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Trams get a fare deal
Supply Management – 17 February 2005

Escalating costs threatened to derail three systems in England. But inventive procurement has put two back on track, says Mark Smulian

It is clean, efficient, popular, fits with the government's sustainability policies and helps local economies to grow. And it costs a fortune. Light rail has had a fitful history in the UK, but two major public-private projects now have a serious chance of going ahead after radical adjustments in their procurement and funding.

In short, the changes mean local authorities will underwrite an agreed value of fare income, allowing the private contractors' costs to be cut dramatically.

This new lease of life has actually been forced on the local authorities by transport secretary Alistair Darling, who last summer looked at the spiralling, and apparently open-ended, costs of Manchester's Metrolink extensions, the Leeds Supertram and the South Hampshire Rapid Transit project, and called a halt.

He said "no government could accept" such a perilous commitment. But he left the door open for revised, cheaper schemes. The fare guarantee idea has been developed to fill the gap.

The Leeds and Hampshire schemes have cut costs by guaranteeing the local authority part of the fare revenue - a curious, but seemingly effective inversion of the private finance initiative (PFI) idea, which transfers risk to the private sector. Manchester continues to negotiate the terms of its deal.

Leeds City Council, and the joint venture of Hampshire County Council and Portsmouth City Council, were required by government policy to use PFI for schemes both argue are essential to their local economies.

But problems arose with the way the private sector sees the multiple risks of running an urban light rail system for 30 years: the prospect of construction delays; the possibility of defective rolling stock or engineering; unexpected hikes in electricity costs; or a change in the demographics of the areas served by the tram. And, unlike buses, tram routes cannot easily be altered.

Such uncertainty induces caution in lenders, and the Leeds Supertram team found to its alarm that bids were far higher than expected.

Potential concessionaires (private-sector partners) wanted 660 mil_lion to design, build, operate and maintain the system for its initial lifespan, but the government had limited its contribution to 355 million.

Even with an additional 120 million available, mainly from the city council, the gap was unbridgeable and provoked Darling's refusal of further funds.

It was back to the drawing board for Steve Hemingway, the project's manager. "The risks caused uneasiness among bidders as some other light rail schemes had not done quite as well as expected," he says.

Leeds remained confident in its analysis that the community and economic benefits the tram would bring could not be matched by buses, and that the regeneration benefits of the system would be substantial.

The city council forecasts the creation of 32,000 jobs by 2014, with 70 per cent of workers travelling from outside the city to fill them.

There is not the road capacity for them to arrive by car and the Supertram is expected to carry about 19 million passengers a year - a quarter of them former car users.

"The prices came in very high and the sums did not add up," Hemingway says.

His solution was to simplify part of the project by deferring - he insists that does not mean "abandoning" - a spur track off the southern line.

Other savings came from eschewing the extremely costly process of diverting all utility cables and pipes.

Instead, some would be left in place and alternative connections built, and others removed and replaced elsewhere.

But even after these cost reductions, a funding gap remained. Another pool was required to make the project's finances reach the required total.

Hence the idea that the council and the government will jointly guarantee fare revenue for the early years to soothe bidders' jitters. He is currently unwilling to specify the sums involved.

Their hope is that the funds will never be called on, and so will not be a real cost, but that the guarantee's presence will enable the bidder to remove this element of risk.

Leeds is waiting to hear whether the Department for Transport will accept the revised bid, but it is unclear when that decision will be handed down.

South Hampshire faced a similar problem with high-risk pricing, says project director Steve Nicholson, but had far less scope to make savings from technical changes.

The proposed line would link Gosport, the UK's largest stationless town, with Portsmouth. The towns face each other across Portsmouth Harbour, beneath which a 1 kilometre tunnel would be dug.

Tunnelling carries a high proportion of the cost but there would be no point in building any of the line without it. With the rest of the cost comparatively small, the only possible saving was to remove a short loop proposed for Fareham.

Nicholson says: "Market appetite is well down for light rail, as operating costs seem to always go up."

South Hampshire's market proposition was a 30-year design, build, finance and operate concession. The revenue was to come from fares and the bidding competition looked for the minimum claim on public subsidy for the service delivery payment.

As in Leeds, the market "put in large elements to cover risk if fare revenue was not as large as expected", Nicholson says.

Original bids came in at 270 million, but government PFI and grant support was only 170 million.

The reduction in Fareham and some technical changes shaved off 70 million, and the rest is "de-risking" of the fare income through a revenue guarantee similar to the one in Leeds, Nicholson says.

The councils feel they have some advantages over Leeds in that it is difficult for buses or cars to compete with a system that links two sides of a waterway.

"Leeds has a city centre system and people can run buses to compete, but our trams will run across a harbour between two congested peninsulas and we have journey times of five minutes against 45 minutes, so that is a pretty strong factor in our favour," he says.

The two councils can also promote tram ridership by, for example, designing parking and traffic policies to encourage its use and discouraging car commuting.

Local government has its own consultancy for public-private partnerships, called 4Ps. Senior executive Andrew Hugill is familiar with the gripes about PFI appearing to involve huge contingencies for risk that would not arise were the project wholly funded from the public purse.

But he points out that financing infrastructure from public money does not somehow make risks vanish: rather, there is a tendency to ignore them.

As he explains: "Whatever option a local authority takes, it is clear that risk is a vital element and pricing it is an important factor, preferably one that is costed from the start.

"PFI has led to a perception that it brings about higher risk, but risk is fundamental and inherent and has to be considered even if other options are pursued."

Light rail's selling point is that its clean, comfortable and modern style appeals to people who would not otherwise be seen dead on public transport, and so cuts car use in line with government environmental policy.

But another government policy demands the use of PFI to gather in private funding for public works, and with many of light rail's benefits, including urban regeneration, being only indirect, the two do not always sit happily together.

It remains possible that the government will scupper these plans, and if it does, the projects will again have to be rethought.

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