Interview with Rafal Swierczynski, Vice President of the Management Board MPK Krakow.
With over 760,000 citizens, Krakow, the second largest city of Poland, has a dense network of trams and buses and supplies efficient transport services. The tram network is made of 25 lines with a length of 90 km, including the underground rapid tram tunnel. For the development of the public transport system, the authorities have considered the development of a metro network, but they have abandoned the project because of financial problems and have instead adopted a development plan for the rapid tram network. With all these hypotheses, local authorities have launched a referendum which has also included the problem of the metro construction and the outcome will have a significant impact in the decision-making process. The city’s mobility system relies on public transport as 73% of the city’s families declared that they use public transport services (trams and buses) and the market share of municipal transport is 50%, while around 25% of the citizens use personal cars. At present, transport services ensure a traffic of 15 million train-km and 50-55% use the tram of the total number of public transport passengers.
Encouraging results have made the authorities focus their attention to the continuous development of the public transport system and, in 2013, the Municipality announced the programme for the development of a sustainable transport system which also involves the adjacent areas of the city for which an agreement on the organisation of public transport was signed.
Projects on the development of rail public transport system include both the modernisation and acquisition of new trams, but also the extension of the network. EUR 80 Million were invested for a period of 5 years in rolling stock, and up to EUR 160 Million could be invested in the acquisition and modernisation of rolling stock in the next 5 years. The project would be carried out in two phases: the first phase would be completed in 2015 and would include the acquisition of 36 trams, and the second phase, 2016-2019, would include the acquisition of another 36 vehicles. Aside from the renewal of the fleet, MPK wants to modernise 10 trams and the company’s objective is to renew 55% of the rolling stock fleet by 2020.
The principal funding source is depreciation, the amount of which is included in the fees for transport services rendered. We have long-term public transport contracts signed with the City of Krakow.
Other significant investment funding sources are EU funds. The company’s own contribution to the projects is estimated at minimum of 50%. Obviously, bigger share of the co-financing means broader investment schemes. Presently, the company is looking forward to an approval of an increase in the level of the co-financing to 75%, which would allow it to buy 10 trams more without increasing our debt level. Moreover, another financing source are loans and EBRD and EIB know the company’s investment plans and the banks have positively evaluated the implemented projects. Mr. Rafal Swierczynski, Vice President of the Management Board MPK Krakow, explains in the following interview the importance of elaborating a long-term plan on the development of the transport system, the financing mechanisms the company chooses in implementing investment programmes, as well as future projects that represent the foundation of creating a transport system that would answer to mobility needs.
Railway PRO: Krakow, one of the largest cities of Poland, has a well-organised public transport system with a tram network of 25 lines. What is the market share of this transport mode, compared to the other public transport means? What about the share of public transport, compared to individual motorised transport?
Rafal Swierczynski: First and foremost, thank you very much for the positive assessment of the Krakow tram transport system. Krakow’s municipal transport is appraised very high, as shown by the 9th place in the Forbes magazine’s rank of 2008, which reviewed metropolitan areas across the globe. The Municipal Transport Company (MPK) is one of the leaders in the sector in terms of the quality of services.
We receive information about the share of municipal transport services in the total of passenger traffic from annual market surveys performed by independent bodies. As this research shows, 73% of households declare using municipal tram and bus transport services. The share of the municipal transport in all means of transport amounts to a total of 50%. Slightly more than 25% of Krakow inhabitants travel by a company or a private car, and nearly 21% travel in Krakow by foot. 2.6% of city inhabitants use bikes as a means of transportation.
The fact that the municipal transport accounts for 50% of all transport means is reflected in actual transport work being done. The services are provided by means of 25 tram and 148 bus lines. Actual tram-based transport services cover over 15 million train kilometres whereas the annual bus mileage is nearly 35 million bus kilometres. We transport over 372 million passengers, including local inhabitants and tourists. In other words, we transport one million passengers every day. We estimate that the passenger stream on the trams accounts for 50-55% of all passengers.
Railway PRO: Have the municipal authorities elaborated a public transport development strategy on medium term?
Rafal Swierczynski: In 2013, the City of Krakow announced a sustainable plan for mass transport development for the Municipality of Krakow and adjacent communities, with whom the Municipality of Krakow entered into an agreement on the organisation of public transportation. The document points certain directions for the development of transport and defines forecasts of transport needs as well as their funding sources. It is also worth mentioning that the coverage of net expenditure with the revenues from ticket sales and fees for the use of bus and tram stops and neighbouring communes’ contributions remains high despite an extensive municipal transport investment agenda. In 2008-2012 this ratio was 62-71%.
Obviously, the transport development plan should not be looked into without considering long-term investment plans. We know fields of development both regarding the delivery of new tram lines and new road-based services. Due to the legal and organisational environment, including the fact that the Company has a status of an internal entity, as set forth by the EU Regulation 1370/2007, the strategy of the Company on municipal transport services has been entirely dependent on Municipa-lity of Krakow’s public transport policy.
Railway PRO: What is the estimated value of necessary investments for implementing this strategy? Have you identified financing sources?
Rafal Swierczynski: Transport policy objectives determine MPK’s activities concerning planned investments. The total value of the bus and tram fleet purchase projects by 2020 will amount to about PLN 200 million (EUR 48 Million) The projects aside, our own capital expenditures amount to EUR 10-12 million. In a nutshell, the main objectives by 2020 are the replacement of buses so that the average age of a bus should not exceed 6-7 years. When it comes to the tram fleet, we seek to keep the minimum ratio of new trams at the level of 55% while at the same time keeping all other trams fully modernized.
The principal funding source is depreciation, the amount of which is included in the fees for transport services rendered. We have long-term public transport contracts signed with the City of Krakow. We cover 100% of the tram-based transport services market and about 90% of the bus transport market.
Other significant investment funding sources are EU funds. Our own contribution to the projects is estimated at the minimum of 50%. Obviously, bigger share of the co-financing means broader investment schemes. Presently, we are looking forward to an approval of an increase in the level of the co-financing to 75%, which would allow us to buy 10 trams more without increasing our debt level.
The third funding source is bank loans. Debtwise, our financial standing is assessed by EBRD and EIB, institutions familiar with our investment plans and appraising their implementation positively. For MPK, bank loans are a kind of ‘bridge’, the period of loan repayment being 7-10 years. This apparent paradox can be easily justified with the relationship between the loan repayment period and the depreciation period. Tax depreciation for tram rolling stock is 5-7%, and in the case of the International Accounting Standards – 3.3%. Thus, the gap between the loan period and the depreciation period is, subject to depreciation rates adopted, between 10 and 20 years. In other words, bank loans do not cover own contribution for the whole operating period of the fleet, hence their bridging character.
What I think of as a very important factor in finance management is the use of derivatives, both options and futures. Unfortunately, in 2008, several dozen companies made many millions of losses on EUR, USD and CHF foreign exchange contracts as their spec positions were left open. These events resulted in a stagnation of the derivatives market, including the public corporate sector. When used only as risk-mitigation instruments, derivatives related to fuels, electric power, foreign exchange rates, inflation and interest rates, may play a significant role in reducing possible losses and thus retaining company’s own funds. My calculations show that the use of derivatives for the past couple of years would have allowed MPK to save about EUR 5-7 million. In that case, the company could deploy more investments and reduce operating risks.
Railway PRO: The authorities have considered the construction of a metro system for developing urban rail transport, but the plan has been abandoned because of financial constraints. A plan on developing an underground rapid tram network was adopted instead. What is the stage of this project?
Rafal Swierczynski: It is true that the problem with the Krakow underground project is the high costs of development and ensuring maintenance. The 25th of May this year saw a referendum among inhabitants of Krakow, which included a question about the underground. The results of the referendum will have a significant impact on subsequent works on this project.
Independent of the underground development plans, a plan for the development of the so-called pre-underground was also drawn up several years ago. This plan envisages development of additional Krakow rapid tram lines along with tunnels and flyovers, all of them enabling fast and collision-free tram-based transportation, especially in the city centre.
Railway PRO: What does construction of the underground rapid tram network imply and what are the investments necessary?
Rafal Swierczynski: Above all, it is worth mentioning that the entity responsible for development of the Krakow rapid tram network is the Municipal Infrastructure and Transportation Board. It is an entity making decisions on flagship investments related to Krakow transportation. Certainly, the rapid tram project will see progress depending on the funds available for investments and the level of co-financing for the projects from EU funds.
A good example of investments as part of the rapid tram network development is the new track to be delivered between Lipska and Wielicka street. This project has a significant impact on the layout of the transport system. The delivery of the flyover above the tram track will reduce the time that passengers of several big Krakow residential estates take to arrive in the city centre. I believe that this will encourage drivers to leave their cars at home and use trams instead. This will reduce car traffic. It is another step in cutting down on the emissions and improving the purity of Krakow air. Implementation of such investments will result in an increasingly more efficient and comfortable public transport.
I believe that in terms of investment priorities, travel comfort is just as important as efficiency of the transport system. Benefits from implementing this kind of projects translate into the amount of passengers and thus the revenues. Research projects investigating the transport market show that for most passengers, travel efficiency, that is difficulty and time of travel, should be inextricably bound with the comfort of travel. To satisfy our passengers’ needs, we conduct numerous renovation projects regarding travelling comfort.
Railway PRO: The programme on improving rail transport has focused on the acquisition of new trams. Over the next 5 years, MPK will focus on projects for the renewal of the fleet. What is the stage of this future project? How many trams will be bought and what would be the cost of the contract? Can you provide details on the call for tender and financing sources for this programme?
Rafal Swierczynski: Presently, we are implementing a purchase project concerning 36 trams, each over 42 metres long, and 40 stationary ticket vending machines. Based on our information, the Centre of EU Transport Projects (CUPT) might be expected this quarter to issue an approval of co-funding the project with EU funds. The company to deliver the trams has also been selected: namely, the Bydgoszcz-based company Pesa. We envisage that the deliveries of the tram will end at the latest in September 2015. As we purchase the new trams, 108 old 105N cars will be retired. The value of the contract is almost EUR 70 million.
Moreover, we have launched works on another purchase project for 36 trams, 32 metres long each, as well as redevelopment and renovation of the facilities at the tram service station in Nowa Huta. Simultaneously, at the same location, we want to deliver a charging station for 30-50 electric buses and to purchase those vehicles. The estimate net value of the tram project will be over EUR 85 million.
Railway PRO: Is MPK’s objective by 2020 to modernise the entire fleet of vehicles or are programmes on developing the existing fleet also included?
Rafal Swierczynski: For many years, MPK has sought to keep the fleet as fresh as possible by buying new vehicles but also by renovating the trams it already has. The amount of MPK’s annual own capital expenditure is about EUR 10-12 million. A significant part of this concerns trams. For example, the renovation projects conducted in 2013 concerned 17 N8, GT8S, EU8N, C3 and E1 tram cars. For 2014, we envisage a similar scale of investments.
As part of the renovation projects, N8 and GT8S vehicles took on a new and original external look, especially in the front wall areas, they were fitted with air conditioning systems in passenger compartments and driver’s cabins, new sliding plug doors, a ramp wheelchair platform within the low-floor section, an innovative interior illumination solution based on LED sources, and a chopper-based start-up and breaking system marked by a lower power consumption, starting-up and breaking fluidity and a wide speed adjustment range.
As for the renovation of EU8N cars, these units were fitted with new middle floors and air conditioning systems and their passenger compartments was thoroughly renovated. C3 and E1 cars purchased in Vienna were renovated in a smaller extent. The outcomes of the renovation are new interior fittings on the trams, a new illumination line, an on-tram ticket vending machine, electronic boards for passenger announcements and a voice system announcing upcoming stops.
Railway PRO: What is MPK’s strategy to increase public transport share against individual transport?
Rafal Swierczynski: I am very glad you have posed this question. MPK’s efforts significantly increase the demand for collective transportation services in Krakow. The company has a pro-customer policy. In our view, the ‘Passenger’ equals the ‘Customer’. Viewing individual transport as its competition, MPK needs to commit to this area of the ‘fight’ for the customer. To strengthen our competitive edge, we will seek to raise travel comfort and safety. As independent quality research run among our customers shows, most passengers appraise our services as 7-8.6 points on the 0-10 points scale. Although it is a high score, we are not satisfied with that result. Therefore, we are further pursuing our efforts to improve passengers’ comfort, as I mentioned before. It is worth mentioning that we deliver high-quality services while keeping financial factors stable.
Additionally, we implement environmentally-friendly solutions, perceived quite positively by Krakow inhabitants due to city’s high level of air pollution. We are the first company in Poland to have launched a regular bus line based on electricity-po-wered buses.
Presently, we are applying for the funds under the Gazela fund for CNG powered hybrid buses run by the National Fund for Environmental Protection.
It is worth mentioning that we have the largest fleet of Euro 6-powered buses out of all Polish companies, and these are vehicles that meet Europe’s most demanding environmental preservation standards. These efforts are aimed not only at curbing environmentally-harmful substances in an effective way. It is also important for us to inform our customers that they support environment and development of proper transport systems by using our services.
I would also like to say ‘thank you’ to the journalists. I believe that you make for an important factor shaping transport policies. On many occasions, I have experienced positive effects of press articles. Promotion of the benefits for the environment, and hence for our customers, made implementation of our projects easier. Thank you very much for the meeting. It helps us promote public transport and MPK.
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