Vietnam-metrorail-completionreport.pdf

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Asian Development Bank

Public Private Infrastructure Advisory Facility

TA 4862-VIE:Preparing the Ho Chi Minh

City Metro Rail System -

PPIAF Study -

Completion Report

August 2008


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Preparing the HCMC Metro Rail System – Completion Report Asian Development Bank and PPIAF

Table of Contents

Synopsis ..................................................................................................................................................... i

1. Introduction .................................................................................................................................. 1

1.1 Background ........................................................................................................................ 1

1.2 Objectives of PPIAF Technical Assistance ................................................................... 2

1.3 This Completion Report................................................................................................... 2

1.4 Study Team ......................................................................................................................... 3

2. Activity 1: Framework for Considering Private Sector Participation (PSP) – OptionsDevelopment ................................................................................................................................ 4

3.

Activities 2 and 3: Financial Modeling Including Risk ........................................................... 8

3.1 Financial Model ................................................................................................................. 8

3.2 Financing and Delivery Options ..................................................................................... 8

3.3 Value for Money (VFM) Test .......................................................................................... 8

3.3.1. Assumptions and contingencies ......................................................................... 9

4.

Activity 4: Stakeholder Feedback and Implementation Arrangements .............................. 11

4.1 Key Tasks ......................................................................................................................... 11

4.2 Key Stakeholders ............................................................................................................. 11

4.3

Transport Agencies and Functions in HCMC ............................................................ 13

4.4 Key Laws .......................................................................................................................... 13

4.5 Institutional Options ....................................................................................................... 14

4.6 Fares and Ticketing ......................................................................................................... 17

4.7 Building Technical and Managerial Capacity ............................................................... 20

Appendix A: Issues and Options for Private Sector Participation and Concession Template Working Paper ............................................................................................................................ 22

Appendix B: Financial Modeling Working Paper ............................................................................ 23

Appendix C: Stakeholder Feedback and Implementation Arrangements: Institutional Options Working Paper ............................................................................................................................ 24

Appendix D: Fares and Ticketing Working Paper .......................................................................... 25

References and Bibliography ............................................................................................................... 26

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ii

Abbreviations

ADB Asian Development Bank

BOT Build-Operate-Transfer

DOPI Department of Planning & Investment, HCMC

PC

DNRE Department of Natural Resources &

Environment, HCMC PC

DOF Department of Finance, HCMC PC

DTUPWS Department of Transport & Urban Public

Works & Services, HCMC PC

DUPA Department of Urban Planning & Architecture,

HCMC PC

GVN Government of Viet Nam

HCMC Ho Chi Minh City

HIFU Ho Chi Minh City Infrastructure Fund for

Urban DevelopmentIFI International Financial Institution

ODA Official Development Assistance

PC People’s Committee

PPI Private Participation in Infrastructure

PPIAF Public Private Infrastructure Advisory Facility

PPP Public-Private Partnership

PSP Private Sector Participation

SOE State Owned Enterprise

TA Technical Assistance

ToR Terms of Reference

MAUR Management Authority for Urban Railways,HCMC PC


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Synopsis

Rail based Mass Rapid Transit (MRT) is a key component of Ho Chi Minh City’s urban

transport strategy. But MRT is expensive. MRT therefore requires good integration with busservices and other modes, convenient access for pedestrians and coordinated land useintensification to optimize MRT’s potential.

Development of MRT of most benefit to the community requires a focus on the developmentof integrated network of services that are well integrated with bus, and that provide the fastest,most convenient and affordable journey possible between home and work and all the otherorigins and destinations in the city.

A focus on how to secure the operation of efficient, high quality, and responsive MRTservices, and integrated ticketing and fares, is therefore very important and is a necessarycomplement to the implementation of high quality MRT infrastructure.

Recognizing the importance of efficient MRT operations and services ADB mobilized a grantfrom the Public Private Infrastructure Advisory Facility (PPIAF) to develop appropriate shortterm and longer term implementation and management arrangements for MRT in the contextof wider urban transport, including options for how best to optimize private sectorparticipation in MRT.

The objectives of the PPIAF technical assistance (TA) therefore included developing (i) aframework for considering private sector participation in implementation and operation of theProject; (ii) a value-for-money analysis for implementation approaches that involve varyingdegrees of private sector participation, (iii) a detailed financial model reflecting the preferredapproach and measuring the performance of the project from the points of view of the

government and private sector participants; and (iv) a stakeholder feedback and a descriptionof necessary institutional and contractual arrangements given the preferred implementationapproach.

A summary of the work undertaken is contained in the attached report along with copies ofthe key working papers produced by the TA.

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1. Introduction

1.1 Background

With a population of approximately 6.1 million in 2004, HCMC is the largest city in Viet Namand its economic hub. HCMC has a total administrative area of 2,095 km2 covering 19 urbanand five suburban/rural districts. The average population density is about 2,900 inhabitantsper square km with a central area density of around 45,000 inhabitants per square km (JICA2004). Approximately 2.3 million people were estimated to live in the three adjoiningprovinces of Dong Nai, Binh Duong, and Long An which make up the Greater HCMCregion. Population for the region was forecast to reach 13.5 million by 2020 with 10 million inHCMC by HOUTRANS (JICA 2004).

Current trends are for continuing rapid growth in incomes and motorization, increasedurbanization, and associated traffic congestion, and related pollution (local and global) and

crashes, which will to some extent reduce the productivity of region’s, and therefore, VietNam’s economy. Addressing this considerable challenge requires as its foundation appropriateinstitutional and regulatory arrangements to coordinate land use and transport developmentmanagement, formulation and implementation of transport policies and infrastructure, and thedelivery of efficient integrated, multi-modal transport services.

The People’s Committee (PC) of Ho Chi Minh City (HCMC), Viet Nam has initiated studiesto develop a rail mass rapid transit (MRT) system for the City based on the current MRTMaster Plan (as approved in January 2007). Prior to early 2008, tTwo lines (MRT2 and MRT3)had been proposed for Asian Development Bank (ADB) funding with another line (MRT1) tobe financed by the Government of Japan1. The Government of China, is a developing aproposal for an MRT line, there are other proposals including one from China for MRT,

Malaysian interests to develop a monorail, and for a French consortium to develop a tramroute.

ADB has mobilized a PPTA and selected a firm for the following components of the projectpreparation for MRT Lines 2 and 3. The PPTA study, which commenced in May 2007 and isto be completed in May 2008, is responsible for providing:

• An optimized MRT Master Plan which integrates the currently proposed MRT lines intoa cohesive network with other modes, identifies required supporting policies, anddevelops design parameters for the two project lines.

• A feasibility assessment and preliminary engineering design for the two project lines.

The PPTA must confirm the engineering feasibility, and identify social andenvironmental impacts for accurate cost estimation and financial appraisal.

• A plan to support project implementation, including institutional and staffingarrangements, capacity building, financing/funding options, and implementationprogram.

In parallel, ADB mobilized a grant from the Public Private Infrastructure Advisory Facility(PPIAF) to optimize private sector participation in MRT 2 and 3, and to assist the HCMC PCto develop appropriate short term and longer term implementation and managementarrangements for MRT in the context of wider urban transport

1 During 2007, the JBIC’s role in funding increased with principal or sole involvement in the first three MRTlines.

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1.2 Objectives of PPIAF Technical Assistance

The objectives of the PPIAF technical assistance (TA) therefore included developing (i) aframework for considering private sector participation in implementation and operation of theProject; (ii) a value-for-money analysis for implementation approaches that involve varying

degrees of private sector participation, (iii) a detailed financial model reflecting the preferredapproach and measuring the performance of the project from the points of view of thegovernment and private sector participants; and (iv) a stakeholder feedback and a descriptionof necessary institutional and contractual arrangements given the preferred implementationapproach.

This PPIAF TA draws on detailed information on project costs, patronage and revenueprepared by consultants undertaking the PPTA. The results of its work were presented inconjunction with the work of the PPTA to ensure an integrated and complete business casethat the HCMC PC and ADB can use to direct implementation and ongoing operations.

1.3

This Completion Report This Completion Report summarizes the key findings and recommendations of the TA. Indoing so, it draws upon the following reports, working papers or other outputs prepared bythe TA:

Table 1.1: Activities and Outputs

Activity Principal Outputs

1.

Framework for Considering PrivateSector Participation (PSP) – OptionsDevelopment

• Issues and Options for Private Sector Participation& Concession Template Working Paper –

Vietnamese and English language versions (April 2008).Refer Appendix A for English Version.

2. Risk and Value-for-Money Analysis • Financial Modeling Working Paper & Model – Vietnamese and English language versions (June 2008).Refer Appendix B for English Version.

3.

Financial Analysis: Financing Plan &Financial Model

• Financial Modeling – as above

4.

Stakeholder Feedback andImplementation Arrangements

• Inception Report – English language version only(March 2008)

•

Stakeholder Feedback and Implementation Arrangements: Institutional Options WorkingPaper – Vietnamese and English language versions(March 2008). Refer Appendix C for English Version.

• Stakeholder Engagement Plan – English language version only (March 2008) – Informal document.

• Fares and Ticketing Working Paper – Vietnameseand English language versions (June 2008). Refer

Appendix D for English Version.

The PPIAF TA mobilized on March 3, 2008. Work proceeded intermittently in HCMC andthe consultants’ home offices over the period to July 2008. Subsequent sections of the reportdiscuss identified key issues and priorities and the work program formulated to meet the

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requirements of the TA. Several meetings with key agencies were held including theManagement Authority for Urban Railways (MAUR) of the HCMC PC, other agencies of thePC, financial institutions, the PPTA team and the visiting supervising mission from ADB.

1.4 Study Team

The PIAF consultant team responsible for preparing this report were greatly assisted by stafffrom the HCMC PC’s:

• Management Authority for Urban Railways;

• Department of Planning and Investment; and

• Ho Chi Minh City Infrastructure Fund for Urban Development.

Important guidance was also provided by several ADB staff who visited HCMC during theinception mission including: Dr Hubert Jenny, Senior Urban Development Specialist,Southeast Asia Department, Infrastructure Division; Dr Antoine Kunth, Infrastructure

Specialist, Southeast Asia Infrastructure Division; Mr Le Dinh Thang, Program/ProjectImplementation Officer, Viet Nam Resident Mission; Mr Jamie Leather, Senior TransportSpecialist, Energy, Transport and Water Division, Regional and Sustainable DevelopmentDepartment, and Yuji Tsujiki Financial Analysis Specialist Infrastructure Division, Southeast

Asia Department.

David Margonstern, PADDI (Centres de prospective et’etudes urbaines of the Rhone AlpesRegion, France), who worked closely with many departments in the HCMC PC provided

valuable inputs. Close cooperation with the PPTA team was also facilitated by the PPIAFteam making use of the PPTA team’s office and day to day interaction.

The consultant study team consisted of:

• Philip Sayeg, the Urban Transport Planning Specialist /Team Leader;

• David Bray, Urban Transport Institutional Specialist; and

• Dr Sudhisakdi Manibhandu, Private Sector Financing Specialist (Public PrivatePartnerships).

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2. Activity 1: Framework for Considering Private SectorParticipation (PSP) – Options Development

Under this Activity, in accordance with the ToR for the TA, various opportunities to use theprivate sector for implementing and operating rail mass rapid transit (MRT) in HCMC had tobe considered. The English language version of the Working Paper prepared for the TA

which is entitled “Issues and Options for Private Sector Participation and Concession Template” (contained in Appendix A) provides full details of the work carried out which issummarized below.

Options for private sector participation were considered with a broader view than anyindividual MRT line in HCMC because the ultimate objective of the government is asubstantial increase in the use of public transport in the city, which in turn requires anintegrated public transport system. The use of the private sector is not addressed from anideological perspective, but rather as a means for securing the delivery of high quality MRT at

the lowest possible cost to the community. The Working Paper notes that the private sector has been involved in MRT in nearbycountries in recent years: always for implementation of infrastructure; often for the operationof services; and to a lesser extent for investment in MRT assets. It also notes generalexperience that the cost of public sector operation of public transport is higher than withprivate sector operation, and that there is a general worldwide trend to make greater use of theprivate sector for the operation of public transport.

Consideration was given to the range of factors that affect the manner in which the privatesector could be involved. These factors have two broad influences. The first is the extent to

which the private sector could provide finance for implementation of the MRT. In this

respect, it appears that the current approach to MRT in HCMC is likely to result in fare andrelated revenue that will, at best, cover operating costs and make a small contribution tocapital costs. Accordingly, the government will need to eventually pay the private sector formost of the cost of any capital that the private sector might provide in the first instance toimplement the project. While the cost of capital to the private sector is generally moreexpensive than the cost of capital for the government, the report notes that this may be offsetby lower costs that result from the transfer of manageable risk to the private sector and theincentive for the private sector to better integrate assets and operations to reduce life-cyclecosts.

The second influence is on the form of the agreement between the government and theorganization that is to operate the MRT system (called the concessionaire). It is essential that

such an agreement be in place, irrespective of whether the concessionaire is a government or aprivate organization. It is common for such agreements to have a term of around 30 years orso, especially where the concessionaire contributes capital investment. There is also a need forthe agreement to include conditions that provide the operator with the incentive to undertaketheir tasks in a manner that meets the government’s objectives for MRT in HCMC.

There has been a tendency in the past to use a form of agreement wherein the concessionairekeeps fare and other revenue for the MRT line to which the contract pertains and uses therevenue to cover its costs. The government may need to provide supplementary financing ifthe revenue available to the concessionaire is insufficient to met the costs. This approach,called a Net Cost form of concession, has major limitations. In particular it does not facilitate

operation of an integrated public transport system and reduces the flexibility of thegovernment to develop the transport system and modify its urban transport policies over theterm of the concession. An alternative approach, called a Gross Cost form of concession, is

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strongly recommended. Under it, revenue from fares accrues to the government, which inturn pays the concessionaire for the services that the concessionaire provides. Refer Table 2.1for a summary of the features of each approach.

Table 2.1: Summary of Net Cost and Gross Cost Concession Models

Net Cost Gross Cost

Infrastructure Government provides civil infrastructure. Concessionaire provides trains and related items such astrain control & communications systems and depot equipment.

Risk sharing Concessionaire assumes all patronage risk,and shares extra profits (if any) with the Authority.

Risk is shared between the Authority andconcessionaire. Optimum sharing of risk will minimisethe concession cost.

Revenue Concessionaire keeps revenue Fare revenue is given to the Authority

Services Concessionaire determines services to beprovided on the basis of profitability.

Authority sets service standards and theconcessionaire determines services based on thesestandards.

Payments Concessionaire meets costs from its ownrevenue. Additional payments may be

needed from the government ifconcessionaire’s revenue is too low.

Authority pays the concessionaire for servicesprovided according to rates set on the basis of

competitive tendering and quantity/quality of serviceprovided.

Authority role Authority invites tenders & establishes aconcession; has only a small rolethereafter; difficult to vary contractconditions.

Authority invites tenders and establishes aconcession; has a continuing major role in managingthe concession agreement; can vary conditions whenneeded.

Source: Consultant

The Working Paper describes how this form of concession can be implemented to give theconcessionaire (or any other operator) the incentive to provide good quality services that meetthe needs of passengers at the lowest possible cost and with the least need for detailedmanagement of the concession contract by the government.

Four possible implementation options were considered. All four were subject to value-for-money analysis as described in Section 3 of this report, to indicate the potential cost to thegovernment of delivering Line 2 of the MRT system and the provision of services on the lineover the long term. The results of this analysis will be presented in a separate report. Theoptions are:

• Government financing, implementation and operation of the MRT.

• Government financing and implementation of all MRT assets, and engagement of aconcessionaire to operate MRT services.

• Government financing and implementation of MRT civil infrastructure, and

engagement of a concessionaire to finance and provide trains and related electrical andmechanical equipment and systems, and to operate MRT services.

• Private sector financing, implementation and operation of the MRT.

Key features of each of these four options are shown in Table 2.2.

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Table 2.2: Features of Delivery and Financing Models

PublicEnterprise

PublicImplementationwith Operating

Concession (PIOC)

Train Supply andOperating

Concession (TSOC)

Build, Operate &Transfer

(BOT)

Delivery of: Civil Infrastructureand Fixed Equipment

Delivered through competitively tendered contracts to thegovernment.

Delivered throughcompetitivelytendered Net Cost contract to thegovernment.

Trains, train controland communications,and depot equipment

Delivered through competitively tenderedcontracts to the government.

Delivered through acompetitive tenderedGross Cost concession.

Train services andinfrastructuremaintenance

Contract negotiatedwith an SOE.

Competitivelytendered Gross Cost contract.

Risk Transfer

Transfer of risk fromthe government islimited to the extentallowed inconstruction andequipment supplycontracts. Thegovernment retainsrisk associated withoperations throughits ownership of theoperator.

As for the PublicEnterprise option butcan transfer operatingrisk to theconcessionaire. Somepatronage risk can betransferred throughthe Gross Cost concession. Thegovernment retainsoperating risk relatedto mismatch betweentrains it provides andconcessionaire needs.

The governmenttransfers more risk tothe concessionairethan in the PIOCoption because theconcessionairepurchases trains andcan therefore bearmore risk foroperations becausethey have more controlover service quality.

Transfers the greatestamount of risk fromthe government, butthe government losesflexibility for changein policy and forpublic transportnetwork integration.

Finance

Civil Infrastructure

and Fixed Equipment

Capital provided by the government. Capital provided by the

government.

Capital provided by

the concessionaire.The government willneed to pay for costsas specified in thecontract (to coverboth capital and O&Mcosts net of farerevenue, where farerevenue will be muchless than the costs).

Trains, train controland communications,and depot equipment

Capital provided by the government. Capital provided by theconcessionaire. Thegovernment pays forcosts as specified in thecontract (to cover bothcapital and O&M costs).

Train services andinfrastructuremaintenance

The governmentpays all costsincurred by the SOE,including workingcapital

The governmentpays for operatingand maintenancecosts as specified inthe contract.

Fare revenue The governmentretains fare andother revenue (orpays SOE the

difference betweencosts and revenue ifthe SOE retains therevenue).

Fare revenue accrues to the government. Concessionaire retainsfare and otherrevenue.

Source: Consultant

The Gross Cost form of concession is recommended for the first three options. A Net Cost form of concession is appropriate for the last option to allow the concessionaire to manage itsgreater financial exposure in a way that minimizes its risks. In all four cases, the government

will eventually pay for the total cost of implementing and operating MRT. However, the totalcost to the government will vary. This occurs because the four options involve different waysof allocating and managing MRT responsibilities, and hence the incentive and capacity for

those involved to manage the associated financial, engineering, operational and patronagerisks.

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The report draws general conclusions about the relative merits of the four implementation/-financing options, but does not unequivocally recommend any particular approach. Rather,the intention of developing and assessing the options is to provide understanding that canhelp the government with its consideration of an arrangement that is appropriate for HCMC.

Two other key recommendations are made. The first is that there should eventually be at leasttwo companies involved in the operation of MRT in HCMC. This puts competitive pressureon each operator to improve its performance so that they are not seen to be inferior to theother operator(s). It also provides data that the government can use to benchmark theperformance of the operators so that it can provide feedback to the operators onopportunities for improved performance. Finally, it provides the government with flexibility inthe event that one operator fails to perform, with the capacity for another of the operators totake over in the short term if that should become necessary. The second recommendation isthat international competitive tendering should be used to select the concessionaire, with thelikelihood that a foreign party will form a consortium with a local enterprise. This will bringinternational experience and expertise to support the development of world class MRT in

HCMC and provide a sound basis for developing domestic skills in MRT.Finally, the report presents an outline of a concession agreement and discusses the actionsneeded to select a concessionaire and establish and manage a contract.

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3. Activities 2 and 3: Financial Modeling Including Risk

There were several strands to the financial modeling work that are summarized below. TheEnglish language version of the Working Paper prepared for the TA on this Activity is

contained in Appendix B.

3.1 Financial Model

Part of the PPIAF assignment has involved the development of a financial model capable ofbeing used in MRT network planning and in project preparation of the HCMC Line 2. Themodel is used to perform two tasks: (i) a value-for-money (VfM) analysis of MRT projectdevelopment options identified in the assignment issues and options analysis for privateparticipation in the development of Line 2; and (ii) financial analysis of the HCMC Line 2.

The second task, ie financial analysis of Line 2, is reported in the PPTA study documentation. A technical paper responding to the PPIAF terms of reference describes the financial model

and the VfM analysis carried out of development options for Line 2. The VfM analysis issummarized in the following paragraphs.

3.2 Financing and Delivery Options

The Issues and Options study identifies for detailed examination four alternativeapproaches—including private sector participation and public private partnerships (PPP)—toproject development of Line 2: (i) the project is developed by a state-owned enterprise (SOE),

with government taking maximum responsibility in project management, financing and servicedelivery; (ii) the service delivery is by a private sector concessionaire, with governmentretaining the remaining project responsibility; (iii) the operating concessionaire supplies (ie also

finances) the required trains and signaling and communications, and government retains allother responsibility; and (iv) the project is developed as a build-operate-transfer (BOT)concession, where the private sector take the maximum project responsibility, allowinggovernment to play only a monitoring and evaluation role, at least in theory.

3.3 Value for Money (VFM) Test

The potential cost to the community of the four options is evaluated and compared in aquantitative value-for-money (VfM) test. It is common experience that government generallyfaces a lower financing cost compared to the private sector. At the same time, statisticalanalyses1 of international transport projects provide well-founded evidence of substantial

public sector optimism bias (a propensity for actual cost to exceed forecast or for actualrevenue to fall short of forecast) in project capital cost estimates. Now, common experiencesuggests that, much more than the bureaucratic organization, a private sector enterprise isgenerally under strong motivation to manage uncertainly in project planning andimplementation. Meanwhile, studies of privatized public transport2, especially bus, indicatethat the private sector can be expected to deliver service at a cost significantly lower than thepublic sector. Thus, in theory, an MRT project development with an appropriate assignmentof responsibility and risk between government and the private sector concessionaire couldyield a lower expected cost, risk taken into account, compared to a eg a pure governmenteffort.

1 See references in Financial Model paper.

2 See Issues and Options paper, Section 2.9.

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A VfM test carried out for the four options indicates that option (iii), private sector trains andtrain-related systems supply and service operation, incurs the lowest expected cost to thecommunity; with option (ii) the next lowest. The BOT option shows a lower optimism biasthan all the other options, but, since it uses the concessionaire’s private sector financing forthe full project investment, it incurs a maximum premium on the government’s financing cost;

this option turns out to have the highest expected cost to the community, the SOE optionincluded. Evidently the BOT option is a doubly inappropriate approach to MRT projectdevelopment. Details of the VfM test methodology, input data and parameters, as well asresults can be found in the Financial Model paper.

3.3.1. Assumptions and contingencies

It is important to understand what assumptions are necessary for, and what contingencies would invalidate, the VfM test results. These are summarized below.

Market competition. VfM requires a competitive tender market for the concession and forrelated sub-contracting of the technology (eg design, construction, systems integration and

installation, operation and maintenance in MRT service provision) and financing services toensure that payment of concessionaires and sub-contractors is not in excess of a normal risk-

weighted remuneration for effort. This means that an option which has cleared a VfM testcould at the procurement stage be facing a market failure (eg only one bidder), threatening itsability to deliver the anticipated VfM1. Thus, transition and emerging countries in particularoften cannot count on a reliable international supply of private sector financing. The threat ofmarket failure in a specialized field such as MRT concessioning and sub-contracting shouldnot be dismissed lightly.

Financial and services market distortions. Here are some examples of distortions that canthreaten or dilute VfM:

• Limited recourse financing of a PPP concession promotes VfM because the seniorlenders, usually financial institutions regulated by a central bank, will for as long as thedebt is outstanding have an interest in the project which is aligned with the authoritygranting the concession and bring professional skill to the monitoring of theconcessionaire’s performance. The lenders’ incentive to monitor the concessionaireperformance is diluted with the lenders’ use of credit risk transfer (CRT) products. Thispractice dilutes the concession authority’s effort to share an exposure to theconcessionaire’s performance level with the senior lenders, minimizing the monitoringcost in the process.

• Bilateral ODA financing can also introduce distortions in the sub-contracting markets.

The tying of an ODA loan to supply of goods and services of a national origin restrictsthe competitive tendering for the procurement of MRT consulting and constructionservices and systems supply. An opportunity can be created for vendors to use theconcessionary pricing of a loan to build in an additional margin on goods and services.In the long term, the practice can create a situation where, in a narrow field, thepotential suppliers tacitly agree to live and let live instead of competing, with adverseeffect on supply prices and therefore VfM.

• Partnering developed over time among financiers and sub-contractors while having apotential to be an effective project risk management tool for a concessionaire can be

1 The UK Treasury’s answer to this problem, to give an illustration, is to require any candidate for a PPPdevelopment to have a back-up public sector option to be activated in the event of a market failure.

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abused if allowed to develop into a collusive arrangement, which in the end threatens VfM.

PPP procurement capability. Ability to procure well is important for realizing VfM. Thebalance of opinion, if not of evidence, is that a greater capability is required of the public

sector in the procurement of a PPP concessionaire than in a conventional public worksprocurement. Ad hoc outsourcing for the required skills leads to limited results. For example,legal firms skilled in PPP contracting, forced to make a choice through conflict of interestrules, can tend to opt for working for the concessionaire side rather than government.Institutional capability building is required.

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4. Activity 4: Stakeholder Feedback and Implementation Arrangements

4.1

Key TasksKey tasks carried out under this Activity were:

• Stakeholder analysis;

• Concession Template;

• Analysis of institutional options; and

• Fares and ticketing analysis and options.

The outputs of these tasks are

•

Stakeholder Feedback and Implementation Arrangements: Institutional Options Working Paper – Vietnamese and English language versions (March 2008). Refer Appendix C for English Version.

• Stakeholder Engagement Plan – English language version only (March 2008) –Informal document;

• Concession Template – refer Section 2 and Appendix A;

• Fares and Ticketing Working Paper – Vietnamese and English language versions (June2008). Refer Appendix D for English Version.

• Other capacity, likely legal and procurement requirements recognizing the PPIAF teamdid not have any legal resources available to them (covered variously in all outputs).

4.2 Key Stakeholders

A list of identified core stakeholders1 within HCMC is shown in Table 4.1. This list is basedon the information contained in the Working Paper entitled “Stakeholder Feedback andImplementation Arrangements: Institutional Options.” While several stakeholders at nationaland HCMC levels have been identified the most important are shown in bold text in Table4.1. IFIs or other bilateral donors have been excluded from the Table.

Table 4.1: Identified Key Stakeholders

Stakeholder Responsibility

National Level

Ministry of Transport (MOT) Through its different modal administrations and departments (a) plans,manages and maintains national infrastructure through its differentdepartments and administrations; (b) assists local governments indeveloping transport plans and selecting transport projects; and (c)manages public bus transport plans by approving cities master plans

1 From now on in this paper core stakeholders will be referred to only as stakeholders.

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Stakeholder Responsibility

Vietnam Railways Administration (VNRA)—under MOT

Plans and manages the development of the sub sectorRegulates the sub-sector including national and other rail systems includingmetro or MRT in cities and provinces. Provides oversight of City andProvincial rail and MRT Master Plans and is charged with approval oftechnical standards and safety of rail and MRT systems. Main functions of

relevance to project:• Informal MRT Master Plan approval• MRT technical standards• MRT safety standards & compliance

Ministry of Finance (MOF) Arranging of finance from external agencies including IFIs and provision offinance to local governments. Currently, financial planning aspects offuture MRT development in Vietnam.

Transport Development StrategyInstitute (TDSI)-under MOT

Develops long and medium term transport sector strategies and plans (incollaboration with modal administrations)

Department of Planning andInvestment (DPI)-under MOT

Integrates investment plans prepared by modal administrations forsubmission to MPI for inclusion in the PIP and to MOF for inclusion in theState Budget.

The Ministry of NaturalResources and the Environment(MNRE)

Reviews and approves environmental impact assessments for transportprojects.

HCMC PC level

People’s Committee Approves key issues such as fares, opening and closing of routes,schedules and subsidies.

Transport and Urban PublicWorks Services’ (TUPWS)Transport and IndustryManagement Department(TIMD); and theManagement and OperationsCentre for Public Transport

(MOCPT).

Develops cities’ transport strategies; Plans and manages construction;Maintains urban transport infrastructure; Manages bus transport;Coordinates planning and implementation of traffic management withPolice. Main functions of relevance to project:• Transport Strategy• Traffic management and parking• Bus route planning & franchising incl bus-MRT integration•

Bus system ticketing

HCMC Management Authority for Urban Railways

Plans / implements rail-based mass transit plans and has responsibility formanaging and arranging for operations and maintenance. Main functionsof relevance to project:• MRT civil infrastructure development incl land acquisition• MRT rolling stock & E&M supply• MRT ticketing• MRT operations procurement and/or operations directly

HCMC Investment Fund(HIFU)

Arrangement of finance through bond issue for counterpart funds,coordination with private sector incl private financial institutions, possibleshareholding role in a JV operating entity

Department of Finance(DOF)

Treasury functions such as processing of project-related local expendituresincluding counterpart payments

District Level and CommuneGovernments

Relevant district governments through which a project passes will have arole in land acquisition & other facilitation

Urban Planning and Architecture Department(DUPA)

Land Use Master Plan preparation and approval of developments. Landapprovals are separately made by the Department of Natural Resourcesand Environment (DNRE) with little linkage to the Master Plan.

Department of Planning andInvestment (DPI)

Investment programming including one year annual budget and five yearPublic Investment Program (PIP)

Traffic Police under thePublic Security Department

Enforces traffic management including the operation of traffic signals incoordination with TUPWS

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4.3 Transport Agencies and Functions in HCMC

The HCMC PC is the key agency responsible for planning and delivery (ie here referring toregulation, purchasing of services and oversight, and construction of infrastructure) of publictransport, such as bus, mass rapid transit and supporting land use and transport management

functions. Within the PC the following agencies have key roles for urban transport:

• Transport and Urban Public Works Services (TUPWS) which is responsible forpreparation of city transport strategies, the planning and management of construction,maintaining urban transport infrastructure, planning and managing bus transport; andcoordinating planning and implementation of traffic management with Police. Forplanning and regulation of urban public transport (bus/ other) the Management andOperations Centre for Public Transport (MOCPT) of TUPWS is the most importantagency;

• Management Authority for Urban Railways (MAUR) 1 – plans and implements railbased mass transit infrastructure and responsible for operations;

• Urban Planning and Architecture Department (DUPA) – Land Use Master Planpreparation and approval of developments. The process of planning is normative andappears not to reflect market preferences nor what is optimal in terms of infrastructureand social services provision. Land approvals are separately made by the Department ofNatural Resources and Environment (DNRE) with little linkage to the Master Plan.Similarly infrastructure planning is made with little reference to the Master Plan. Inaddition, even for individual building and more major developments there are nospecific standards or guidelines providing certainty to developers on how much GrossFloor Area (GFA) they can build or other conditions such as building set back andbuilding form;

•

Department of Planning and Investment – investment promotion, coordination ofinvestment including development of development assistance from IFIs and bilateralsources; and

• Department of Finance – treasury, budget, investment planning and arrangement ofsources of finance.

4.4 Key Laws

National and city legislation governs the present provision of public transport services,currently mainly bus, in HCMC. The laws of most relevance to urban rail or urban MRT are:

•

Railway Law 2005 (NA Order No. 35/2005/QH11); and

• HC PC Decree 119/ 2007/QD-UBND establishing the Management Authority forUrban Railways.

Railway Law

Within cities the Railway Law 2005 defines relevant types of urban railway as including metroor MRT using a wide variety of technologies. Authority for planning urban railway networks isgiven to People’s Committees (Articles 14 and 15). Master Plans shall be prepared covering adetailed period of 10 years and less definitive further 10 year period. Fare setting is theresponsibility of the PC.

1 Until September 2007, it was known as the Urban Railway Management Unit and was under TUPWS.

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Decree 119/ 2007/QD-UBND establishing Management Authority for UrbanRailways, HCMC

The Urban Railway Management Unit (known as the Management Authority for UrbanRailways) was established in September 2007 by Decree 119. The Authority replaced the

previous Urban Railway Management Division under TUPWS. MAUR is also under theguidance of Central Ministries – branches and Departments – branches of the city.

The current MAUR structure is shown in Figure 4.1. With new responsibilities formanagement of operations and maintenance, the number of staff in MAUR is increasing. It isalso understood that it is proposed to revise the current structure of MAUR in the near futureto better reflect the management and operational functions.

Figure 4.1: Current Structure of MAUR

HCMC PC

DirectorNguyen Do Luong

PMU Line 1

Vice DirectorNguyen Van Quoc

Vice DirectorTran Thi Anh Nguyet

Vice DirectorLe Hong Ha

Planning andInvestment

Technical Quality

Procurement

Administration

Finance and Accounting

Organization andTraining

PMU Lines 2 & 3

Source: MAUR

4.5 Institutional Options

Given the previous discussion, the alternative arrangements for an Authority relate primarilyto the scope of its functions rather than to the underlying functions themselves. On this basis,four options for improved institutional arrangements for HCMC are identified:

•

Option 1: Strengthen the Management Authority for Urban Railways (MAUR) ; • Option 2: Interim Public Transport Authority using increased PC level

coordination between bus and MRT;

• Option 3: Integrated Public Transport Authority. Refer Figure 4.2. In this optionthe proposed Integrated Public Transport Authority would be solely responsible forensuring the delivery and operation of a fully integrated public transport system(MRT and bus) for HCMC; and

• Option 4: Integrated Transport Authority. In this option, a wholly integrated Authority would plan the multi-modal network, specify the services, program the

investment (including roads, MRT and bus).

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The options are capable of progressive implementation and a summary of their features isshown in Table 4.1. A worthwhile and practical option is Option 3 which is illustrated inFigure 4.2. In addition to developing integrated bus and MRT services this option wouldenable all public transport ticketing and fares to be integrated as long as MRT and busoperating arrangements are consistent.

Table 4.1: Improvement Options

Feature Option 1:Strengthen MAUR

Option 2:Interim PT Authority

Option 3:Integrated PT

Authority

Option 4:Integrated

Transport Authority

Integration ofpublic transportin HCMC (1)

Increasing integration

Introduction

Transportoutcome

Fairly good MRTintegration possible

Fairly good MRTintegration more likely

Fully integrated PTsystem more probable

Fully integrated publictransport system

Description Minimum change tocurrent institutionalresponsibilities.

As for Option 1 butimproved direction &coordination

Strong direction andpurpose for PT

Strong direction andpurpose for transport &land use

Examples fromother places

Hong Kong &Singapore in the 1980s

Bangkok in 1990s Melbourne andBrisbane, Australia

Hong Kong, Singapore

Benefits forcustomers

Ease of use of MRTwith integratedticketing and easyinterchanging whereMRT lines intersectpossible

Ease of use of MRTwith integratedticketing and easyinterchanging whereMRT lines intersect.Integration with buseslikely.

Passengers able to usethe PT system asthough it was a singlesystem, with fares,tickets, marketing andpresentationintegrated. Physicalintegration good.

As for Option 3 butbetter integration withland use and roadnetwork.

Agency responsibilitiesTransport policy & planning (2)

Urban planning DUPA DUPA DUPA DUPA

Transport policy TUPWS TUPWS TUPWS Integrated Transport Authority

Strategic trans-port planning

TUPWS TUPWS TUPWS Integrated Transport Authority

Financingpolicies

DPI & DOF DPI & DOF DPI, DOF with adviceof Integrated PT Authority

DPI, DOF with adviceof Integrated Transport Authority

Fares policy andservice

standards

MAUR for MRT;TUPWS/ MOCPT for

bus

MAUR for rail; TUPWS/MOCPT for bus

Integrated PT Authorityfor MRT and bus

Integrated Transport Authority for MRT and

bus

Regulation (3)

Safetystandards

Independent regulator;TUPWS for bus

Independent regulator;TUPWS for bus

Independent regulator;Integrated PT Authorityfor bus

Independent regulator;Integrated Transport Authority for bus

Environmentalstandards

DNRE DNRE DNRE DNRE

Economicregulation(5)

MAUR MAUR/ Interim PT Authority

Integrated PT Authority Integrated Transport Authority

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Feature Option 1: Option 2: Option 3: Option 4:Strengthen MAUR Interim PT Authority Integrated PT Integrated

Authority Transport Authority

Public transport program management (4)

Programcoordination &direction

MAUR MAUR Integrated PT Authority

Integrated Transport Authority

Project planning& feasibilitystudies



Investmentprogramming &financingapproval

MAUR/ DPI/DOF/ PC MAUR/ DPI/DOF/ PC Integrated PT Authority / DPI/DOF/PC

Integrated Transport Authority / DPI/DOF/ PC

Project design MAUR MAUR Integrated PT Authority


Environmental &other approvals

MAUR/ DNRE MAUR/ DNRE Integrated PT Authority/ DNRE

Integrated Transport Authority/ DNRE

Tendering MAUR MAUR Integrated PT Authority


Contractmanagement



Infrastructuremaintenance

MRT operators/concessionaires (foroperations)




MRT servicedesign



Concessionpreparation andmanagement



Service delivery

Rail services Operators/Concessionaires

Operators/Concessionaires



Bus services Operators Operators Operators Operators

Ticketing andfare collection

Single contract underPC

Single contract underPC

Single contract underIntegrated PT Authority

Single contract underIntegrated Transport Authority

Marketing Operators Operators Integrated PT Authorityand operators

Integrated Transport Authority andoperators

(1) All options cover the provision of formal public transport in Greater HCMC. (2) Covers setting of policies within whichagencies do detailed project planning & implementation & provision of services. (3) In the case of public transport,

regulation relates primarily to safety. Vehicle registration and driver licensing, which are applicable for bus services, are notaddressed because they are the same for all options. Economic regulation needs to be treated as an integral part of theTransport Policy and Planning function, though some aspects such as anti-monopoly regulation will be managed by othergovernment agencies. (4) Includes activities to put strategies into practice strategies, including development andimplementation of projects and arranging for the delivery of public transport and ancillary services. (5) Includes control overentry to the market (eg how many buses and companies are allowed) and control of fares.

Source: Consultant

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Figure 4.2: Key lines of responsibility for Option 3 – “Integrated Public Transport Authority”

Source: Study Team

4.6 Fares and Ticketing

An objective for rail mass rapid transit (MRT) in HCMC is that it be convenient to use andfree of artificial barriers that could be imposed if MRT lines and their method of operations

were to be done on a “standalone” basis.

The Working Paper contained in Appendix D presents a discussion of the policy issuesregarding fares and ticketing systems and recommends an approach to secure both integratedfares and an integrated ticketing system primarily for MRT, but also for other public transport,as MRT will rely on an integrated public transport system to maximize its performance.

Fare policy and an associated ticketing system are essential to the success of MRT and thebroader public transport system. Fare policy is vital because:

•

financially, it affects the number of people who will use MRT, which in turn influencesfare revenue, MRT operating costs and, ultimately, the viability of MRT lines;

• socially, the absolute level affects the affordability of public transport to people, whilealternative fare structures have differential, and thus distributional, effects on thecommunity;

• technically, it influences the form of operating concessions, and the design of the MRTsystem in general and the ticket system in particular; and

• for the remainder of transport system, the level and structure of MRT fares affects theuse made of other public transport and the amount of private travel, with consequences

for the transport system and community as a whole.

A policy objective for HCMC, as it is in most cities that seek to provide an attractive publictransport system, should be:

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• an integrated ticket and fare system for MRT and, ultimately, the bus system also; and

• uniform fares for modes of similar quality.

Fare policy is therefore a matter that needs to be addressed at the outset, because it

affects passenger demand, design of stations and interchanges, the financial viabilityof public transport, and the form and content of operating concessions.

Table 4.2 shows that achievement of uniform fares and integrated ticketing is best suited to aGross Cost form of operating contract and that both need an MRT or Public Transport

Authority with ability to manage more complex concession agreements with more intricatefinancial arrangements.

Table 4.2: Requirements for Uniform and Integrated fares

Fare(1) Ticket Concession MRT Authority

Uniform & integrated Must be integrated All concessions on same basis. Needrevenue settlement system, perhaps with

fares collected by third party. Grosscost

(2) form of concession is better.

Needs an Authority withability to manage more

complex concessionagreements with moreintricate financialarrangements

(1)Uniform fare = same Fare VND/km on all lines; Integrated fare = no second or subsequent flagfallLink to cost recovery: (i) how will loss of second flagfall with integrated fares be recovered?; and (ii)how will concessionaires be compensated for different level of cost recovery for each line withuniform and integrated fares?

(2) Gross cost concession – all fare revenue is paid to the government with bids made for the amountthe government should pay for provision of the tasks set out in the concession. Can involve sometransfer of patronage risk to the concessionaire. Source: Consultant

It will be exceptionally difficult, perhaps impracticable, to implement an integrated ticketingsystem with each public transport operator supplying their own equipment without a commonapproach. Accordingly, there is a universal movement towards integrated ticketing and faresystems that are managed centrally rather than by individual service providers. It isrecommended that such an approach is essential for HCMC.

Figure 4.3: Integrated Ticketing - Preferred Technical Option

Line 1 Line 2 Bus BRT Other

Smartcard

Reader/Device

Operator System

Central System

CentralClearinghousePhase II

Open Standard Clearinghouse Interface

Open Standard Card/Reader Interface

Non-Transit

Applica tions

Source: Study Team

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Moving towards implementation of such an integrated fares and ticketing system requires anappropriate framework in which all necessary studies and activities can be undertaken. While itis not essential that the fare structure and level be confirmed before commencing the processof planning an integrated ticketing system, an early decision will provide clarity and directionto future work. In any event, establishing the fare structure and level is essential to the

development of future MRT lines in HCMC, and is thus a matter than needs urgent attention. Accordingly, it is recommended that work commence as soon as possible to examine a rangeof fare structures and levels, and identify the option that best balances MRT financial viabilityand social obligations.

Experience elsewhere suggests that a practical way forward to implementation of an integratedticket system is to commence with a high level working group that should:

• recommend a preferred fare structure and level;

• prepare a functional specification for the ticketing system, identify a preferredtechnology, and estimate likely capital and ongoing operating and maintenance costs;

•

recommend arrangements for an integrated procurement contract that covers bothimplementation and ongoing operation and maintenance of the ticket system, and whichalso considers possible private sector financing of capital costs;

• recommend institutional arrangements for the management of fares and ticketing forMRT in HCMC following implementation of a new integrated ticket system; and

• present a program for implementation of the recommendations that describes activities,costs, schedules and agency responsibilities for government consideration and approval.

It is recommended that this working group should comprise representatives of the PC’sManagement Authority for Urban Rail (MAUR), Transport and Urban Public Works Services

(TUPWS), Department of Planning and Investment (DPI) and Department of Finance orcould be an embryonic form of the Integrated Public Transport Authority.

Representatives of organizations and the community who will be affected by the proposalsshould be invited to participate, either as members of a steering committee or an advisorypanel. A period of about 12 months will be required for the working group to undertake theabove tasks to the necessary level of detail. The key steps are shown in Figure 4.4.

Following a positive decision on the working group’s report, it is recommended that thegovernment organization that is to be responsible for managing the ticket and fare systemshould be established (at least in the form of a “project office”), and required to prepare:

• bidding documents;

• plans to implement the procurement process, including tender assessment, award andmanagement procedures; and

• plans for operation of integrated ticketing across the entire MRT system, includingcurrent lines, bus and other modes.

This work is likely to take a further six to twelve months, and will permit the government toproceed to formalization of institutional arrangements, implementation of the ticketing systemand its ongoing operation. Based on experience in other cities, it is expected that it will thentake about three to four years to tender, contract, deliver, install and commission the ticketingsystem, including establishing arrangements for delivery, sale and use of new smartcard-type

tickets and management of fare revenue.

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Figure 4.4: Steps to Implement Integrated Ticketing & Fares

Source: Study Team

Finally, responsibility for developing a suitable integrated ticketing and fare policy to supportan integrated MRT and public transport system for HCMC rests with the Management

Authority for Urban Rail (MAUR) in the first instance. The thinking needed to develop anappropriate ticketing system and fare policy cannot be outsourced to others.

4.7 Building Technical and Managerial Capacity

Depending on the option eventually chosen, with the exception of Option 4 (Integrated Transit Authority) the proposed agency will have a key role in working to efficiently andeffectively connect high level transport policy and plan making done by TUPWS to detailedimplementation.

DPI will continue to have an important role in overseeing the performance of the transportsector in terms of fiscal monitoring, but would also benefit from having a stronger MAUR orIntegrated Public Transport Authority to provide economic regulation and technical

management of MRT (and/or bus) investment programming and management of annualMRT operating budgets, and desirably for other public transport.

Economic regulation and oversight involves issues of pricing including fares, subsidies (andcommunity service obligations), competition, concessioning including compliance supervisionand requires skills in economics and to associated legal and financial impacts.

Technical supervision of rail MRT and public transport investments and their integratedoperation including ticketing requires high level knowledge and skills in:

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21

• interpreting transport policy and master plans prepared by TUPWS and centralgovernment’s MOT and providing appropriate feedback and advice;

• translating these policies and plans into appropriate forward work programs that canresult in timely and efficient implementation of MRT, other public transport

improvements and reforms, and integrative systems;• providing appropriate advice to TUPWS/ DPI/ DOF/ DUPA and other agencies as

required; and

• appropriate coordination with the Department of Natural Resources and Environment.

While the PC is acting to strengthen MAUR (under Options 1 and 2) or if it intends to createan Integrated Public Transport Authority (Option 3) or an Integrated Transport Authority(Option 4) it should be careful to match the skills and capabilities of the people to be engagedand /or transferred to the desired new organization and its structure taking full account of theneeded capabilities in high level economic and technical supervision and oversight.


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Appendix A: Issues and Options for Private Sector Participation

and Concession Template Working Paper

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Asian Development BankPublic Private Infrastructure Advisory Facility

RSC-C71557 (VIE),TA4862-VIE

Ho Chi Minh CityMetro Rail System:

Issues and Options

for Private SectorParticipation, and

Concession Template

April 2008


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Table of Contents

Executive Summary ................................................................................................................................ 1

1.

Introduction .................................................................................................................................. 3

1.1 Background ........................................................................................................................ 3

1.2

Role of the current report ................................................................................................ 4

1.3 Terminology ....................................................................................................................... 4

2. Factors Influencing the Structure of MRT Delivery ............................................................... 7

2.1 Structuring management in the transport sector .......................................................... 7

2.2 Network integration .......................................................................................................... 9

2.3 Policy control ..................................................................................................................... 9

2.4

Implications of low financial cost recovery for the MRT system .............................. 9

2.5 MRT system components .............................................................................................. 10

2.6 Participants in MRT provision ...................................................................................... 11

2.7 Bundling MRT components .......................................................................................... 11

2.8 Risk transfer ..................................................................................................................... 14

2.9 Forms of MRT concession – Gross Cost and Net Cost ................................................ 14

2.10 Using the private sector to minimize the cost of MRT operations .......................... 16

2.11 Potential roles for the private sector............................................................................. 16

2.12 Assessing the value of private sector involvement - Value for Money analysis ..... 17

3. Identification and Assessment of Potential Concession Models ........................................ 19

3.1 Introduction ..................................................................................................................... 19

3.2 Recent examples in other cities ..................................................................................... 20

3.3 Potential implementation models for HCMC ............................................................. 20

3.4 Next steps ......................................................................................................................... 26

4. Risk Allocation for Concessioning and Financing Options ................................................ 27

5.

Concession Template ................................................................................................................ 32

5.1 Key Factors Affecting the Concession Agreement .................................................... 32

5.1.1. Form of Concession .......................................................................................... 32

5.1.2. Allocation of Risk .............................................................................................. 32

5.1.3. Value for Money ................................................................................................ 32

5.1.4.

Structure of Payments to the Concessionaire ................................................ 33

5.2 Content of the Template ................................................................................................ 35

5.3 Next Steps to Implement the Template ....................................................................... 37


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6. Implementing Competitive Tendering and Concessioning ................................................. 39

6.1 Probity ............................................................................................................................... 39

6.2 Market Testing ................................................................................................................. 39

6.3 Preparation of a Request for Proposals ....................................................................... 39

6.4

Tendering and Tender Assessment............................................................................... 41

6.5 Concession Contract and Implementation .................................................................. 42

6.6 Concession Management ................................................................................................ 42

6.7 Schedule ............................................................................................................................ 43

Appendix A:

Bibliography................................................................................................................ 44

Appendix B: Summary of Some MRT Concession Arrangements in Other Cities ................ 45

Appendix C: Additional Issues Related to Use of Net Cost and Gross Cost Concessions ... 47

Appendix D:

Concession Template ................................................................................................ 56

Appendix E: Presentation and Report Summary ......................................................................... 81


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Executive Summary

This report considers opportunities to use the private sector in implement and operate railmass rapid transit (MRT) in Ho Chi Minh City (HCMC). This matter is considered with a

broader view than any individual MRT line in HCMC because the ultimate objective of thegovernment is a substantial increase in the use of public transport in the city, which in turnrequires an integrated public transport system. The use of the private sector is not addressedfrom an ideological perspective, but rather as a means for securing the delivery of high qualityMRT at the lowest possible cost to the community.

The report notes that the private sector has been involved in MRT in nearby countries inrecent years: always for implementation of infrastructure; often for the operation of services;and to a lesser extent for investment in MRT assets. It also notes general experience that thecost of public sector operation of public transport is higher than with private sector operation,and that there is a general worldwide trend to make greater use of the private sector for theoperation of public transport.

Consideration is given in the report to the range of factors that affect the manner in which theprivate sector could be involved. These factors have two broad influences.

The first is the extent to which the private sector could provide finance for implementation ofthe MRT. In this respect, it appears that the current approach to MRT in HCMC is likely toresult in fare and related revenue that will, at best, cover operating costs and make a smallcontribution to capital costs. Accordingly, the government will need to eventually pay theprivate sector for most of the cost of any capital that the private sector might provide in thefirst instance to implement the project. While the cost of capital to the private sector isgenerally more expensive than the cost of capital for the government, the report notes thatthis may be offset by lower costs that result from the transfer of manageable risk to the private

sector and the incentive for the private sector to better integrate assets and operations toreduce life-cycle costs.

The second influence is on the form of the agreement between the government and theorganization that is to operate the MRT system (called the concessionaire). It is essential thatsuch an agreement be in place, irrespective of whether the concessionaire is a government or aprivate organization. It is common for such agreements to have a term of around 30 years orso, especially where the concessionaire contributes capital investment. There is also a need forthe agreement to include conditions that provide the operator with the incentive to undertaketheir tasks in a manner that meets the government’s objectives for MRT in HCMC.

There has been a tendency in the past to use a form of agreement wherein the concessionaire

keeps fare and other revenue for the MRT line to which the contract pertains and uses therevenue to cover its costs. The government may need to provide supplementary financing ifthe revenue available to the concessionaire is insufficient to met the costs. This approach,called a Net Cost form of concession, has major limitations. In particular it does not facilitateoperation of an integrated public transport system and reduces the flexibility of thegovernment to develop the transport system and modify its urban transport policies over theterm of the concession. An alternative approach, called a Gross Cost form of concession, isstrongly recommended. Under it, revenue from fares accrues to the government, which inturn pays the concessionaire for the services that the concessionaire provides. The reportdescribes how this form of concession can be implemented to give the concessionaire theincentive to provide good quality services that meet the needs of passengers at the lowest

possible cost and with the least need for detailed management of the concession contract bythe government.

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Four possible implementation options are considered in the report. All four will be subject to value-for-money analysis under the current study to indicate the potential cost to thegovernment of delivering Line 2 of the MRT system and the provision of services on the lineover the long term. The results of this analysis will be presented in a separate report. Theoptions are:

•

Government financing, implementation and operation of the MRT.

• Government financing and implementation of all MRT assets, and engagement of aconcessionaire to operate MRT services.

• Government financing and implementation of MRT civil infrastructure, andengagement of a concessionaire to finance and provide trains and related electrical andmechanical equipment and systems, and to operate MRT services.

• Private sector financing, implementation and operation of the MRT.

The Gross Cost form of concession is recommended for the first three options. A Net Cost form of concession is appropriate for the last option to allow the concessionaire to manage its

greater financial exposure in a way that minimizes its risks. In all four cases, the government will eventually pay for the total cost of implementing and operating MRT. However, the totalcost to the government will vary. This occurs because the four options involve different waysof allocating and managing MRT responsibilities, and hence the incentive and capacity forthose involved to manage the associated financial, engineering, operational and patronagerisks.

The report draws general conclusions about the relative merits of the four implementation/-financing options, but does not unequivocally recommend any particular approach. Rather,the intention of developing and assessing the options is to provide understanding that canhelp the government with its consideration of an arrangement that is appropriate for HCMC.

Two other key recommendations are made. The first is that there should eventually be at leasttwo companies involved in the operation of MRT in HCMC. This puts competitive pressureon each operator to improve its performance so that they are not seen to be inferior to theother operator(s). It also provides data that the government can use to benchmark theperformance of the operators so that it can provide feedback to the operators onopportunities for improved performance. Finally, it provides the government with flexibility inthe event that one operator fails to perform, with the capacity for another of the operators totake over in the short term if that should become necessary. The second recommendation isthat international competitive tendering should be used to select the concessionaire, with thelikelihood that a foreign party will form a consortium with a local enterprise. This will bringinternational experience and expertise to support the development of world class MRT in

HCMC and provide a sound basis for developing domestic skills in MRT.

Finally, the report presents an outline of a concession agreement and discusses the actionsneeded to select a concessionaire and establish and manage a contract.

A detailed presentation of issues addressed in the report is presented in Appendix E.

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1. Introduction

1.1 Background

The People’s Committee (PC) of Ho Chi Minh City (HCMC) has initiated studies to develop arail mass rapid transit (MRT) system for the City. An MRT Master Plan was prepared as partof a Japanese funded urban transport study, HOUTRANS. An updated Master Plan with sixMRT lines was approved in December 2006. A proposal for two monorail lines is also underconsideration, as is the use of bus rapid transit (BRT). These systems would complement anevolving on-street bus system.

Two lines (UMRT2 and UMRT3) have been proposed for Asian Development Bank (ADB)funding with another line (UMRT1) to be financed by the Government of Japan and one lineby the Government of China. ADB has mobilized a Project Preparatory Technical Assistance(PPTA) to assist the government to develop UMRT2 and UMRT3 (or variations on thoselines if that should be recommended – termed the Project hereafter). The PPTA, which

commenced in May 2007 and is to be completed in May 2008, is responsible for providing:

• an optimized MRT Master Plan which integrates the currently proposed MRT lines intoa cohesive network with other modes, identifies required supporting policies, anddevelops design parameters for the two project lines;

• a feasibility assessment and preliminary engineering design for the Project lines - thePPTA will confirm the engineering feasibility, and identify social and environmentalimpacts for accurate cost estimation and financial appraisal; and

• a plan to support project implementation, including institutional and staffingarrangements, capacity building, financing/funding options, and implementation

program.In addition, ADB has mobilized a grant from the Public Private Infrastructure AdvisoryFacility (PPIAF)1 to assist the government to consider the appropriate role for the privatesector in implementing and operating the Project, with a view to minimizing the cost of theproject to the government on a risk adjusted basis and taking advantage of a market orientedapproach to maximizing the benefits of the Project. The study will provide the followingoutputs:

•

a framework for considering private sector participation in implementation andoperation of the Project;

• a value-for-money analysis for implementation approaches that involve varying degrees

of private sector participation;

• a more detailed financial model reflecting the preferred approach and measuring theperformance of the project from the points of view of the government and privatesector participants; and

• a stakeholder feedback and a description of necessary institutional and contractualarrangements given the preferred implementation approach.

1 The Public-Private Infrastructure Advisory Facility (PPIAF) is a multi-donor technical assistance facilityaimed at helping developing countries improve the quality of their infrastructure through private sectorinvolvement. For more information on the facility see the website: www.ppiaf.org .

3

http://www.ppiaf.org/http://www.ppiaf.org/


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1.2 Role of the current report

The current report addresses the first of these subjects under the PPIAF study. It is noted thatthe objective for arrangements that are to be adopted for implementation and operation of theProject are to:

•

minimize overall costs to the government on a risk-adjusted basis, covering

‒ initial capital costs for infrastructure;

‒ ongoing operating and maintenance costs for infrastructure and train operations; and

‒ costs incurred by the government to manage implementation and operation of theProject; and

• maximize the benefits of the Project, including maximizing MRT patronage.

The form of construction contracts is generally well understood, and is not addressed in thecurrent report. Rather, the focus is on:

•

the operation and maintenance of infrastructure and provision of train services,including the role of the private sector in undertaking and financing these activities;

• the extent to which infrastructure provision and financing can be undertaken by theprivate sector; and

• the extent to which provision of infrastructure and its financing should be linked withsubsequent operations and maintenance of the Project.

Following sections of this report therefore:

• address some terminological matters to clarify subsequent discussion;

•

present an overview of issues that will affect the role of the private sector with regard tothe Project, including features of the Project, its potential financial performance and thestructuring of government responsibilities in the transport sector; and

• identify a range of private sector roles and screen these to identify four models that willbe subject to a value-for-money analysis (i.e. the second component of the PPIAFstudy).

1.3 Terminology

A range of terminology can be used to describe participants in, and arrangements for, thefinancing, implementation and operation of an MRT line. To avoid confusion, the following

terms are used in this report:

• The Authority is the government agency that is responsible for ensuring the delivery andoperation of the MRT system.

• The term infrastructure contractor is used to describe the entity (or entities) that constructsinfrastructure, including the supply of directly associated equipment, under a contract tothe Authority. As will be described in Section 2.1, the infrastructure contractor shouldbe entirely independent of the Authority, i.e. the Authority owns no shares in it.

• Equipment suppliers may provide electrical and mechanical equipment (e.g. any or all oftrains, signaling and communications equipment, power supply systems, train control

systems, escalators, etc.) under contract either directly to the Authority or to aninfrastructure contractor or a concessionaire.

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• Financier who provides or arranges the provision of capital to finance the construction ofinfrastructure or the provision of electrical and mechanical equipment. The financiermay provide the capital as a grant or loan to the Authority or a concessionaire (who

would then use it to pay infrastructure contractors and equipment suppliers); the Authority or concessionaire would repay the financier on the basis of agreed terms – in

the case of grants, no repayment would be necessary. It is likely that a number offinanciers may be involved in the Project.

• An operator is the organization that delivers train services. It could be part of the Authority but, as will be described in Section 2.1, it is strongly recommended that thisshould not be the case. The operator need not necessarily provide the civil infrastructureon which the trains operate or even the trains themselves. The operator could be apublic or a private organization.

• A concession is a contract between the Authority and a concessionaire , where the latter is theorganization that delivers train services (i.e. it includes the operator) and any otheragreed activities. The additional activities could include the construction and ongoing

operation and maintenance of infrastructure, the provision of trains and the provisionof finance used to purchase asset

Documents

Vietnam-metrorail-completionreport.pdf