The Challenges of Private Sector Participation in Urban Bus Systems | 19
Box 1.2, continued
a project than the public sector. In some cases, private companies may have more experience in delivering services or operating in an efficient manner and may be in a better position to encourage innovation, manage certain risks, and provide better service to the users. • Achieve more efficient risk allocation. PPPs allow for more efficient risk management.
A well-structured PPP assigns risks to the party in the best position to manage them and ensures that mitigation measures are in place for all risks. This efficient allocation of risks and responsibilities creates efficiencies in project design, implementation, or operations and is key to achieving bankability.
Sources: Based on French Development Agency 2009; World Bank 2017; World Bank Group, PPIAF 2012.
FURTHER DISCUSSION When it comes to transferring costs, the success of urban bus PPPs depends on the financial position of the private concessionaire and the ability of the project to generate revenue. Unfortunately, the perceived risks of most urban bus PPP structures are too high to ensure bankability. Therefore, under the most common structure, a private operator provides the fleet and the public sector provides the infrastructure. Several projects have experienced cost overruns or faced implementation challenges because the operator lacked access to finance. This is particularly common when the structure relies on incumbent operators to provide services. Projects that feature the competitive selection of operators, infrastructure, or providers have mitigated this risk by including financial requirements in the bidding process. Despite some exceptions, experience shows that most projects are not financially self-sustaining and require sources of funding in addition to operating revenues. Similarly, projects have achieved more efficient implementation thanks to capable and experienced concessionaires. When it comes to efficiency, the private sector may have a competitive advantage in both the provision and implementation of technological components as well as in operations. The public sector has extensive experience in the provision of urban roads; specific requirements for BRT (like lane infrastructure) are addressed at the design stage. Again, setting up the right requirements for the concessionaire of an operation mitigates the risk of working with an inexperienced one. Efficient risk allocation is at the core of project finance. It is critical to ensuring the concessionaire’s access to finance, whereas its lack has posed a stumbling block for numerous projects. Properly structured projects minimize risks and achieve bankability. There is a level of risk that is not acceptable for financiers and cannot be compensated for by a higher financial rate. If the perceived risk of a project is over this threshold, the project is not bankable. Numerous urban bus PPPs face this problem. Anecdotally, banks in Colombia and Mexico reportedly feel more comfortable directly financing the company that owns an SPV than the SPV itself. A bank’s preference for providing corporate financing to an operator or SPV shareholder over a project finance plan lending to the SPV may indicate inefficient risk allocation.3
