Innovative Financing Techniques: European Urban Rail Projects and the Case of the Athens Metro Extensions

Innovative Financing Techniques: European Urban Rail Projects and the Case of the Athens Metro Extensions


A Deloukas, E Apostolopoulou, Attiko Metro, GR



In the last two decades the attraction of private capital as a way to finance urban transport projects has revived in Europe. There are numerous reasons for this revival.

The assumption of financial risks by private parties in this sector reduces the risk exposure of the public party. The awareness about the true costs and the risk profile of transport projects increases. A financial responsibility of the private sector in project implementation results in efficiency gains (timely completion on budget).

The revival is more evident concerning road projects. There is less experience with public-private collaboration in the urban rail sector, especially outside U.K. An aim of the paper is to examine the reasons for this unbalanced development. The potential for realization of privately financed urban rail projects is to be assessed. It is assumed further on, that the urban rail projects under consideration are socio-economically desirable, and what is required are the terms of their financial viability.

Apart from the traditional forms of public procurement and pure privatization (Build/Own/Operate for ever), a typology of more innovative forms of public-private collaboration is defined. It is distinguished between: (a) concession projects, where a risk allocation between both parties applies, for instance the private party assumes all commercial risks and the public party the non-commercial risks (e.g. force majeure). An example is the Croydon Tramlink south of London (DBFMO concession) (b) concession projects, where a risk sharing applies, for instance the private party assumes a share of the commercial risks whereas the public party directly or indirectly (e.g. shadow payments, guarantees) assumes the rest. The Dockland Light Rail extension to Lewisham is an illustration (DBFM concession) (c) other mixed forms of collaboration, where the public party controls the project development company (named Special Purpose Company, SPC). The private party participates significantly in the implementation phase, assumes financial risks during the construction, and is adequately compensated after completion (e.g. through a long-term bond privately placed by the SPC). A variant of this German ?Vorfinanzierungsmodell? has been recently suggested by the Strategic Rail Authority in the U.K. for enhancements to the network (DBFT model).

In the case of concessions, the private investment costs are recovered during the concession period by means of future revenue streams (non-recourse financing of commercially viable projects) and/or a public support to reach financial viability (limited recourse project financing). In all three forms, the full ownership of the transport project is transferred to the public party after a fixed period.

A pertinent issue arising frequently, is the coupling of the concession length with the return on investment achieved by the private party. Such a mechanism is difficult to implement in reality. The private parties have the tendency to hold back financial information, i.a. due to rules of commercial confidentiality. An asymmetry of information between the public (principal) and the private party (promoter or agent) arises. A principal-agent relationship rather than an equal partnership characterises both parties in a public-private collaborative project. Market competition prevails when the bids are offered. Afterwards, the concessionaire is often in the position of a monopolist using his market position to present financial information according to his interest. This is also an important reason to close the negotiations about the entire concession terms and activities before signing the concession agreement.

The paper investigates the strategy formulation/assessment/choice referring to alternative forms of provision of urban rail infrastructure in Europe. The choice dimensions concern: (a) selection of a suitable form of PP collaboration. Urban rail projects contain both capital- (e.g. systems, rolling stock, ticketing) and labour-intensive components (e.g. civils, O&M). Typically, the public party borrows capital at a lower cost. The private party manages labour more efficiently and designs more innovative. Requested is an optimal mix of capital and labour cost efficiencies (b) selection of the scope of PP collaboration (DBFT/M/O). There is a rich literature about the synergies or diseconomies of scope of vertical integration or separation of infrastructure/operations/maintenance. A DBFM concession is an interesting option, i.a. due to the incentive to balance initial investment costs and future (for urban rail: high) maintenance costs. However, the urban rail life-cycle is typically longer than the concession period. This means that an optimal use of life-cycle costing is likely only in the case of full privatization (no transfer to the public party). A key issue here is the capture of some traffic risk in the formula of shadow payment to the concessionaire (variable usage fee). The DBFMO concession exploits synergies of integrated operations and maintenance activities, but it is heavier exposed to the traffic risk (c) selection of the scale of PP collaboration. On the cost-side, a horizontal integration of sub-projects (e.g. extensions, subsystems) provides economies of scale, whereas a split between more than one concessionaires produces co-ordination costs. On the revenue-side, the combination of unattractive extensions having low profitability with commercially viable extensions is a promising strategy. The strategy assessment shows whether tenders should be launched once for all sub-projects, in parallel, or successively. A major issue here is a possible integration with the existing network, which could lead to the spreading of the commercial risk. Urban rail extensions derive most of their value because of the existence of the base network. The transfer risks (e.g. industrial relations) and interface risks of the integration with the existing system are to be weighted against the positive network effects.

Finally, the broader the scope and scale of the PP collaboration, the less competition is expected in the tendering phase, and the more difficulty to built up a consortium and keep it together till the expiration of the concession.

Moreover, certain immanent urban rail project characteristics are analysed from the point of view of a PP development framework. Urban rail constitutes the backbone of the urban transport infrastructure. Its importance constitutes a large residual risk for the public party. In case of private default and insensible lenders, the public party must assume responsibility to assure continued service provision, i.e. a hidden government guarantee is inevitable, even if not deliberately given. Urban rail systems contain a high level of complexity. This implies high costs of co-ordination between more than one concessionaires or costs of integration with an existing system. It implies further on high monitoring costs because any performance-based output specifications must be compulsorily very broad.

The construction risk of urban rail projects (cost overruns, late completion) is best controlled by the private party. Therefore, a risk transfer to the private party is meaningful. In underground metros especially, the technical and the completion risk (e.g. unforeseen ground conditions) is considered by far as the most significant project risk. This means that the promoter should be financially robust, because the risks involved are far larger than those for conventional turnkey contractors.

Further on, urban rail projects are compared to road projects within the perspective of the PP framework. There are more reasons speaking for a private provision of services in case of roads than in case of urban rail: (a) the road network topology is more flexible, typically provides competing (route) alternatives to the travelers. The urban rail topology is more stable, provides few or no route alternatives, so modal choosers in case of service failure will switch to modal alternatives. The condition within the urban rail market is monopolistic (b) the urban rail operation is heavier regulated than road operation. Tariff levels are set and subsidized by the public party. The urban rail contains a higher regulatory risk (c) the urban rail operation produces nonuser benefits outside of market mechanism (market failure). Such benefits concern de-congestion on competing systems, intermodal accident savings and air quality improvement. On the other side, cars do not pay the full social costs of their use (negative externalities). In other words, an unfair competition between car and urban rail emerges, the urban rail cannot cover its total costs, and the public subsidy becomes indispensable. In most of the cases the urban rail cannot be profitable and self-financed, but only co-financed by the private sector.

The paper devotes a section to the value dimensions for the comparative assessment of PP collaboration forms, as well as to the comparative evaluation of innovative financial instruments suitable for urban rail investments. The EU insistence on a reduced public debt and the attractiveness of funding projects off-balance sheet are closely scrutinised.

The next chapter compares European urban rail projects developed with private capital along dimensions, such as scale (new or extension of existing system), scope (DBFT/ DBFM/ DBFMO) and form of PP collaboration, mainly from England, France and Greece. The planned Seville Metro Line 1, Tagus LRT south of Lisbon and Dublin Underground are also considered.

Finally, the specific features of the PP collaboration for the development of four Athens Metro extensions are comprehensively discussed. Special emphasis is given to the strategic options elaborated, their financial assessment and the selected strategy for PP collaboration in the development of the extensions.


Association for European Transport