Public Finance Model

In the traditional public funding model, the cost of construction, maintenance and management is covered from public administration accounts. The resources initially come from the public administration budget, i.e. from taxes. Public finance models are primarily used for awarding large grants (e.g. large interchange facilities).

This financing model provides new infrastructures or the maintenance of existing ones, all funded by the public treasury. The works are paid through partial payments, which means that if you have a building budget and as long as the building work is going on, you compare the percentage of the work done with the percentage of the budget, so when you complete the work, you will have 100% of the work done, and you will have pay 100% of the budget of that work.

The public treasury is in charge of building the new infrastructure or the maintenance of existing infrastructure. Typically, the works are paid through partial payments, making use of the full budget over the entire construction period.

Advantages of the public financing model

  • The passengers don’t pay directly for use of the infrastructure.
  • The total cost of management and construction does not include additional financial costs.
  • Coordination and integration with a wider strategy for urban policy, such as integrated mobility plans.

Disadvantages of the public financing model

  • Limitation of the public budget.
  • Blocking off of projects caused by the lack of financing both for the construction of new infrastructures and for the maintenance of existing ones.
  • All the risks are assumed by the government.
  • Lack of direct financial profitability (relation between direct income and project cost)
  • The risks of the investments are linked to the financial status of the administrator

Usually, the main purpose of the funding is regulated and set by legislation. In public funding schemes, the cost is fully covered by public funds and usually the procedures, deadlines and milestones are subject to public information. On the other hand, this model type is much more bureaucratic; it requires lengthy proposals and usually reviewers tend to favour established applicants. Moreover, due to the lack of public budgets, public sector involvement is expected to decrease in some countries.

 


NODES strategic objectiveContribution
Enhance accessibility and integration +
Enhance intermodality 0
Enhance liveability +
Increase safety and security conditions +
Increase economic viability and costs efficiency 0
Stimulate local economy 0
Increase environmental efficiency ++
Increase energy efficiency ++

Good practice

Most common financing models for interchanges in most EU countries, e.g. construction, operation and maintenance of the Athens metro system.

Public Finance Models were extensively used in the past to fund large-scale projects. However, financial constraints on public funds make this type of funding less preferable in the coming years. The Greek experience shows that this model has been used successfully in the past. However, current financial conditions do not favour this type of funding. As a result, more flexible and modern ways of funding should be prioritised.

Application in NODES sites – MIKRA interchange, Thessaloniki

The Thessaloniki metro system has been under construction since 2006. However, the first discussions about the operation of a fixed route system in the city of Thessaloniki go back to 1980. After a number of unsuccessful proposals for EU or private funds, the Greek government decided to construct the Thessaloniki Metro System as a public-funded project. After years of serious delays, the project is scheduled to be completed in 2018. Currently, two lines are being constructed; Line 1, with a length of 9.6 km, and Line 2 (the extension to the eastern part of the city – Kalamaria), with a length of 5.5 km. In total, 17 stations are being constructed. The total cost for the construction of Lines 1 & 2, is estimated at 1,560,000,000 euros (1,052,000,000 euros for Line 1 and 520,000,000 euros for Line 2). It includes the construction of all the stations (17 in total) as well as the tunnels {(9.6+5.5) x 2 = 30.2 km) and the depot. Both the constructor and the operator is ATTIKO METRO SA. The construction contracts have been signed as “design-built” contracts.

Advantages of the tool’s implementation at MIKRA metro station

  1. The same constructor and owner of the MIKRA metro station with the Metro Project. 2. Complementary with other public finance projects in the area (integrated strategic planning). 3. Integrated design approach, similar to the other metro stations (e.g. signage). 4. Operability with other public transport modes

Disadvantages of the tool’s implementation at MIKRA metro station

  1. Financial risks related with the funding capability of the public sector (availability of public funds). 2. Design process is usually performed by public agencies located in the capital city Attiko Metro SA – far away from the project location. Design/planning/operational failures may be observed. 3. Bureaucracy issues, may cause a lack of flexibility for a number of issues related to the operation of the station, such as commercial usage of the shops, marketing initiatives, advertising opportunities, etc.

Potential interchange performance improvement

Intermodality and integration of the project into the urban fabric is likely to be facilitated in a public finance model (integration of different public services by the local authorities).


Resources

The only resource needed is a business model investigation study in order to identify potential financial risks and to conclude which finance model is the most appropriate for the interchange. It is low-cost to investigate the type of funding. It is difficult to convince the decision-makers on these aspects.

References

Kirby, R.F. (1992). Financing Public Transportation. In G.E. Grey & L. A. Hoel (Eds.), Public Transportation (2nd ed., pp 445-660). Englewood Cliffs, NJ: Prentice-Hall. Available online: http://ntl.bts.gov/data/letter_ak/Chapter15.pdf

International Transport Forum (2004). Financing Public Projects in Eastern Europe and Russia. Available online: http://www.internationaltransportforum.org/IntOrg/ecmt/urban/Moscow04/Bruggeman.pdf