William Blair
  Inside this issue:

Preparing Your Portfolio for Rising Interest Rates
Public–Private Partnership Delivers Major Upgrades for CTA’s Fare Collection
CEO’s Perspective
Taking Stock of the Real Estate Recovery


Winds of Change for CTA’s Open Fare Collection System

Public–private partnership brings state-of-the-art fare collection system to Chicago mass transit.

Since 1947, the Chicago Transit Authority (CTA) has been in the business of getting Chicagoans where they need to go via buses and the Windy City’s famous elevated “L” train. Since 1997, when the CTA introduced its existing fare-card system, the CTA has also been in the business of creating those cards, maintaining the equipment used to read the cards, and processing the payments.

Starting in the summer of 2013, the CTA is getting out of those other businesses thanks to a public–private partnership that William Blair & Company helped structure.

Through a partnership with Cubic Transportation Systems, the CTA is implementing an open fare collection system that makes it more convenient for riders to pay their fares and easier for the CTA to manage the second-largest mass transit system in the United States.

“This new system will put the CTA in the forefront of transit systems across the country,” said CTA President Forrest Claypool.

Equipment challenge creates partnership opportunity

With the CTA’s existing fare card equipment scheduled to become obsolete over the next several years, the CTA faced the expensive proposition of having to raise more than $200 million to replace card scanners for more than 4,000 buses and train turnstiles.

“Upgrading the equipment created several big challenges for the CTA,” said Nathan Flynn of William Blair’s public finance group. “In addition to raising the capital, the CTA would have to take on the enormous operational and technological risk of installing the new equipment. Once the equipment was installed, the CTA would still have the burden of maintaining the equipment and processing all of the payments.”

For a project that presented multifaceted challenges, a public–private partnership provided a solution that worked on multiple levels.

By partnering with Cubic, the CTA was able to upgrade to a state-of-the-art fare collection system while reducing the cost of the project and transferring much of the financial, operational, and technological risk to a private vendor.

As part of the $509 million, 10-year service contract, Cubic is responsible for purchasing and installing the new fare collection equipment, maintaining the equipment, and processing all the payments. The CTA will maintain full control of setting fare prices.

“Being able to shift the upfront capital outlays and operational risk to the private sector is an enormous benefit to the CTA and Chicago taxpayers,” Flynn said.

Added convenience, reduced risk

The CTA’s new fare collection system, called Ventra, will launch later this year and will be completely implemented in 2014. With Ventra, the CTA will be the first major U.S. city to have an “open fare” collection system for its mass transit system.

Riders will be able to pay with a transit card or any personal credit or debit card that is equipped with contactless radio wave technology. Riders will also eventually be able to pay using their smartphones.

While riders will certainly enjoy the added convenience of the multiple payment options, taxpayers will benefit from the cost savings generated by the public–private partnership. By placing the responsibility of installing the equipment, maintaining the equipment, and processing the payments with Cubic, the partnership is expected to generate $50 million of operational savings for the CTA over the next 10 years.

“The CTA originally got into the business of manufacturing the fare cards and processing the payments out of necessity,” Flynn said. “This public–private partnership allows the CTA to focus on its core business of transporting people around the city.”

A vigorous, transparent selection process

Cubic was chosen as the CTA’s partner through a vigorous, two-year process in which the CTA evaluated proposals from some of the world’s leading payment technology companies. As the CTA’s financial advisor on the project, William Blair analyzed the potential cost savings and risk-transfer benefits of each proposal and worked closely with CTA officials and their technical advisers to determine whether each proposal would meet the CTA’s stringent criteria for the new fare collection system.

One important criterion was the need for the new fare collection system to serve the needs of the CTA’s “unbanked” riders. Many CTA riders do not have credit cards or bank accounts, so the CTA required that the new system greatly expand the number of locations where riders could purchase prepaid transit cards using cash.

Once the new system is fully implemented, riders will be able to purchase these prepaid cards at more than 2,000 retailers throughout the Chicago area—up from 700 locations with the existing system. In addition, riders who purchase these prepaid cards can use them as debit cards outside the CTA system.

“The CTA worked very hard to protect the interests of the ‘unbanked;’ this was a huge priority for the CTA,” Flynn said.

Aligning financial incentives

Several other major cities, including Washington, D.C. and Philadelphia, are pursuing open fare collection systems through public–private partnerships (or “P3” transactions).

Tom Lanctot, who heads William Blair’s Debt Capital Markets group, said municipalities increasingly view P3 transactions as the most effective way to complete capital-intensive infrastructure projects.

In addition to eliminating the municipality’s need to borrow funds for the initial capital outlay, P3 structures can also significantly reduce the total lifecycle cost of the project. By putting performance measures in the contract and by making the private vendor responsible for maintaining and operating the infrastructure, a P3 can effectively align the private vendor’s financial interests with the municipality’s objectives.

With the CTA’s Ventra system, part of Cubic’s compensation will be determined by performance measures for areas such as customer service and equipment downtime.

“It creates a huge financial incentive for the private vendor to build the project correctly in the first place and then operate it as efficiently as possible,” Lanctot said.

William Blair has served as financial advisor to some of the most innovative P3 transactions in the United States, including the long-term leases of Chicago’s parking meter system and Millennium Park parking garages. To learn more about William Blair’s P3 advisory capabilities, visit williamblair.com/P3.

One should not assume that the listed client approves or disapproves of William Blair & Company or the advisory services provided.


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