Usually with things, you go where you can find the financing to do it.Don Bluth, animator, 1937–
In order to secure the necessary funding and financing for a BRT system, it is necessary to first have an idea about how much the system is going to cost to plan and construct, and then how profitable or loss making the operations are likely to be. Normally, the engineers designing the infrastructure have the best idea about the projected cost of the infrastructure, while the fleet size, fare collection system equipment, and other capital costs necessary for operations are better projected by the team that developed the specific service plan and the team that is doing the business planning. The service plan provides the basis for the fleet projections, which are the most significant capital cost after the infrastructure. The service planning team should also be asked to provide a reasonable estimate of the potential profitability of the system.
The costs of a BRT system can be divided into the costs of planning and engineering, the capital costs incurred in creating and building the system, and the operating costs incurred in running it and maintaining it. While this chapter focuses primarily on funding and financing the capital costs, it is a good idea to know how much the system will cost to plan and design. It is also good to have an idea of how profitable the operations are likely to be. If there are no funds available for planning, they can perhaps be covered as part of the capital program’s funding and financing. If the operations are not going to be profitable, more of the costs of operating the system can be treated as a capital investment, hopefully reducing operating losses to zero. In other words, there is a category of costs that can either be treated as an operating cost or as a capital cost. For example, if the system being planned is potentially very profitable, the cost of buying the vehicles, the fare collection equipment, and the operational control system can all be treated as operating costs and paid for out of operating revenue. If the system is less profitable, these will need to be treated as capital costs—and funds to cover them will need to be found elsewhere.
The costs of planning and designing a BRT system are not generally a significant part of the overall project cost. Proper planning, however, can make the difference between a system that fully recovers its operating costs and one that loses money year after year. As such, it would be foolish to fail to invest in proper planning and design, only to encumber the system with permanent liabilities. Total planning and engineering costs for a BRT project normally run in the US$5 million range, though this could be done for much less if the project team is very talented and can do much of the work in-house, or it could cost more if the detailed engineering is included and the project involves complicated engineering. Quito’s BRT was done largely in-house. Bogotá’s TransMilenio spent just over US$5 million for planning, basic engineering, and business consulting.
In higher-income economies, there are generally funds available from the operating budget of the transit authority or department of transportation to contract outside experts to design and engineer a BRT system, though some have been done in-house as part of the normal operating budget. Sometimes this has led to an overreliance on local contractors familiar with the local government but not necessarily familiar with international best practices in BRT system design. Ideally, projects are designed by consortia with both local and international best practice knowledge. Normally, it is somewhat better to contract out the planning and design of the system rather than doing it in-house, so that the design team can focus fully on the BRT project and not be distracted by other responsibilities. It is also better this way so that the design team can benefit from the broader expertise of specialists.
In lower-income economies, there are many sources of technical assistance available for designing BRT systems. Normally the funds required are not so high that the government planning the project cannot fund it. However, local governments sometimes have a hard time contracting foreign experts, and they are less likely to be familiar with the appropriate experts. As such, international funding for BRT project planning has been fairly common. If the project is likely to be funded by one of the development banks, it is generally possible to use project preparation funds or an ongoing larger infrastructure loan to also finance the necessary technical assistance, and most development banks also have funds for project preparation. Almost all of the development banks, UNDP, UN Habitat, UNEP, GIZ, the Global Environmental Facility, and many private foundations have all played a role in BRT project preparation. Once the system is operational, planning should be a function of the BRT authority and included as part of its operational budget.
The capital costs of a BRT system are those for which capital investment funds need to be found. These investments should result in a long-term sustainable reduction in operating costs for the public transit system as a whole, so long as the investment is properly maintained. The capital costs of a BRT system primarily include the BRT infrastructure, such as:
Normally, the costs of infrastructure construction and maintenance are paid by the government, and there should be no expectation that these costs will ever be recovered from fare revenue. There is no evidence that a BRT system can cover these costs from fare revenue even in the best of circumstances.
Capital costs also generally include the following:
Whether these capital costs can be made by private investors and fully covered by fare revenues (and hence be treated as part of operating costs covered by ongoing operating revenues) or whether they should be treated as capital investments and funded by outside, generally public funds, will vary on a case by case basis depending on the profitability of the system overall. Empirical evidence suggests that the most profitable systems are able to cover all of these costs, while the less profitable systems will not be able to cover all or perhaps any of these costs out of fare revenue.
Operating costs normally include the following:
How much of these operating costs, if any at all, can be covered from fare revenue depends on the overall profitability of the system. The most profitable systems cover the system administration costs from fare revenue, which helps insulate the system’s administration from political interference, but the less profitable systems generally cover system administration costs out of general budget revenue. Vehicle operations are generally recovered primarily from fare revenue, but some BRT systems require operating subsidies. These are generally covered by tax revenues. The fewer tax revenues are needed to cover operating losses, the more public funds that are available for capital investments.
In principle, ongoing recurrent costs such as operating losses to a BRT system, should not be debt financed, nor should they be funded from one-off revenue sources. For example, additional tax receipts resulting from “value capture,” or the increase in property values arising directly from the implementation of the new BRT system, could be used to fund capital costs but should not be used to fund ongoing operating losses. Longer term increases in property or sales tax receipts, however, would be a reasonable source of funds to cover operating losses.
The BRT project team will need to identify sources of funding and financing for all of those capital costs that cannot be covered out of the fare revenue. Advertising revenue, while it sometimes helps to supplement fare box revenue, is rarely sufficient to significantly change the equation. Therefore, estimating what capital costs above and beyond operating costs can be covered from the fare box revenue is a critical first step.
No BRT systems fund more than a small portion of their infrastructure capital costs out of fare revenue, and only a few are able to cover the capital investment into their vehicles, their fare collection system, and their operational control system. The extent to which these costs can be covered from fare revenue depends on a variety of factors—and they can vary widely among cities. Crucial factors include not only the number of customers carried by the system, but especially the differential between peak and off-peak demand and whether demand is tidal in nature. Where a system has high peak demand all in the same direction and low off-peak demand, its financial viability is likely to be low even if it carries large numbers of customers. This is because the system has to be sized to service the peak but has very low utilization levels at all other times. Even in peaks vehicles are largely empty on their return journey to take their next peak load.
Indeed, once a basic demand threshold is reached that justifies investment in the system the viability of the system is much more dependent on an even customer demand flow in all directions throughout the day than on total customer volumes.
Other important factors include average trip length and user income levels. Short trips are more affordable and can be charged at a higher rate. Where there is substantial seat renewal along a single bus route a vehicle can earn far more than if it carries customers for long distances between route end points.
Gaining an understanding of the extent to which vehicle procurement, fare collection equipment, and operational control system equipment can be covered by operating revenue, thereby to be treated as an operating cost, should be determined as early as possible. It must be based on a sound understanding of the demand profile including not only the estimated number of customers carried but also the peak to off-peak differential and realistic fare levels. And it must be based on realistic cost projections. Unfortunately, when BRT is new to a city or country or where good demand modelling is not available, achieving accuracy can be difficult, but doing so must be treated as an absolute priority as part of the initial planning process.
The financial challenge is to first design a system where as many of the capital costs as are feasible can be covered out of fare revenue. Secondly, it is to raise the remaining capital funds, turning to debt financing where the capital funds are likely to accrue gradually over time while the need for the funds is immediate. Thirdly, if operating revenues are insufficient to cover projected operating losses, other stable long-term revenue sources will need to be found to cover these projected deficits. If the system is likely to operate at a deficit, then financing the capital program is likely to require that the project team can prove it has access to an ongoing revenue stream large enough and reliable enough to cover the operating losses and still service the debt.
A logical starting point for any funding and financing plan is to examine existing capital budgets for public transport and roadway development. If financing is needed, the first source of financing to turn to should be the typical source of financing for any similar public works project sponsored by the same client, whether it is a municipal, state, or national government building the BRT system. Financial institutions are always more comfortable lending to established clients for projects similar to other projects they have financed. Often the price of two or three highway flyovers or one or two links in a new metro system is equivalent to the cost of building the first operational phase of a BRT system. Unorthodox sources of funding and financing should only be approached as a last resort as they are likely to significantly delay a project.
Ideally, an effort to identify the necessary funding should begin at the earliest stages of the planning process. The funding and financing plans should be developed on an iterative basis with the operational and infrastructure design process since the available funding and financing will be a determining factor in the final design.
If the estimated needed funding and financing is based on tenuous assumptions about certain future revenues, then the long-term viability of the system will be placed in doubt. In such cases, the quality of all public services can be compromised if future administrations and future generations are burdened with an unrealistic debt level. For this reason, as far as is practicable, the funding and financing process and the assignment of long-term financial responsibility to specific institutions or levels of government should be discussed in a wholly transparent manner to allow all parties (including civil society) to provide input. The total financing package must be cost-effective, achieving an optimum interest rate and a reasonable debt level.
Financing also needs to be timely. Generally, the political leadership of a BRT project will require project implementation to be achieved within a particular time frame, and sometimes higher interest rates or fees may be required in order to secure financing in time to meet a specific political timetable.
The long-term vision of the funding and financing strategy will likely vary from the financing applied to the system’s initial corridors. Before a country is familiar with BRT it is likely that more of a project will need to be funded on a cash basis from government grants, or with loans with the full faith and credit of the government behind them. If BRT becomes proven and viable in a city, alternative, lower-cost forms of financing generally become available. Many BRT projects have been started with relatively expensive financing, only to be later refinanced once the viability of the project and the credit-worthiness of the borrowers have been better established.
While there are exceptions, the general funding strategy for a BRT system will often focus on the following principles: