EKN backs financing of Bus Rapid Transit system in Bogota

The growing urbanization across the world poses a challenge to city planners faced with the task of creating sustainable infrastructure to accommodate the transport needs of an ever-growing number of dwellers. Constructing an underground rail network from scratch takes a long time and may carve a deep hole in a limited infrastructure budget. Instead, the Bus Rapid Transit (BRT) concept has become the system of choice in a growing number of cities, particularly in Latin America, by offering a transport mode that combines the capacity and speed of a metro with the flexibility, lower cost and simplicity of a bus system.

The concept includes designated bus lanes, right of way in intersections and elevated platforms in the middle of the street, accessed via a footbridge, where passengers board and buy tickets in advance in order to save time and keep free riders out. The purpose-built buses are often articulated, or even bi-articulated, to maximize capacity and minimize emissions per passenger.

Biggest contract in ten years

As one of three manufacturers worldwide capable of supplying purpose-built BRT buses, Volvo secured its biggest contract in Latin America for the past ten years, in delivering 700 buses to the TransMilenio BRT system in Colombia’s capital Bogotá. Also, Swedish bus manufacturer Scania will deliver over 700 buses to the project.

Widely seen as the most advanced BRT system in the world, TransMilenio has over 100 bus stations and transports 1.6 million passengers in 266 districts every day. “In Latin America, Volvo was early in developing BRT systems”, says Marcos Hepp, Director Structured Trade Finance & Credit Management at Volvo do Brasil and based in Curitiba, Brazil, where it all took off:

“The city of Curitiba launched the continent’s first BRT system in the 1970s, when the mayor introduced a plan to grow the city by running bus lines to areas where few people lived at the time. He invited Volvo to develop a type of bus that would fit the requirements of what we now know as the BRT concept, such as articulated buses adapted to elevated platforms.”

His vision was a success and Curitiba became a role model for public transport planners from all over the continent, who visited the city to learn more and to replicate the system.

“To Volvo, it was a fantastic opportunity to market our brand and associate it with a successful public transport solution”, adds Hepp.

Routes put out to tender

TransMilenio in Bogota awards contracts for the operation of different routes to external operators by putting the routes out to tender. The winners of the bids order the number of buses required to service their allotted routes. Financing of such a massive contract, however, came to rely on financial institutions outside the country for several reasons:

“Projects of this magnitude, where the borrower is a newly established bus service operator with a limited business record are often outside the scope of local banks, with loan amounts and tenors beyond their capacity or appetite for risk”, notes Hepp. “And, since the service operators receive their revenues in Colombian pesos, whether from ticket fares or funding from the city budget, it is a great advantage to borrow in local currency.”

Funding in local currency reduces the currency exposure and minimizes the risk for operating companies and their lenders. By matching the currency of assets and liabilities, clients can mitigate the impact of foreign exchange volatility on public budgets and development programs.

Volvo invited EKN to partner up at an early stage. Eventually, Banco Santander in Spain provided the necessary financing of 440 Volvo buses, backed by guarantees from EKN. (The remaining 260 buses delivered by Volvo were financed via an investment fund.)

“To us, it is crucial to have EKNs backing and EKN played an important part in making the deal happen. Landing a project of this size is not possible without well-structured financing and the availability of local-currency borrowing was a cornerstone in making the project viable”, Hepp concludes.

At EKN, Senior Underwriter Oscar Entrambasaguas was involved from the project start, and explains why guarantees were an absolute necessity in securing the project:

“Few banks would grant a loan of this magnitude to a medium-sized company with a limited track record without a guarantee to back it up.”

How, then, does EKN evaluate the risks involved?

“We closely analyze the operator’s business model and experience to assess the level of default risk involved. The payment from the city to the operator is partly based on the latter’s performance and TransMilenio is allowed to deduct 5 percent of the proceeds for each month the services delivered fail to reach the agreed level.”

“I am very optimistic”

If an operator fails to deliver the stipulated service level, the city may exchange it for another operator, and given the importance of public transport the buses will stay in operation. The involvement of the city of Bogota and the innovative structure, to some extent ringfencing the owner of the bus fleet, has been imperative for EKNs support.

From a sustainability perspective – and given the disastrous consequences to air quality in megacities where inhabitants choose private cars above public transport – BRT is a solution for the future. Constructing a new underground rail system costs on average ten times as much as launching a BRT system and may take ten times as long to complete.

“I am very optimistic about the future for BRT. EKN as well as Sweden has an important part to play here, particularly since two of the few bus manufacturers that are capable of delivering BRT-adapted buses are Swedish”, Entrambasaguas concludes. “EKN has developed competence in the area of financing BRT systems, which may benefit Swedish suppliers. In participating in bidding rounds related to future BRT launches, it is important to have financing in place from day one.”