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Metro Rails: where's the money? And VC, eh? What about it?

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  • Eric Britton
    Dear Value Capture Friends, There is a discussion going on over at the New Mobility Agenda (http://www.newmobility.org ) where
    Message 1 of 1 , Aug 9, 2006
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      Dear Value Capture Friends,


      There is a discussion going on over at the New Mobility Agenda (http://www.newmobility.org) where they know a great deal when it comes to matters relating to transportation but seem to come up a bit short in terms of how you put value capture to work to recoup all value which is created by public investments in and around the transport sector.  I have extracted both the main reactions as well as the original article (which took urban rail investments as its point of departure, but I would hope that we can keep our remarks on a more general plane. . . all forms of public investment via the transport sector which enhance value.)


      It would be interesting to have your reactions and views to this – either to me,  to this list, or best of all perhaps to both. The address of the New Mobility Café is NewMobilityCafe@yahoogroups.com.


      I look forward to this, because I have for years felt that this simply had to be part of the public policy toolkit, at the very least when the taxpayers dollars are the ones who are going the work (or at least some key part of it).











      From: "Lee Schipper" <SCHIPPER@...>
      Date: Wed Aug 9, 2006 1:47 pm
      Subject: Re: [NewMobilityCafe] Metro Rails: where's the money? Where's the property?


      There is ample evidence of the same kind of value gain along the Trans
      Milenio corridor in Bogota. There is no REAL BRT in the US (perhaps
      parts of Los Angeles not withstanding) to compare with this kind of
      improvement.  The beautiful apartments along the main line in Curitiba,
      some there before the line went in years ago, some built afterwards, are
      also evidence that ANY reliable fast transport stimulates growth in
      housing, etc., particularly if the density is high.  Los Angeles has
      been talking to developers for a long time to beef up the nodes around
      the Wilshire and Valley BRT lines.
      Contrast with my real home town in Beserkeley CA, who made it clear
      over the last 30 plus years that there would be ABSOLUTELY no
      development of property around the N. Berkeley BART site, something we
      call a parking lot with rails. Since dozens of homes were removed to
      create the BART station and parking lot, the net "gain" to the
      relatively low-density, single family home community near the stop was
      probably negative. Berkeley is still fighting over whether to develop
      around the s. Berkeley BART station, and El Cerrito Plaza, one stop
      north of n. Berkeley, almost died over the decades of neglect before
      finally being rebuilt, with (chuckle) Trader Joes as the centerpiece.
      Other parts of the BART system are equally outrageous, with virtually no
      development on top of or close by stations, but lots of parking for
      lucky and wealthy suburban commuters.  Some stations in DC are like
      that, notably Vienna Va (you emerge and ask "Where's Vienna" and no one
      knows" and many other outlying stations.
      In other words, its all a matter of luck, planning, and many other
      factors whether there is sizeable development, who gains, or who
      Unfortunately there is another side to this value gain. I live 2 blocks
      from the Cleveland Park Metro in DC. Comparing house prices close (i.e.,
      within four blocks) and farther way showed a huge gradient. Its one
      thing if you already own the house (or you own lots of undeveloped
      property, such as all those real estate magnates who want billions of
      OPM ("other peoples' money) to be spent for rail to the Dulles airport
      so they can cash in) --- but what if you are one buying in and find you
      have to pay the $200K extra. Do a present value on that extra cost
      against the time and/or fuel saved. Is it worth it or would it be
      cheaper to live father away and use a car?  My lovely CP neighbors have
      fought much densification here and at other stations -- even worse, were
      not allowed to build up on the existing 50 year old strip mall (the very
      first in the US) that is astride the Metro Station.  Contrast that with
      Bethesda (six stops northwest) or Silver Spring (15 stops in the other
      direction, NE DC just in Maryland) where huge apartment developments
      really make these two town-lets good examples of transit metropolis that
      Bob Cervero has written about.
      In other words, its all a matter of luck, planning and who opposes...
      Lee Schipper
      Director of Research
      EMBARQ, the WRI Center
      for Sustainable Transport
      Washington DC
      +1202 729 7735


      -----Original Message-----
      From: NewMobilityCafe@yahoogroups.com [mailto:NewMobilityCafe@yahoogroups.com] On Behalf Of Richard Layman
      Wednesday, August 09, 2006 1:24 PM
      To: NewMobilityCafe@yahoogroups.com
      Subject: Re: [NewMobilityCafe] Metro Rails: where's the money?


      This was my original reaction to the article as well.  In large part, public investment, especially in transit, is to spur additional private investment.  In North America anyway, I think it's unlikely that BRT will do so, while there is no question that rail-based projects do. 

      In my neighborhood for example, which is maybe 1/6 of the area impacted by the new "infill" station, the
      New York Avenue red line subway station in Washington, DC:

      1.  Houses rose a minimum of $200,000 in value between the time of the announcement and opening of the station.  That's a rise of $350 million in property value.
      2.  Construction projects for between 2,000 and 2,800 units of condominiums are in process now also.  (Some were announced beforehand, but for years and years had gone nowhere.)  Arguably, separating out previously announced projects, this is worth $1 billion.

      And this is but 1/6 of the total geography impacted by this station.  And the station cost $120 million to build.  Granted the red line had already been built, costing billions. 

      (Other examples include the construction along the Hiawatha Line in
      Minnesota, and the experience of Houston and Dallas.  There is a chapter in the new edition of _Geography of Urban Transportation_ on this topic, although I do not yet have this book.)

      And speaking of depreciation.  Buses wear out and need to be replaced.  While it is true that train cars wear out too, they are usually refurbished, and last for decades.

      U.S. transit systems have "problems," is that most of the value captured from transit investment connotes to private investors.  Unlike HKT and the Japanese Railway system, U.S. transit systems aren't active property-portfolio developers, and therefore lose additional revenue streams that could be used to "subsidize" transit, just like transit was often developed to spur housing development in the 1800s and 1900s.

      Richard Layman
      Washington, DC

      Roland Sapsford <roland@actrix. gen.nz> wrote:

      Yes - I find the argument about property development unusual as well.
      Most motorways projects have aided sprawl in part because the motorways
      have been provided gratis as access to greenfields spaces. I agree with
      Erics logic below in relation to property development. However I don't
      know the circumstances of the specific case that started this debate -
      it may well be that, for example, low-income accommodation or heritage is
      being destroyed.

      Best wishes
      Roland Sapsford

      Eric Bruun wrote:
      > Boy, I don't agree with this article at all.
      > First of all, much of rapid transit investment has no depreciation. Most
      > tunnels that were built 100+ years ago are more valuable today than they were then. This is an example
      > of sustainable development, even if initially costly.
      > Second, what is wrong with using real estate funds to pay back the rail investment? It is the rail investment
      > that added value to the property in the first place. Why should there be a windfall to external developers?
      Hong Kong's Metro and Japanese railways have always been real estate developers. In fact that is how most
      > of the original streetcar lines got started -- as means to open up real estate.
      > Eric Bruun

      Metro Rails: where's the money?

      Posted by: "Eric Britton" eric.britton@...   fekbritton

      Mon Aug 7, 2006 9:54 pm (PST)

      Metro Rails: where's the money?

      Bus Rapid Transit makes more
      <http://www.financia lexpress. com/fe_full_ story.php? content_id= 136535> financial
      sense as an urban transport system

      <http://www.financia lexpress. com/about/ feedback. html> RAMESH RAMANATHAN

      Posted online:
      Tuesday, August 08, 2006 at 0000 hours IST

      http://www.financia lexpress. com/fe_full_ story.php? content_id= 136535

      E Sreedharan, the driving force behind the Delhi Metro, is a living legend-a
      remarkable engineer. He delivered the Delhi Metro on time, within cost, and as a
      example of how public infrastructure ought to be built. In a country parched for
      projects that move from conception to delivery with no glitches, he is a shining
      example of how to do it right.

      Unfortunately, Sreedharan is not a magician. No matter what he does, he can't
      make the Delhi Metro's financials work, because the numbers don't add up.

      Phase 1 cost Rs 10,000 crore for 64 km - a whopping Rs 150 crore/km. With 66%
      debt financing, interest cost at 8% works out to Rs 550 crore p.a. And principal
      repayment would be Rs 500-600 crore p.a., assuming a 10-15 year repayment

      Where are the revenues coming from? Last year, the Metro had operating revenues
      (i.e. from passengers) of Rs 113 crore. Operating expenditures were Rs 102
      crore, leaving barely Rs 10 crore as surplus before interest. And one other
      painful item: depreciation. When you build a Rs 10,000crore asset, depreciation
      can really start hurting. This was Rs 200 crore last year, but will balloon .
      Which means that the Metro is suffering massive losses, even before interest
      expenses, forget principal repayment. There is no way the Delhi Metro can
      generate surpluses. Ever.

      The only solution to this fiscal problem is to find alternative sources of
      <http://www.financia lexpress. com/fe_full_ story.php? content_id= 136535> financing,
      which is what Delhi Metro has done. They are now developing real estate-a
      six-hectare property at
      Shastri Park, 93 acre at Khyber Pass, etc. Last year,
      one-time income from real estate came to Rs 300 crore, almost three times that
      which the Delhi Metro was originally set up for, mass transit. The reality:
      Metro Rail projects are financial white elephants.

      Who is <http://www.financia lexpress. com/fe_full_ story.php? content_id= 136535>
      lending to Metro projects? The biggest - and, possibly, only - lender so far has
      been the Japan Bank for International Cooperation (JBIC). They financed
      Metro over Rs 4,000 crore, and have completed due diligence on phase 2 - debt of
      another Rs 4,000 crore. There is no public data available on JBIC's rationale
      for lending to Metro projects.

      Strangely, just as the financial hole of Delhi Metro is increasing, the Metro
      bandwagon is moving across the country.
      Bangalore has just launched its Metro
      project, Mumbai followed suit a month later,
      Hyderabad and Chennai are busy
      preparing detailed project reports. If the numbers are so bad, why are cities
      interested in these projects?

      Actually, it is not the city governments that get to decide (topic for another
      debate) but their state governments. There are a number of reasons. Urban
      testosterone for one; metros have become a status symbol. But there are many
      other factors at play, which make the Metro lobby a force to reckon with. A
      World Bank report on urban transport in
      India states that our urban transport
      approach is "supply-oriented, and traffic growth-biased. It conflicts with the
      principles outlined in the government urban transport policy statement in a
      number of ways.

      In the short term, it neglects the mobility of low-income and poor travelers,
      especially the non-motorised one..(and) ..favors the most capital-intensive
      public transport modes (metros and other urban railways) which may not be
      warranted by either traffic density and passengers' ability to pay, or their
      budget capacity to pay subsidies in perpetuity."

      Quick Take

      . Delhi Metro is suffering huge losses. And no way can it generate surpluses
      . The only solution is to look for alternative sources
      of financing
      . A Bus Rapid Transit system is possibly a more viable transport alternative

      What is preventing urban transport alternatives from emerging in
      India? One key
      reason, indeed the first reason, the World Bank report suggests is that these
      alternative proposals run counter to "the formidable urban rail lobby", among

      But are there alternatives? Clearly, we need mass transport systems in our
      cities - private cars and two-wheelers are already choking the streets, and
      barely provide 20% of the total travel needs even today. One possible
      alternative is Bus-Rapid-Transit (BRT). Across the world, there is increasing
      support for BRTs. Remarkable scaled up solutions have emerged, none better than
      Bogota and Curitiba in South America.

      A report prepared by Seema Parekh ,et al for 'India Urban Space', a conference
      on challenges in urban
      India, states: "Bogota today boasts of a world-class Bus
      Rapid Transit system of dedicated bus lanes called TransMilenio;
      Latin America's
      largest network of bicycle ways called ciclo-rutas 150 miles long; world's
      longest pedestrian-only street spanning 10.2 miles, hundreds of miles of
      sidewalks many through the city's poorest neighborhoods; and the world's biggest
      Car-Free Day (dia sin carro), during which private vehicles are not allowed to
      enter the entire city of 135 square miles."

      Importantly, from a financial standpoint, the infrastructure was built at a cost
      of about $5.3 million per km (Rs 20 crore, or one-sixth of Delhi Metro). As a
      result, "TransMilenio requires no operating subsidies and earns substantial
      profits for its operators."

      BRT systems make more financial sense than Metros. Ahmedabad seems to think so -
      it is the first Indian city to go for BRT. Jaipur,
      Indore and others are also
      moving in this direction. An alternative is emerging.

      Beyond finances, any urban transport system fundamentally defines the destiny of
      a city for decades, just by virtue of its impact. It is critical, therefore,
      that these decisions be integrated into an overall plan.

      Swati Ramanathan of Janaagraha says: "Introducing any rapid transit system
      without developing a Master Plan with integrated transport as a component is
      like putting the cart before the horse."

      Most public policy decisions are like icebergs. Urban transport choices are no
      different. For those who want to improve the quality of the public debate on
      this issue, the Achilles heel of Metro Rail systems is their finances. Sorry, Mr
      Sreedharan-- I still think you are great engineer.

      -The writer is founder of Janaagraha,which aims at reforms in urban governance

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      Re: Metro Rails: where's the money?

      Posted by: "Lee Schipper" SCHIPPER@...

      Tue Aug 8, 2006 3:52 am (PST)

      Nice example of what can be done with OPM -- Other Peoples' Money!


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