Private Investment for Public Transport: Sao Paulo’s Linha 4 Leads the Way
Originally posted on TheCityFix.
Brazil has what may seem like a fortunate problem: public finance is too readily available for transport projects. The government financed most of the improved transport for the 2014 World Cup and 2016 Rio Olympics, while the three big public banks accounted for half of all outstanding credit in Brazil.
Readily available public finance can undercut the market and crowd out private investment. Despite policy efforts to develop an attractive legal framework, Brazil experienced a lull in private investment in the mid-20th century. This is a concern because robust private investment in transport can deliver operational expertise and financial capacity that the public sector may lack. Also, private sector know-how can make transport services more efficient. Private financiers may cost more, but they offer higher value for the investment. As Brazil enters a period of economic uncertainty, public budgets may become more constrained. Therefore, mobilizing domestic and international private investment is now a strategic question for Brazil.
One inspiring example of private participation in Brazil’s transport sector is Sao Paulo’s Linha 4, which was designed specifically to integrate disparate transit systems and to improve access to jobs. The project leveraged the existing institutional and legal frameworks in Brazil to attract private investment and was able to procure $1.6 billion in public investment and $246 million in private investment from seven different financial institutions. Using these varied sources of finance mitigated risk and kept the project financially sustainable.
Public-Private Partnerships Improve Transport in Sao Paulo
The Sao Paulo metro area is home to 20.2 million people, accounts for 20 percent of Brazil’s gross domestic product (GDP), and has one of the most crowded public transport systems on Earth. The 168-mile system boasts more than 16 million annual trips per mile of track—far more than Mexico City, Buenos Aires and Santiago combined. Besides crowding, there was little integration between the state-owned and -operated commuter rail and metropolitan bus systems, a separate underground rail system and the city’s municipal bus network.
2 Key Elements to Linha 4’s Success
Risk Mitigation: Linha 4 was planned to depend on fare revenue to recover project costs. To mitigate the risk of low ridership, the government and the private sector agreed that if ridership fell below an expected level, the government would make up the difference. If ridership topped expectations, the government would be compensated. In addition, the project used a financial guarantee backed by revenues from the state’s integrated public transport system. This guarantee served as an independent fund, distanced from the influences of corruption and political turbulence, and enabled consistent, secure financial flows. Corruption is still a huge issue, as nearly every construction or engineering company has been accused of or investigated for bribery. Frequent changes in government often mean that contractual obligations are not honored by subsequent leaders. Both corruption and changes in governance have tarnished Brazil’s reputation, and private investors have been wary of the transport market.
Institutional/ Regulatory Environment: Brazil experienced a lull in private investment in the mid-20th century, but has recently seen a resurgence in private sector investment in public transport projects. This is in large part due to new concession laws that encourage public-private partnership and use private investment for public projects. Other laws have been passed that provide a legal basis for public compensation paid directly to private providers for transport services. Linha 4 could not have succeeded without these supporting policies.
Brazil on the Right Track
Investment in transport infrastructure is estimated at US $1.4 – 2.1 trillion annually. While meeting this demand will require action from federal, state and municipal governments, the private sector—often crowded out in these markets—can also play an important role, particularly in countries where public budgets are constrained. Linha 4 is a case in point.
Brazil is on the right track, but increasing private sector investment in transport in Brazil will have to be accomplished through a variety of actions. Promoting stronger legal frameworks, giving local governments the flexibility to implement deals, collaborating with financial partners and development institutions to guarantee the viability of the project, and adding guarantees and mitigating risk all have helped Brazil improve transport infrastructure with the private sector as a key partner.