What is a public-private partnership in urban bus systems?

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The Challenges of Private Sector Participation in Urban Bus Systems

Cities around the world face similar challenges in implementing projects to improve urban bus services; in many cases, the private sector’s participation promises key benefits. Fiscal constraints and lack of capacity or flexibility in the public sector leave room for private actors, which often are more efficient and have lower operating costs. Where private actors are already involved in the operation of transit or paratransit (that is, informal) services, their place must be considered in any system reform. The design of a successful reform effort will include mechanisms to support the transition of private actors to those functions that are the most suitable, given their particular strengths and weaknesses.

WHAT IS A PUBLIC-PRIVATE PARTNERSHIP IN URBAN BUS SYSTEMS?

An especially popular form of private sector participation in public transportation is the public-private partnership (PPP). Many cities in low- and middle-income countries have sought to attract private sector investment by structuring PPPs, as was done in the first-generation urban bus reforms of the 1990s. The prospects of such investment have spurred the growth of companies associated with bus rapid transit (BRT)—such as bus manufacturers, consulting services, and tech firms—which have quickly begun to understand and adapt to new trends in transportation. But financing and banking services have not developed as quickly as the industry. Only a few banks are offering loans to urban bus operators, and many projects have found it difficult to attract private investments or achieve bankability. Three interrelated issues explain this challenge: (a) difficulties dealing with incumbent operators; (b) the relative complexity of urban bus projects, which are characterized by various components that can (and often are) handled by different entities; and (c) the relatively small size of urban bus projects (which often do not require infrastructure investments).

One of the most overlooked elements of structuring urban bus PPPs is dealing with incumbent operators. In many cases, an urban bus reform project targets a

service already provided by the private sector. For example, it may seek to formalize the private provision of a particular service to improve efficiency and overall quality. On the one hand, incumbent operators may ensure profits by ignoring labor regulations, avoiding taxes, and neglecting maintenance and fleet renovation. Relatively unorganized incumbents that have low standards of corporate governance may easily increase a project’s governance risks. On the other hand, well-organized incumbent operators may oppose any change to the status quo and stoke opposition that delays the project. In both cases, improper management of incumbents creates the risk of increased informal competition with the system after the reform. These and other examples help to explain why an assessment of incumbent bus operators, their market structures, and their access to finance is so important. various successful solutions have involved incumbent operators to different degrees, depending on the market. For instance, if incumbent operators are assigned responsibility for the provision of fleets but lack access to finance, this situation jeopardizes both their own financial sustainability and that of the project. In the absence of measures to mitigate or better manage commercial, political, and regulatory risks, access to finance remains limited. Also, local financiers of the transportation sector may not be ready to lend under project finance arrangements. Today, many banks feel more comfortable lending to a traditional operator than to a special-purpose vehicle (sPv).1

Myriad interrelated decisions specific to urban bus services—regarding functions, components, and risk management strategies—add an additional layer of complexity to the process of structuring an urban bus project, increasing either transaction costs or the risk of a suboptimal structure. When designing an urban bus PPP, it is important to consider all project components and divide responsibility for them between the public and private sectors. Components are traditionally defined using six categories: design, finance, build, operate, maintain, and, eventually, transfer. A road or an energy plant typically has one component. A bus project, by contrast, is modular and complex, and the application of these categories to each component must be considered in the design of the PPP structure. For example, a bus project may or may not include stations, terminals, stops, lanes, a fare collection system, monitoring systems, buses, signaling, control centers, and so forth. In addition, each of the defined components may be built and operated by either the public or the private sector. Also, private sector participation may be articulated as one or a combination of several sPvs or service providers. Finally, the definition of risk mitigation mechanisms and relations among agents may require a reconsideration of project components. For instance, depending on the local transportation authority’s responsibility for monitoring operations, information systems for fleet management and control may or may not be needed, which implies an interrelation between technical definitions and risk allocation and mitigation strategies.

All these factors call for an integrated approach to project planning, in which each component is slotted for public or private provisioning and associated financial mechanisms and concession elements are carefully considered. Also, it is critical that incentives in the project’s design maximize efficiency and mitigate risks to achieve bankability at a project level. urban bus PPPs usually focus on leveraging private capital for fleet provision, which limits the size of the transactions involved. The ability of most urban bus PPPs to leverage private capital is limited to the rolling stock for several reasons. First, most private actors are experienced in delivering only those components