Money makes the wheels go round

O. P. Agarwal

As cities expand and the world’s population becomes increasingly urbanised, the need for reliable and affordable transport systems, especially in developing countries, grows more urgent. But with the costs of maintaining existing infrastructure and building new projects being so high, innovative financing methods must be sought to help authorities bridge the funding gap and keep the city moving, writes O. P. Agarwal.

If cities are the ‘engines’ of economic growth, then transport sys­tems are the ‘wheels’ of this engine. Just as the engine would cease to work if the wheels did not move, so the city would come to a standstill if the transport system stopped functioning. The public transport network enables residents to access jobs, education, health care and recreation. Similarly, it allows industry to access labour, raw materials and the market for its products. Thus, the smooth running of the urban transport system is critical to the health and well-being of the people as well to the economic efficiency of the city.

In a rapidly urbanising world, city transport systems are coming under severe strain, especially in developing countries. By 2025, two thirds of the world’s population will live in cities. According to a re­cent report by global consulting firm McKinsey & Company, China will have to pave 5 billion square metres of road and add up to 170 mass transit systems by 2025, when the country will have 221 cit­ies with one million or more inhabitants. In cities around the world, congestion is common and being ‘stuck in traffic’ is a daily concern.

Most cities, therefore, are looking to enhance the capacity of their transport systems. Whether for the widening of a road, the improvement of an intersection or the addition of a new bus fleet, the investment needs are becoming huge. A 2011 study by the High Power Expert Committee in India estimated the investment requirements for transport in the country’s cities over the next 20 years to be INR20 trillion (approximately $400 billion). In addi­tion to building new capacity, existing facilities must be kept in a state of good repair. But as the length of the roads and mass transit systems grows, so do the maintenance needs and costs.

Transport services can be classified in two categories – those that are free and those for which a fee is charged. Users of roads and pavements generally do not pay for using them, while most public transport systems and parking facilities charge a fee. Financing of the systems also falls into two broad categories – one-time capital investments, and annual operations and maintenance charges. For example, metro rail systems cost sizeable amounts to build, often in the range of $50-100 million per km, depending on the nature of the system. And funds are also needed to operate and maintain the system over several decades. These can range from $3 million to $7 million per year/per km, sometimes more, depending on the price of electricity and local wages.

Capital funds are usually met from two sources: promoters’ contributions and loans. In most cases, the main promoter would be the city or a higher level of the government. If the entire ex­penditure is met from public resources, then no loans are required. However, funds are increasingly being borrowed to part-finance the capital investments in urban transport. Typically, infrastructure projects require long-term debt and lower interest rates compared to commercial borrowings for manufacturing activities. To meet such needs, several countries have set up infrastructure financing companies that offer special terms for infrastructure funds.

Multilateral development banks like the World Bank, the Asian Development Bank and others also provide loans for transport in­frastructure in developing countries. Between 1999 and 2011, the World Bank supported more than 80 urban transport projects in­volving commitments totalling $10.5 million. These have included metro rail projects in Kunming (China) and Sao Paulo (Brazil), as well as Bus Rapid Transit (BRT) projects in Accra (Ghana), Bogotá (Colombia), Lagos (Nigeria) and Lima (Peru). BRT systems are also under preparation in Cebu (Philippines), Ho Chi Minh City (Vietnam) and several cities in China.

The private sector contribution to urban transport finance is also growing, largely in the shape of public-private partnerships. In such cases, the private sector shares in the financial burden; however, the primary benefit of involving the private sector is enhanced efficiency during the operations and maintenance phase. Financing this phase has long posed a severe challenge. Revenues from fares have of­ten failed to meet operating costs. It is difficult to increase fares by enough to cover these costs as public transport systems are often the only means of travel for the poor, and affordability concerns limit the fare that can be charged. In addition, it is difficult to charge for the use of roads, bridges and pavements in an urban space. Yet all these facilities are needed and have to be kept operational. The question that arises then is, how can funds be found to meet these gaps? Are there other means of raising revenue beyond charging user fees?

Fortunately, several innovative sources of financing urban trans­port, especially for the operations and maintenance phase, have been emerging around the world. Key examples include conges­tion charges, the restriction of vehicle ownership and the selling of advertising rights on public transport (see box for details).

As cities grow, the financing needs for urban transport services are becoming huge. Without increased investments, the potential for cities to lead economic growth in the developing world will be diminished. Finding resources for the capital investments, by way of promoters’ contributions and lending from multiple agencies, has been relatively easy, but financing for operations and main­tenance is posing a severe challenge. Fortunately, the innovative methods mentioned above could help bridge the gap.

About the author:

O. P. Agarwal is Senior Urban Transport Specialist at the World Bank, Washington, DC


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