Safe, efficient and sustainable transportation systems are increasingly important in fast-growing cities of the world, particularly in Asia. In Southeast Asia, traffic congestion causes an annual economic loss equivalent to at most five percent of the region's gross domestic product (GDP). Recognising the severity of this issue, the Association of Southeast Asian Nations (ASEAN) has identified mobility as a key priority in its efforts to achieve urban sustainability.

Among the different modes of urban transportation, Mass Rapid Transit (MRT) systems stand out for their ability to alleviate traffic congestion, reduce emissions, and enhance connectivity. Governments have turned to Public-Private Partnerships (PPPs) in the development and operation of their MRTs, offering a framework for collaboration between public and private entities.

According to SMU’s Celia Moh Chair Professor Sock-Yong Phang, MRT PPPs are "the most efficient urban mobility solutions for high-density metropolitan areas that also have the potential to generate significant economic and social benefits." What are the different PPP models being used and what can be learned from them? Prof Phang shares her insights based on four diverse case studies: Singapore, London, Beijing, and Hong Kong.

The origin of MRT PPPs

A PPP is an agreement between a government entity and a private party to deliver a public asset or service. This arrangement involves transferring responsibilities to the private party, while the government entity retains the responsibility for ensuring the successful delivery of the asset. PPP models range from operate and maintain (O&M) contracts to complex greenfield Design-Build-Finance-Operate-Maintain (DBFOM) contracts.

Despite their clear benefits, Prof Phang details MRTs as “inherently large, unprofitable, and risky projects” due to their high construction, rolling stock, operating and maintenance costs. She explains: “Construction costs on a per km basis can range from USD 100 million to over USD 500 million. In most cases, fare revenues are insufficient to cover costs. Besides technical complexities, project managers are often also responsible for acquisition of land, engaging with multiple stakeholders, and managing risks over the different phases and duration of the PPP.” 

Indeed, MRT projects in the ASEAN region have faced various issues. Singapore, in particular, faced challenges due to its rapid population growth of 18.2% between 2006 to 2011. According to Prof Phang, this surge resulted in overcrowding, longer wait times, and increased strain on existing services then. 

“It is important to identify the risks early at the project planning stage so that the decisions on allocation of specific risks to either the public or private partner of the PPP can be made,” she says. 

She highlights the need for early risk identification and allocation during contract preparation stage and prior to contract signing. The risk register for MRT projects include those at the design, financing, land acquisition, construction, operations and maintenance stages. The risks allocated to the private sector partner will significantly influence the PPP's success and sustainability.

Moreover, there are potential pitfalls to be aware of: “The successful bid may have been too low, costs may escalate over time, projected revenues may have been overly optimistic, the private profit motives may not align with the public goals over time,” Prof Phang shared. “This will require dispute resolution mechanisms to be in place and contracts to be renegotiated.”

In her study, she noted that the duration of the PPP contract depends on the responsibilities being transferred to the private party which is related to the amount of private financing required. “For bundled DBFOM PPPs, the duration of the concession must be long enough for the private party to integrate O&M costs considerations at the design phase of the project,” she shared. “This “whole-life” approach is one of the main benefits of using PPPs.”

Other factors that impact the duration of the PPP include the asset lifespan and the availability of financing options. “DBFOM MRT PPPs are typically of 20 to 30-year duration while O&M contracts where infrastructure assets including rolling stock are owned by the public entity can be shorter,” she said. 

Case studies of four MRT systems 

The case studies below highlight how four different MRT systems began their PPP contracts. Two were successful and are still running to this day, while the other two were first returned to state ownership (renationalised) and made structural changes.

London

The London Underground Metronet PPP serves as a prominent example of an MRT project that experienced the renationalisation mentioned above.

Breaking ground in 1863, the London Underground is the world’s first underground passenger railway. After more than a century in operation, the fully-government-owned London Underground Limited inked a deal with three different infrastructure companies (infracos) in 2000 to lessen breakdowns and upgrade their network.

The contracts in particular were: (1) BCV for Bakerloo, Central, Victoria and Waterloo and City lines); (2) SSL for Circle, District, East London, Hammersmith and City and Metropolitan lines and (3) JNP for the Jubilee, Northern and Piccadilly lines. In 2002, Tube Lines Ltd., comprised of companies Bechtel, Jarvis, and Amey, won the JNP PPP concession. The following year, Metronet Rail Ltd., which included companies Atkins, Balfour Beatty, Bombardier, EDF Energy, and Thames Water, won the BCV and SSL concessions.

Over the next few years, the two projects encountered significant challenges. For Metronet,  estimated losses to the taxpayer at the time of its termination were as high as £410 million. For Tube Lines, their initial ask of £6.8 billion to renew the Piccadilly and Northern Lines, was denied and they were only given £4.4 billion. This huge difference led to a series of events that ended in nationalisation.

Metronet’s collapse was partly blamed on its strategy of having its shareholders also be its suppliers, known as a "tied supply chain." While this strategy is not uncommon and has worked in other PPPs before, Metronet failed due to poor management and clear favouritism towards suppliers. Stronger governance could have prevented this by having third-party financiers as project sponsors, but this was not the case for Metronet. 

Ultimately, both Metronet and Tube Lines found it hard to manage and carry out their PPP projects because of cost escalations. 

Despite its failures, Professor Phang still described the infraco PPPs as a "successful change agent" because the shortcomings of the project ultimately led to improvements in the funding policy for Transport for London and kickstarted the renewal process for the century-old system.

Singapore

Although Singapore is now known as having one of the best MRT systems in Asia, it also had its experience of renationalisation in 2016 with SMRT, one of two MRT operators aside from the privately-owned SBS Transit.

At its inception in 1987, Singapore's MRT was operated by Singapore MRT Limited (SMRT), which the government wholly owned through Temasek Holdings, a government-owned investment holding company. At the time, the Singapore government expected the MRT fare revenues to cover its operating and maintenance costs. 

In 1998, the Land Transport Authority (LTA) made a 30-year deal with SMRT to run the North-South and East-West MRT lines. SMRT rented the tracks and stations and purchased the operating assets and rolling stocks from the government for S$1.2 billion. SMRT became a publicly listed company in 2000.

By late 2011, cracks had begun to show in the SMRT’s operation of its MRT lines. There were multiple breakdowns, overcrowding, and longer wait times. The LTA’s outcome-based regulatory approach at that time was deemed to have contributed to inadequate oversight in areas affecting reliability. 

In 2016, SMRT was delisted with shares brought back by Temasek Holdings. SMRT's change of ownership shows the problems with a 30-year contract to run the MRT. One of the key issues faced was SMRT’s failure to comply with approved operating and maintenance procedures meant to ensure system reliability. 

Prof Phang highlighted the importance of appropriate revenue risk allocation in PPP contracts and the need for strong regulatory oversight by public entities over private companies. Despite not being a traditional PPP, the challenges faced by the SMRT and the subsequent restructuring of the company indicate that public entities must still closely regulate how private MRT operators maintain and improve their infrastructure.

Hong Kong

Hong Kong stands out for its successful deployment of the Mass Transit Railway (MTR) system and Public-Private Partnerships (PPPs), showcasing a model of super vertical integration. 

Unlike traditional PPPs where private entities can take on a majority of the responsibilities for a project, Hong Kong's approach involves the government planning the urban rail transit system, while the railway lines are built and operated by the semi-private Mass Transit Railway Corporation Limited (MTR). Hong Kong used a “Rail Plus Property” framework wherein the government gave the MTR exclusive rights to develop the land near or above railway stations and depots. In return, the MTR undertook the costs of building and running the rail lines. 

Prof Phang deemed the venture a “successful land value capture for MRT development,” proving that real estate development with MRT development under the same company can be a solution to financing expensive MRT Lines.

“In densely polluted cities, the building of an MRT line can lead to large gains in land values in areas around key stations,” she said. “Successful capture of the increase in land values can be used to finance the costs of building and operating MRT systems.”

Beijing

Beijing's MTR system also stands as a testament to the success of strategic PPP in urban transportation development.

With Beijing set to be the host country for the 2008 Summer Olympics, the Beijing Infrastructure Investment Corporation (BIIC) began planning to expand the MTR system from two to eight lines before the event. In particular, the 29-km Line 4 utilised a PPP. A  joint venture company, the Beijing MTR Corporation (BMTRC),was set up. It consisted of the Hong Kong MTR (owning 49% of the shares), and the BIIC and another state-owned entity that together owned the other 51%.

BIIC financed the civil works and BMTRC financed the rolling stock, signalling, and E&M systems.

Line No. 4 was completed on schedule in September 2009, and BMTRC achieved cost savings through a combination of debt restructuring and currency hedging, a financial strategy used to mitigate the risks associated with foreign exchange rate fluctuations. By hedging their currency exposure, BMTRC was able to protect against potential losses arising from changes in exchange rates, ultimately contributing to their cost-saving efforts.

Through joint governance,  hybrid financing, and the careful allocation of ridership and revenue risks, Beijing leveraged PPPs to build and operate a sustainable and efficient MRT line. 

London, Singapore, Hong Kong, and Beijing illustrate the diverse approaches and outcomes of PPPs in urban MRTs. While each city faces its unique challenges and circumstances, there are overarching lessons that can be gleaned from their experiences. 

Their outcomes show that how financial and revenue risks are allocated is crucial for sustainable operation and financial stability. Both London and Singapore highlighted the importance of establishing clear termination conditions or unwinding strategies for PPPs to reduce uncertainty. They also show the importance of the government’s continued involvement as joint owner, and the importance of monitoring of costs and operations. The success of both Hong Kong and Beijing shows that the government should own their metro systems, but there are still benefits of entering into DBFOMT PPPs for development of individual lines within a system.

Despite their challenges, a well-executed MRT system, whether built by the public sector or through a PPP, can have manifold economic, environmental, and social benefits, stressed Prof Phang. When done right and with sustainability in mind, PPPs give MRT systems benefits that can far exceed their costs.

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Read about the recent research of Prof Sock-Yong Phang and Bin Chye Tan titled “Sustainable strategies for Mass Rapid Transit PPPs.”