(a)        Demand or Availability     

Passenger fares tend to be low/subsidised and urban infrastructure is expensive. Many passenger rail projects structured on a demand-basis failed and needed to be restructured. High demand elasticity and competition makes it difficult to increase fares and maintain high usage.

A study of 27 rail PPP projects in 2012.described some of these failures, and noted that in every single project the demand forecasts had been overestimated, with most falling between a 20% and a 80% overestimate. Lending institutions are now much more cautious about demand risk within an urban rail context and as a result, in developed markets the vast majority of passenger driven projects are structured on an availability basis (or with some measure of guaranteed usage for the infrastructure concessionaire, or with cross subsidy from other lines of business (e.g. Heath row Airport’s rail link, where the infrastructure cost is subsidised by the broader commercial business)).

(b)        Structure of the project    

Does the project include operations of the system (DBFOM) or just the construction and maintenance of the system to be operated by others (DBFM)? How do operations fit within the wider urban transport policies?

This is a key structuring point for the government. The new network may work well as a standalone operation (particular if new and evolving technology that is not currently used by the city authorities), in which case DBFOM (design-build-finance-operate-maintain) may be appropriate, but if the city wishes to have greater day to day control over the system as part of a city-wide transport strategy, it may want to keep the operations out of the project and procure as a DBFM (design-build-finance-maintain). It is an important early question because the performance and payment mechanism will be very different between the two structures. This is discussed further in due course.

(a)        Urban construction risks

Does the project involve tunnelling (underground scheme) and/or remodelling of roads (tramway/elevated scheme)? How is the risk of unknown conditions dealt with (e.g. relocation of utilities, removal or containment of contamination)? Are any existing structures being taken over?

Tunnelling projects are expensive and create their own risks, which may be difficult to incorporate into the wider financing of the project. For this reason a number of metro projects have either been developed outside of a PPP route, or the tunnelling component has been developed outside the PPP route and the finished tunnels then handed to the concessionaire to build out the system within it.

Remodelling of roads on a tramway scheme also involves significant interaction with the built environment as well as existing services and businesses. On some projects the government party may seek to minimise the risk for the financing by doing some of the necessary work and utility removals before the concessionaire’s work starts.

The concessionaire’s ability to take on utility removal / contamination / existing asset risk will be a function of the existence and quality of surveys, so the government can improve the quality of bids by doing these and making them available in good time in the bidders’ data room. The government usually avoids accepting that reliance may be made on the reports but this may not be a reasonable position if the concessionaire has no way of verifying the data.

(b)        Performance and service levels    

What are the key KPIs? What level of performance is the concessionaire required to achieve? Is it achievable? Is there a suitable buffer before deductions start? Is there a ramp up period in the early phase? How will service levels be set?

A DBFOM project will focus more on punctuality and reliability of the service; a DBFM project will focus more on functionality and the availability of the rolling stock, track and stations to meet the requirements of the timetable set by the city operations team.

Whichever requirements are set, 100% performance is not realistic – there will always be issues due to breakdowns, maintenance requirements, passenger-related events, vandalism, etc. If the performance levels are set at 100% then the concessionaire will price in the risk of unavoidable deductions at (say) 2% and when it achieves greater than 98% reliability it will keep the risk money as extra profit. It may be more cost effective to set a performance level at 98% and avoid the increased risk pricing. Risk can also be reduced by agreeing a number of “excusing causes” – external events that will relieve the concessionaire from performance deductions – but these should not be so numerous or subjective that the contract becomes difficult to administer.

In some projects – e.g. a new tramway project where the system will be interacting with new traffic signals for the first time – it may be difficult to predict how well the system will perform; it may take a few months to achieve a steady service. If so, it may be appropriate to allow some latitude in the deduction regime during the first year so that the concessionaire is not overly penalised.

(c)        Rolling stock issues

Are vehicles being supplied by the concessionaire or by the government? If the latter, how will the concessionaire manage the handover risk? Vehicles tend to be procured on a long lead-time. What happens to performance levels if vehicles are damaged?

In most DBFOM projects the concessionaire will be asked to provide the rolling stock alongside the civil works so that it can take responsibility for delivering a total integrated system. If the government has access to vehicles through another source – e.g. a framework contract for supply of vehicles for the wider transport network – then more thought will be required as to how systems integration is managed and as to who takes the risk of problems arising between the components.

(d)        Passenger interface issues

If the concessionaire is being managed on performance, what protection does it have against increased passenger numbers? Who takes the risk of needing to supply more vehicles to meet demand?

Vehicles will probably be designed to accommodate a certain number of people; trains can usually be made longer by adding new units (if the platform lengths permit); the timetable will assume a certain amount of dwell time at each stop. If passenger numbers increase significantly, it may affect the ability to meet timetable, and it may even become a safety issue. If new vehicles are required, a suitable lead time will be required in the contract given the manufacturing time. New vehicle options are usually limited in time to the first few years, because after then it will be more difficult for the original vehicle manufacturer to guarantee delivery of additional vehicles to an agreed price and time, as they may have taken on other orders or reconfigured their production lines.

(e)        Segregation and traffic interface   

Is the project physically isolated from other rail networks? Is it segregated from road traffic? In a tramway project with a traffic interface, how will the signalisation between trams and cars be managed? How will traffic accidents / blockages be dealt with?

Each potential interaction with other rail or road vehicles outside of the concessionaire’s control will need to be considered when setting any punctuality/timetable requirements. If the project involves a new tramway, the concessionaire may be responsible for designing the new traffic signals and ensuring these are integrated into the government’s wider road signalling system, who will then be responsible for operating it. This may take time to bed down and the concessionaire may need some latitude in terms of its punctuality metrics. Similarly, if the concessionaire is dependent upon local emergency services to remove blockages, it may wish to be protected from a major delay that affects the timetable in a material way.

(f)         Safety regulations

Rail transportation tends to be highly regulated from a perspective of safety. Changes in safety law could present a disproportionate impact on those operating rail systems. Can additional costs be recovered under the contract if this occurs?

One may expect that changes to the rail sector will be covered as “Specific Changes in Law”, but in some rail projects this approach has been expanded to include general changes in law with a disproportionate effect on the project.

(g)        Energy use

Power will be a major component of project operating costs. How will the project allocate energy consumption and tariff risk between the parties?

Energy costs will be a function of a number of issues, including: (i) efficiency of the trains and provision of traction power to the system; (ii) how the trains are operated by the drivers (braking and accelerating profiles); (iii) prevailing weather conditions and the level of exposure of the system components to the weather. It would be reasonable for the concessionaire to take responsibility for those components within its control – in terms of design, construction and selection of components; and in terms of operator efficiency if the concessionaire has that responsibility as well. A compensation mechanism may involve requiring the concessionaire to include the expected energy usage of the system in its bid and to pay compensation if actual energy use exceeds this.

(h)        Network expansion

Is it likely that the project will be expanded during the concession lifetime or interact with new network lines? Can this additional work or impact be predictably priced by the existing concessionaire? How will the interface be managed if a new contractor or concessionaire is engaged?

If a network expansion is likely, there will be a lot of sense in asking the existing maintainer/operator to take charge of the expansion, but without competitive tension, the government may find it difficult to get the same value for money it would have had. Some projects have proceeded by terminating the first concession, and then resetting the project as a further new-build contract with the right to operate both the original and the new lines. This can also be an overly expensive route, as the original concessionaire would expect to be able to claim the lost profit it would have earned on the original concession.