Mass transit grabs a small but significant amount of attention from project finance lenders in the US but, to date, there has not yet been a real concession-based financing for a light rail, monorail or other rail asset in the US. Now, a number of potential availability-based financings are lined up, looking to a model that has been used more extensively in Europe. Sponsors and bankers alike believe that there are new possibilities for municipalities to look at such structures, since presently mass transit in the US operates at a loss, and is as dependent on public subsidies as its European counterparts.

The RTD FasTracks project in Denver, Colorado, the Bay Area Rapid Transit Oakland Airport Connector (BART-OAC), in San Francisco, California, and the Dallas Area Rapid Transit in Texas are all in the process of lining up project sponsors, contractorss and operators. All are much more likely than the past to rely on availability payments to sponsors rather than passenger, or farebox, revenue.

For this new wave of deals, the C$1.895 billion ($1.86 billion at today's rates) Richmond Airport Vancouver rapid transit project (RAV) from 2005 is the only financing template available in the Western hemisphere for long-term design, build, finance and operate concession. The 35-year concession, though, featured $1.175 million in public funding, with the sponsor, SNC Lavalin, providing $120 million of the balance as equity and $600 million in bank debt arranged by Bank of Ireland, NordLB and Société Générale.

European provides a more fruitful source of precedents, such as the Manchester MetroLink (Phase III) in the UK, which features a design-build-finance-operate structure, but which has yet to be completed. The Eu138 million ($200 million) Parla light rail deal in Spain, which closed in 2006, was an innovative mixture of performance and ridership risk. The 40-year concession is backed by availability payments for the first five years and then changes to a volume-based shadow payment system for the remaining 35 years. The financing, arranged by BNP Paribas and Caja Castilla La Mancha, comprises a Eu87 million long-term facility maturing in 2037; a Eu29 million advanced payment facility maturing in 2008; a Eu22 million VAT facility maturing in 2009; and a Eu7 million interest rate swap solely provided by BNP that hedges a portion of the long term debt.

Is the US ready?

Such sophisticated concession structures have not yet been tested on US mass transit deals; though many projects might benefit from a higher proportion of debt financing and private operational expertise. The challenges to government are not so much those of stimulating debt and equity appetites, nor even the technical requirements of the projects, complicated though they are, so much as reconciling the risk transfer requirements of a PPP contract with the public ownership of transit systems. Such tensions, clear to European authorities, even if not always resolved cleanly (see the London Underground's struggles for an example) are very new to US municipalities.

According to research conducted by Cambridge Systematics for the American Public Transport Association (APTA) in 2006, it costs between $20 billion and $35 billion annually to maintain the US mass transit system, and would cost between $30 billion and $45 billion to upgrade it. The APTA also estimates that ridership has increased by 30%, or 1.9% annually, since 1995. The need for efficient mass transit is undisputed, but the projects are for the most part funded through Federal the Transportation Administration (although sometimes using programmes such as TIFIA and Penta-P) rather than through purely private financing methods. Of the cost of transit systems nationally, only 32% is recovered at the farebox.

Alistair Sawers, head of infrastructure and project finance for RBC's western US group, stresses; "It isn't that transit PPPs are not yet feasible in the US, it's that the concept of subsidy minimisation, by using availability payments, is novel and historically it has all been about going back for more Federal or State grants."

However, despite lagging behind Europe in terms of concession structure, North American deals have achieved competitive pricing when compared with their European equivalents. For example, The C$600 million commercial debt for RAV priced at 115bp over CDOR during construction, dropping to 105bp post-completion, and then rising to 125bp over the 28-year tenor, although it benefited from a tail of seven years on the 35-year concession.

Transit evolution

Tony Porter, managing director for US infrastructure project finance at LloydsTSB, has worked on a mixture of concession and design-build contracts in various capacities. While at Raytheon, he worked on the Hudson-Bergen light rail project in New Jersey. The project was awarded in 1996, and was the first US mass transit deal to feature a design, build, operate and maintain structure, although it differed from the classic PPP structure in several key respects, including risk transfer. Porter also led NordLB's infrastructure project finance team in the Americas when it was one of the mandated lead arrangers on RAV.

Says Porter: "There is a tremendous need in the US to focus on solving inner-city congestion and commuting needs. The Europeans are much more focussed on mass transit, ensuring that public transport is safe, well-lit, convenient and frequent. But there are some successful models in the Americas too, and they keep improving. For example, on RAV, BC improved on former deals, like Hudson Bergen, as the risk transfer was more effective".

For sponsors of mass transit PPPs, performance risk is key. Payment risk comes down to the credit profile of the procuring authority, and financings can feature a much lower proportion of sponsor equity than, say, a toll road with traffic risk, as little as 10%. But ensuring that sponsors or subcontractors can meet performance benchmarks is a difficult task for equity providers.

Sawers comments that in the US, "risk sharing is feared. It would take a brave politician to accept risk back even if that is what happens on a design, bid, build project every day. In a climate of 'all or nothing' risk transfer, it is very easy for opponents to PPPs to characterise availability payments and risk sharing as soft on the private sector regardless of whether it provides significantly better value for money in the long term and holds them accountable for risks they can control."

For financiers, and sponsors of projects which do not have an availability structure, the risk factors are greater, and thus the projects are less appealing. As mass transit does not, on the whole, make money, it has to be cost effective. Or, as one lender active in the sector notes, "the benefits are clear for the public sector, but the incentives for the private sector, as the market currently stands, could be bolstered. The public authorities granting the concessions, therefore, have to make the projects attractive to the private sector."

Self-sustainability?

Frank Russo and Ben Redd formed the Russo & Redd Consulting Group to advise governments on mass transit and other infrastructure projects. Redd says that, "the next step is to invest in the underlying land and infrastructure improvements surrounding the projects, and turning short-term costs into long-term obligations."

According to Redd, the benefits in terms of development and increased value of real estate surrounding mass transit projects are proven, since increased population density results in a rise in property prices. Redd and Russo use Hudson-Bergen, and Tyson's Corner (the Washington DC neighbourhood which has been revitalised as a result of the Dulles metro) as examples of where the light rail has been a catalyst for commercial and residential development, but say there are numerous other examples globally.

They believe that this significantly increased commercial property value is an untapped source of financing, which could be used to alleviate some of the burden on the public sector, through implementing property development taxation in the areas that benefit from the mass transit. Indeed, they suggest that special tax districts, in conjunction with operating revenues and other commercial ventures, could fund mass transit projects to the extent that they could be self-sustaining. Such concepts have been applied to stadium and other leisure financings in the US, but have yet to applied to transit projects.

There are other means of supplementing mass transit financing, such as commercial leases for kiosks and advertising rights, which have been employed in other infrastructure projects such as parking lot deals (indeed, parking rights might also prove lucrative), and in toll-road rest stops, and are suggested as alternative sources of revenue in the Denver plans. In the case of such heavily subsidised projects, the question is whether the sponsor or the public authority appropriates the commercial rights; the former as an incentive to invest in the project, or the latter as a means of reducing the subsidies.

Below is the status of two high-profile PPP concessions nearing market:

Doing the BART
The BART-OAC project is creating a buzz in the project finance market, as its traffic studies indicate that it has potential to sustain a concession through fare-box revenues, after the construction phase.

The concession is to design, build, finance and operate the 5.15km route from the existing BART Colosseum station to Oakland Airport. The concession will run for 35 years, and is currently expected to cost in the region of $300 million to $350 million, which will include $168 million in public funding. The light rail project is expected to carry 8,000 passengers daily by 2011 and 15,300 in 2020. According to the study, ridership is expected to be approximately 20% of passengers using Oakland Airport by 2020.

Three consortiums have pre-qualified to bid for the project, bbm AiRail Transfer Team, led by Balfour Beatty with financing from Citigroup; Oakland Airport Access Team, led by Sumitomo with Tutor Saliba, Mitsubishi, and financing from NordLB and Bank of Tokyo-Mitsubishi; and the Airport Connector Team, featuring financing from Merrill Lynch, with Parsons, Granite and Bombardier. Though no official statements have been made regarding the procurement process, a source close to the deal indicated that the Airport Connector Team is "the only one still in the running".

The financing for the project is widely believed to be based on an direct government payment structure, with RAV as a model. Whether the transit authority payments will only apply during the construction phase, followed by a shadow-toll arrangement or some other such farebox based mechanism, has yet to be disclosed, if not decided.

Denver FasTracks: Many or few?
In Denver, Colorado, the city is developing 192km of new mass transit routes, including six light rail lines, two commuter rail lines, and a number of bus routes. The projects will also involve development of Denver's Union Station, existing rail lines and the T-Rex roads system, a $1.67 billion project which completed construction last year. The entire FasTracks network is to be completed, and in operation, between 2013 and 2016.

The cost of all twelve discrete projects, plus operating and maintenance costs, is estimated by the state at $6.0651 billion as of September 2007; a significant increase from the $4.7171 billion estimated costs at the project's inception in 2004. Of this most recent sum, 9% (or $547.8 million) will be privately funded through PPP initiatives, and this proportion of funding is expected to rise as the projects evolve. PPP financing did not feature in the 2004 projections. The expected proportion of the financing funded through government bonds, overall, has fallen from 50.2% to 32.5% since 2004, underlining the potential of PPPs and other alternative financing methods.

The most recent financial plans for the RTD FasTracks projects propose availability payment structures for the P3 East Corridor, the Gold Line and the commuter rail maintenance contracts, and negotiable 50-year concessions for the other parts of the project. The report also outlines ways that the risks of concessions and PPP could be mitigated, including a reduction of the scope of the project, and adjustments to the time frame. However, if the current recommendations are implemented, Denver could set a precedent for future mass transit financings in the region.