Public private partnerships (PPP), a suitable tool for the development of mass urban transport in Africa

African cities (especially in Sub-Saharan Africa) have been experiencing a strong and steady urbanisation. However, public transport remains largely underdeveloped, and mainly performed by informal actors using small and antiquated buses, while private car ownership increases.

This leads to many nuisances including traffic congestion, pollution and an overall lack of means of safe, reliable and affordable transport.

An efficient and high-capacity urban transportation network is therefore critical to improve living conditions and foster economic development.

However, developing mass transit systems – such as Bus Rapid Transit (BRT), Light Rail Transit (LRT), tramways and metros – typically requires significant initial investment for infrastructure construction, as well as for the purchase of rolling stock and related equipment.

Raising affordable financing has generally been a challenge for African municipalities and central governments, which have often prioritised their public spending towards other types of transport infrastructure (roads, highways, airports) and public services perceived as more essential or economically viable, rather than urban mobility. As a result public funding for urban transport projects remains scarce. Therefore, PPPs – where the private partner is responsible for financing the project costs – offer an opportunity to leverage private investment and allow authorities to accelerate the development of urban transport to meet the growing needs, while benefiting from the expertise developed by the private sector in building and operating these inherently complex projects.

In many cases however, public financing remains necessary for the delivery of urban transport infrastructure (e.g. roadways, stations, depots and control centre), as fare revenues are generally unable to sustain debt and equity repayments for both the infrastructure and the rolling stock. Therefore, the private partner will usually only be responsible for financing the rolling stock and other equipment (i.e. passenger information system, fare collection system, etc.). Governments will typically seek concessional funding to cover the infrastructure costs from development finance institutions.

This disaggregated structure has been successfully implemented in the Dakar BRT PPP project, where the infrastructure was separately procured by the Senegalese State using IDA financing, while Dakar Mobilité, as concessionaire of the operation and maintenance of the BRT system, is providing the €135 million financing required to acquire the bus fleet and associated systems via equity from its shareholders Meridiam and Fonsis, senior loans from Proparco and EAIF and grants from the EU and PIDG.

Main regulatory and institutional challenges of urban transport PPPs

Structuring and implementing bankable urban transport PPPs requires a clear and enabling legal and institutional framework. Careful consideration should be given to the following specific regulatory issues:

• There should be a dedicated public transport authority with clear prerogatives, which should assume all tasks regarding the preparation, procurement and management of urban transport projects. While other authorities will need to be involved to provide support at various stages (e.g. the finance ministry for a sovereign guarantee where required), overlapping roles regarding urban mobility planning should be avoided, in order to streamline the project implementation. This is especially key as projects will generally depend on many other moving parts, such as infrastructure procurement, city-wide public transport restructuring studies and plans, etc. which should fall within the purview of the same authority.
• Road use regulations should be amended, where necessary, to ensure that the fleet can be designed and operated in order to meet the desired performance requirements. This includes rules regarding maximum vehicle size and load, transit signal priority, etc.
• Provisions on setting tariffs should be unambiguous. Preferably, the legal framework should allow tariffs to be regulated through the PPP contract – where the parties would agree on a fare policy, tariff ceilings and adjustment mechanisms – rather than being subject to approval by other authorities.
• Fiscal incentives and subsidies may be considered to the extent necessary to attract private investment (through exemptions from import duties on vehicles for instance).

Key risk allocation issues in urban transport PPPs

Urban transport PPPs raise a number of specific risk allocation issues which must be properly addressed in the project documentation in order to meet bankability standards, including:

• demand risk: this is certainly the most complex risk to assess and mitigate. Where the contracting authority intends the private partner to bear this risk, bidders will expect to be given the opportunity to make their own demand assessment. The willingness of the private sector to accept the demand risk will notably depend on the availability of reliable data from which future demand may be extrapolated, as well as the level of control given to the private partner over network and fleet design, service schedule, tariff setting and fare collection. Even so, the contracting authority is often expected to share some of the risk by agreeing to minimum revenue or usage guarantees – the terms of which will be negotiated in the PPP contract, but which should be set to allow the project company to meet its debt service obligations.
• Interface risk: mass transit PPPs typically consist of one or more trunk corridors that rely on feeder routes, often operated by third parties. Where the demand risk is borne by the private partner, the contracting authority will assume the risk of the unavailability and underperformance of third-party feeder routes. Where infrastructure delivery remains with the public sector (see above), interface risks may also arise from inadequate infrastructure design or construction delays that prevent or delay operations. These interface risks will also usually be borne by the contracting authority, although the private partner could be willing to share some of the infrastructure design risks, provided it is able to review and approve related design documents.
• Competition from incumbent operators: where the demand risk is borne by the private partner, the contracting authority will generally assume the risk of existing operators running parallel routes or encroaching on the dedicated corridor, thereby eroding the private partner’s revenues. Contracting authorities should seek to mitigate this risk from the outset, through the implementation of broader urban mobility planning strategies and the integration of incumbent operators in the design and operation of the mass transit system (e.g. as feeder route operators or employees of the private partner). This is a critical issue that, if not appropriately addressed, can lead to significant disruption and delays due to the large number of operators involved; as an example, there are more than 80,000 motorcycle taxis in Douala that account for 70% of the city traffic.
• Fare collection: where the private partner assumes the demand risk, it will also typically require to be able to manage ticketing and revenue collection. However, the contracting authority may require that the ticketing system is interoperable with some degree of tariff integration, where part of the private partner’s revenues will depend on collections made on feeder routes (and vice versa). In that case, to minimise cash management issues with feeder operators, it may be preferable to appoint an independent agent to collect and allocate fares between the relevant operators, provided that lenders are comfortable with how and when fare payments are routed to the private partner.

Future prospects of mass transport PPPs in African cities

These projects require careful planning and preparation by authorities in order to achieve a bankable structure and unlock much-needed private investment to create high quality and sustainable public transport systems.

BRTs in particular have proved to be a popular option, as they are generally less capital-intensive and quicker to build than urban rail transit systems, while still achieving a similar throughput. As a result, a growing number of African cities, such as Dakar, Lagos, Douala, Addis Ababa, Kampala, Abidjan, Cairo, Maputo and Dar es Salaam have implemented or plan to implement new or additional BRT corridors, several of which are intended be structured under a PPP scheme.