Lessons from Sao Paulo's Metropolitan Busway Concessions Program

In an earlier paper (Policy Research Working Paper 1546), the authors described a pioneer initiative of Sao Paulo's municipal and state governments, to give the private sector a concession on building and operating a number of"trunk"busways. At the time, the Sao Paulo Municipal Government had already awarded a number of busway corridors to private consortia, although the consortia had yet to get the financing needed to implement the investment plan. On the other hand, the state had not yet awarded its first corridor and was still adjusting the bidding documents based on comments received from interested parties. In this paper, the authors describe what happened since then and draw lessons for the future. After a long, successful bidding process, this imaginative and pioneering program launched by the municipality failed to materialize because of problems in getting financing. Possibly the market felt that the risks involved in building and operating system outweighed the benefits and that the Sao Paulo and Brazilian market was not yet prepared to accept such a challenge without better partial risk guarantees. The state learned from the mistakes of the municipality and was successful in the concession of the Sao Mateus-Jabaquara corridor. Among the lessons learned from this project: 1) Private bus operators in Brazil are generally traditional entrepreneurs. They must be taught how to prepare financing plans or at least to get the best advice about putting together a project's financial engineering design. In this case, all consortia turned to BNDES (Brazilian National Social Development Bank) for financing, probably because their loan interests rates were lower than those of commercial banks but also because the concession was with the government. They did not consider other options such as the International Finance Corporation or other private-sector-related development institutions. 2) The Sao Paulo municipality should also have undertaken detailed economic evaluation of the projects, from the standpoint of the region as a whole, including the impact on other modes of transportation and on systems integration. Such analysis is required by all bilateral and multilateral development institutions, including BNDES. 3) When private operators are paid for vehicle-kilometer supplied and when the state collects all revenues and then pays the operators, concession contracts or operating revenues cannot be easily used as guarantees. Before defining tariff mechanism, governments should think through the impacts they might have on financing, since the revenues collected are often the best guarantee that can be offered.