Financing urban and intercity transport in the North

Cities and large urban areas usually allocate large proportions of their budgets to fund the construction of the vital transport infrastructure, often in combination with borrowing. Funding infrastructure and public transport projects through the budget requires balanced, economic and ecological long-term planning, including factors such as availability and utilising land and space, estimates of population growth, general economic development and environmental requirements.

In the same way, planning the financing of transport investments through borrowing needs to take into account the life-span of the given infrastructure and equipment. Financing investments with long-term loans is often an indispensable means in urban financial planning, especially when necessary infra – structural backlogs become insurmountable, and yes, also during times with diminished budgets. Planning is the key for successful investments, where the will to borrow and the ability to repay the loans go hand in hand, creating the necessary credibility.

NIB’s infrastructure financing

For over 35 years, the Nordic Investment Bank (NIB) has been financing infrastructure, energy, environment and transport projects. Financing environmentally sound urban transport has also been a natural part of the Bank’s activities, comprising a variety of projects. As the name indicates, the NIB’s main operational arena is the Nordic countries and it was established by Finland, Denmark, Iceland, Norway and Sweden.

Nordic cooperation was built upon the five countries’ common interests, history and culture. In 2005, the NIB was further strengthened when three Baltic States – Estonia, Latvia and Lithuania – became members of the Bank. The Bank is also involved with financing important projects in other countries of the Baltic Sea region. Albeit to a lesser scale, the NIB operates in Brazil and China and a few other countries, supporting the Nordic-Baltic region’s businesses in gaining access to markets in these countries. The NIB is an International Financial Institution (IFI) funding itself on the international markets, and holds a ‘triple A’ rating by the international rating companies.

The mandate

Operating on a clear mandate from the Bank’s owners, the NIB constantly seeks new oppor – tunities, receives loan proposals and cautiously selects new projects to finance that support the competitiveness of the Bank’s member countries and promote sustainable growth and environmental improvement. Urban transport has played a significant role in the Bank’s activities for this particular reason, as these projects are normally regarded as enhancing the economic sustainability of cities, creating access within, as well as, to and from urban areas. Moreover, such projects frequently bring about substantial environmental benefits. The longlasting traits of such projects and the accomp – anying funding, needs to correlate with the Bank’s exceptional capability to provide longterm lending facilities of 30 years or longer.

Variety of projects

Enhancing lending towards transport, including logistics and communications, has been one of the NIB’s goals in recent years. In 2011, the NIB disbursed loans to the transport sector alone to the sum of approximately €365 million, corresponding to 20% of the Bank’s annual lending, which, in aggregate, was close to €2 billion in 2011. Many of these projects are considered state-of-the-art examples of Scandinavian urban infrastructure.

The NIB also takes pride in having participated in many of the main interregional transport projects in the region, both road and rail, located on the so-called TEN-T network and the Nordic Triangle, stretching from Copenhagen to Oslo and Stockholm and onwards to Helsinki and St. Petersburg. Three of these projects are located on, or are connected to, the E18 motorway in Southern Finland, all of which are built, financed and operated under the Public Private Partnership (PPP) form. In addition, the NIB financed three successful PPP road projects in Norway which have been in service for the past 10 years.

Two additional air terminals of significance for the region are currently under construction, partly financed by the NIB – at the Pulkova Airport in St. Petersburg (also a PPP project) and at Gardermoen Airport close to Oslo. In recent years, the NIB has also been financier to many of the key harbours in the Baltic Sea region, such as Klaipeda in Lithuania, Riga Freeport in Latvia, Muuga Port in Estonia and the Port of Gävle in Sweden. Last but not least, both state owned and private rail operators in Sweden, Finland and the Baltic countries have benefitted from the NIB’s funding, whether financing construction of rail infrastructure or financing new train sets and equipment.

Financing the West Metro

The West Metro (Länsimetro) in Helsinki is one of the NIB’s recent undertakings as a financier of urban transport. It is a monumental project, connecting the western part of the greater capital area (Espoo) to the existing east-bound Helsinki Metro line which dates back to 1982, through the city centre. The new 13.9km metro line will be built mostly underground and when completed in 2015, the project will further strengthen the already robust urban infrastructure in the greater Helsinki area, and hence the region’s competitiveness. The total cost of the project is estimated at €780 million.

The state will contribute 30% of the cost, while debt financing covers the rest. The NIB has agreed, with Länsimetro Oy, to establish a joint project company owned by the City of Helsinki and Espoo, on a loan of €120 million over 30 years. The European Investment Bank (EIB) also provided the company an additional facility. The exceptionally long-term financing facility is considered the greatest value added by the NIB, as it enables the cities of Helsinki and Espoo, throughout the lifetime of the projects, to fulfil their transport and traffic plans and to be able to keep the public transport tariffs at a moderate level.

The NIB always focuses on the environmental sustainability of projects and so the Bank carries out an environmental study before a loan is granted. In this case, the West Metro will bring about substantial environmental benefits. Once the West Metro is completed, the current bus traffic from the southern Espoo municipality to the centre of Helsinki along the city’s Western Motorway will be discontinued and feeder buses will transport passengers to metro stations.

Railway transportation causes considerably lower emissions per person, per km in com parison with road travel. For the transportation of one passenger, the metro only needs one-third of the energy required by a bus. The project results in an annual decrease of 7,400 tonnes of CO2 due to the transfer of passengers from road to rail based on the traffic calculations. CO2 and NOx emissions will also be reduced and the reduction of traffic congestion in the city centre of Helsinki is also one of the major environmental advantages.

Renewing rolling stock

The NIB frequently finances the acquisition of new locomotives, trams and train sets, because such projects correspond with the Bank’s environmental mandate perspective and policies. At the same time, rail as a means of public and goods transport, has been favoured in transport plans and policies by most of the NIB’s member-countries, and is also reflected in the EU’s White Paper on Transport issued in 2011.

The NIB’s most recent intercity transport loan, amounting to €83 million with a 10 year maturity, was granted to AB Transitio in April 2012, to finance the acquisition of 10 new train sets delivered by Alstom. AB Transitio is a Swedish private limited liability company, owned by regional Public Transport Authorities (PTAs) and 19 county councils. The company acquires, finances and administers regional trains for the PTAs. Owning or leasing and managing rolling stock, AB Transitio in turn leases these to the regional PTAs and their operators. With a common pool of extra trains, the availability can be secured in a costefficient way.

The new trains will use less energy than the older models due mainly to lower air resistance and better recovery of break energy. Travel time between cities will decrease and the departures will be more frequent. Passenger capacity will be increased, and faster transport alternatives are considered as contributing to the com – petitiveness of the region which will benefit from the project. Last but not least, shorter journey times make rail traffic more competitive against other alternatives, reducing the climate related burden.

Preserving urban attractiveness and the environment

Every project has its own traits that need to be evaluated and analysed individually, both by the borrower and the lender. The structure of the transaction, repayment capacity of the borrower, and guarantees if applicable will, among other factors, determine the loan amount, repayment period and cost of borrowing. The question a municipality, operator of a public infrastructure, urban transport company or, as a matter of fact, any given borrower must ask, is whether long-term debt financing is necessary to realise or accelerate the necessary investments. The answer often boils down to how the attract iveness of the urban or regional area and wellbeing of its citizens and businesses is secured, thereby ensuring the project’s relevance, preserving a sustainable environment and enhancing urban/regional competitiveness. The Nordic Investment Bank finances Nordic and Baltic projects that fulfil these criteria, supported by its extensive experience with many of the region’s finest urban transport projects.

About the author

Stefan Fridriksson studied business administration and economics at the University of Iceland and received a Master’s Degree in Microeconomics in 2001 from the Copenhagen Business School, specialising in logistics and supply chain management. From 1999 to 2003, Stefan promoted trade procedures and e-commerce in the government and the private market. From 2003 to 2007, Stefan was Head of Division within the Ministry of Finance of Iceland, assisting in policy making and managing the privatisation of public entities and stakes in companies held by the Treasury and supervising the implementation of the EU’s Directives on public procurement in domestic legislation. Stefan administered PPPs and various tasks regarding the interaction and collaboration between the public and private sectors. Stefan was a representative in a number of ministerial policy committees and task forces concerning these issues during the time, including new ways of financing transport projects. From 2007, Stefan has been employed at the Nordic Investment Bank (NIB) as a Senior Manager within NIB’s Lending Department. For the past two years he has focused on developing investment lending in the field of transport, logistics and communications.