New forms of financing can significantly change the public transport market
The transition to zero-emission bus transport results in high purchase costs for the carriers. So there is a need for a different financing model. Banks are interested in offering a variant of the bus loan, as developed by the Amsterdam Transport Region. Buses can therefore be accommodated in an asset BV, a kind of rolling stock company. This in turn offers possibilities for the way in which registration is made for a concession or for the length of a concession.
The introduction of zero emission public transport in the Netherlands is happening at a fast pace. As a result of the transition to electric buses, we see increasing interest in instruments to facilitate the financing of assets. Both at public transport companies and at banks. This has everything to do with the characteristics of the zero emission buses: high purchase costs, but also long service life and much lower maintenance costs. The capital costs are high but the operational costs are much lower. The high purchase costs put a heavy burden on the balance sheets of the companies, certainly if they make bids for several tenders.
In order to be able to maintain rapid growth, the progressive insight of various market parties is needed. The financing model also needs a 2.0 version. In discussions with several banks it became clear that they are actively looking at this market and are focusing on variants of the bus loan as developed by the Amsterdam Transport Region. These new forms of financing can substantially change the public transport market.
_For some years now, the bus loan instrument has been used in the Amsterdam Transport Region. For example, 145 million Euro is made available in the current tender procedure for the Zaanstreek - Waterland concession. This facility is optional; the carriers themselves determine whether they use it. The idea behind the bus loan is that companies can save costs and use this saving - under pressure from the competition in a tender - for extra transport. This provides a direct benefit for the Transport region. In addition, risk reduction is an important reason for using this instrument. After all, the Transport Region establishes a lien on the buses, which considerably reduces the risk of disruption to public transport in the event of a bankruptcy.
How does the instrument work exactly? When awarding a new concession, the public transport authority undertakes to grant a subsidy for a certain period; for example, a subsidy of 50 million euros for 10 years. In most cases this is an undivided amount that the carrier can use to cover its operating costs and its capital charges. With the bus loan, an imaginary distinction is made between these two components and the ’capital charges’ component of all 10 years of the concession is brought forward. This subsidy amount is made available in one go at the start of the concession in the form of a loan with which the carrier can purchase the buses.
_One of the obligations is that the buses are accommodated in a special assets BV  . In exchange for the loan, the lender establishes a number of securities, including the pledge on the buses. In addition, the lender withholds the interest and repayments from the subsidy on a monthly basis. For example, instead of 50 million euros annually, the lender will only transfer 30 million euros. There can never be a payment delay that way.
If the lender does not have sufficient funds in cash, it will have to take out a loan with the banks for the payment of a capital subsidy: a so-called back-to-back financing. Most lenders have a triple A status in the Netherlands and can therefore borrow money relatively easily and at low costs.
_The most important difference with the model of the banks is the placement of the BV assets. In the construction with the bus loan, this BV is a fully owned subsidiary of the transport company. Banks, such as ING and the German KFW, often situate these assets BV separately from the carrier. The assets BV then more or less take on the character of a lease company or a rolling stock company, with the core activity of making buses available (buses as a service).
In this construction, the bank does not grant the loan to the lender but to the BV assets. This has the advantage that the balance of the lender is not taxed. The banks will, however, want guarantees about the monthly fee that the carrier must pay to this BV. A guarantee from the lender would be possible on this. It is also possible that the lender pays the amount corresponding to the monthly capital charges reimbursement directly to the banks. In this example, the balance sheets of the carrier and the concession provider are exempt from loans. After all, there is a shift from ownership by the carrier to a type of lease with the BV assets.
_Foreign examples show that the assets BV also allow participation from, for example, the bus supplier and energy companies. The bus supplier contributes knowledge about the optimum maintenance schedule and the maximum service life of the batteries. The energy companies contribute their knowledge about skimming the energy market at the lowest possible costs. This is because there are times on the day that there is a surplus of energy and that payment is made when electricity is purchased. The batteries of the buses, possibly supplemented with standalone batteries, have an enormous buffer capacity, making this an interesting option.
Instead of substantial diesel costs, it is conceivable that fuel costs will go to zero. If this kind of knowledge is present within the BV assets, it can also be examined whether the buses can act as a buffer for energy users around the bus depot. To reduce the peak load on the energy network, energy companies have money left over, because that can result in savings on investments elsewhere in the network.
_With a little imagination and guts we will see a major change in the public transportation market in the coming years. Three components can be identified for this:
- Transfer of staff,
- Assets BVs,
- The arrival of MaaS (Mobility as a Service) providers.
In the first place, the transfer of expert personnel is regulated in the WP2000. Direct and indirect personnel (involved in a concession) are protected by law and will transfer to the new concessionaire in the event of a change in concession.
In the second place, the arrival of independent asset companies makes it relatively easy for new concession holders to get zero emission buses. The assets BV guarantees the availability of buses and the concessionaire can pay the user fee with the Capex part of the subsidy.
Thirdly, with the arrival of the new payment and MaaS providers, distribution and ticket sales will increasingly take place digitally and will be done by parties other than public transport companies. New service providers are going to build new mobility propositions by offering different elements of transport in 1 product or service. The public transport ticketing will undergo the same transition as from the quarter in a telephone booth to the conclusion of a calling bundle with a provider.
_Based on these three components, it becomes possible that a relatively small number of staff can register for a concession. A first variant is that a management BV, supplemented by some transport experts for the development function, registers for concessions.
A second variant is that asset BV, strengthened with an expert staff, will register for concessions. After all, a large part of the costs and therefore the difference in operating costs is in the capital costs and energy costs. Such an asset BV can create a significant cost difference and thereby win concessions.
_A third possibility is that several assets BVs will arise where carriers can lease their ZE buses. This gives another important advantage; lenders can then put shorter concessions on the market. After all, in that case it does not take 10 or 15 years to recoup the investments in ZE buses.
A shorter duration of concession makes it possible to test the market more frequently for the latest innovations; for example every five years. It is then possible to respond much more frequently to the new mobility developments. Of course there must then be a (lease) market for zero emission buses. Until that time, lenders will opt for longer concessions to allow carriers to recoup their investments.
Level playing field
_New financing structures that value the financial strength of the lenders and are available to all potential tenderers lead to a clear level playing field within a tender. Ultimately, the quality and innovation of public transport offered in a tendering process must always win from (differences in) the financial strength of the tenderers.
I am curious how market parties and consultants view these new developments. Do they have specific proposals to encourage or better guide this development? What role should governments and lenders play? I ask other governments, market parties and consultants to think about this development.
Author: Nico Van Paridon (Deputy-director Vervoerregio Amsterdam)
Updated : February 18, 2020