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transport financing

Railways are the future—so how can countries finance them?

Martha Lawrence's picture
Photo: Kavya Bhat/Flickr
As a railway expert working for the World Bank, I engage with many client countries that are looking to expand or upgrade their railway systems. Whenever someone pitches a railway investment, my first question is always, “What are your trains going to carry?” I ask this question because it is fundamental to railway financing. 

Railways are very capital intensive and increasingly need to attract financing from the private sector to be successful. That is why the World Bank recently updated its Railway Toolkit to include more information and case studies on railway financing. Here, in a nutshell are the key lessons about railway financing from this update. 

Maximizing finance for sustainable urban mobility

Daniel Pulido's picture
Photo: ITDP Africa/Flickr

The World Bank Group (WBG) is currently implementing a new approach to development finance that will help better support our poverty reduction and shared prosperity goals. This crucial effort, dubbed Maximizing Finance for Development (MFD), seeks to leverage the private sector and optimize the use of scarce public resources to finance development projects in a way that is fiscally, environmentally, and socially sustainable.
 
There are several reasons why cities and transport planners should pay close attention to the MFD approach. First, while the need for sustainable urban mobility is greater than ever before, the available financing is nowhere near sufficient—and the financing gap only grows wider when you consider the need for climate change adaptation and mitigation. At the same time, worldwide investment commitments in transport projects with private participation have fallen in the last three years and currently stand near a 10-year low. When private investment does go to transport, it tends to be largely concentrated in higher income countries and specific subsectors like ports, airports, and roads. Finally, there is a lot of private money earning low yields and waiting to be invested in good projects. The aspiration is to try to get some of that money invested in sustainable urban mobility.

Mind the (funding) gap, next stop: Making some extra money

Daniel Pulido's picture
Follow the authors on Twitter: @danpulido and @IrenePortabales
 

A branded metro station in Madrid
Most metro systems around the world are unable to cover their operating costs with fare box revenues, let alone fund capital expenditures. According to data from international benchmarking programs CoMET and Nova, tariff revenues cover an average 75% of operating costs, while other commercial revenues provide about 15%, resulting in an operating deficit of 10%. Similarly, a back of the envelope exercise that we conducted for Latin American metro companies showed that these had an average operating deficit of 10% in 2012. When including capital expenditures, this deficit grew to 30%. There are of course examples of metro systems that do recoup their operating costs, such as Santiago de Chile and Hong Kong, but others like the Mexico City Metro only cover half of their operating expenses with fare revenues. We should all mind this funding gap as it is a significant impediment to maintaining service quality and addressing growing urban mobility needs.

Unfortunately, the underfunding of transit systems can become chronic as public budgets are under growing pressure and the most direct solutions for increasing revenues are hard to implement: increasing fares, for instance, has proved to be politically difficult and disproportionately affects the poor, who use public transport the most; and charging a price that fully covers the social cost of private vehicle usage (i.e., congestion charges) as a way to fund transit is also politically sensitive.

In that context, transit operators are increasingly looking at new ways to tap additional sources of commercial revenue and make up for funding shortfalls, often through agreements with the private sector. Although most examples are concentrated in developed countries, some metro systems in Latin America and the developing world are looking at ways to increase non-tariff revenues: