A surge in the provision of public transport is essential to the energy transition. First, because ride sharing necessarily leads to a significant reduction in greenhouse gas emissions, with most estimates centring on something like a two-thirds reduction per passenger per kilometre travelled, and second, because the electrification of public transport vehicles will allow further massive savings.
In its latest climate action report, the UN goes so far as suggesting such a switch is “essential” and estimates suggest global public transport capacity must double by 2030 if the world is to limit global warming to 1.5C.
However, covid-19 led to a significant fall in public transport usage which has never fully recovered. Even today, in New York and London passenger numbers on some days are 20 percent below what they were. As it stands, urban transportation is a long way from where it should be to meet the desired goals. What role can technology and private capital play in bridging this gap?
Electrification is key
When it comes to new technologies in transportation, investors appear to be adopting a cautious approach, which favours straightforward electrification. “Looking at how technologies can be value accretive to existing transport assets without materially increasing the risk profile of business models is likely to be the most important approach,” says Richard Marshall, head of infrastructure research at DWS.
Electrification of public bus networks easily offers resilient income streams for investors. Through the rolling out of electric bus technology and fleet management, and the installation of charging infrastructure at depots, investors can “play a role in the modernisation of a crucial element of urban transit networks and ensure a fleet will meet the requirements of increasingly stringent emissions policies in cities”, believes Marshall.
Likewise, for Andreas Köttering, head of private infrastructure, Europe, at CBRE Investment Management, there is no doubt which technology is the most important for investors in urban transport. “In my view, it is the electrification of urban transport in all different guises, such as batteries on scooters, bikes, buses, ferries, trams and underground trains, as well as charging points. These will continue to offer a growing opportunity set for investors.”
CBRE IM has invested in the provision of electric ferries in Olso, which is an area that has also attracted the attention of Carl Sjölund, partner at EQT. Last year, one of his investments – Nordic Ferry Infrastructure – launched the world’s first self-driving commercial passenger ferry entirely powered by electricity.
Sjölund also argues that “electricity is a more mature source of energy and fuel”. However, he adds: “[While] some green mobility solutions are supported by fundamental demand, otherwise there is typically a need for government support to initially scale green technologies and ultimately bring down costs.”
Government support is crucial
Investors clearly feel more comfortable with a helping hand from government. Access to the grid network and securing renewable energy at sufficient scale are two challenges for any electrification strategy for transportation.
There is a requirement to work closely with local authorities for permitting which can cause delays and increase costs if not managed effectively. Marshall notes: “There are also challenges when working in the public transport sector, or any regulated infrastructure, with regards to ensuring that regulations allow for or incentivise the level of capital expenditure required for implementing the rollout of new technology.”
“There is typically a need for government support to initially scale green technologies and ultimately bring down costs”
Carl Sjölund
EQT
This is well understood in the US. The Biden administration has supported electrification efforts as part of the White House EV Acceleration Challenge. EQT’s investment, First Student, the largest provider of school transportation in North America, is taking part in this initiative. This year more than three million miles were driven on electric school buses, and EQT is supporting First Student’s goal to transition 30,000 school buses to being fully electric by 2035.
“None of these efforts will succeed without putting the adjacent infrastructure in place. Investment is needed to professionalise the public charging experience and give people the confidence to make the change,” says Sjölund.
Challenges with other new technologies
There are other important technologies which will play a role, such as digital technology allowing real-time data transfer on urban transport performance, connecting passengers with transport modes, enabling autonomous transport and providing uninterrupted internet access at all times above and below ground.
But Köttering urges caution: “So far, the business models that have emerged around these technologies are not typically set up (yet) to allow infrastructure investors who seek long-term secured, stable, inflation-protected cashflows and high barriers to entry, to commit capital against them.”
Mobility as a service (MaaS) has the potential to unlock the complementarity of large-scale, traditional, real asset transport infrastructure with the growing number of ‘last mile’, micro-mobility and flexible transit operators. Marshall says: “A more efficient and flexible transit network ultimately benefits all types of infrastructure given the reduced bottlenecks and spreading of demand.”
The challenge, according to Marshall, is to ensure that the data necessary for such MaaS platforms is transparent and available. Given the overlay of public and private, traditional and modern, this could be challenging.
Many ride-sharing and micro-mobility businesses are yet to become profitable and are “often subject to a shifting regulatory environment, and thus are unsuitable for infrastructure investors targeting stable, yielding assets”, he notes.
Policymakers can provide a solution. “Economic regulation and government policy, if flagged well in advance, to create a reliable and consistent environment, can provide important conditions to make such technologies investible,” says Köttering. “This goes beyond just venture capitalists and large, well-capitalised corporates, but also to infrastructure investors with more moderate return expectations and a high downside risk aversion.”
Future outlook
Urban transport should continue becoming greener and more digitally enabled. The push factors, such as government climate policy and technical innovation, join the pull factors which include consumer demand for sustainable solutions and capital allocations by investors.
But investors are likely to keep that risk aversion in the future. ‘Autonomous’ and ‘AI-enabled’ transport offerings are still being developed, which for Marshall means that the significant potential opportunities that stem from areas like driverless vehicles also bring risks to investors. He notes: “All require significant upfront costs, with long dated and often uncertain returns on investment.”
However, Köttering is optimistic. He says: “There are lots of exciting initiatives. However, it is unclear which particular technologies and systems will succeed. What is needed is a collaboration between public sector authorities and private capital.”