The European Investment Bank’s role in financing sustainable urban transport

Since 2000, the European Investment Bank has lent over EUR 17 billion for investment in urban transport projects, mostly for schemes located within the European Union Member States. Established nearly 50 years ago, EIB is the EU’s bank for financing projects that promote the Union’s economic and social policies.

Currently, EIB’s main lending priorities are focused on projects supporting development in the EU’s poorer cohesion regions, construction of trans-European transport and energy networks, promoting innovation and human capital, supporting the activities of small and medium sized enterprises, improving the environment, and ensuring efficient and secure energy supplies. Outside the European Union, the Bank supports projects as part of the EU’s external cooperation and development policy.

In 2006, EIB lent EUR 45.76 billion for capital investment projects, almost 90% of which was in the European Union and the remainder in the acceding, candidate and partner countries. Financing for urban transport schemes amounted to EUR 1.46 billion, a fifth of EIB direct lending in the transport sector as a whole, and 8% of total individual loans.

To qualify for financial support from EIB, any project it finances needs to be proven sustainable both from the environmental and economic standpoints. As few projects are environmentally neutral, a major feature of the Bank’s appraisal is to check that the net environmental impact of every project is acceptable and that suitable mitigation and compensating measures are properly identified.

EIB financing for sustainable urban transport supports European Union transport, environmental and energy policies. Investment in public transport networks is to encourage a shift from private to public transport to reduce congestion. Such projects should enhance air quality and decrease noise nuisance, as well as help tackle climate change by improving energy efficiency and limiting CO2 emissions. Overall, well designed urban transport schemes will contribute to improving the quality of life.

EIB activity in the public urban transport sector

Although the loan volume going to urban transport varies annually and by country as EIB lending is based more on demand than on quotas, the proportional share of financing for this sector has remained similar over the last seven years. Indeed, it is rare for a high-quality metro or light rail project in Europe not to have received funding from the EIB.

Between 2000 and 2006, EIB supported nearly 100 projects in the urban transport sector with EUR 17.34 billion of direct financing. Projects financed included the construction, extension or rehabilitation of public transport infrastructures (metro, light rail or tramways systems) and the acquisition of rolling stock in major cities, for example in London, Athens, Madrid, Lisbon, Berlin, as well as in others, such as Dublin, Mulhouse, Padova, Sevilla, Budapest, Prague, etc.

In the seven years, the largest amount of finance went to projects in Spain: EUR 5.14 billion (30%), with the construction of new metro lines in Madrid (EUR 1.22 billion) and Barcelona (EUR 650 million) taking up the lion’s share. Urban transport projects in France accounted for EUR 2.75 billion (16%), including EUR 380 million going to the extension of the Toulouse metro. Loans in the United Kingdom came to EUR 2.21 billion (14%), of which more than EUR 1.34 billion went to upgrading the London underground network.

Outside the EU, where EIB lending for public urban transport totalled EUR 930 million over the last seven years, the Bank has played a significant role in financing urban mass transit in such cities as Budapest, Bucharest (both now within the EU), Belgrade, Cairo, Tunis, and various mid-sized Turkish cities.

Financing urban public transportation

The challenge for EIB in financing public transport is to give support to solutions that balance the growing demand for mobility with the quality of urban environment. In the newer EU Member States and in the acceding countries this inevitably places limits on the indiscriminate proliferation of new infrastructures and the development and implementation of rational long-term planning processes.

Urban public transport projects are only rarely financially self-supporting and usually face substantial operating deficits. Typically, tariffs have to be at acceptable levels, because mobility is considered a common good and public transport is used as a tool for income redistribution. This may create serious difficulties for local authorities that are not financially strong. The challenge for EIB is to ensure that when it finances such projects, they show a robust economic rate of return.

To meet their financing needs, both for new investment and to cover operating deficits, most cities rely on comparatively discretionary contributions from central, regional and municipal governments. However, there is a growing need to develop new approaches to mobilising needed financial resources, not only to ensure quality of service, but also to increase the supply of services to meet changing societal needs. EIB can play an important role in this respect.

Appraising projects with a view to their financing

In appraising public transport investment plans, EIB takes into account the structuring and general coordination of the operation from a financial point of view. If needed, it will provide technical assistance to ensure that the operation is feasible and fundable. This requires carrying out a detailed analysis of the risks associated with the various phases of the project (design, bidding, construction, and operation). EIB will examine the stakeholders involved in the operation, the potential risks and ways of minimising these risks.

Against this backdrop, EIB conducts a thorough analysis of each project, and its technical experts prepare an assessment report that that includes:

• Justification for EIB funding (EU policy objectives served)
• Additional favourable factors (e.g. innovative character of the investment)
• Key risks
• Recommendations to the borrower, miscellaneous comments, service life
• General terms and conditions applicable to the loan and its disbursement
• Supervision of the contract by EIB (type, content, and frequency of reporting)
• A general assessment of the environmental impact as well as the social impact on the affected residents

To sum up, before a decision to finance is reached, EIB has to establish that the project is viable from an economic, financial, technical and environmental point of view. Project promoters have to prepare adequate documentation that allows the Bank to analyse the relevant project issues. EIB also always carries out an on-site visit with the promoter in order to ensure that the project assessment is as objective and comprehensive as possible.

Funding urban public transport projects through public-private partnerships

The number of projects funded through public-private partnerships (PPPs) is increasing constantly. The great majority of EIB lending for PPPs is in the transport sector, including urban transport. The main attraction of PPPs lies in the increased efficiency and effectiveness achieved by sharing a project’s risks. Risks should be shouldered by those best able to manage them: the construction and operational risks are borne by the private enterprise, while public authorities take on the responsibility for establishing and maintaining a balanced legal and economic framework throughout the life of the project. In addition, PPPs enable public authorities to create public service infrastructure while staggering the burden of their investment over time and, in certain cases, allowing off-balance sheet commitments.

Successful PPPs involve a close partnership among the parties, while keeping a constant eye on the final customer. The public authorities and the private concession-holder must have a clear grasp of the project’s scope, both in terms of its purpose (public service) and its duration (long-term).

Taking this into account, EIB normally analyses public transport PPPs in two distinct stages. First, during the preparation of the bidding specifications, the Bank assists the developer with regard to the financial organisation of the invitation to tender. Second, EIB will validate the viability of the operation once the concession-holder has been selected, and provide the necessary finance.

The Bank works in close cooperation with all the main players: the European Institutions, public authorities, and the private sector. To meet this challenge, EIB has a dedicated unit for giving advice and transferring know-how in the structuring of PPPs. EIB is committed to partnership with all the stakeholders involved in urban public transport projects, whether PPPs or more conventional undertakings. It makes sure that its considerable financial resources are used in the best possible way to enhance the quality of life of Europe’s citizens.