Related Projects.
High rates of urban development in Latin America over the 20th century has acted as a double-edged sword for its people and the environment. Many socioeconomic benefits have been accompanied by formidable challenges, which governments find difficult to tackle because of a scarcity of resources and proper infrastructure.
One such concern is the rapid expansion of the region’s transportation sector – the fastest-growing vehicle fleet globally, with the numbers set to grow threefold by 2050. Urbanisation and the mass movement of people to the cities has added upward pressure on the demand for public transport, giving rise to the highest use of the bus system per capita across the world. Meanwhile, the industry remains the primary source of greenhouse gas emissions in Latin America. Nearly 230 thousand people died of causes attributable to ambient air pollution across Latin America and the Caribbean in 2019 alone.
As governments develop strategies to cap the surge of fossil-fuel-based vehicles, there has been a strong interest in wholly electrifying public buses as a part of the region’s efforts to transition to cleaner mobility. However, several technical, financial, and policy risks and barriers need to be overcome for the deployment of electric vehicles to gather speed in Latin America. Since the form and intensity of these hurdles vary across countries, BASE has been collaborating with partners to popularise localised e-mobility solutions across the region.
In 2013, BASE joined the Inter-American Development Bank and Bancoldex, a Colombian development bank, in structuring a US $20 million financial product that would cater to Colombia’s plans to adopt the use of low-emission buses. Together, they created a financial mechanism to facilitate the uptake of 270 hybrid buses. Since battery prices make up the lion’s share of the upfront costs for electrifying mass mobility, Volvo, in consultation with BASE’s experts, implemented battery as a service. Under this model, Volvo entered an agreement with bus owners to cover any form of battery upkeep, repair, and changes until the end of the vehicle’s life cycle, estimated to be 12 years, in exchange for affordable monthly instalment payments. Through its extensive network of partners, Volvo ensures that the retired bus batteries are disposed of wp-contentropriately. By introducing this ‘product as a service’ model to secure performance and trouble-free operation, the team brought down the capital costs associated with the electric bus adoption by up to 30%, pulling forward the country’s timetable for moving from diesel to hybrid buses.
Building on the clean air momentum initiated by the government, which at the time of the project was considering mandating the installation of catalytic particulate filters in all diesel buses, BASE conducted on-field calculations to further the cause of reducing Colombia’s carbon footprint. With electric vehicles being nearly three times better at converting energy to kilometres than a combustion engine, hybrid buses were found to save 35% fuel vis-à-vis diesel buses. As a result, electrifying the transport systems reduced the GHG emission from the sector and helped the government curb soot pollution.
To expand on the benefits of the as-a-service model, BASE supported TransMilenio – the Bus Rapid Transit (BRT) network that forms the backbone of Bogota’s public transportation system – with designing a framework and financial instrument in 2019 to facilitate a shift to e-mobility services. Given the high initial expenses of purchasing electric buses, bus operators required new means to acquire sufficient financing to shift to clean mobility. In the case of diesel buses, banks and manufacturers readily offer financing by accepting the purchased bus as collateral. However, the lack of a mature secondary market for electric buses deterred banks from extending similar loans to operators seeking to make the switch.
As a solution, BASE and its partners crafted a novel cost structure under the bus as a service model to disentangle capital and operational risks. TransMilenio (the state-led transport management company) now signs two separate contracts for the operation and the provision of the e-fleet. Consequently, bus operators receive the electric buses with the understanding that they will only bear the operational costs, such as maintenance, repair, charging, parking, among other things. The fees collected from users and other sources of funding allocated to the system pay for the fleet’s provision and its independent operation. At the same time, TransMilenio enters a futures contract with the electric bus providers, backed by the city’s income, to cover costs when passenger demand fluctuates. Thereby, the primary capital risk is transferred to the state.
As a layer of safety, a well-structured stability fund was established to guarantee the transport system income with relatively little risk to the concessionaires. These measures unlocked other financial products, like securitisation, that played a critical part in helping Bogota gain access to nearly 1,500 electric buses. This model has successfully expedited the uptake of electric buses in Bogota and built a more sustainable transportation sector where social and business values are achieved in harmony. Owing to these efforts, Bogota currently has the largest electric fleet awarded outside of China.
BASE has supported similar initiatives in Peru, Argentina, and Costa Rica for technical, financial, and operational analysis and modelling. This has resulted in better remuneration structures for bus operators to adopt e-mobility, deconcentration of risk arising from demand fluctuations between bus operators and local governments, lower energy tariffs on electric buses, and longer concession contracts for electric vehicles. It has further helped identify transport companies capable of investing in pilot projects in different contexts meant to gather information on and improve e-mobility operations and infrastructure.
Our experience designing baselines to enable the widespread electrification of public transportation in Latin American countries shows that there is no one-size-fits-all strategy. Every market has its unique challenges that need to be addressed independently. Working with local governments in designing guarantee mechanisms backed by alternate sources of finances lies at the core of disincentivising the use of private vehicles and fossil fuels without reducing current and compromised public inflows.
