CROST: on the track of affordable tramways

Talk by Lewis Lesley

UCL 4th March 2009

Financial engineering

Tramways compared to bus operations are a trade off between capital costs and labour costs. Capital costs are fixed once made, and tramways have lower operating costs than buses. This was one of the reasons why trams were retained in Germany in the 1950's and 1960's, when there was a labour shortage, to free up workers for export industries. Recruiting and retaining tram drivers is easier than bus drivers. When the Tramlink advertised for 80 tram drivers in 1998, it received over 1000 applications. In many circumstances an operating surplus can be expected, as passenger revenue exceeds operating costs. This surplus can be used to service some or all of the capital investment.

"Cutting cloth" to provide only what is needed for tram operations, is another way to reduce the overall cost. The NAO Report commented that Civic Pride was often a reason for the high capital costs of the "gold plated" UK schemes reviewed. Investing in only what is need to operate trams therefore also makes it possible that all the capital investment could be raised from a variety of private sources. Private investors today get under 3%pa from putting money into a bank, assuming the bank does not fold. A commercially funded tramway would offer investors dividends of about 10%pa, more than enough to compensate for any perceived extra risk ?

The biggest risk in building a new tramway is between permission being granted by public authorities, and the carrying the first passengers. This is a high risk period. Once the tramway is open, there is a physical asset, and a proven revenue stream. At this point the high cost initial funding can be replaced by a new "mortgage" at lower interest costs based on a physical assets, completion and revenue. In any case a privately funded tramway will have a mixture of Loans, Shares and Leasing of equipment, to spread the risk, and reduce the initial debt servicing charges.

Once the tramway is open, then its finances become dependent on patronage and revenue. In London fares are regulated by the GLA, presently about 1 per bus trip. So operating viability depends on economies of scale and the number of passengers. The table below shows the sensitivity of tram operations to passenger numbers.


Table 8 Operating viability compared to forecast patronage (Cross River)

Patronage pa (m)Tram Frequency (mins) Viable CROST income per passenger (£) Compensation per pax (£)
9.9 4.0 2.5 1.5
15.2 3.5 2.0 1.0
18.3 3.0 1.5 0.5
26.4 2.5 1.2 0.2
30.1 2.0 1.0 0
35.5 2.0 0.9 0
39.6 1.5 1.0 0
TRAM Power Ltd economic model

This table shows that a tramway carrying 15m passengers a year would need the same subsidy as London buses presently get. At 18m pa, only 50p per passenger, and above 26m pa the need for subsidy disappears. At 40m pa however operating diseconomies of scale set in, increasing the unit cost per passenger carried.



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