project Information Document, Vietnam- HIFU Development Project Appraisal Stage Report no. AB

256 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF Appendix D: Fares and Ticketing Working Paper 25

257 Asian Development Bank Public Private Infrastructure Advisory Facility TA 4862-VIE: Preparing the Ho Chi Minh City Metro Rail System - PPIAF Study - Working Paper Fares & Ticketing June 3, 2008

258 Table of Contents Summary & Recommendations... i 1. Background and Purpose Fares Policy Issues & Implications for Fare Structure Policy Issues Implications for Fare Price Structure and Form of Fare System Patronage and Revenue Impacts of Fare Price Changes Relevant Experience on Fare Price Elasticities Fare Price Elasticities Using Results of Demand Modeling Study / 2008 Study Conclusion on MRT Fare Price Elasticity in HCMC at Achieving Uniform Fares and Integrated Ticketing Introduction Separating Ticketing from Other Aspects of MRT Operations Addressing the Challenges of Implementation Importance of Fare Pricing Policy Specification of Ticketing System Components Procurement Options for Ticketing System Integrated Ticketing Administration...25 Appendix A: Affordability Analysis & Tourist Use...27 A.1 Introduction...27 A.2 Alternative Affordability Analysis...28 A.3 Tourist Use...30 Appendix B: Most Likely Technical Option...31 B.1 Likely Technical Components...31 B.2 System Scalability Requirements...32 References and Bibliography...33

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

260 Summary & Recommendations An objective for rail mass rapid transit (MRT) in HCMC is that it be convenient to use and free of artificial barriers that could be imposed if MRT lines and their method of operations were to be done on a standalone basis. Fare policy and an associated ticketing system are essential to the success of MRT and the broader public transport system. Fare policy is vital because: financially, it affects the number of people who will use MRT, which in turn influences fare revenue, MRT operating costs and, ultimately, the viability of MRT lines; socially, the absolute level affects the affordability of public transport to people, while alternative fare structures have differential, and thus distributional, effects on the community; technically, it influences the form of operating concessions, and the design of the MRT system in general and the ticket system in particular; and for the remainder of transport system, the level and structure of MRT fares affects the use made of other public transport and the amount of private travel, with consequences for the transport system and community as a whole. A policy objective for HCMC, as it is in most cities that seek to provide an attractive public transport system, should be: an integrated ticket and fare system for MRT and, ultimately, the bus system also; and uniform fares for modes of similar quality. It will be exceptionally difficult, perhaps impracticable, to implement an integrated ticketing system with each public transport operator supplying their own equipment. Accordingly, there is a universal movement towards integrated ticketing and fare systems that are managed centrally rather than by individual service providers. It is recommended that such an approach is essential for HCMC. Moving towards implementation of such a system requires an appropriate framework in which all necessary studies and activities can be undertaken. This framework is discussed below and is presented in more detail in Table 4.3. While it is not essential that the fare structure and level be confirmed before commencing the process of planning an integrated ticketing system, an early decision will provide clarity and direction to future work. In any event, establishing the fare structure and level is essential to the development of future MRT lines in HCMC, and is thus a matter than needs urgent attention. Accordingly, it is recommended that work commence as soon as possible to examine a range of fare structures and levels, and identify the option that best balances MRT financial viability and social obligations. Experience elsewhere suggests that a practical way forward to implementation of an integrated ticket system is to commence with a high level working group that should: recommend a preferred fare structure and level; prepare a functional specification for the ticketing system, identify a preferred technology, and estimate likely capital and ongoing operating and maintenance costs; i

261 recommend arrangements for an integrated procurement contract that covers both implementation and ongoing operation and maintenance of the ticket system, and which also considers possible private sector financing of capital costs; recommend institutional arrangements for the management of fares and ticketing for MRT in HCMC following implementation of a new integrated ticket system; and present a program for implementation of the recommendations that describes activities, costs, schedules and agency responsibilities for government consideration and approval. It is recommended that this working group should comprise representatives of the PC s Management Authority for Urban Rail (MAUR), Transport and Urban Public Works Services (TUPWS), Department of Planning and Investment (DPI) and Department of Finance or could be an embryonic form of the Integrated Public Transport Authority. Representatives of organizations and the community who will be affected by the proposals should be invited to participate, either as members of a steering committee or an advisory panel. A period of about 12 months will be required for the working group to undertake the above tasks to the necessary level of detail. Following a positive decision on the working group s report, it is recommended that the government organization that is to be responsible for managing the ticket and fare system should be established (at least in the form of a project office ), and required to prepare: bidding documents; plans to implement the procurement process, including tender assessment, award and management procedures; and plans for operation of integrated ticketing across the entire MRT system, including current lines, bus and other modes. This work is likely to take a further six to twelve months, and will permit the government to proceed to formalization of institutional arrangements, implementation of the ticketing system and its ongoing operation. Based on experience in other cities, it is expected that it will then take about three to four years to tender, contract, deliver, install and commission the ticketing system, including establishing arrangements for delivery, sale and use of new smartcard-type tickets and management of fare revenue. Finally, responsibility for developing a suitable integrated ticketing and fare policy to support an integrated MRT and public transport system for HCMC rests with the Management Authority for Urban Rail (MAUR) in the first instance. The thinking needed to develop an appropriate ticketing system and fare policy cannot be outsourced to others. ii

262 1. Background and Purpose The People s Committee (PC) of Ho Chi Minh City (HCMC), Viet Nam has initiated studies to develop a rail mass rapid transit (MRT) system for the City based on the current MRT Master Plan (as approved in January 2007). Hitherto, two lines (MRT2 and MRT3) were proposed for Asian Development Bank (ADB) funding with another line (MRT1) to be financed by the Government of Japan. The Government of China, is a developing a proposal for an MRT line, there are other proposals including one from China for MRT, Malaysian interests to develop a monorail, and for a French consortium to develop a tram route. ADB has mobilized a PPTA and selected a firm for the following components of the project preparation for MRT Lines 2 and 3. The PPTA study, which commenced in May 2007 and is to be completed in May 2008, is responsible for providing: An optimized MRT Master Plan which integrates the currently proposed MRT lines into a cohesive network with other modes, identifies required supporting policies, and develops design parameters for the two project lines. A feasibility assessment and preliminary engineering design for the two project lines. The PPTA must confirm the engineering feasibility, and identify social and environmental impacts for accurate cost estimation and financial appraisal. A plan to support project implementation, including institutional and staffing arrangements, capacity building, financing/funding options, and implementation program. In parallel, ADB is mobilizing a grant from the Public Private Infrastructure Advisory Facility (PPIAF 1 ) to optimize private sector participation in MRT 2 and 3, and to assist the HCMC PC to develop appropriate short term and longer term implementation and management arrangements for MRT in the context of wider urban transport. The scope of the PPIAF technical assistance (TA) therefore covers developing (i) a framework for considering private sector participation in implementation and operation of the Project; (ii) a value-for-money analysis for implementation approaches that involve varying degrees of private sector participation, (iii) a detailed financial model reflecting the preferred approach and measuring the performance of the project from the points of view of the government and private sector participants; and (iv) a stakeholder feedback and a description of necessary institutional and contractual arrangements given the preferred implementation approach. This PPIAF TA draws on detailed information on project costs, patronage and revenue prepared by consultants undertaking the PPTA. The results of its work will be presented in conjunction with the work of the PPTA to ensure an integrated and complete business case that the HCMC PC and ADB can use to direct implementation and ongoing operations. While the MRT system will be developed by the PC, the GVN will also be involved through various approval processes and possibly financing also. It is therefore necessary to establish in detail the roles for various agencies of these governments for project approval and implementation, and the manner in which integrated MRT development, including fares and ticketing, in HCMC will be managed. 1 The Public-Private Infrastructure Advisory Facility (PPIAF) is a multi-donor technical assistance facility aimed at helping developing countries improve the quality of their infrastructure through private sector involvement. For more information on the facility see the website: < 1

263 This Working Paper presents a discussion of the policy issues regarding fares and ticketing systems and recommends an approach to secure both integrated fares and an integrated ticketing system primarily for MRT, but also for other public transport, as MRT will rely on an integrated public transport system to maximize its performance. 2

264 2. Fares Policy Issues & Implications for Fare Structure 2.1 Policy Issues This section summarizes the key issues related to why both uniform fares and integrated ticketing are needed in Greater HCMC. The principal focus of this paper is on fares and ticketing for MRT. But a common approach to developing fares and ticketing policy needs to be taken for MRT and the wider public transport system which in future, even with extensive MRT, will rely on bus transport. The benefit of an MRT network is that it substantially increases the range of locations between which people can travel, though this also requires people to more frequently interchange between lines, and to access the MRT network using bus services (and other modes). Integration of ticketing systems enables people to use a single ticket on different MRT lines, and potentially on bus services, independent of the fare structure for the various lines. However, from a passenger s perspective, if there is a need to pay a second flagfall (also known as the boarding charge) when transferring between trains of different operators would likely be that it is unfair and is counter to the implicit objective of providing a convenient transfer between various lines of an MRT system. Achieving integrated fares, that is with no flagfall for second or subsequent boardings in the course of a single trip, ensures that public transport users are not affected adversely in a financial sense by the possible adoption of different fares policies on different MRT lines. A similar line of discussion applies to transfers between MRT and bus. Achieving integrated fares requires additional policy decisions and intervention by the Government. If the fare system is integrated, people would not be charged a second or subsequent flagfall for a single trip that involved use of several lines. There is a second aspect to fare integration. It is that fare rates could vary between MRT lines and bus services. Policy analysis could note that the different fares reflect the different cost 1 of providing services on various lines but could still seek to establish a simpler fare structure that is easier for the community to understand, for example a standard flagfall and distance charge for all MRT, and possibly bus, lines (ie uniform fares). This is generally the practice for MRT and bus systems in most cities. Finally, in considering fare policy, it is necessary to also recognize that if fares are set too low, substantial subsidies are needed, which must be funded from other taxes on the community. Low fares also encourage additional demand, which raises the cost of providing services and further increases the need for subsidies. Complex fare structures and arrangements discourage use of MRT. Fares policy needs to balance the need for cost-recovery, simplicity of understanding, and other Government policies such as with regard to the environment and social equity. 1 The cost of providing services on a subway system such as the proposed Line 2 would be higher than for an MRT line where much of it is above-ground or at-grade such as Line 1 because of, for example, additional airconditioning and emergency requirements. 3

265 A policy objective for HCMC, as it is in most cities that seek to provide an attractive public transport system, should be: the integration of the ticketing and fare systems of MRT and, ultimately, the bus system; and the adoption of uniform fares for modes of similar quality. Fare policy is a matter that needs to be addressed at the outset, because it affects passenger demand, design of stations and interchanges, the financial viability of public transport, and the form and content of operating concessions. Table 2.1 shows that achievement of uniform fares and integrated ticketing is best suited to a Gross Cost form of operating contract (as recommended by the PPIAF Working Paper on private sector participation options) and that both need an MRT or Public Transport Authority with ability to manage more complex concession agreements with more intricate financial arrangements. Table 2.1: Requirements for Uniform and Integrated fares Fare (1) Ticket Concession MRT Authority Uniform & integrated Must be integrated All concessions on same basis. Need revenue settlement system, perhaps with fares collected by third party. Gross cost (2) form of concession is better. Needs an Authority with ability to manage more complex concession agreements with more intricate financial arrangements (1)Uniform fare = same Fare VND/km on all lines; Integrated fare = no second or subsequent flagfall Link to cost recovery: (i) how will loss of second flagfall with integrated fares be recovered?; and (ii) how will concessionaires be compensated for different level of cost recovery for each line with uniform and integrated fares? (2) Gross cost concession all fare revenue is paid to the government with bids made for the amount the government should pay for provision of the tasks set out in the concession. Can involve some transfer of patronage risk to the concessionaire. Source: Consultant The addition of uniform fares (ie with the same fare per kilometer traveled in addition to only a single common flagfall) is very complex because it requires net financial transfers between operators, if there is more than one. However, integrated and uniform fares are the usual situation for urban public transport systems because they provide a standard fare structure that is easily understood by travelers and judged by them to be fair. To users, the entire public transport system (ie MRT, bus etc) should be presented as an integrated system with no fare-related impediments to making best use of the network. Hence, it is recommended that Government policy on fares should aim for this situation. Implementing the approach requires a substantial role for the Government. 2.2 Implications for Fare Price Structure and Form of Fare System Fare prices influence demand and any proposal to develop a new uniform fares and integrated ticketing system for HCMC can be expected to affect demand and associated revenue in complex ways. A change in fares, keeping all other factors the same, will have an immediate effect on patronage and revenue, which can be expected to prevail in the short term. Many other factors affect patronage and revenue such as modal quality, trip purpose, availability of other modes and the income status of passengers. Also relevant as indicated above is the fare structure such as whether fares are flat, distance-based or zonal. 4

266 Distance based fare systems are typically preferred by public operators as they are more likely to balance demand across the system and to yield the highest patronage-related revenue. Economists prefer distance based fares for similar reasons. On the other hand graduated or zonal fares may be preferred for simplicity. Flat fares are also easier to implement and need only relatively simple, and therefore not so expensive, ticketing systems. In HCMC at present the current bus operators make use of flat fares structures with the fares and fare product types shown in Table 2.2. Table 2.2: Bus Fares Source: MVA (2008); A set is a book of 30 tickets. For the purposes of this paper, some typical fare structures that could be applied are illustrated in Figure 2.1: Proposed MRT system two different boarding charges plus different distance-based fare structures; Proposed MRT system common different distance-based fare structures plus common boarding charges; Flat fare for all public transport ie including bus and MRT or just MRT alone; Zonal systems for all public transport or just MRT alone. The diagram shows that a detailed zonal system could be structured in a variety of ways: Flat fare a single zone fare system; Simple zonal fare system with few zones; More complex zonal fare system to an extent that if there are a large number of zones it approximates a distance-based fare system; and Other zonal structures eg with widely spaced zones in outer suburban areas if low income groups are heavily represented. Zonal fare structures need not necessarily be circles but could consist of arcs across the region or a patchwork quilt approach based on neighborhoods. 5

267 Figure 2.1: Example of Possible Fare Structure Options Distance Fares Varying by Line Patchwork Quilt based on neighborhoods Flat Fare Arcs radiating from CBD Standardized Distance Fare Simple Zonal Fare Zonal Fare Zonal Fare with Social Objective Source: Consultant 6

268 3. Patronage and Revenue Impacts of Fare Price Changes A change in fares, keeping all other factors the same, will have an immediate effect on patronage and revenue, which can be expected to prevail in the short term. Many other factors affect patronage and therefore revenue and they include: fare structure whether flat fare or distance-based or zonal fares; purpose of trips and their importance ie essential trips such as for work or education versus those that are more discretionary in nature such as shopping or personal business; effects of service frequency, quality of service and vehicles, waiting times, and ease of access to stations and movement within stations; influence of marketing and range of ticket products and concession tickets 1 for school children, monks etc; availability, and the costs in time and money, of alternative modes of transportation such as private modes (car, motorcycle), bus etc. These effects take into account congestion encountered by buses and cars and so on. household incomes average income and distribution of incomes; economic situation price of goods and employment situation; and urban development patterns including the extent of substitutability of key destinations such as shopping and business centers, and regional travel patterns. The interaction of these other factors is complex and generally become more important in the medium to long term when the economy, urban development and incomes and car ownership can all vary considerably. The current Working Paper focuses briefly on the implications of MRT fare price level and fare structure on MRT patronage and revenue, and only gives preliminary consideration to the many other factors which may also come into play. 3.1 Relevant Experience on Fare Price Elasticities The approach to estimating the effect of fare level on patronage and associated revenue is to review previous experience for similar situations. The way this is most appropriately done is to use the concept of elasticity. Elasticity is the impact of a change in an independent (or stimulus) variable on a dependent (or response) variable, both measured in percentage changes (Hague 1999). If a 1% increase in the MRT fares results in a decrease in MRT passenger trips by 0.3%, the fare elasticity of the demand for MRT travel is -0.3 (=-0.3/1). Elasticities are defined using the ceteris paribus condition: they are valid under the assumption that all other things (eg other independent variables) do not change. An elasticity can be positive or negative. If an elasticity (in absolute values) exceeds 1, the dependent variable is called elastic (eg elastic demand) with respect to the independent variable, ie demand is highly variable with fares. If the elasticity value (in absolute terms) is low, the dependent variable is described as being inelastic, ie demand is not substantially affected by fares. 1 Concession tickets are those that may be offered at lower than normal prices for special groups such as school children, religious persons, the elderly or those with disabilities. 7

269 For MRT and other public transport, as for most other goods and services, an increase in prices leads to a reduction in demand. The normal range of MRT and public transport fare price elasticities would be between 0 and An elasticity of zero would mean that demand is inelastic and would not vary with price. While this condition may apply for small increases in price for wealthy people higher and higher prices would be expected to reduce demand eventually. An elasticity of -1.0 means that an increase in price reduces demand by the same amount. For example, an increase in price of 10% would lead to a reduction in demand of 10% thus meaning that revenue would stay the same. This condition can be attained by a commercial MRT or public transport operator that is free to raise prices to maximize their income, as would be commonly experienced in sectors where the price is unregulated or only lightly regulated (airport limousine services, airline travel, tourist coach services). How can we measure fare price elasticity of MRT passenger demand? Transit Cooperative Research Program (1999) identifies the following general methods: time series analysis using historical data on fares and passenger demand using regression analysis to isolate the effects of other factors (eg fuel price changes, MRT service level changes); before and after analysis of demand for a particular fare change; use of a demand function, often on the basis of stated preference surveys or use of a revealed choices as simulated by available transport models; and review of industry experience for similar cities with similar MRT systems. For this PPIAF study we use the third and fourth approaches. The third approach makes use of Systra MVA s transport model which is used to simulate the effect of a variety of fares on passenger demand and revenue. The fourth approach makes use of available published or unpublished data on MRT fare elasticities from other cities in the region. There appears to be no MRT fare price elasticity information available for similar cities to HCMC at somewhat similar stages of development (eg Singapore and Hong Kong 1 in the 1970s and 1980s; and Manila, Philippines and Kuala Lumpur, Malaysia, in the 1980s). Current information from Hong Kong s urban and suburban railway operator KCRC indicates their systems fare price elasticity of demand is about -0.3 (Personal Communication 2006d). Experience from Manila s MRT3 (Metrostar) indicates that the fare price elasticity of demand is around -0.7 (Personal Communication 2007). In Bangkok, Thailand as the only two MRT systems BTS and BMCL s Blue Line subway did not adjust their full (undiscounted) fares until mid 2007 since their opening in December 1999 and mid 2004 respectively, there is no available information for Bangkok on demand response to MRT fare price changes 2. There is a longer history with bus fares although until recently there have been relatively few fare price changes. Given the quality differences between existing bus services and MRT in Bangkok any information on bus fare price elasticity for Bangkok buses is not considered applicable to MRT. 1 Singapore and Hong Kong s first MRT systems opened around 1980 and 1988 respectively. 2 It is possible that if BTS and BMCL had closely monitored the effects of various discount fares on demand and were able to separate it from the wider effects of underlying growth some information on demand response to fare price could be gained by them. 8

270 There is more extensive information reported on MRT and suburban rail fare price elasticities of demand for western cities. For the purposes of this section, this is satisfactory, as the aim is not to precisely define likely MRT fare price elasticities of MRT demand for HCMC but merely to suggest their likely size. Balcombe et al (2004) found in their review of various studies found that: MRT fare price elasticities in the short run 1 had a mean elasticity of with a range of to Suburban rail in UK had a mean fare price elasticity of with a range of to MRT fare price elasticities in the long run had a mean elasticity of with a range of to Short run MRT fare price elasticities for the peak period had a mean of which was shown to be higher than the off-peak period when the mean was found to be Short run suburban rail fare price elasticities for the peak period has a mean of which was shown to be higher than the off-peak period when the mean was found to be Wardman and Shires (2003), found that in the UK, MRT fare price elasticities for commuter tickets (no concession tickets at discounted prices) the underground MRT fare price elasticity of demand in the short run was and in the long run was It would be expected that MRT fare price elasticity will increase, ie become more elastic, as follows: With the passage of time as incomes and associated access to private modes increase. Balcombe et al (2004) found that long run elasticities are higher (ie more elastic) than short run elasticities; In response to how essential the trips are for more important trips such as work/ education, the MRT price elasticity would be expected to be lower than for less essential trips or those where a variety of destinations can satisfy the same desire for travel eg shopping could take place at a variety of centers. As more less essential travel occurs within off-peak periods it is not surprising that off-peak elasticities were found by Balcombe et al (2004) to be higher (ie more elastic) than in the peak period; As incomes decrease lower income groups would be expected to be inclined to manage their overall expenditure to match available budgets. For very poor people that occasionally use MRT for essential trips a fare increase would be expected to lead to a direct reduction in expenditure on other items or conversely on MRT travel itself as total household expenditure is held to the available budget; and As land use and travel patterns change. 1 Balcombe defined short term one or two years with the long run as being 12 to 15 years, and possibly longer eg 20 years. In a very dynamic growing city such as HCMC with relatively low car ownership (94% of households are estimated by SYSTRA MVA (2008) to not have had access to a car in 2007 although 91% had access to one or more motorcycles) the short run may be considered to be a period of a few months, with the long run being a period of three to five years or longer. 9

271 MRT fare price elasticities can also be expected to decrease with distance as the impact of the flagfall becomes more muted. Similarly, MRT (and bus fare) price elasticities can be expected to decrease with the adoption of integrated fares which imply the payment of only one flagfall irrespective of how many modes are used. Fare price elasticities would be also expected to be lower where there are available ticket products at deep discounts as exist for set tickets 1 and monthly tickets for bus today in HCMC and which would likely be adopted for MRT also. For example, as shown in Table 2.2, the use of a set ticket on a single trip basis is at a discount of over 20% compared to the full price single ticket. 3.2 Fare Price Elasticities Using Results of Demand Modeling Study For TEWET (2003 and 2005), MVA prepared demand forecasts and also examined the impact of different fares levels on demand and associated revenue. For the current PPTA study, SYSTRA MVA et al (2008) updated the earlier demand model and have prepared revised estimates of patronage and revenue for various assumptions including different fare price levels. ADB (2007a) found in its review of the work of TEWET (2003 and 2005) that for an MRT opening year of 2010: Forecast demand is extraordinarily sensitive to fare level the implied demand with respect to fare price elasticity (defined below) at 2010 is -1.1 which is higher than might be expected. In HCMC an elasticity of perhaps around -0.7 to -0.8 would have been expected at these relatively low fare price levels. Further discussion on elasticities is made below. This is also surprising given that bus fares in 2005 prices are VND2,860 which from years 2010 to are higher or almost the same as METRAS fares. And, as discussed above, this level of bus fare is broadly consistent with the current bus fare in terms of affordability to passengers and therefore their behavior. While on the one hand demand here appears overly sensitive to price, as transport models do not model many of the degrees of freedom actually available to travelers (changes of budgeting and associated consumption patterns) and often model others poorly (changes in origins, destinations, trips with multiple legs, social constraints where travel is captive to certain modes due to the nature of the trip, or even the decision to travel at all) the elasticity estimated from a transport model would usually be expected to understate the actual elasticity. The analysis reported in Appendix A presents an alternative approach to examining the sensitivity of demand with respect to fare price by examining likely affordability. This analysis reported by ADB (2007a) required many assumptions but indicated that the demand with respect to fare price elasticity implied by the results of TEWET (2003 and 2005) were overly high. This conclusion appears to have been confirmed by the results of the 2007 demand forecasting of SYSTRA MVA et al (2008) as shown below. 1 A set is a book of 30 tickets. 10

272 / 2008 Study Non Integrated Fares A review of the results of SYSTRA MVA et al (2008) show that for Lines 2 and 3 for non integrated fares 1 that: For an opening year of 2015, forecast demand with respect to fare price level exhibits a fare price elasticity of around -0.9 rising from a fare of VND4,000 (in 2007 prices) to -1.0 at the revenue maximizing fare of around VND4,500 (in 2007 prices). For an opening year of 2025, forecast demand with respect to fare price level exhibits a fare price elasticity of around -0.6 rising from a fare of VND4,000 (in 2007 prices) to -1.0 at the revenue maximizing fare of around VND6,500 (in 2007 prices). Average household incomes at 2025 would be approximately 2.26 times greater than at 2015 (based on assumed average GDP growth of 8.5% pa). The modeling results show that as incomes rise, demand is expected to show less sensitivity to fare price and this effect is reflected in lower derived elasticities as shown by comparing the 2007 modeling results to 2003 and 2005, and the forecasts at 2025 compared to Integrated Fares SYSTRA MVA et al (2008) showed that the forecast demand and the revenue with an integrated fare 2 are also both higher than with non integrated fares. For Lines 2, SYSTRA MVA et all forecast that demand and revenue increased by 24%. For Line 3, demand and revenue were both forecast to increase by 10.2%. 3.3 Conclusion on MRT Fare Price Elasticity in HCMC at 2015 Elasticity of demand with respect to fare price is clearly a complex matter. Elasticities depend on the price level too. By definition, the elasticity at the revenue maximizing fare is Normally, in a developing city an average short run elasticity of around -0.7 to -0.8 would be expected. A similar result in HCMC is also expected on average. Elasticities would vary by income level. Lower income groups would be expected to exhibit higher sensitivity with respect to fare price and have a higher elasticity. The long term MRT fare price elasticity in HCMC would also be expected to be higher. Refer Table 3.1. Over a much longer period such as 2015 to 2025, and as incomes grow, the demand with respect to a (reasonable) fare price level would be expected to become less sensitive with both short and long run elasticities reducing on average. 1 The user has to pay VND4,000 per boarding. 2 That is, only an initial boarding charge when entering the first MRT line but no subsequent boarding charge for transfers to a second or other line. 11

273 Table 3.1: Estimated short term MRT fare elasticity of demand in HCMC at 2015 Sensitivity to price Likely short term Income Range Distribution Frequency of Use (1) MRT fare price elasticity Lowest quartile 25% Non-Regular/ Occasional user Second lowest quartile Second highest quartile Price sensitive Greater than % Occasional user Somewhat price sensitive Around -0.7 to % Regular user Not very price sensitive -0.4 to -0.7 Highest quartile 25% Regular user Not price sensitive Less than Total 100% Around -0.7 to -0.8 on average (1) For definitions of non-regular user (once a month), occasional user (once a week) and regular user (almost every day) Source: Consultant 12

274 4. Achieving Uniform Fares and Integrated Ticketing 4.1 Introduction In this section the question of how to decide what is the appropriate system of uniform fares and the supporting integrated ticketing system for Greater HCMC is addressed. In this section three distinct concepts are discussed: Integrated ticketing involving a common ticketing system making use of an appropriate technology that permit convenient travel on the entire public transport system and convenient back office revenue clearing and handling. Integrated fares public transport ticket prices implicitly involve a two-part fare structure, consisting of a flagfall (an initial amount related to boarding a vehicle) and a distance-related part 1. Integrated fares requires that only a single flagfall be paid, ie a passenger who needs to transfer between public transport vehicles to undertake their journey should not be penalized because the public transport system does not allow them to make the trip on a single vehicle. Uniform fares - Uniform fares requires some standardization of the distance-related portion of fares 2. By necessity, integrated and uniform fares requires standard definitions of discounted (or concession) fares, and require an integrated ticketing system to permit the fares to be implemented. The SAPROF Study for Line 1 (PB Asia et al 2006) and the TEWET (2003 and 2005) studies only considered ticketing in the context of their proposed individual MRT lines and not the needs of the future MRT network. The focus in the PPIAF fares and ticketing work is the policy needs for the future MRT network such as having a convenient and integrated ticketing system where one ticket can be used on different lines in the future MRT network (and desirably on other public transport). The discussion on this section is on ticketing for MRT as providing ticketing for various MRT lines with possible different operators is very complex. The capacity for the chosen method of ticketing to be provided for the bus system at the same or a later time is implied. 4.2 Separating Ticketing from Other Aspects of MRT Operations The Working Paper on private sector participation of this PPIAF recommended a gross cost form of operating concession (or contract) with some investment in the form of key operating assets such as trains and control system. 1 In this way, the fare for a 10 km journey on a single vehicle is less than double the fare for a 5 km journey. However, the cost of a 10 km trip that involves say 5 km on one vehicle and a transfer to a 5 km trip on another vehicle will cost double a single 5 km trip for the distance-related component. 2 Some consideration can be given to different distance-related fares to reflect cost and quality attributes of public transport models, eg MRT, and non air-conditioned and air-conditioned bus services. 13

275 From a ticketing perspective a gross cost concession environment provides: greater control of ticketing policy by government, enabling the simpler implementation of social objectives, such as common fares; and a significantly simpler fare revenue management arrangement. There are two basic system options for implementing integrated ticketing within the gross cost concession environment: integrating multiple and possible disparate systems by the use of a interoperability standard; or the implementation of a single system across all MRT concessions. The issues arising from these two options are summarized in Table 4.1. Based on the assessment in Table 4.1, the procurement of a single system is the preferred option for HCMC. The alternative of integrating multiple and possible disparate systems by the use of a interoperability standard is exceptionally risky. Other benefits of procuring a single system will include the minimization of multiple procurement transactions costs and the likely costefficiencies due to single-systems economies of scale. Issues Coordination and regulatory effort to achieve common ticketing Table 4.1: Assessment of System Options Multiple Systems Integrated by Interoperability Standard High Single System Implemented across all MRT concessions minimal Risk of vendor lock-in Medium High Standardization of equipment, system and operational performance requirements difficult multiple contracts simple single specification Government ability to direct ticketing contractor(s) Government ability to coordinate and implement future enhancements Government ability to deal with system performance issues Ability to provide common look and feel to customers Source: Consultant minimal no direct relationship minimal - complex minimal no direct relationship difficult differing equipment types and operating regimes high direct contractual relationship high - simple high direct contractual relationship simple common equipment International experience confirms this approach. There is a universal movement towards ticketing and fare systems that are integrated across the public transport network of cities, in recognition of the impracticality of coordinating numerous independent systems and to provide good public transport services to the community. It is therefore considered essential that the ticketing system for MRT, and potentially other public transport, in HCMC should be designed and managed by a separate agency rather than by individual service providers. The remainder of this working paper is based on such an arrangement. 14

276 4.3 Addressing the Challenges of Implementation It is common for there to be an assumption that integrated ticketing issues can be dealt with by adopting a particular technology (eg smart cards) and method of procurement (eg turnkey supply, operate and maintain contract). But this assumption is incorrect. Implementing an integrated ticketing (and uniform fares) is challenging with strong interlinkages to transport policy (eg on fares and level of integration of transport services desired), MRT concessioning and with major financial implications for government. For example fares policy and the implications of standardization of business rules 1 for ticketing across all operators involves extensive technical analysis of the revenue implications and consultation with all parties and public transport users. A wide variety of fare systems and associated methods of validation and revenue protection would need to be considered. The policy issues and challenges for a public transport system where there are existing separate MRT operators with different fares (and concession agreements) include: what are the objectives of an integrated ticketing system with uniform fares passenger convenience or some other financial measure; should bus and other modes be integrated into the new integrated fare system for MRT if so, when and how? Desirably, the answer should be yes and as soon as practicable. what fare structure is to be adopted, eg: o zonal fares should they be used, how many zones should be used, and how will they operate? o flat fares should they be used, what level should be used, should they be completely flat, even for very long journeys? o distance-based fares what flagfall, what distance charge, how will the distance based component be measured and monitored, should bus and MRT fares be the same? should ticket products and prices be standardized across all operators/ modes; what concession or special fares and tickets should be created; how will ticket validation be handled closed systems are less vulnerable to revenue leakage; how should trade-offs be made between those who will benefit and lose from changes; should implementation of a new integrated ticketing system be staged; what technology or technologies would be appropriate; what is the capital and operating and maintenance cost of the ticketing system; and what are the financial implications of any chosen fare system? pricing of average fares below average system cost recovery implies external financial support would be required. HCMC is in the fortunate position that at present there are presently no MRT operators and there is a bus system which has common fares. Consequently, the issues for fares and ticketing 1 These rules would include those for fare structure and ticket products and prices. 15

277 are potentially simpler but require appropriate decisions in advance of embarking on implementation. The general array of policy elements and implications to be faced when considering any integrated approach to fares and ticketing is set out in Table 4.2. Table 4.2: Key Policy Issues for Integrated Ticketing Policy Element Example Implications Aims & objectives Revenue versus simplicity Influences decision on zones and number versus sections or distance-fares Availability of other revenue sources Passenger types & concessions Public Service Obligations (PSOs) payments for concessions or lower price levels Full fare, child, student, senior, monk etc Influences passenger types and ticket types Influences ticket types and pricing Pricing method Flat fares, sections, zones Influences ticket types and prices Base fare level Single adult fare Influences the discount scheme Ticket types & discounts Return, daily, weekly Creates travel conditions Conditions of travel Times, dates, service area e Creates a need for validation Revenue protection Ticketing technology Visual checking or electronic validation Paper ticket issuers, magnetic cards, smart cards Source: Based on table of SEQ Integrated Ticketing Project Team (1999:10) Influences the technology choice Impacts on ease of use of system and costs Moving purposefully towards implementation of integrated ticketing and fare system requires well thought out and comprehensive action by a body with appropriate authority and with supporting budgets. Studies to progress the subject need to be undertaken within a clear framework and with explicit objectives that enable key decisions to be made in a step-wise fashion towards the ultimate goal of implementation. Experience in other cities suggests that this body is best initiated as an inter-agency project working group, and could be formalized into a separate agency or division of an agency when procurement begins. It is preferable that the working group have appropriate institutional and consumer representation to ensure all key stakeholders are involved in the process. Table 4.3 sets out a series of sequential steps that can permit the efficient and effective implementation of integrated ticketing and fares. Each step involves complex challenges and difficult decisions. Ticket technology and the method of procurement while costly and very important should be addressed after the other policy matters are decided. Based on experience in other places, the entire process of planning and initiate procurement of an integrated ticketing system is likely to take at least two years. Depending on the scope and complexity of the system an additional three or four years would be needed for implementation. 16

278 Table 4.3: Steps to Implement Integrated Ticketing and Fares Step Description Duration 1. Set up inter-agency working group 2.Develop fares policy 3. Ticketing technology specification 4. Confirm how ticketing system will be packaged and form of outsourcing 5. Confirm likely costrecovery of each MRT line (and bus etc) 6. Confirm concession form 7. Decide on appropriate organization for ongoing fares & ticketing management 8. Confirm willingness of government to ongoing financial support Working Group charged to develop and deliver best option for uniform fares and ticketing on a project basis Fares zone or distance based? Revenue implications, business rules, modes to be included, implications for concession arrangements and revenue handling Develop functional specification to deliver desired fares and ticketing system Three options identified: (1) Traditional supply tender with separate O&M (2) Turnkey supply and O&M contract funded by government on on-going basis (3) Turnkey supply and O&M concession funded by % of revenues collected This work identifies which lines can generate revenues which exceed operating cost Confirm MRT (and bus) preferred operating concession arrangements, method of revenue management and implications for ongoing government financial support Option 1: Government management (30 people) policy setting, administration & management of outsourced ticketing contract on supply/ operate/ maintain including clearing house & handling of legal/ banking aspects Option 2: Government oversight (< 10 people) policy setting, auditing, with outsourced administration done separately to outsourced ticketing contract on supply/ operate/ maintain including clearing house & handling of legal/ banking aspects Examine likely packaging of MRT lines to minimize direct revenue support from government & identify MoF operating financial support needed - 12 months concurrent concurrent concurrent concurrent Concurrent Concurrent 9. Prepare roll-out plan Details of phased roll-out 3 months 10. Prepare tender documents for ticketing system & separate administration contract (as necessary) Prepare tender documents 9 months 11. Tender assessment Bidding & award 9 months 12. Implementation Delivery, installation and testing of equipment, tickets and support systems 2 to 3 years (depends on complexity of preferred system) 13. Convert project to long term institutional form Source: Consultant Set up organization, arrange agreements with banks etc Concurrent It is not desirable for Government (ie MOT and MOF) to outsource the thinking needed to address the various inter-related policy issues. Four major issues are discussed in following subsections to illustrate why government needs to remain in firm control of the implementation process. 17

279 Importance of Fare Pricing Policy Fare policy is vital because: financially, it affects the number of people who will use MRT and bus/ other, which in turn affects revenue collected from passengers, MRT operating costs and, ultimately, the viability of future proposed MRT lines and bus services etc; socially, the absolute level can affect the affordability of public transport to people and alternative fare structures have differential, and thus distributional, effects on the community; technically, it influences the form of operating concessions, and the design of the MRT system in general and the ticket system in particular (though it will generally be desired that the ticketing system be able to accommodate a range of possible fare structures and levels to allow for policy changes in the future); and for the remainder of transport system, the level and structure of MRT fares affects the quantity of use made of other public transport and of private travel, with consequences for the transport system as a whole. The potential effect of the level and structure of fares on public transport patronage and costs can be substantial. While it is not essential that the fare structure and level be confirmed before commencing the process of planning an integrated ticketing system, an early decision will provide clarity and direction. In any event, establishing the fare structure and level is essential to the development of future MRT lines in HCMC, and is thus a matter than needs urgent attention. Accordingly, it is recommended that work commence as soon as possible to examine a range of fare structures and levels, and identify the option that best balances MRT financial viability and social obligations. Similar analysis for the bus and wider public transport system would also be needed. Clearly, fare pricing has significant financial implications and is a major transport policy and national finance issue. Any decision of fare price and form of fare system (eg zones, distancebased etc) should only be taken after careful study, analysis, technical discussion and consultation with stakeholders. A general approach to fare restructuring, as adopted in the by the Chicago Transit Authority (CTA) in the USA, is described in Box 4.1. The criteria used by the CTA to evaluate various fare options are presented in Table Specification of Ticketing System Components The total capital cost of a smart card ticketing system for all public transport in HCMC could be in the order of US$80 million and around the same amount in present value terms for operation and maintenance over ten years. Given the complexity and high cost of operations and maintenance (O&M) of ticketing equipment, it is increasingly common for supply and O&M of ticketing equipment to be integrated in a single contract. 18

280 Box 4.1: Fare restructuring study - example of Chicago Transit Authority Chicago Transit Authority (CTA) has performed two major fare structure studies in the recent years. The first, in 1987, evaluated the following types of fare strategies: Distance-based pricing, Peak/off-peak differential, Bus/rail differential, and Maximum prepayment. The steps included in this study, which laid the groundwork for the subsequent study, were as follows: Identify Fare Policy Goals Goals were identified and "strategic trade-offs" between specific goals were established through discussions with staff from various departments and selected Board members. Develop Evaluation Framework Ten criteria were identified, and evaluation guidelines were defined for each criterion. Where possible, specific quantitative guidelines were provided. The criteria and guidelines are summarized in Table 4.4, along with the relative weights assigned each criterion; the criteria weights were based on interviews with CTA Board members. As shown in Table 4.4 ridership, revenue, and costs were considered the most important, while the provision of management information was ranked lowest. Define and Analyze CTA's Markets Considerable effort was devoted to defining and analyzing the potential markets for CTA service. Elasticities were based on the results of a series of "stated preference" surveys of riders and non-riders and were used to predict the effect of different fare options on ridership. Develop and Estimate Costs for Fare Options Six different options were developed and evaluated in isolation in order to understand the implications of each even though it was acknowledged that actual fare structures might include a combination of strategies. The options included peak/off-peak differentials, distancebased pricing (zonal for rail only or system-wide, and rail point to point), modal differentials, and maximization of prepayment. Potential costs (capital and operating) were calculated for each option. The distance-based options were found to cost the most, largely because a new fare technology probably would be needed to implement such a strategy effectively. Evaluate Options Each options was evaluated on a comparative basis with regard to each of the weighted criteria. Table 4.4: Fare Options Evaluation Criteria of Chicago Transit Authority Evaluation Criteria Weight Criterion Definition/ Evaluation Guidelines Maximize revenue while minimizing ridership loss Maximize ridership while maintaining sting net revenue 80 Ability to raise additional revenue compared to base case 80 Ability to increase ridership w/o losing revenue, compared to base case Ease of implementation 20 Phasing necessary to achieve reasonable transition, reflected in costs and timing, evaluated using discounting Reasonableness (public acceptability) 10 Assessment based on experience from market research and public meetings Revenue protection 25 Evaluated in qualitative terms, based on scope and likelihood of improvements in revenue protection Cost 80 Includes capital costs of fare equipment and station modifications, and revenue collection costs Reversibility (risk) 20 Ease with which an option can be implemented or abandoned; includes institutional, public relations, other factors Maximize rides by disadvantaged 20 Equity of fares, especially of the transportation disadvantaged Simplicity 10 Assess simplicity, ease of understanding and convenience of use of each option Management information 5 Assess extent of improvement in each of three areas: financial accounting/ revenue control; operational control; marketing/ planning Source: Table 31, TCRP (1999) 19

281 The ticketing system comprises two inter-related physical components: tickets (sometimes called fare media ), and ticket validation equipment 1. Ticketing system components for various types of fare collection system using a variety of fare media (eg paper tickets, magnetic stripe cards, smart card etc) are shown in Table 4.5 and likely applicability to various modes including bus and MRT (ie rail and LRT) as occurs in the USA. The most likely and appropriate fare collection system for HCMC would be closed barrier systems for MRT (as in Hong Kong, Singapore, Bangkok etc) and conductor-validated systems for bus. Table 4.5: Ticketing System Components Fare Fare Media Fare Equipment (1) Mode Collection Bus LRT Rapid Commu System rail -ter rail Pay on Cash/token Fare box X entry Paper ticket TVM, validator X X Magnetic ticket Validator, TVM X Smart card Validator X Credit/debit card* TVM, ATM X X Barrier Cash/token Turnstile/ gate X X Paper ticket TVM, validator X Magnetic ticket Validator, TVM X X X (3) Smart card Validator X X Credit/debit card* TVM, ATM X X Proof-ofpayment Cash/token - Paper ticket TVM, TOM, validator (handheld) X X X (barrier free) Magnetic ticket - Smart card - Credit/ debit card* TVM, ATM X X X Conductorvalidated Cash/token - Paper ticket TVM, TOM, validator (handheld) X (2) X X X Magnetic ticket Validator (handheld) X (2) Smart card Validator (handheld) X (2) Credit/debit card* TVM, ATM X X X (1) AVM = Automatic Vending Machine; ATM = Automatic Teller Machine; TOM = Ticket Office Machine (2) Purchase of ticket media needed also (3) Metra Electric is the only current barrier commuter rail system in USA Source: Adapted from Table 41, TCRP (1999) The most appropriate fare collection system and fare media for HCMC needs detailed study. Smart cards are now an established technology in public transport systems, but there a variety of systems with different costs. The more functions a smart card is intended to have the more complex and expensive the entire system becomes. In 1997 Hong Kong became a model for how smart cards could be introduced into city-wide public transport systems with the smart card extended to pay for other forms of transport, and minor purchases at convenience stores and so on. The overall, integrated system is called Octopus and was introduced by Creative Star, a joint venture company formed by the Mass 1 This is complemented by management systems for maintaining the equipment, managing the supply and distribution of tickets, managing revenue (including distribution of revenue to appropriate parties), and collecting and using statistics on patronage. 20

282 Transit Railway (MTR) and five other transport operators. This fully integrated ticketing system now allows passengers to travel more conveniently on all modes of public transport (ie trams, light rail, bus and ferry) and minimizes the need to carry cash or to purchase tickets. The multi-modal cards can now be used at retail and fast food stores. Most pay phones also accept the card. The system was fully operational by end Other cities in the world including Singapore (refer Box 4.2), Sydney, Brisbane, Melbourne, London and Kuala Lumpur have since followed, or are following, the model adopted by Hong Kong. Box 4.2: Scope of Singapore s ez-link Originally known as the EIFS (Enhanced Integrated Fare System), Singapore s ez-link is an integrated smart card ticketing project that was awarded to ERG of Australia in April 1999 for full implementation by end Maintenance was separately contracted and exceeded the capital cost. The full upfront, capital cost was S$134.6M (ie about US $80M) and included 22,000 readers, 3,800 on-bus tag on and tag off ticketing systems, and five million smart cards (more than one per capita). It also included the installation of GPS systems on 3,800 buses. An ez-link company was also established as a subsidiary of the Land Transport Authority. Source: Sayeg and Charles (2004) Although smart cards are becoming widespread in public transport schemes around the world, conventional smart cards are considered to be expensive by some operators as not all trips made by regular users not all regular users will travel on period passes and several ticket options are not best served by smart cards. A new low cost smart card is now available on the market although is not yet widespread. Box 4.3 discusses some key features of smart cards and new limited use smart tickets. The advantages and disadvantages of each ticketing technology need to be fully considered and in due course a functional specification developed to procure the most appropriate costeffective system for HCMC s needs. Appendix B provides an overview of what might be the most likely technical option which would the use of some kind of smart card for more detailed consideration at a later stage Procurement Options for Ticketing System Three procurement issues need to be considered: (i) the supply of equipment and its ongoing operation and maintenance; (ii) whether government or private sector capital should be used to purchase the equipment in the first instance; and (iii) how payment should be made to the contractor who supplies and undertakes O&M for the ticketing system. With regard to the last item, the case is made in a separate working paper on the desirability that the cost of ticketing be recovered from passenger fare revenue. Under the recommended Gross Cost form of MRT operating concession, fare revenue would accrue to the government, which could then pay the government ticket system contractor using these funds. 21

283 Box 4.3: Smart Cards and New Limited Use Smart Tickets The smart card is technically an integrated circuit card and has a built in logic. All types of smart cards can store large amounts of data. An advantage of smart cards over magnetic stripe cards is they offer a greater measure of security and can be used as an instrument for controlling access as well as to stored value to be used to purchase a variety of services. Smart cards can store different amounts in their memory for different clients or agencies. Contactless smart cards offer the advantage of not having to be read or swiped by a ticket reader. Instead these cards only have to be placed close to the reader resulting in less wear and tear on equipment and greater convenience for passengers and people with disabilities who may find presenting and inserting conventional tickets or smart cards difficult. Smart cards remain expensive at (depending on the application) and volume from at least US$2 each up to several dollars each. Smart cards have also a growing application in very secure credit cards, payment, and secure ID (national ID cards; ID cards for libraries, universities, driving licenses etc). The more uses and functions on a card the more expensive they become. What are Limited Use Smart Tickets? They are low cost (around a fifth to a less of conventional smart cards) and offer a viable smart ticketing solution for low-cost or limited-use ticket types which characterize a substantial proportion of journeys carried-out on worldwide rail, bus and metro networks such as single or return journeys. For example, on BTS and the Blue Line Subway around 50% of users are represented by single trip tickets/ tokens. Limited Use Smart Tickets are similar to contactless smart cards and have a IC attached to an antenna using Radio Frequency Identification (RFID) technology that is embedded in the card however they: Are paper instead of plastic; Have a smaller memory, no processing; Have a lower cost; Are used for a period (typically 1 day to a month) and then disposed of. Limited Use Smart Tickets are being used in Europe (Capri 4 million cards; Porto 3 million cards; Lisbon 12 million cards; Firenze 1 million cards; Netherlands 15 million cards; Oslo 10 million cards). Several major cities including Santiago, Sydney, Melbourne, and several US cities are planning to use Limited Use Smart Tickets. Based on European experience the current media cost per ticket (depends on volume) is around US$0.30. Below US$0.15 per ticket Limited Use Smart Tickets become commercially viable. Limited Use Smart Tickets can work side by side in the same equipment used by conventional smart cards with any ISO14443 standard reader infrastructure: No hardware modification should be needed; and Minor software changes may be required to: allow the reader to recognize the chip signature ; ensure that correct read/write data protocol is followed; software changes are minimal. Source: TCRP (1999); Sayeg and Charles (2004b); Crotch-Harvey (2005) Three options to procure the ticketing system have been identified in Step 4 in Table 4.3 (showing the proposed integrated ticketing implementation steps): traditional supply tender with separate O&M, with government financing capital in the first instance; single turnkey supply and O&M contract with government financing capital in the first instance; and single turnkey supply and O&M concession, with the concessionaire providing the system using their own capital in the first instance, and being reimbursed over time, possibly through their retention of a share of fare revenue. Ticketing systems, especially those using smart cards, are extremely complex and despite various international standards much hardware and software is somewhat proprietary so it is it not possible to separate the supply of equipment from its operation and maintenance. In addition, combining both into a single contract ensures the whole of life cycle cost and benefits are fully considered by the supplier/contractor consortium. Most cities implementing smart card ticketing systems are therefore adopting the approach of direct government funding of a single contract for supply, testing and implementation and operation and maintenance. Accordingly, the first option listed above is not recommended. 22

284 Under the second approach described above, the government would engage a consortium to provide and operate the ticketing system. It would pay for the capital cost of supplying, installing and commissioning of the ticketing system on completion and would pay for O&M on a periodic basis. Most associated services including operating the clearing house for revenue management and settlement would for convenience purposes would also be operated by the consortium. Finally, it is possible to also adopt a similar integrated supply and operate approach but to implement it though a Public- Box 4.4: Bogota s TransMilenio Ticket Concession TransMilenio (a bus rapid transit system) uses pre-paid contact-less smartcard technology as part of a ticketing system that applies to its system only. A private company was contracted through competitive tendering to provide and manage ticketing and fare collection on behalf of the management authority for the TransMilenio system. The private concessionaire financed the ticketing system and is paid a share of the fare revenue that it collects. The concessionaire pays the revenue it collects into a trust fund, from whence it is distributed to various companies involved in providing and operating the TransMilenio system, including the management authority, in agreed shares. Source: Consultant Private Partnership (PPP) concession. In this case, private finance would be used to implement the system, with the concessionaire receiving payment either according to an agreed schedule or by retaining a share of revenue they collect. The latter arrangement has been adopted in Bogota (see Box 4.4). The merit of using private sector capital in this way can be assessed using a value-for-money analysis that takes account of risk transfer to the private sector (see the Concession Model Working Paper for a more detailed discussion of this issue). Particular care is required in the case of payment being recovered as a share of fare revenue to ensure that a transparent and cost-effective arrangement is achieved. The advantages and disadvantages of the second and third options need to be studied further by Government to establish the preferred approach. Ticketing System Requirements The ticketing system to be procured will comprise all devices and systems required to implement the common ticketing system in HCMC A generic model of a smartcard-based fare collection system using a typical tier typology is illustrated in Figure 4.1. Figure 4.1: Generic Smartcard-based Fare Collection System Source: TCRP 115 (2006) 23

285 The specification for the common ticketing system will include the following devices and systems as a minimum: smartcards including transit application definition as well as card format compliance to an adopted interoperability standard; smartcard readers; fare gates; ticket office machines for smartcard distribution and reload; smartcard reload machines; handheld smartcard readers for revenue protection officers; data system servers as required often necessary at stations; station-level control systems; operator head-office accessibility often requiring integration into other operator systems; a central system principally for transaction processing, configuration data management (such as fare tables and card hotlists) and system and device monitoring; appropriate redundancy for both security and disaster recovery considerations; and requisite communications infrastructure for network connectivity. Operations Requirements The common ticketing system will also require the following on-going operational services as a minimum: card management; maintenance management; operator technical support; asset management; training; marketing; system management and monitoring; configuration management; financial reconciliation and settlement; and reporting. Clearinghouse Ownership and Governance In the preferred gross cost concession environment envisaged, with all fare revenues being remitted to the government, the importance of transaction clearing is significantly reduced. However, as discussed above clearing activities will be a consideration both initially for the current concessions (between themselves, as well as with the new common ticketing system) as well as ultimately with non-transit partners. Given the uncertainties surrounding these future partners it is only possible at this stage to define some of the governing principles which will guide any future considerations of clearinghouse ownership and governance: government should retain adequate control (by way of ownership or regulation) to enable it to continue to implement its transit fare policies; governance should generally be established based upon equity investment, tempered by the government s need to facilitate social objectives within its transit systems. This may also require an appropriate regulatory framework; and existing banking regulations regarding the use of open e-purse schemes will need to be accommodated. 24

286 In terms of transit purposes, as discussed above two clearinghouse arrangements will require consideration: a clearinghouse for use between the two existing concessions to enable interoperability; and a possible common ticketing system clearinghouse to interface with the two existing concessions until these are modified to a gross cost contract arrangement. In the case of the clearinghouse for the two existing concessions, it is envisaged that the most appropriate form of ownership would involve the two parties only. However, it is likely that the clearinghouse s governance will need regulatory involvement of government to ensure its strategic fit with the proposed new common ticketing system. This regulatory involvement would cover issues of compatibility as well as the more fundamental compulsion to interact with the new system. As the clearinghouse for the new common ticketing system will deal principally with the remittance of fare revenues to government, it is consider logical that it be owned and governed by government (through an appropriate agency). As discussed above, the clearinghouse ownership and governance framework is likely to require a more sophisticated approach if non-transit expansion of the system is to be realized in the future Integrated Ticketing Administration Step 7 of Table 4.3 discusses two generic options for the organization that would be charged to administer and manage the integrated ticketing system. A wide variety of models are possible, but usually the organization is embedded within an established government organization eg MAUR, HIFU or the Department of Finance at PC level. In HCMC, it may need to be established as some form of government-owned entity in order for it to deal directly with the private sector including financial institutions. Two basic options are: Option 1: Government management (30 people) for policy setting, administration & management of outsourced ticketing contract for the supply, O&M, clearing house and handling of legal and banking aspects; and Option 2: Government oversight (less than 10 people) for policy setting and auditing, with separately outsourced administration that supervises the outsourced ticketing contract for the supply, O&M, clearing house and handling of legal and banking aspects. Based on interviews with the heads of three systems for which integrated ticketing systems have either recently been implemented (Singapore) or are being implemented (Sydney and Brisbane, Australia) the two identified options encompass the principal possibilities (see Table 4.6 for lessons learned from these interviews). Either option is workable but a final decision needs to be made taking into account the form of ticketing procurement chosen. 25

287 City Table 4.6: Lessons on Integrated Ticketing Administration Singapore (ez-link) Integrated smart card ticketing project ( ). ez-link company was established as a subsidiary of the Land Transport Authority. Brisbane, Australia Integrated smart card ticketing system required the integration of ticket products & systems for train, ferry and over 20 bus operators. Overseen & managed by newly established TransLink (a government agency). Operations and Maintenance separately contracted over 10 years & likely to > capital cost of A$100M (ie about US$77M). Roll-out commenced in July Sydney, Australia Integrated smart card ticketing project. Currently trialling. Targeting an organization of 30 people after ticketing system is procured. Ticketing contractor will control/ manage/ maintain ticketing equipment performance; autoload facility; clearing house, put money in Bank Accounts (accounts all in government name). NSW Transport Administration Corporation, the ticketing authority, not required to make a profit ie must extract what money it needs from operators/ stakeholders who will hold it closely accountable. Source: Personal Communication 2006a, b and c Lessons on oversight Few staff in LTA/ ez-link to oversee; can always increase if needed. Difficult to reduce. Policy of outsourcing adopted as most skills of non-recurrent nature. Routine financial auditing annually. Integrity auditing 3 yearly. TransLink in implementation phase with 15 staff. Will reduce later & outsource. May end up with 5 staff in contract management functions. Some additional call centre staff needed will sit alongside public transport call center staff on usual toll free no. TransLink want to maintain customer interface. Due to need for clear separation of goverment & business interests staff to oversee will be largish to: monitor contract ie Key Performance Indicators. Will have a bias to more financial/ accounting staff. Could outsource almost all functions. Govt. operates the ticketing call centre as an extension of public transport information centre an additional 12 people; important that govt. maintains relationship with customers. Due to long implementation period (4 years) for big bang approach there is operator fatigue. A staged approach has merit. 26

288 Appendix A: Affordability Analysis & Tourist Use This Appendix reproduces with only minor editing an affordability analysis reported by ADB (2007a) which interpreted available information on household incomes in HCMC reported by TEWET (2005). A.1 Introduction Information in Table A.1 provides a preliminary assessment of affordability. It shows that at 2010 the main modeled fare of VND4,000 (2005 prices) proposed for MRT in HCMC is less affordable than MRT fares in Bangkok, Kuala Lumpur and Manila by a third, quarter and 90% respectively shortly after their MRT systems opened. For the revenue-maximizing fare of VND 2,000 (2005 prices) the affordability in HCMC would be slightly better than for the other cities. Table A.2 presents similar data from MVA Asia (2005) which shows also in 2005, HCMC MRT the main modeled fare of VND4,000 (2005 prices) relative to GDP would be much more expensive than Bangkok, Hong Kong and Singapore. However, for the forecast GDP for HCMC (and implied associated income growth assumptions) by 2010 the fares would relatively the same as Bangkok although still relatively much more expensive than those for Hong Kong and Singapore. By 2020, however, relative MRT fares for HCMC would be cheaper than Bangkok today although still 50% relatively more expensive than Hong Kong and Singapore. That is, with economic growth and associated income growth, MRT fares in HCMC are expected to become relatively more affordable. GNI or GDP (US$) per capita Total est. linked person trips in City area defined above % by public modes 2001 Fares in $US for average full fare 8 km trip in 2001 or proposed for HCMC 2010 Affordability of MRT fares today No of MRT passenger/day and % MRT of total approx one year after opening) Table A.1: Summary of MRT Fares and Demand in Other Cities Bangkok 4,800 (2000 est) Kuala Lumpur 9,600 (2000 est) Metro Manila 2,800 (2000 est) Hong Kong Singapore HCMC 25,330 (2001) 21,500 (2001) 2,000 (2005) 12,800,000 3,250,000 19,199,600 13,400,000 8,400,000 16,300,000 45% (2005) US$0.6 20% 70% 80% 70% < 5% (2005) US$1.40 US$0.26 US$ 0.70 US$0.70 US$0.25 (Putra) 1.0% 1.2% 0.8% 0.2% 0.3% 1.5% (main modeled scenario) or 0.75% for revenuemaximizing fare) 216,000 on BTS MRT in April % 192,000 passenger/day on Star (60,000) and Putra MRT (132,000) together at end % 210,000 Metrostar at April ,000 LRT1 1.1% (excluding LRT1) 14% MRT 3.7% heavy rail 1.7% LRT (1992) 14% MRT (1998) Forecast of 128,000 passenger per day for fare shown in

289 No of MRT passenger and % MRT (of total in 2005) Bangkok 580,000 passenger/day on BTS and Blue Line Subway MRT in % Kuala Lumpur 260,000 for total system Metro Manila 400,000 Metrostar 550,000 LRT1 2.1% (excluding LRT1) Hong Kong Singapore HCMC na na na Source Consultant. Notes: 1. GNI or GDP 2020 is available. For HCMC 2020 GDP per capita from MVA 2005 and stated in 2005 prices. 2. Linked person trips per day on mechanized modes and unmechanized modes. A linked trip is a journey from A to B including all modes used along the way. Data for Bangkok Metropolitan Region shows that in 2005 it is estimated there are 19.7 million linked trips including 15% walking etc with a population of 10 million from Len Johnstone, Transport Modeler. For HCMC data for 2001 from Houtrans (JICA 2003) shows that HCMC region population was 8.6 million in 2001 and linked person trips were 23 million including 17% walking etc. Hence, Bangkok Metro Region person trip rate is 2.0 per capita per day and for HCMC region, 3.0 per capita per day. For other cities linked trips are estimated as 2.5 trips per capita per day except Metro Manila where 2 trips per capita per day used. 4. The % of total linked trips by public modes including bus, MRT, taxi etc in 2001 or as stated. For HCMC, data from MVA Asia (2005) and Houtrans (JICA 2004). Other data sourced from Appendices of PAS/ EPS Fares in $US for average full fare 8 km trip in 2001 or proposed for HCMC 2010 for the main modeled fare of VND4,000 in 2005 prices and VND2,000 (revenue-maximizing fare) also in 2005 prices is approximately date of opening of several of the MRT systems. Source of 2001 data is PAS/EPS Affordability of MRT fares circa 2005 ie Average fare/ GDP/12 per capita * No and % MRT after approx one year of operation using latest available patronage figures for MRT demand divided by total linked trips. For Manila, LRT Line 1 ignored as opened in 1984 and not a recent MRT. Source: Appendixes of PAS/ EPS 2001 and J Leather ADB 2006 for Manila figures. For Singapore and Hong Kong with well developed MRT networks that commenced in the 1980s, only mode split shown. 8. Latest number and % of MRT Figures for MRT demand divided by total linked trips stated for earlier year. Source: Appendixes of PAS/ EPS 2001 and J Leather ADB 2006 for Manila figures. Table A.2: Public Transport Price Comparison with Other Asian Cities (for an average 6 km commuter trip, in US$ 2005 Prices) City HCMC Bangkok Hong Kong Singapore Bus (regular) $0.11 $0.18 $0.18 $0.13 N/A $0.45 Bus (air-con) $0.11 $0.18 $0.18 $0.30 $0.75 $0.60 MRT (VND4,000 for HCMC) $0.25 $0.25 $0.25 $0.50 $0.80 $0.55 GDP / Capita $2,000 $3,100 $5,600 $6,200 $24,000 $22,000 Affordability of MRT fares (Average fare/ GDP/12 per 1.04% 0.67% 0.37% 0.67% 0.26% 0.21% capita *100) Source: MVA Asia (2005), Table 5.2 and others. Data on GDP differs slightly from shown in Table A.1 due to different sources and years. A.2 Alternative Affordability Analysis An alternative way of examining affordability is to examine the distribution of household incomes by income 1 group. These data are unavailable to the team. JICA (2004) provide survey data of public transport users in 2002 or 2003 for a variety of public transport modes as shown in Table A.3. The average distribution of incomes for all public transport users is likely a more useful starting point than average HCMC household incomes which would likely be lower on average. 1 Income data are difficult to collect and often understated. Instead many researchers identify household expenditure which is less problematic. 28

290 Based on Table A.4, the potential household trip frequency for MRT at 2010 at the main fare modeled by MVA Asia (2005) (ie VND4,000 in 2005 prices or VND3,500 in 2003 prices) was estimated as shown in Table A.4 This table shows that at % of households who are potential public transport users would not be able to afford to purchase more than four MRT fares per week in total per household equivalent to 2 round-trips. In contrast, 80% of households would be able to purchase more than MRT 12 fares per week or 6 round-trips ie to travel every day. This table also shows in broad terms that perhaps most households may not be all that sensitive to modest fare increases above the chosen fare. For example, at an assumed fare 20% higher than the chosen fare almost 80% of households could still purchase almost at least 8 MRT fares per week or 4 round-trips per week ie to travel almost every day. This also implies that affordability may be better than implied by the revenue maximizing demand forecasts and fare price level assumed by MVA Asia (2003 and 2005). Table A.3: Houtrans Public Transport Users Interview Summary Attribute Bus Taxi Cyclo Xe om Total No. of Samples 1, ,008 Sex (%) Male Female Age (%) > Average Age Household Income < (million/month:%) > Average Household Income (000/month) 1,412 2,368 1,607 2,035 1,742 Vehicle Ownership Car (Individual) Motorbike Bicycle None Frequency of use of Daily public transport At least once a week Unusual Source: Houtrans (JICA 2004) 29

291 Table A.4: Potential Trip Frequency for MRT at 2010 Year Est MRT Trips Per H Hold per month GDP / Capita $1,400 $3,100 H Hold Income (VND million/month) 2003 prices Est MRT Trips per week < % 20% % 48% % 30% > % 2% >107 >36 Average H Hold Income 000 VND/month 2003 prices Total 100.0% 100.0% 1,742 3,830 Source: Consultant. Notes: GDP per capita from Table A.2; 2003 household Income % for public transport users from Table A.3. Estimated household income % for public transport users by Consultant; Est MRT Trips per month per household: 15% of representative h hold income divided by VND 3,500 (2010 fare of VND4,000 in 2005 prices deflated to 2003 prices) divided by assuming MRT can only represent one third of all h hold transport expenditure. In Thailand 1998, according to the National Statistics Office, on average households spent Baht 2,677 from an average income of Baht 19,820 on transport and communication or 13.5% hence 15% was chosen as a reasonable approximation for HCMC. A.3 Tourist Use There appears to be little specific consideration of the potential for tourist use of MRT in HCMC in the forecasts by TEWET (2005) or Systra MVA et al (2008). Evidence from Bangkok for Bangkok Transit System (BTS) is that tourist use is apparently low. According to data on BTS ticket sales for February 2005, one day tourist passes represented 1.6% of all ticket sales. For Bangkok s Blue Line Subway sales of tourist tickets in October 2005 represented 0.04% of all ticket sales. What these data do not reveal is how many foreigners (or Thai residents from outside Bangkok who are visiting in Bangkok for tourism or social reasons) have purchased ordinary tickets. Surveys of BTS users in early 2001 about six months after its opening showed that foreigners accounted for 3.4% of Bangkok Transit System passengers (with about half being tourists and the other half being business people). It is likely that the proportion of foreigners using BTS is similar today. It concluded that for HCMC that there is the potential for the MRT to carry a similar proportion of tourists assuming the government attempts to facilitate foreign inbound tourism through both promotion and simplifying visa/immigration requirements and develops a reputation as a reliable place to invest. Overall, assuming current policies, a target of 1% of tourists in addition to demand generated by HCMC residents may be plausible in the early years of the system operation which may increase over time to say, 2% by Tourists would also likely to be less sensitive to absolute fare price levels than HCMC residents. 30

292 Appendix B: Most Likely Technical Option B.1 Likely Technical Components Based on the conclusion that a single ticketing system is needed the available technical option is shown in Figure B.1 which illustrates a single system comprising: a single card (ie. single issuer); a single central system; a single clearinghouse. It should be noted that in a gross cost concession environment revenue apportionment is not typically required, however the clearinghouse would be necessary for any extension of the system to non-gross cost operators or particularly expansion into non-transit applications of the card; compatible field equipment (gates and ticket office devices) deployed into all concessions; the implementation of an open interoperability standard at a minimum of the card/reader and central system/clearinghouse interfaces. The strategic implementation of an open standard will limit the impacts of any possible vendor lock-in; in-principle expansion of the MRT system onto the city s bus systems (when and how this can be achieved is not however within this TA s scope. The complexity involved in the implementation of advanced technologies onto bus fleets should not be underestimated); and the existing bus operators integrated into the new system if possible (or replaced if this is not feasible). While Figure B.1 represents the end state of the common ticketing system. 31

293 Figure B.1: Common Ticketing - Preferred Technical Option Line 1 Line 2 Lines 3 etc Bus BRT Other Smartcard Reader/Device Operator System Open Standard Card/Reader Interface Central System Open Standard Clearinghouse Interface Central Clearinghouse Phase II Non- Transit Application s Source: Consultant B.2 System Scalability Requirements The system procured will need to allow for growth both in level of activity as well as the number of participants. The system will need to be capable of processing at least an order of magnitude increase in transactions without significant impact on system performance. This will place significant importance on the card-reader interaction (a maximum of 200 msec is suggested) as well as the fundamental design of the transaction processing database. A set of appropriate performance levels throughout the system should be specified which can be clearly demonstrated during system testing. The system operating schema should also be sympathetic to the possible extension of the MRT system to other modes. Bus always poses significant challenges to any fare collection system, and particularly a bus system as vast as that currently operating in and around HCMC. The design of the initially MRT fare collection system should be undertaken contemplating the expansion of the system into other modes. Thus, operating fundamentals will need to be carefully considered, such as: operating logistics eg tag-on only validation vs tag-on/tag-off; degree of automation eg ongoing use of bus conductors; and environmental issues eg bus fleet condition in terms of electrical noise, power reliability, structural integrity, etc. The ultimate expansion of the system into non-transit applications will also be a necessary design consideration. In this respect it will be important for the design of the system to consider fundamental card transaction security as well as clearinghouse performance. 32

294 References and Bibliography Asian Development Bank and the Government of Thailand (2006a) Integrating Mass Rapid Transit in Bangkok: Options Report, TA 4676-THA: Small Scale Technical Assistance for Infrastructure Investment Advisory Assistance, Thailand. February. Asian Development Bank and the Government of Thailand (2006b) Integrating Mass Rapid Transit in Bangkok: Summary of Resource Papers, TA 4676-THA: Small Scale Technical Assistance for Infrastructure Investment Advisory Assistance, Thailand. July. Asian Development Bank (2007a), HCMC Metro Rail System Project, Strategic Financial Model Update, TA RSC-C61011 (VIE). March. Asian Development Bank and the Government of Thailand (2007b) Integrating Mass Rapid Transit in Bangkok: Phase II, Final Report, TA THA: Technical Assistance for Infrastructure Investment Advisory Assistance (Phase II), Thailand. July. Bangkok Metro Company Ltd (2005) Monthly Monitoring Report to MRTA. Bangkok Transit System Corp (2001) Various Data. Crotch-Harvey, T (2005) Potential for Low Cost Smart Tickets, presentation at Smart Urban Transport 2005 Conference, Brisbane, September. Franzmann, L (2005) Presentation on TransLink Presentation at Smart Urban Transport Conference, Brisbane, Australia 2005 Hague Consulting Group (1999), TRACE Costs of private road travel and their effects on demand, including short and long term elasticities Contract No: RO-97-SC.2035 Prepared for the European Commission Directorate-General for Transport, April. Kinnear, R (2005) Integration within a Franchised Public Transport System. Presentation at Smart Urban Transport Conference, Brisbane, Australia 2005 Balcombe, R (editor) (2004), The Demand for Public Transport, A Practical Guide, UK. TRL Report, TRL 593 Mass Rapid Transit Authority (1996 to 2001) Various Documents. MVA Consultants et al (1996) Urban Transport Database and Model Development Project (UTDM), with Comsis and Asian Engineering Consultants Corp Ltd, for OCMLT, completed March. Parsons Brinckerhoff International and Japan Railway Technical Services (2006) Special Assistance for Project Formation for Ho Chi Minh City Urban Transportation Improvements Project Urban Mass Rapid Transit (UMRT) Line 1, Eastern Section, September. Personal Communication (2006a) Information supplied by Silvester Prakasam, Head of Fares Division/ Ezy-Link, Singapore Land Transport Authority. May. Personal Communication (2006b) Information supplied by Robin Barlow, TransLink, Queensland, Brisbane, Australia, May. Personal Communication (2006c) Information supplied by John Stott, Director General, NSW Transport Administration Corporation, Sydney, Australia, May. Personal Communication (2006d) Information supplied by Dr LK Siu, New Projects and Planning, KCRC, Hong Kong. May. 33

295 Personal Communication (2007) Information supplied by Jamie Leather, Asian Development Bank. January. Policy Appraisal Services Pty Ltd and Economic and Policy Services (2001) Bangkok Mass Transit (Skytrain) Externalities Study, prepared for the International Finance Corporation (June) Prakasam, S (2005) Presentation on Singapore Ezy-Link, presentation at Smart Urban Transport 2005 Conference, Brisbane, September. SEQ Integrated Ticketing Project Team (1999), Towards an Integrated Ticketing and Pricing System. Working Paper prepared for Queensland Transport, 23 November. Systra MVA Thailand Ltd (2008), Ho Chi Minh City Metro Rail System Study HCMC Master Plan Ridership and Revenue Forecast Study, Final Report. January. Transport East West Expert Team GmbH (2003), Feasibility Study: MEtropolitan RAil System (METRAS), Ho Chi Minh City. Transport East West Expert Team GmbH (2005a), Addendum to the Feasibility Study: MEtropolitan RAil System (METRAS), Ho Chi Minh City, September. Prepared by MVA Asia. Transport East West Expert Team GmbH (2005b), METRAS, Metropolitan Rail System HCMC, Financing Report, Berlin, November. Transit Cooperative Research Program (1999), Report 10: Fare Policies, Structures, and Technologies. Transport Research Board. USA. Wardman J and Shires M (2003), Review of Fares Elasticities in Great Britain, Working Paper 573, Institute of Transport Studies, Leeds, UK, December. World Bank (2002) Cities on the Move: A World Bank Urban Transport Strategy Review, Washington DC. 34

296 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF References and Bibliography Asian Development Bank and the Government of Thailand (2006a) Integrating Mass Rapid Transit in Bangkok: Options Report, TA 4676-THA: Small Scale Technical Assistance for Infrastructure Investment Advisory Assistance, Thailand. February. Asian Development Bank and the Government of Thailand (2006b) Integrating Mass Rapid Transit in Bangkok: Summary of Resource Papers, TA 4676-THA: Small Scale Technical Assistance for Infrastructure Investment Advisory Assistance, Thailand. July. Asian Development Bank and the Government of Thailand (2007) Integrating Mass Rapid Transit in Bangkok: Phase II, Final Report, TA THA: Technical Assistance for Infrastructure Investment Advisory Assistance (Phase II), Thailand. July. Asian Development Bank (2007), HCMC Metro Rail System Project, Strategic Financial Model Update, TA RSC-C61011 (VIE). March. Allport R (2004) A Tale of Three Cities: Urban Rail Concessions in Bangkok, Kuala Lumpur and Manila., prepared by Halcrow Group Ltd for World Bank as part of ADB-JBIC-World Bank East Asia and Pacific Infrastructure Flagship Study. Astris Finance and Systra (2005), Hanoi LRT Pilot Line Feasibility Study, Executive Summary, Ocober. Booth, C. and Richardson, T. (2001) Placing the public in integrated transport planning, Transport Policy, 8(2) British Department for Transport (2004), Procedures for Dealing with Optimism Bias in Transport. Guidance Note. Coulthart A, Nguyen Q and Sharpe H (2006), Urban Development Strategy: Meeting the challenges of rapid urbanization and the transition to a market oriented economy, Viet Nam. Prepared by World Bank. Chiplunkar, A (2006), Presentation on Public Private Partnerships (PPPs) Framework for Infrastructure Development in Vietnam. Dr Chiplunkar served as ADB Staff Consultant on PPP in GMS. Finlayson, R (2007), Viet Nam Case Studies on Private Sector Development and Operations A Case Study from the 2007 Special Evaluation Study on Private Sector Development and Operations: Harnessing Synergies with the Public Sector, Prepared for ADB Operations Evaluation Department. June. Flyvbjerg, B., Skramris Holm, M., and Buhl, S. L. (2005) How (In)accurate Are Demand Forecasts in Public Works Projects? Journal of the American Planning Association, 71(2), Flyvbjerg, B., Skramris Holm, M., and Mette-Buhl, S. (2004) What Causes Cost Overrun in Transport Infrastructure Projects? Transport Reviews, 24(1), Flyvbjerg, B., Bruzelius, N. and Rothengatter, W. (2003a) Megaprojects and Risk: An Anatomy of Ambition, Cambridge University Press, Cambridge, England. Flyvbjerg, B., Skramris Holm, M. K. and Mette-Buhl, S. (2003b) "How common and how large are cost overruns in transport infrastructure projects?", Transport Reviews, 23(1), January,

297 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF Flyvbjerg, B., Skramris Holm, M., and Buhl, S. L. (2002) Underestimating Costs in Public Works Projects - Error or Lie? Journal of the American Planning Association, 63(3), Fouracre P R, Allport R J, Thomson J M (1990) The Performance and Impact of Rail Mass Transit in Developing Countries, Transport and Road Research Laboratory, Research Report 278, UK. HCMC PC Web site: < Accessed October 24. Japan Bank for International Cooperation, Japan (2006) Terms of Reference for Special Assistance for Project Formation (SAPROF) for Japanese Line, HCMC. Japan International Cooperation Agency (2004) Study on Urban Transport Master Plan and Feasibility Study in Ho Chi Minh Metropolitan Area (Houtrans) undertaken for the Ministry of Transport and the Ho Chi Minh City People's Committee with support from the Japan International Cooperation Agency. Prepared by ALMEC Consultants, Japan. Japan International Cooperation Agency (2006) Integrated Urban and UMRT Line 1 Development Strategy in HCMC draft Final Report. Prepared by ALMEC Consultants, Japan. Larwin, T. F. (2005) Transit Planning for the 21st Century, ITE Journal, 75(8) MVA Asia (2006), Task 3 Report, Institutional Recommendations for Involvement of the Private Sector Involvement, Technical Assistance for Consolidation and Development of a Bus System in Ho Chi Minh City, Viet Nam for World Bank with PPIAF funding, April. Parsons Brinckerhoff International and Japan Railway Technical Services (2006) Special Assistance for Project Formation for Ho Chi Minh City Urban Transportation Improvements Project Urban Mass Rapid Transit (UMRT) Line 1, Eastern Section, September. Policy Appraisal Services Pty Ltd and Economic and Policy Services (2001) Bangkok Mass Transit (Skytrain) Externalities Study, prepared for the International Finance Corporation (June). Preston, J. (2005) Contracting out public transport planning: options and prospects, 9th International Conference on Competition and Ownership in Land Passenger Transport, Lisbon, Portugal, 5-9 September. Transparency International (2006), National Integrity Systems: Country Study Report, Viet Nam. Transport East West Expert Team GmbH (2003), Feasibility Study: MEtropolitan RAil System (METRAS), Ho Chi Minh City. Transport East West Expert Team GmbH (2005a), Addendum to the Feasibility Study: MEtropolitan RAil System (METRAS), Ho Chi Minh City, September. Prepared by MVA Asia. Transport East West Expert Team GmbH (2005b), METRAS, Metropolitan Rail System HCMC, Financing Report, Berlin, November. van de Velde, D. M. (1999) Organisational forms and entrepreneurship in public transport: classifying organisational forms, Transport Policy, 6(3) Wallis, I. P. and Hensher, D. A. (2005) Competitive tendering for urban bus services - cost impacts: international experience and issues, 9th International Conference on Competition and Ownership in Land Passenger Transport, Lisbon, Portugal, 5-9 September. 27

298 Preparing the HCMC Metro Rail System Completion Report Asian Development Bank and PPIAF Wallis, I. and Lupton, D. (1999) Metropolitan Public Transport Policy and Planning: Institutional Development in a Multi-Operator Environment, 6th International Conference on Competition and Ownership in Land Passenger Transport, Cape Town, September World Bank (2002) Cities on the Move: A World Bank Urban Transport Strategy Review, Washington DC. World Bank (2005), Vietnam Transport (Draft) World Bank (2006), Infrastructure Strategy Cross Sectoral Issues, Vietnam. World Bank (2007), Project Information Document, Vietnam- HIFU Development Project Appraisal Stage Report no. AB